EDGAR 10-K Filing

Company CIK: 932781
Filing Year: 2021
Filename: 932781_10-K_2021_0001552781-21-000119.json

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ITEM 1. BUSINESS
Item 1. Business.
General
First Community Corporation, a bank holding company registered under the Bank Holding Company Act of 1956, was incorporated under the laws of South Carolina in November 1994 primarily to own and control all of the capital stock of First Community Bank, which commenced operations in August 1995. The Bank’s primary federal regulator is the Federal Deposit Insurance Corporation (the “FDIC”). The Bank is also regulated and examined by the South Carolina Board of Financial Institutions (the “S.C. Board”).
Unless otherwise mentioned or unless the context requires otherwise, references herein to “First Community,” the “Company” “we,” “us,” “our” or similar references mean First Community Corporation and its consolidated subsidiaries. References to the “Bank” means First Community Bank.
We engage in a commercial banking business from our main office in Lexington, South Carolina and our 21 full-service offices located in: the Midlands of South Carolina, which includes Lexington County (6 offices), Richland County (4 offices), Newberry County (2 offices) and Kershaw County (1 office); the Upstate of South Carolina, which includes Greenville County (2 offices), Anderson County (1 office) and Pickens County (1 office); and the Central Savannah River area, which includes Aiken County, South Carolina (1 office); and in Augusta, Georgia, which includes Richmond County (2 offices) and Columbia County (1 office). In addition, we conducted business from a mortgage loan production office in Richland County, South Carolina until January 24, 2020, after which we consolidated such operations with other existing Bank offices. At December 31, 2020, we had approximately $1.4 billion in assets, $844.2 million in loans, $1.2 billion in deposits, and $136.3 million in shareholders’ equity.
On October 20, 2017, we acquired all of the outstanding common stock of Cornerstone Bancorp headquartered in Easley, South Carolina (“Cornerstone”) the bank holding company for Cornerstone National Bank (“CNB”), in a cash and stock transaction. The total purchase price was approximately $27.1 million, consisting of $7.8 million in cash and 877,364 shares of our common stock valued at $19.3 million based on a provision in the merger agreement that 30% of the outstanding shares of Cornerstone common stock be exchanged for cash and 70% of the outstanding shares of Cornerstone common stock be exchanged for shares of our common stock. The value of our common stock issued was determined based on the closing price of the common stock on October 19, 2017 as reported by NASDAQ, which was $22.05. Cornerstone common shareholders received 0.54 shares of our common stock in exchange for each share of Cornerstone common stock, or $11.00 per share, subject to the limitations discussed above.
We offer a wide-range of traditional banking products and services for professionals and small-to medium-sized businesses, including consumer and commercial, mortgage, brokerage and investment, and insurance services. We also offer online banking to our customers. We have grown organically and through acquisitions.
Our stock trades on The NASDAQ Capital Market under the symbol “FCCO”.
Available Information
We provide our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”) on our website at www.firstcommunitysc.com/ under the About section, under the Investors link. These filings are made accessible as soon as reasonably practicable after they have been filed electronically with the Securities and Exchange Commission (the “SEC”). These filings are also accessible on the SEC’s website at www.sec.gov. In addition, we make available under our Investor Relations section on our website the following, among other things: (i) Code of Business Conduct and Ethics, which applies to our directors and all employees and (ii) the charters of the Audit and Compliance, Human Resources and Compensation, and Nominations and Corporate Governance Committees of our board of directors. These materials are available to the general public on our website free of charge. Printed copies of these materials are also available free of charge to shareholders who request them in writing. Please address your request to: Investor Relations, First Community Corporation, 5455 Sunset Boulevard, Lexington, South Carolina 29072. Statements of beneficial ownership of equity securities filed by directors, officers, and 10% or greater shareholders under Section 16 of the Exchange Act are also available through our website. The information on our website is not incorporated by reference into this report.
Location and Service Area
The Bank is engaged in a general commercial and retail banking business, emphasizing the needs of small-to-medium sized businesses, professional concerns and individuals. We have a total of 13 full-service offices located in Richland, Lexington, Kershaw and Newberry Counties of South Carolina and the surrounding areas. We refer to these counties as the “Midlands” region of South Carolina. Lexington County is home to six of our Bank’s branch offices. Richland County, in which we currently have four branches, is the second largest county in South Carolina. Columbia is located within Richland County and is South Carolina’s capital city and is geographically positioned in the center of the state between the industrialized Upstate region of South Carolina and the coastal city of Charleston, South Carolina. Intersected by three major interstate highways (I-20, I-77, and I-26), Columbia’s strategic location has contributed greatly to its commercial appeal and growth. With the acquisition of Savannah River Banking Company in 2014, we added a branch in Aiken, South Carolina and a branch in Augusta, Georgia (Richmond County). In 2016, we opened a loan production office in Greenville County, which we converted into a full service office in February 2019. With the acquisition of CNB in 2017, we added a branch in each of Greenville, Pickens, and Anderson Counties of South Carolina. We refer to this three-county area as the “Upstate” region of South Carolina. In 2018, we opened a de novo branch in downtown Augusta, Georgia (Richmond County). In 2019, we opened a de novo branch in Evans, Georgia, a suburb of Augusta in Columbia County, Georgia. We refer to the three-county area of Aiken County (South Carolina), Richmond County (Georgia) and Columbia County (Georgia) as the “CSRA” region.
The following table shows data as to deposits, market share and population for our three market areas (deposits in thousands):
Total
Estimated
Total Market
Deposits(2)
Our Market
Deposits(2)
Offices
Population(1)
June 30, 2020
June 30, 2020
Market Share
Midlands Region
(3)
819,500
$ 24,272,721
$ 843,895
3.48 %
CSRA Region
530,104
$ 9,051,092
$ 144,689
1.60 %
Upstate Region
(4)
852,984
$ 20,163,710
$ 133,936
0.66 %
(1) All population data is derived from July 2019 estimates based on survey changes to the 2010 U. S. Census data.
(2) All deposit data as of June 30, 2020 is derived from the most recent data published by the FDIC.
(3) As of June 30, 2020, the Midlands Region consisted of 13 full service branches.
(4) As of June 30, 2020, the Upstate Region consisted of four full service branches.
We believe that we serve attractive banking markets with long-term growth potential and a well-educated employment base that helps to support our diverse and relatively stable local economy. According to U.S. Census Data, median household incomes for each of the counties in the regions noted above were as follows for 2019:
Richland County, SC
$ 54,767
Lexington County, SC
$ 61,173
Newberry County, SC
$ 44,226
Kershaw County SC
$ 51,479
Greenville County, SC
$ 60,351
Anderson County, SC
$ 50,865
Pickens County SC
$ 49,573
Aiken County SC
$ 51,399
Richmond County, GA
$ 42,728
Columbia County, GA
$ 82,339
The county estimates noted above compare to 2019 statewide median household income estimates of $53,199 and $58,700 for South Carolina and Georgia, respectively. The principal components of the economy within our market areas are service industries, government and education, and wholesale and retail trade. The largest employers in the Midlands market area, each of which employs in excess of 3,000 people, include the State of South Carolina, Prisma Health, BlueCross BlueShield of SC, the University of South Carolina, the United States Department of the Army (Fort Jackson Army Base), Richland School District 1, Richland School District 2, and Lexington Medical Center. The largest employers in our CSRA market area, each of which employs in excess of 3,000 people, include the U.S. Army Cyber Center of Excellence & Fort Gordon, Augusta University, Richmond County School System, NSA Augusta, University Hospital, Augusta University Hospitals, and the Department of Energy, Savannah River Site. The Upstate region major employers include, among others, Prisma Health, Greenville County Schools, BMW Manufacturing Corp., Michelin North America, BI-LO, LLC, Bon Secours St. Francis Health System, AnMed Health Medical Center, Clemson University, Duke Energy Corp., and GE Power & Water. We believe that this diversified economic base has reduced, and will likely continue to reduce, economic volatility in our market areas. Our markets have experienced steady economic and population growth over the past 10 years, and we expect that the area, as well as the service industry needed to support it, will continue to grow.
Banking Services
We offer a full range of deposit services that are typically available in most banks and thrift institutions, including checking accounts, NOW accounts, savings accounts and other time deposits of various types, ranging from daily money market accounts to longer-term certificates of deposit. The transaction accounts and time certificates are tailored to our principal market area at rates competitive to those offered in the area. In addition, we offer certain retirement account services, such as individual retirement accounts (“IRAs”). All deposit accounts are insured by the FDIC up to the maximum amount allowed by law (currently, $250,000, subject to aggregation rules).
We also offer a full range of commercial and personal loans. Commercial loans include both secured and unsecured loans for working capital (including inventory and receivables), business expansion (including acquisition of real estate and improvements), and the purchase of equipment and machinery. Consumer loans include secured and unsecured loans for financing automobiles, home improvements, education, and personal investments. We also make real estate construction and acquisition loans. We originate fixed and variable rate mortgage loans, substantially all of which are sold into the secondary market. Our lending activities are subject to a variety of lending limits imposed by federal law. While differing limits apply in certain circumstances based on the type of loan or the nature of the borrower (including the borrower’s relationship to the bank), in general, we are subject to a loans-to-one-borrower limit of an amount equal to 15% of the Bank’s unimpaired capital and surplus, or 25% of the unimpaired capital and surplus if the excess over 15% is approved by the board of directors of the Bank and is fully secured by readily marketable collateral. As a result, our lending limit will increase or decrease in response to increases or decreases in the Bank’s level of capital. Based upon the capitalization of the Bank at December 31, 2020, the maximum amount we could lend to one borrower is $19.6 million. In addition, we may not make any loans to any director, officer, employee, or 10% shareholder of the Company or the Bank unless the loan is approved by our board of directors and is made on terms not more favorable to such person than would be available to a person not affiliated with the Bank.
Other bank services include internet banking, cash management services, safe deposit boxes, travelers checks, direct deposit of payroll and social security checks, and automatic drafts for various accounts. We offer non-deposit investment products and other investment brokerage services through a registered representative with an affiliation through LPL Financial. We are associated with Nyce and Plus networks of automated teller machines and MasterCard debit cards that may be used by our customers throughout South Carolina and other regions. In November 2019, we deconverted from the Star network of automated teller machines. We also offer VISA and MasterCard credit card services through a correspondent bank as our agent.
We currently do not exercise trust powers, but we can begin to do so with the prior approval of our primary banking regulators, the FDIC and the S.C. Board.
Competition
The banking business is highly competitive. We compete as a financial intermediary with other commercial banks, savings and loan associations, credit unions and money market mutual funds operating in our market areas. As of June 30, 2020, there were 24 financial institutions operating approximately 167 offices in the Midlands market, 19 financial institutions operating 97 branches in the CSRA market, and 35 financial institutions operating 227 branches in the Upstate market. The competition among the various financial institutions is based upon a variety of factors, including interest rates offered on deposit accounts, interest rates charged on loans, credit and service charges, the quality of services rendered, the convenience of banking facilities and, in the case of loans to large commercial borrowers, relative lending limits. Size gives larger banks certain advantages in competing for business from large corporations. These advantages include higher lending limits and the ability to offer services in other areas of South Carolina and Georgia. As a result, we do not generally attempt to compete for the banking relationships of large corporations, but concentrate our efforts on small-to-medium sized businesses and individuals. We believe we have competed effectively in this market by offering quality and personal service. In addition, many of our non-bank competitors are not subject to the same extensive federal regulations that govern bank holding companies and federally insured banks.
Employees
As of December 31, 2020, the company had 244 full-time employees. We believe that we have good relations with our employees and our employees are not represented by any collective bargaining group or agreement. We believe our ability to attract and retain employees is a key to our success and one of our core values is mutual respect for our colleagues and their role in our success. Our employees embody and consistently demonstrate our five cultural beliefs of honesty and integrity, everyone matters, spirit of service, strong work ethic and excellence with humility. Accordingly, we strive to offer competitive salaries, insurance and retirement benefits, a generous paid time off plan including paid holidays, and a stable and friendly working environment to all employees. We believe the development of our staff is important to the success of our company and we encourage employees to continue on a lifelong trajectory of learning. As such, we provide a number of opportunities for employee development through both internal and external sources. To develop our current and future leaders, the Bank created the First Community Bank Leadership Institute (FCBLI), an eighteen-month leadership development program that provides academic and experiential learning to teach and nurture leadership skills across the organization to prepare to support the Bank now and in the future. The Bank also supports the development of employees through external educational opportunities such as various bankers’ schools that offer multi-year development programs as well as short term training classes and industry conferences. In addition to these, the Bank encourages employees to continue with career development specific to their role to insure employees stay current with the most up-to-date information and best practices.
The health, safety and well-being of our employees, customers, vendors and communities has been and continues to be our top priority. The COVID-19 pandemic presented challenges as we worked to continue to serve our customers and the community. Throughout the pandemic, we followed guidance from the Centers for Disease Control and the South Carolina Department of Health and Environmental Control and made the necessary adjustments as guidance and recommendations changed. We implemented a number of safety protocols to help provide a safe workplace for our employees, customers and vendors. This included limiting access to facilities, including at times our banking offices (except by appointment), encouraging the use of drive thru facilities and online, electronic and other technology products and services, implementing remote working and rotating work schedules, enhanced and more frequent cleaning of facilities, written communication to employees as updates were available, and reminders on safety protocols including social distancing, monitoring symptoms and quarantining with exposure or potential exposure to the virus, and hand washing/sanitizing. We provided supplies including masks, gloves, and hand sanitizer to employees and customers. With recent positive news on pandemic conditions, we are beginning a transition to a more normal operating environment.
Executive Officers of First Community Corporation
Executive officers of First Community Corporation are elected by the board of directors annually and serve at the pleasure of the board of directors. The current executive officers, and persons chosen to become executive officers, and their ages, positions with us over the past five years, and terms of office as of March 12, 2021, are as follows:
Name (age)
Position and Five Year History with Company
With the
Company
Since
Michael C. Crapps (62)
Chief Executive Officer and President, Director
John T. Nissen (59)
Chief Banking Officer; formerly Chief Commercial and Retail Banking Officer
Robin D. Brown (53)
Chief Human Resources and Marketing Officer
Tanya A. Butts (62)
Chief Operations Officer/Chief Risk Officer
John F. (Jack) Walker (55)
Chief Credit Officer, formerly Senior Vice President and Loan Approval and Special Assets Officer
D. Shawn Jordan (53)
Chief Financial Officer, formerly Executive Vice President
None of the above officers are related and there are no arrangements or understandings between them and any other person pursuant to which any of them was elected as an officer, other than arrangements or understandings with the directors or officers of the Company acting solely in their capacities as such.
SUPERVISION AND REGULATION
Both the Company and the Bank are subject to extensive state and federal banking laws and regulations that impose specific requirements or restrictions on and provide for general regulatory oversight of virtually all aspects of our operations. These laws generally are intended primarily for the protection of customers, depositors and other consumers, the FDIC’s Deposit Insurance Fund (the “DIF”), and the banking system as a whole; not for the protection of our other creditors and shareholders.
The following discussion is not intended to be a complete list of all the activities regulated by the banking laws or of the impact of those laws and regulations on our operations. The following summary is qualified by reference to the statutory and regulatory provisions discussed. Changes in applicable laws or regulations may have a material effect on our business and prospects. Our operations may be affected by legislative changes and the policies of various regulatory authorities. We cannot predict the effect that fiscal or monetary policies, economic control, or new federal or state legislation may have on our business and earnings in the future.
Legislative and Regulatory Developments.
An older legislative and regulatory development implemented in response to the 2008 financial crisis-the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”)-and the newer regulatory developments implemented in response to the COVID-19 pandemic, including the CARES Act and the Consolidated Appropriations Act, 2021, which enhanced and expanded certain provisions of the CARES Act-have had and will continue to have an impact on our operations.
The Dodd-Frank Wall Street Reform and Consumer Protection Act
The Dodd-Frank Act was signed into law in July 2010 and impacts financial institutions in numerous ways, including:
· The creation of a Financial Stability Oversight Council responsible for monitoring and managing systemic risk;
· Granting additional authority to the Board of Governors of the Federal Reserve (the “Federal Reserve”) to regulate certain types of nonbank financial companies;
· Granting new authority to the FDIC as liquidator and receiver;
· Changing the manner in which deposit insurance assessments are made;
· Requiring regulators to modify capital standards;
· Establishing the Consumer Financial Protection Bureau (the “CFPB”);
· Capping interchange fees that certain banks charge merchants for debit card transactions;
· Imposing more stringent requirements on mortgage lenders; and
· Limiting banks’ proprietary trading activities.
There are many provisions in the Dodd-Frank Act mandating regulators to adopt new regulations and conduct studies upon which future regulation may be based. While some have been issued, many remain to be issued. Governmental intervention and new regulations could materially and adversely affect our business, financial condition and results of operations.
2018 Regulatory Reform.
In May 2018, the Economic Growth, Regulatory Reform and Consumer Protection Act (“Regulatory Relief Act”), was enacted to modify or remove certain financial reform rules and regulations, including some of those implemented under the Dodd-Frank Act. While the Regulatory Relief Act maintains most of the regulatory structure established by the Dodd-Frank Act, it amends certain aspects of the regulatory framework for small depository institutions with assets of less than $10 billion and for large banks with assets of more than $50 billion.
The Regulatory Relief Act, among other things, expanded the definition of qualified mortgages a financial institution may hold and simplified the regulatory capital rules for financial institutions and their holding companies with total consolidated assets of less than $10 billion by instructing the federal banking regulators to establish a single “community bank leverage ratio” between 8% and 10%. As such, in November 2019, the federal banking regulators published final rules implementing a simplified measure of capital adequacy for certain banking organizations that have less than $10 billion in total consolidated assets. Under the final rules, which went into effect on January 1, 2020, depository institutions and depository institution holding companies that have less than $10 billion in total consolidated assets and meet other qualifying criteria, including a leverage ratio of greater than 9%, off-balance-sheet exposures of 25% or less of total consolidated assets and trading assets plus trading liabilities of 5% or less of total consolidated assets, are deemed “qualifying community banking organizations” and are eligible to opt into the “community bank leverage ratio framework.” A qualifying community banking organization that elects to use the community bank leverage ratio framework and that maintains a leverage ratio of greater than 9% is considered to have satisfied the generally applicable risk-based and leverage capital requirements under the Basel III rules, discussed below, and, if applicable, is considered to have met the “well capitalized” capital ratio requirements for purposes of its primary federal regulator’s prompt corrective action rules, discussed below. The final rules include a two-quarter grace period during which a qualifying community banking organization that temporarily fails to meet any of the qualifying criteria, including the greater-than-9% leverage capital ratio requirement, is generally still deemed “well capitalized” so long as the banking organization maintains a leverage capital ratio greater than 8%. A banking organization that fails to maintain a leverage capital ratio greater than 8% is not permitted to use the grace period and must comply with the generally applicable requirements under the Basel III rules and file the appropriate regulatory reports. We do not have any immediate plans to elect to use the community bank leverage ratio framework but may make such an election in the future.
The Regulatory Relief Act also expanded the category of holding companies that may rely on the “Small Bank Holding Company and Savings and Loan Holding Company Policy Statement” by raising the maximum amount of assets a qualifying holding company may have from $1.0 billion to $3.0 billion. This expansion also excluded such holding companies from the minimum capital requirements of the Dodd-Frank Act. In addition, the Regulatory Relief Act included regulatory relief for community banks regarding regulatory examination cycles, call reports, the proprietary trading prohibitions in the Volcker Rule, mortgage disclosures, and risk weights for certain high-risk commercial real estate loans.
We believe these reforms are favorable to our operations, but the ultimate impacts remain difficult to predict until rulemaking is complete and the reforms are fully implemented.
The CARES Act and Initiatives Related to COVID-19
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act, was signed into law. The CARES Act provided for approximately $2.2 trillion in direct economic relief in response to the public health and economic impacts of COVID-19. Many of the CARES Act’s programs are, and remain, dependent upon the direct involvement of financial institutions like the Bank. These programs have been implemented through rules and guidance adopted by federal departments and agencies, including the U.S. Department of Treasury, the Federal Reserve and other federal bank regulatory authorities, including those with direct supervisory jurisdiction over the Company and the Bank. Furthermore, as the COVID-19 pandemic evolves, federal regulatory authorities continue to issue additional guidance with respect to the implementation, life cycle, and eligibility requirements for the various CARES Act programs, as well as industry-specific recovery procedures for COVID-19. In addition, it is possible that Congress will enact supplementary COVID-19 response legislation, including amendments to the CARES Act or new bills comparable in scope to the CARES Act. We continue to assess the impact of the CARES Act and other statutes, regulations and supervisory guidance related to the COVID-19 pandemic.
Paycheck Protection Program. A principal provision of the CARES Act amended the SBA’s loan program to create a guaranteed, unsecured loan program, the Paycheck Protection Program, or PPP, to fund operational costs of eligible businesses, organizations and self-employed persons impacted by COVID-19. These loans are eligible to be forgiven if certain conditions are satisfied and are fully guaranteed by the SBA. Additionally, loan payments will also be deferred for the first six months of the loan term. The PPP commenced on April 3, 2020 and was available to qualified borrowers through August 8, 2020. No collateral or personal guarantees were required. On December 27, 2020, the President signed into law omnibus federal spending and economic stimulus legislation titled the “Consolidated Appropriations Act, 2021” that included the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (the “HHSB Act”). Among other things, the HHSB Act renewed the PPP, allocating $284.45 billion for both new first time PPP loans under the existing PPP and the expansion of existing PPP loans for certain qualified, existing PPP borrowers. In addition to extending and amending the PPP, the HHSB Act also creates a new grant program for “shuttered venue operators.” As a participating lender in the PPP, we continue to monitor legislative, regulatory, and supervisory developments related thereto, including the most recent changes implemented by the HHSB Act.
Troubled Debt Restructurings and Loan Modifications for Affected Borrowers. The CARES Act, as extended by certain provisions of the Consolidated Appropriations Act, 2021, permits banks to suspend requirements under GAAP for loan modifications to borrowers affected by COVID-19 that may otherwise be characterized as troubled debt restructurings and suspend any determination related thereto if (i) the borrower was not more than 30 days past due as of December 31, 2019, (ii) the modifications are related to COVID-19, and (iii) the modification occurs between March 1, 2020 and the earlier of 60 days after the date of termination of the national emergency or January 1, 2022. Federal bank regulatory authorities also issued guidance to encourage banks to make loan modifications for borrowers affected by COVID-19.
Main Street Lending Program. The CARES Act encouraged the Federal Reserve, in coordination with the Secretary of the Treasury, to establish or implement various programs to help mid-size businesses, nonprofit organizations, and municipalities. On April 9, 2020, the Federal Reserve proposed the creation of the Main Street Lending Program (the “MSLP”) to implement certain of these recommendations. The MSLP supported lending to small- and medium-sized businesses that were in sound financial condition before the onset of the COVID-19 pandemic. The MSLP, which expired on January 8, 2021, operated through three facilities: the Main Street New Loan Facility, the Main Street Priority Loan Facility, and the Main Street Expanded Loan Facility. The Bank registered as a lender under the MSLP, but as of December 31, 2020, originated no loans under the MSLP.
Proposed Legislation and Regulatory Action. From time to time, various legislative and regulatory initiatives are introduced in Congress and state legislatures, as well as by regulatory agencies. Such initiatives may include proposals to expand or contract the powers of bank holding companies and depository institutions or proposals to substantially change the financial institution regulatory system. Such legislation could change banking statutes and our operating environment in substantial and unpredictable ways. If enacted, such legislation could increase or decrease the cost of doing business, limit or expand permissible activities or affect the competitive balance among banks, savings associations, credit unions, and other financial institutions. We cannot predict whether any such legislation will be enacted, and, if enacted, the effect that it, or any implementing regulations, would have on our financial condition or results of operations. A change in statutes, regulations or regulatory policies applicable to the Company or the Bank could have a material effect on our business.
Temporary Community Bank Leverage Ratio Relief. Pursuant to the CARES Act, the federal banking agencies authorities adopted an interim rule, effective until the earlier of the termination of the COVID-19 emergency declaration and December 31, 2020, to (i) reduce the minimum community bank leverage ratio from 9% to 8% percent and (ii) give community banks two-quarter grace period to satisfy such ratio if such ratio falls out of compliance by no more than 1%.
Capital and Related Requirements.
In July of 2013 (and fully-phased in as of January 1, 2019), the U.S. federal banking agencies approved the implementation of the Basel III regulatory capital reforms in pertinent part, and, at the same time, promulgated rules effecting certain changes required by the Dodd-Frank Act ( “Basel III”). Basel III was released in the form of enforceable regulations by each of the applicable federal bank regulatory agencies. Basel III is applicable to all banking organizations that are subject to minimum capital requirements, including federal and state banks and savings and loan associations, as well as to bank and savings and loan holding companies, other than “small bank holding companies.” A small bank holding company is generally a qualifying bank holding company or savings and loan holding company with less than $3.0 billion in consolidated assets. More stringent requirements are imposed on “advanced approaches” banking organizations-generally those organizations with $250 billion or more in total consolidated assets, $10 billion or more in total foreign exposures applicable to advanced approaches banking organizations.
Based on the foregoing, as a small bank holding company, we are generally not subject to the capital requirements at the holding company level unless otherwise advised by the Federal Reserve; however, our Bank remains subject to the capital requirements. Accordingly, the Bank is required to maintain the following capital levels:
· a Common Equity Tier 1 risk-based capital ratio of 4.5%;
· a Tier 1 risk-based capital ratio of 6%;
· a total risk-based capital ratio of 8%; and
· a leverage ratio of 4%.
Basel III also established a “capital conservation buffer” above the new regulatory minimum capital requirements, which must consist entirely of Common Equity Tier 1 capital, which was phased in over several years. The phase-in of the capital conservation buffer began on January 1, 2016, at a level of 0.625% of risk-weighted assets for 2016 and increased to 1.250% for 2017, and 1.875% for 2018. The fully phased-in capital conservation buffer of 2.500%, which became effective on January 1, 2019, resulted in the following effective minimum capital ratios for the Bank beginning in 2019: (i) a Common Equity Tier 1 capital ratio of 7.0%, (ii) a Tier 1 capital ratio of 8.5%, and (iii) a total capital ratio of 10.5%. Under the final rules, institutions are subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if their capital levels fall below the buffer amount. These limitations establish a maximum percentage of eligible retained income that could be utilized for such actions.
Under Basel III, Tier 1 capital includes two components: Common Equity Tier 1 capital and additional Tier 1 capital. The highest form of capital, Common Equity Tier 1 capital, consists solely of common stock (plus related surplus), retained earnings, accumulated other comprehensive income, otherwise referred to as AOCI, and limited amounts of minority interests that are in the form of common stock. Additional Tier 1 capital is primarily comprised of noncumulative perpetual preferred stock, Tier 1 minority interests and grandfathered trust preferred securities. Tier 2 capital generally includes the allowance for loan losses up to 1.25% of risk-weighted assets, qualifying preferred stock, subordinated debt and qualifying Tier 2 minority interests, less any deductions in Tier 2 instruments of an unconsolidated financial institution. AOCI is presumptively included in Common Equity Tier 1 capital and often would operate to reduce this category of capital. When implemented, Basel III provided a one-time opportunity at the end of the first quarter of 2015 for covered banking organizations to opt out of a large part of this treatment of AOCI. We made this opt-out election and, as a result, retained our pre-existing treatment for AOCI.
In addition, in order to avoid restrictions on capital distributions or discretionary bonus payments to executives, under Basel III, a banking organization must maintain a “capital conservation buffer” on top of its minimum risk-based capital requirements. This buffer must consist solely of Tier 1 Common Equity, but the buffer applies to all three risk-based measurements (Common Equity Tier 1, Tier 1 capital and total capital). The 2.5% capital conservation buffer was phased in incrementally over time, and became fully effective for us on January 1, 2019, resulting in the following effective minimum capital plus capital conservation buffer ratios: (i) a Common Equity Tier 1 capital ratio of 7.0%, (ii) a Tier 1 risk-based capital ratio of 8.5%, and (iii) a total risk-based capital ratio of 10.5%.
On December 21, 2018, the federal banking agencies issued a joint final rule to revise their regulatory capital rules to (i) address the upcoming implementation of a new credit impairment model, the Current Expected Credit Loss, or CECL model, an accounting standard under GAAP; (ii) provide an optional three-year phase-in period for the day-one adverse regulatory capital effects that banking organizations are expected to experience upon adopting CECL; and (iii) require the use of CECL in stress tests beginning with the 2023 capital planning and stress testing cycle for certain banking organizations that are subject to stress testing. We are currently evaluating the impact the CECL model will have on our accounting, and expect to recognize a one-time cumulative-effect adjustment to our allowance for loan losses as of the beginning of the first quarter of 2023, the first reporting period in which the new standard is effective. At this time, we cannot yet reasonably determine the magnitude of such one-time cumulative adjustment, if any, or of the overall impact of the new standard on our business, financial condition or results of operations.
Change in Control.
Two statutes, the Change in Bank Control Act and the Bank Holding Company Act, together with regulations promulgated under them, require some form of regulatory review before any company may acquire “control” of a bank or a bank holding company. Under the Change in Bank Control Act, a person or company is required to file a notice with the Federal Reserve if it will, as a result of the transaction, own or control 10% or more of any class of voting securities or direct the management or policies of a bank or bank holding company and either if the bank or bank holding company has registered securities or if the acquirer would be the largest holder of that class of voting securities after the acquisition. For a change in control at the holding company level, both the Federal Reserve and the subsidiary bank’s primary federal regulator must approve the change in control; at the bank level, only the bank’s primary federal regulator is involved.
In addition, the Bank Holding Company Act prohibits any entity from acquiring 25% (5% if the acquirer is a bank holding company) or more of a bank holding company’s voting securities, or otherwise obtaining control or a controlling influence over the management or policies of a bank or bank holding company without regulatory approval. On January 30, 2020, the Federal Reserve issued a final rule (which became effective September 30, 2020) that clarified and codified the Federal Reserve’s standards for determining whether one company has control over another. The final rule established four categories of tiered presumptions of noncontrol that are based on the percentage of voting shares held by the investor (less than 5%, 5-9.9%, 10-14.9% and 15-24.9%) and the presence of other indicia of control. As the percentage of ownership increases, fewer indicia of control are permitted without falling outside of the presumption of noncontrol. These indicia of control include nonvoting equity ownership, director representation, management interlocks, business relationship and restrictive contractual covenants. Under the final rule, investors can hold up to 24.9% of the voting securities and up to 33% of the total equity of a company without necessarily having a controlling influence.
Transactions subject to the Bank Holding Company Act are exempt from Change in Control Act requirements. For state banks, state laws, including those of South Carolina, typically require approval by the state bank regulator as well.
Transactions with Affiliates and Insiders.
The Company is a legal entity separate and distinct from the Bank and its other subsidiaries. Various legal limitations restrict the Bank from lending or otherwise supplying funds to the Company or its non-bank subsidiaries. The Company and the Bank are subject to Sections 23A and 23B of the Federal Reserve Act and Federal Reserve Regulation W.
Section 23A of the Federal Reserve Act places limits on the amount of loans or extensions of credit by a bank to any affiliate, including its holding company, and on a bank’s investments in, or certain other transactions with, affiliates and on the amount of advances to third parties collateralized by the securities or obligations of any affiliates of the bank. Section 23A also applies to derivative transactions, repurchase agreements and securities lending and borrowing transactions that cause a bank to have credit exposure to an affiliate. The aggregate of all covered transactions is limited in amount, as to any one affiliate, to 10% of the Bank’s capital and surplus and, as to all affiliates combined, to 20% of the Bank’s capital and surplus. Furthermore, within the foregoing limitations as to amount, each covered transaction must meet specified collateral requirements. The Bank is forbidden to purchase low quality assets from an affiliate.
Section 23B of the Federal Reserve Act, among other things, prohibits an institution from engaging in certain transactions with certain affiliates unless the transactions are on terms substantially the same, or at least as favorable to such institution or its subsidiaries, as those prevailing at the time for comparable transactions with nonaffiliated companies. If there are no comparable transactions, a bank’s (or one of its subsidiaries’) affiliate transaction must be on terms and under circumstances, including credit standards, that in good faith would be offered to, or would apply to, nonaffiliated companies. These requirements apply to all transactions subject to Section 23A as well as to certain other transactions.
The affiliates of a bank include any holding company of the bank, any other company under common control with the bank (including any company controlled by the same shareholders who control the bank), any subsidiary of the bank that is itself a bank, any company in which the majority of the directors or trustees also constitute a majority of the directors or trustees of the bank or holding company of the bank, any company sponsored and advised on a contractual basis by the bank or an affiliate, and any mutual fund advised by a bank or any of the bank’s affiliates. Regulation W generally excludes all non-bank and non-savings association subsidiaries of banks from treatment as affiliates, except to the extent that the Federal Reserve decides to treat these subsidiaries as affiliates.
The Bank is also subject to certain restrictions on extensions of credit to executive officers, directors, certain principal shareholders, and their related interests. Extensions of credit include derivative transactions, repurchase and reverse repurchase agreements, and securities borrowing and lending transactions to the extent that such transactions cause a bank to have credit exposure to an insider. Any extension of credit to an insider (i) must be made on substantially the same terms, including interest rates and collateral requirements, as those prevailing at the time for comparable transactions with unrelated third parties and (ii) must not involve more than the normal risk of repayment or present other unfavorable features.
On December 22, 2020, the federal banking agencies issued an interagency statement extending the temporary relief from enforcement action against banks or asset managers, which become principal stockholders of banks, with respect to certain extensions of credit by banks that otherwise would violate Regulation O, provided the asset managers and banks satisfy certain conditions designed to ensure that there is a lack of control by the asset manager over the bank. This temporary relief will apply until January 1, 2022, unless amended or extended, while the Federal Reserve, in consultation with the other federal banking agencies, considers whether to amend Regulation O.
First Community Corporation
We own 100% of the outstanding capital stock of the Bank, and, therefore, we are considered to be a bank holding company under the federal Bank Holding Company Act of 1956 (the “Bank Holding Company Act”). As a result, we are primarily subject to the supervision, examination and reporting requirements of the Federal Reserve under the Bank Holding Company Act and its regulations promulgated thereunder. Moreover, as a bank holding company of a bank located in South Carolina, we also are subject to the South Carolina Banking and Branching Efficiency Act.
Permitted Activities. Under the Bank Holding Company Act, a bank holding company is generally permitted to engage in, or acquire direct or indirect control of more than 5% of the voting shares of any company engaged in, the following activities:
· banking or managing or controlling banks;
· furnishing services to or performing services for our subsidiaries; and
· any activity that the Federal Reserve determines to be so closely related to banking as to be a proper incident to the business of banking;
Activities that the Federal Reserve has found to be so closely related to banking as to be a proper incident to the business of banking include:
· factoring accounts receivable;
· making, acquiring, brokering or servicing loans and usual related activities;
· leasing personal or real property;
· operating a non-bank depository institution, such as a savings association;
· trust company functions;
· financial and investment advisory activities;
· conducting discount securities brokerage activities;
· underwriting and dealing in government obligations and money market instruments;
· providing specified management consulting and counseling activities;
· performing selected data processing services and support services;
· acting as agent or broker in selling credit life insurance and other types of insurance in connection with credit transactions; and
· performing selected insurance underwriting activities.
As a bank holding company, we also can elect to be treated as a “financial holding company,” which would allow us to engage in a broader array of activities. In summary, a financial holding company can engage in activities that are financial in nature or incidental or complimentary to financial activities, including insurance underwriting, sales and brokerage activities, providing financial and investment advisory services, underwriting services and limited merchant banking activities. We have not sought financial holding company status, but may elect such status in the future as our business matures. If we were to elect in writing for financial holding company status, each insured depository institution we control would have to be well capitalized, well managed and have at least a satisfactory rating under the Community Reinvestment Act (“CRA”) (discussed below).
The Federal Reserve has the authority to order a bank holding company or its subsidiaries to terminate any of these activities or to terminate its ownership or control of any subsidiary when it has reasonable cause to believe that the bank holding company’s continued ownership, activity or control constitutes a serious risk to the financial safety, soundness or stability of it or any of its bank subsidiaries.
Source of Strength. There are a number of obligations and restrictions imposed by law and regulatory policy on bank holding companies with regard to their depository institution subsidiaries that are designed to minimize potential loss to depositors and to the FDIC insurance funds in the event that the depository institution becomes in danger of defaulting under its obligations to repay deposits. Under a policy of the Federal Reserve, a bank holding company is required to serve as a source of financial strength to its subsidiary depository institutions and to commit resources to support such institutions in circumstances where it might not do so absent such policy. Under the Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”), to avoid receivership of its insured depository institution subsidiary, a bank holding company is required to guarantee the compliance of any insured depository institution subsidiary that may become “undercapitalized” within the terms of any capital restoration plan filed by such subsidiary with its appropriate federal banking agency up to the lesser of (i) an amount equal to 5% of the institution’s total assets at the time the institution became undercapitalized, or (ii) the amount which is necessary (or would have been necessary) to bring the institution into compliance with all applicable capital standards as of the time the institution fails to comply with such capital restoration plan.
The Federal Reserve also has the authority under the Bank Holding Company Act to require a bank holding company to terminate any activity or relinquish control of a nonbank subsidiary (other than a nonbank subsidiary of a bank) upon the Federal Reserve’s determination that such activity or control constitutes a serious risk to the financial soundness or stability of any subsidiary depository institution of the bank holding company. Further, federal law grants federal bank regulatory authorities’ additional discretion to require a bank holding company to divest itself of any bank or nonbank subsidiary if the agency determines that divestiture may aid the depository institution’s financial condition.
In addition, the “cross guarantee” provisions of the Federal Deposit Insurance Act (“FDIA”) require insured depository institutions under common control to reimburse the FDIC for any loss suffered or reasonably anticipated by the FDIC as a result of the default of a commonly controlled insured depository institution or for any assistance provided by the FDIC to a commonly controlled insured depository institution in danger of default. The FDIC’s claim for damages is superior to claims of shareholders of the insured depository institution or its holding company, but is subordinate to claims of depositors, secured creditors and holders of subordinated debt (other than affiliates) of the commonly controlled insured depository institutions.
The FDIA also provides that amounts received from the liquidation or other resolution of any insured depository institution by any receiver must be distributed (after payment of secured claims) to pay the deposit liabilities of the institution prior to payment of any other general or unsecured senior liability, subordinated liability, general creditor or shareholder. This provision would give depositors a preference over general and subordinated creditors and shareholders in the event a receiver is appointed to distribute the assets of our Bank.
Any capital loans by a bank holding company to any of its subsidiary banks are subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary bank. In the event of a bank holding company’s bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee and entitled to a priority of payment.
Capital Requirements. The Federal Reserve generally imposes certain capital requirements on a bank holding company under the Bank Holding Company Act, including a minimum leverage ratio and a minimum ratio of “qualifying” capital to risk-weighted assets. If applicable, these requirements are essentially the same as those that apply to the Bank and are described above under “Capital and Related Requirements.” However, because the Company currently qualifies as a small bank holding company, these capital requirements do not currently apply to the Company. Subject to certain restrictions, we are able to borrow money to make a capital contribution to the Bank, and these loans may be repaid from dividends paid from the Bank to the Company. Our ability to pay dividends depends on, among other things, the Bank’s ability to pay dividends to us, which is subject to regulatory restrictions as described below in “First Community Bank-Dividends.” We are also able to raise capital for contribution to the Bank by issuing securities without having to receive regulatory approval, subject to compliance with federal and state securities laws.
Dividends. As a bank holding company, the Company’s ability to declare and pay dividends is dependent on certain federal and state regulatory considerations, including the guidelines of the Federal Reserve. The Federal Reserve has issued a policy statement regarding the payment of dividends by bank holding companies. In general, the Federal Reserve’s policies provide that dividends should be paid only out of current earnings and only if the prospective rate of earnings retention by the bank holding company appears consistent with the organization’s capital needs, asset quality and overall financial condition. The Federal Reserve’s policies also require that a bank holding company serve as a source of financial strength to its subsidiary banks by standing ready to use available resources to provide adequate capital funds to those banks during periods of financial stress or adversity and by maintaining the financial flexibility and capital-raising capacity to obtain additional resources for assisting its subsidiary banks where necessary. In addition, under the prompt corrective action regulations, the ability of a bank holding company to pay dividends may be restricted if a subsidiary bank becomes undercapitalized. These regulatory policies could affect the Company’s ability to pay dividends or otherwise engage in capital distributions.
In addition, since the Company is legal entity separate and distinct from the Bank and does not conduct stand-alone operations, its ability to pay dividends depends on the ability of the Bank to pay dividends to it, which is also subject to regulatory restrictions as described below in “First Community Bank-Dividends.”
South Carolina State Regulation. As a South Carolina bank holding company under the South Carolina Banking and Branching Efficiency Act, we are subject to limitations on any sale to, or merger with, other financial institutions. We are not required to obtain the approval of the S.C. Board prior to acquiring the capital stock of a national bank, but we must notify them at least 15 days prior to doing so. We must receive the S.C. Board’s approval prior to engaging in the acquisition of a South Carolina state-chartered bank or another South Carolina bank holding company.
First Community Bank
As a South Carolina state bank, the Bank’s primary federal regulator is the FDIC and the Bank is also regulated and examined by the S.C. Board. Deposits in the Bank are insured by the FDIC up to a maximum amount of $250,000. The FDIC insurance coverage limit applies per depositor, per insured depository institution for each account ownership category.
The S.C. Board and the FDIC regulate or monitor virtually all areas of the Bank’s operations, including:
· security devices and procedures;
· adequacy of capitalization and loss reserves;
· loans;
· investments;
· borrowings;
· deposits;
· mergers;
· issuances of securities;
· payment of dividends;
· interest rates payable on deposits;
· interest rates or fees chargeable on loans;
· establishment of branches;
· corporate reorganizations;
· maintenance of books and records; and
· adequacy of staff training to carry on safe lending and deposit gathering practices.
These agencies, and the federal and state laws applicable to the Bank’s operations, extensively regulate various aspects of our banking business, including, among other things, permissible types and amounts of loans, investments and other activities, capital adequacy, branching, interest rates on loans and on deposits, the maintenance of reserves on demand deposit liabilities, and the safety and soundness of our banking practices.
Prompt Corrective Action. The FDICIA established a “prompt corrective action” program in which every bank is placed in one of five regulatory categories, depending primarily on its regulatory capital levels. The FDIC and the other federal banking regulators are permitted to take increasingly severe action as a bank’s capital position or financial condition declines below the “Adequately Capitalized” level described below. Regulators are also empowered to place in receivership or require the sale of a bank to another depository institution when a bank’s leverage ratio reaches two percent. Better capitalized institutions are generally subject to less onerous regulation and supervision than banks with lesser amounts of capital. The FDIC’s regulations set forth five capital categories, each with specific regulatory consequences. The categories are:
· Well Capitalized-The institution exceeds the required minimum level for each relevant capital measure. A well capitalized institution (i) has a total risk-based capital ratio of 10% or greater, (ii) has a Tier 1 risk-based capital ratio of 8% or greater, (iii) has a common equity Tier 1 risk-based capital ratio of 6.5% or greater, (iv) has a leverage capital ratio of 5% or greater, and (v) is not subject to any order or written directive to meet and maintain a specific capital level for any capital measure.
· Adequately Capitalized-The institution meets the required minimum level for each relevant capital measure. No capital distribution may be made that would result in the institution becoming undercapitalized. An adequately capitalized institution (i) has a total risk-based capital ratio of 8% or greater, (ii) has a Tier 1 risk-based capital ratio of 6% or greater, (iii) has a common equity Tier 1 risk-based capital ratio of 4.5% or greater, and (iv) has a leverage capital ratio of 4% or greater.
· Undercapitalized-The institution fails to meet the required minimum level for any relevant capital measure. An undercapitalized institution (i) has a total risk-based capital ratio of less than 8%, (ii) has a Tier 1 risk-based capital ratio of less than 6%, (iii) has a common equity Tier 1 risk-based capital ratio of less than 4.5% or greater, or (iv) has a leverage capital ratio of less than 4%.
· Significantly Undercapitalized-The institution is significantly below the required minimum level for any relevant capital measure. A significantly undercapitalized institution (i) has a total risk-based capital ratio of less than 6%, (ii) has a Tier 1 risk-based capital ratio of less than 4%, (iii) has a common equity Tier 1 risk-based capital ratio of less than 3% or greater, or (iv) has a leverage capital ratio of less than 3%.
· Critically Undercapitalized-The institution fails to meet a critical capital level set by the appropriate federal banking agency. A critically undercapitalized institution has a ratio of tangible equity to total assets that is equal to or less than 2%.
Effective with the March 31, 2020 Call Report, qualifying community banking organizations that elect to use the new community bank leverage ratio framework and that maintain a leverage ratio of greater than 9.0% will be considered to have satisfied the risk-based and leverage capital requirements to be deemed well capitalized. See the discussion about the community bank leverage ratio above in “Supervision and Regulation- Legislative and Regulatory Developments-2018 Regulatory Reform. We do not have any immediate plans to elect to use the community bank leverage ratio framework but may make such an election in the future.
If the FDIC determines, after notice and an opportunity for hearing, that the bank is in an unsafe or unsound condition, the regulator is authorized to reclassify the bank to the next lower capital category (other than critically undercapitalized) and require the submission of a plan to correct the unsafe or unsound condition.
If a bank is not well capitalized, it cannot accept brokered deposits without prior regulatory approval. In addition, a bank that is not well capitalized cannot offer an effective yield in excess of 75 basis points over interest paid on deposits of comparable size and maturity in such institution’s normal market area for deposits accepted from within its normal market area, or national rate paid on deposits of comparable size and maturity for deposits accepted outside the bank’s normal market area. Moreover, the FDIC generally prohibits a depository institution from making any capital distributions (including payment of a dividend) or paying any management fee to its parent holding company if the depository institution would thereafter be categorized as undercapitalized. Undercapitalized institutions are subject to growth limitations (an undercapitalized institution may not acquire another institution, establish additional branch offices or engage in any new line of business unless determined by the appropriate federal banking agency to be consistent with an accepted capital restoration plan, or unless the FDIC determines that the proposed action will further the purpose of prompt corrective action) and are required to submit a capital restoration plan. The agencies may not accept a capital restoration plan without determining, among other things, that the plan is based on realistic assumptions and is likely to succeed in restoring the depository institution’s capital. In addition, for a capital restoration plan to be acceptable, the depository institution’s parent holding company must guarantee that the institution will comply with the capital restoration plan. The aggregate liability of the parent holding company is limited to the lesser of an amount equal to 5.0% of the depository institution’s total assets at the time it became categorized as undercapitalized or the amount that is necessary (or would have been necessary) to bring the institution into compliance with all capital standards applicable with respect to such institution as of the time it fails to comply with the plan. If a depository institution fails to submit an acceptable plan, it is categorized as significantly undercapitalized.
Significantly undercapitalized categorized depository institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become categorized as adequately capitalized, requirements to reduce total assets, and cessation of receipt of deposits from correspondent banks. The appropriate federal banking agency may take any action authorized for a significantly undercapitalized institution if an undercapitalized institution fails to submit an acceptable capital restoration plan or fails in any material respect to implement a plan accepted by the agency. A critically undercapitalized institution is subject to having a receiver or conservator appointed to manage its affairs and for loss of its charter to conduct banking activities.
An insured depository institution may not pay a management fee to a bank holding company controlling that institution or any other person having control of the institution if, after making the payment, the institution, would be undercapitalized. In addition, an institution cannot make a capital distribution, such as a dividend or other distribution that is in substance a distribution of capital to the owners of the institution if following such a distribution the institution would be undercapitalized. Thus, if payment of such a management fee or the making of such would cause a bank to become undercapitalized, it could not pay a management fee or dividend to the bank holding company.
As of December 31, 2020, the Bank was deemed to be “well capitalized.”
Standards for Safety and Soundness. The FDIA also requires the federal banking regulatory agencies to prescribe, by regulation or guideline, operational and managerial standards for all insured depository institutions relating to: (i) internal controls, information systems and internal audit systems; (ii) loan documentation; (iii) credit underwriting; (iv) interest rate risk exposure; and (v) asset growth. The agencies also must prescribe standards for asset quality, earnings, and stock valuation, as well as standards for compensation, fees and benefits. The federal banking agencies have adopted regulations and Interagency Guidelines Prescribing Standards for Safety and Soundness to implement these required standards. These guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. Under the regulations, if the FDIC determines that the Bank fails to meet any standards prescribed by the guidelines, the agency may require the Bank to submit to the agency an acceptable plan to achieve compliance with the standard, as required by the FDIC. The final regulations establish deadlines for the submission and review of such safety and soundness compliance plans.
Regulatory Examination. The FDIC also requires the Bank to prepare annual reports on the Bank’s financial condition and to conduct an annual audit of its financial affairs in compliance with its minimum standards and procedures.
All insured institutions must undergo regular on-site examinations by their appropriate banking agency. The cost of examinations of insured depository institutions and any affiliates may be assessed by the appropriate federal banking agency against each institution or affiliate as it deems necessary or appropriate. Insured institutions are required to submit annual reports to the FDIC, their federal regulatory agency, and state supervisor when applicable. The FDIC has developed a method for insured depository institutions to provide supplemental disclosure of the estimated fair market value of assets and liabilities, to the extent feasible and practicable, in any balance sheet, financial statement, report of condition or any other report of any insured depository institution. The federal banking regulatory agencies prescribe, by regulation, standards for all insured depository institutions and depository institution holding companies relating, among other things, to the following:
· internal controls;
· information systems and audit systems;
· loan documentation;
· credit underwriting;
· interest rate risk exposure; and
· asset quality.
Dividends. The Company’s principal source of cash flow, including cash flow to pay dividends to its shareholders, is dividends it receives from the Bank. Statutory and regulatory limitations apply to the Bank’s payment of dividends to the Company. As a South Carolina chartered bank, the Bank is subject to limitations on the amount of dividends that it is permitted to pay. Unless otherwise instructed by the S.C. Board, the Bank is generally permitted under South Carolina state banking regulations to pay cash dividends of up to 100% of net income in any calendar year without obtaining the prior approval of the S.C. Board. The FDIC also has the authority under federal law to enjoin a bank from engaging in what in its opinion constitutes an unsafe or unsound practice in conducting its business, including the payment of a dividend under certain circumstances. The Bank must also maintain the Common Equity Tier 1 capital conservation buffer of 2.5%, in excess of its minimum regulatory risk-based capital ratios, to avoid becoming subject to restrictions on capital distributions, including dividends, as described above.
Branching. Federal legislation permits out-of-state acquisitions by bank holding companies, interstate branching by banks, and interstate merging by banks. The Dodd-Frank Act removed previous state law restrictions on de novo interstate branching in states such as South Carolina and Georgia. This change effectively permits out of state banks to open de novo branches in states where the laws of such state would permit a bank chartered by that state to open a de novo branch.
Anti-Tying Restrictions. Under amendments to the Bank Holding Company Act and Federal Reserve regulations, a bank is prohibited from engaging in certain tying or reciprocity arrangements with its customers. In general, a bank may not extend credit, lease, sell property, or furnish any services or fix or vary the consideration for these on the condition that (i) the customer obtain or provide some additional credit, property, or services from or to the bank, the bank holding company or subsidiaries thereof or (ii) the customer may not obtain some other credit, property, or services from a competitor, except to the extent reasonable conditions are imposed to assure the soundness of the credit extended. Certain arrangements are permissible: a bank may offer combined-balance products and may otherwise offer more favorable terms if a customer obtains two or more traditional bank products; and certain foreign transactions are exempt from the general rule. A bank holding company or any bank affiliate also is subject to anti-tying requirements in connection with electronic benefit transfer services.
Community Reinvestment Act. The Bank is subject to certain requirements and reporting obligations under the CRA, which requires federal banking regulators to evaluate the record of each financial institution in meeting the credit needs of its local community, including low- and moderate- income neighborhoods. The CRA further requires these criteria to be considered in evaluating mergers, acquisitions and applications to open a branch or facility. Failure to adequately meet these criteria could result in the imposition of additional requirements and limitations on the Bank. Additionally, financial institutions must publicly disclose the terms of various CRA-related agreements. In its most recent CRA examination, the Bank received a “satisfactory” rating.
In December 2019, the FDIC and the Office of the Comptroller of the Currency (“OCC”) proposed changes to the regulations implementing the CRA, which, if adopted will result in changes to their current CRA framework. The Federal Reserve Board did not join the proposal. On May 20, 2020 the OCC issued a final rule to strengthen and modernize its existing CRA framework, but the FDIC was not prepared to finalize its CRA proposal at that time.
Financial Subsidiaries. Under the Gramm-Leach-Bliley Act, otherwise referred to as the GLBA, subject to certain conditions imposed by their respective banking regulators, national and state-chartered banks are permitted to form “financial subsidiaries” that may conduct financial or incidental activities, thereby permitting bank subsidiaries to engage in certain activities that previously were impermissible. The GLBA imposes several safeguards and restrictions on financial subsidiaries, including that the parent bank’s equity investment in the financial subsidiary be deducted from the bank’s assets and tangible equity for purposes of calculating the bank’s capital adequacy. In addition, the GLBA imposes new restrictions on transactions between a bank and its financial subsidiaries similar to restrictions applicable to transactions between banks and non-bank affiliates.
Consumer Protection Regulations. Activities of the Bank are subject to a variety of statutes and regulations designed to protect consumers. Interest and other charges collected or contracted for by the Bank are subject to state usury laws and federal laws concerning interest rates. The Bank’s loan operations are also subject to federal laws applicable to credit transactions, such as:
· the Dodd-Frank Act that created the CFPB within the Federal Reserve, which has broad rule-making authority over a wide range of consumer laws that apply to all insured depository institutions;
· the federal Truth-In-Lending Act, otherwise referred to as TILA, and Regulation Z, governing disclosures of credit terms to consumer borrowers and including substantial new requirements for mortgage lending, as mandated by the Dodd-Frank Act;
· the Home Mortgage Disclosure Act of 1975, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves;
· the Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit;
· the Fair Credit Reporting Act of 1978, governing the use and provision of information to credit reporting agencies;
· the Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies; and
· the rules and regulations of the various federal agencies charged with the responsibility of implementing such federal laws.
The deposit operations of the Bank also are subject to:
· the FDIA, which, among other things, limits the amount of deposit insurance available per account to $250,000 and imposes other limits on deposit-taking;
· the Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records;
· the Electronic Funds Transfer Act and Regulation E, which governs automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services;
· the Check Clearing for the 21st Century Act (also known as “Check 21”), which gives “substitute checks,” such as digital check images and copies made from that image, the same legal standing as the original paper check; and
· the Truth in Savings Act and Regulation DD, which requires depository institutions to provide disclosures so that consumers can make meaningful comparisons about depository institutions and accounts.
The CFPB is an independent regulatory authority housed within the Federal Reserve. The CFPB has broad authority to regulate the offering and provision of consumer financial products. The CFPB has the authority to supervise and examine depository institutions with more than $10 billion in assets for compliance with federal consumer laws. The authority to supervise and examine depository institutions with $10 billion or less in assets, such as the Bank, for compliance with federal consumer laws remains largely with those institutions’ primary regulators. However, the CFPB may participate in examinations of these smaller institutions on a “sampling basis” and may refer potential enforcement actions against such institutions to their primary regulators. As such, the CFPB may participate in examinations of the Bank.
The CFPB has issued a number of significant rules that impact nearly every aspect of the lifecycle of a residential mortgage loan. These rules implement Dodd-Frank Act amendments to the Equal Credit Opportunity Act, TILA and the Real Estate Settlement Procedures Act (“RESPA”). Among other things, the rules adopted by the CFPB require banks to: (i) develop and implement procedures to ensure compliance with a “reasonable ability-to-repay” test; (ii) implement new or revised disclosures, policies and procedures for originating and servicing mortgages, including, but not limited to, pre-loan counseling, early intervention with delinquent borrowers and specific loss mitigation procedures for loans secured by a borrower’s principal residence, and mortgage origination disclosures, which integrate existing requirements under TILA and RESPA; (iii) comply with additional restrictions on mortgage loan originator hiring and compensation; and (iv) comply with new disclosure requirements and standards for appraisals and certain financial products.
Bank regulators take into account compliance with consumer protection laws when considering approval of a proposed expansionary proposals.
Enforcement Powers. The Bank and its “institution-affiliated parties,” including its management, employee’s agent’s independent contractors and consultants, such as attorneys and accountants, and others who participate in the conduct of the financial institution’s affairs, are subject to potential civil and criminal penalties for violations of law, regulations or written orders of a government agency. These practices can include the failure of an institution to timely file required reports or the filing of false or misleading information or the submission of inaccurate reports. Civil penalties may be as high as $1,000,000 a day for such violations. Criminal penalties for some financial institution crimes have been increased to twenty years. In addition, regulators are provided with greater flexibility to commence enforcement actions against institutions and institution-affiliated parties. Possible enforcement actions include the termination of deposit insurance. Furthermore, banking agencies’ powers to issue cease-and-desist orders have been expanded. Such orders may, among other things, require affirmative action to correct any harm resulting from a violation or practice, including restitution, reimbursement, indemnifications or guarantees against loss. A financial institution may also be ordered to restrict its growth, dispose of certain assets, rescind agreements or contracts, or take other actions as determined by the ordering agency to be appropriate.
Anti-Money Laundering. Financial institutions must maintain anti-money laundering programs that include established internal policies, procedures, and controls; a designated compliance officer; an ongoing employee training program; and testing of the program by an independent audit function. The Company and the Bank are also prohibited from entering into specified financial transactions and account relationships and must meet enhanced standards for due diligence and “knowing your customer” in their dealings with foreign financial institutions and foreign customers. Financial institutions must take reasonable steps to conduct enhanced scrutiny of account relationships to guard against money laundering and to report any suspicious transactions, and recent laws provide law enforcement authorities with increased access to financial information maintained by banks. Anti-money laundering obligations have been substantially strengthened as a result of the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (which we refer to as the “USA PATRIOT Act”). Bank regulators routinely examine institutions for compliance with these obligations and are required to consider compliance in connection with the regulatory review of applications. The regulatory authorities have been active in imposing cease and desist orders and money penalty sanctions against institutions that have not complied with these requirements.
USA PATRIOT Act/Bank Secrecy Act. As a financial institution, the Bank must maintain anti-money laundering programs that include established internal policies, procedures, and controls; a designated compliance officer; an ongoing employee training program; and testing of the program by an independent audit function. The USA PATRIOT Act, amended, in part, the Bank Secrecy Act and provides for the facilitation of information sharing among governmental entities and financial institutions for the purpose of combating terrorism and money laundering by enhancing anti-money laundering and financial transparency laws, as well as enhanced information collection tools and enforcement mechanics for the U.S. government, including: (i) requiring standards for verifying customer identification at account opening; (ii) rules to promote cooperation among financial institutions, regulators, and law enforcement entities in identifying parties that may be involved in terrorism or money laundering; (iii) reports by nonfinancial trades and businesses filed with the U.S. Treasury Department’s Financial Crimes Enforcement Network for transactions exceeding $10,000; and (iv) filing suspicious activities reports if a bank believes a customer may be violating U.S. laws and regulations and requires enhanced due diligence requirements for financial institutions that administer, maintain, or manage private bank accounts or correspondent accounts for non-U.S. persons. Bank regulators routinely examine institutions for compliance with these obligations and are required to consider compliance in connection with the regulatory review of applications.
Under the USA PATRIOT Act, the Federal Bureau of Investigation (“FBI”) can send to the banking regulatory agencies lists of the names of persons suspected of involvement in terrorist activities. The Bank can be requested, to search its records for any relationships or transactions with persons on those lists. If the Bank finds any relationships or transactions, it must file a suspicious activity report and contact the FBI.
The Office of Foreign Assets Control (“OFAC”), which is a division of the U.S. Department of the Treasury (the “Treasury”), is responsible for helping to insure that United States entities do not engage in transactions with “enemies” of the United States, as defined by various Executive Orders and Acts of Congress. OFAC has sent, and will send, our banking regulatory agencies lists of names of persons and organizations suspected of aiding, harboring or engaging in terrorist acts. If the Bank finds a name on any transaction, account or wire transfer that is on an OFAC list, it must freeze such account, file a suspicious activity report and notify the FBI. The Bank has appointed an OFAC compliance officer to oversee the inspection of its accounts and the filing of any notifications. The Bank actively checks high-risk OFAC areas such as new accounts, wire transfers and customer files. The Bank performs these checks utilizing software, which is updated each time a modification is made to the lists provided by OFAC and other agencies of Specially Designated Nationals and Blocked Persons.
Privacy, Data Security and Credit Reporting. Financial institutions are required to disclose their policies for collecting and protecting confidential information. Customers generally may prevent financial institutions from sharing nonpublic personal financial information with nonaffiliated third parties except under narrow circumstances, such as the processing of transactions requested by the consumer. Additionally, financial institutions generally may not disclose consumer account numbers to any nonaffiliated third party for use in telemarketing, direct mail marketing or other marketing to consumers. It is the Bank’s policy not to disclose any personal information unless required by law.
Recent cyber attacks against banks and other institutions that resulted in unauthorized access to confidential customer information have prompted the Federal banking agencies to issue several warnings and extensive guidance on cyber security. The agencies are likely to devote more resources to this part of their safety and soundness examination than they have in the past.
In addition, pursuant to the Fair and Accurate Credit Transactions Act of 2003 (the “FACT Act”) and the implementing regulations of the federal banking agencies and Federal Trade Commission, the Bank is required to have in place an “identity theft red flags” program to detect, prevent and mitigate identity theft. The Bank has implemented an identity theft red flags program designed to meet the requirements of the FACT Act and the joint final rules. Additionally, the FACT Act amends the Fair Credit Reporting Act to generally prohibit a person from using information received from an affiliate to make a solicitation for marketing purposes to a consumer, unless the consumer is given notice and a reasonable opportunity and a reasonable and simple method to opt out of the making of such solicitations.
Effect of Governmental Monetary Policies. Our earnings are affected by domestic economic conditions and the monetary and fiscal policies of the United States government and its agencies. The Federal Reserve’s monetary policies have had, and are likely to continue to have, an important impact on the operating results of commercial banks through its power to implement national monetary policy in order, among other things, to curb inflation or combat a recession. The monetary policies of the Federal Reserve have major effects upon the levels of bank loans, investments and deposits through its open market operations in United States government securities and through its regulation of the discount rate on borrowings of member banks and the reserve requirements against member bank deposits. It is not possible to predict the nature or impact of future changes in monetary and fiscal policies. On August 1, 2019, September 19, 2019 and October 31, 2019, the Federal Open Market Committee (the “FMOC”) decreased the federal funds target rate by 25 basis points, which resulted in a total reduction of 75 basis points during 2019. On March 4, 2020, the FMOC decreased the federal funds target rate by 50 basis points to a target range of 1.00% to 1.25%; and on March 16, 2020, the FMOC decreased the federal funds target rate by 100 basis points to a target range of 0.00% to 0.25%. Further changes may occur in 2021, but, if so, there is no announced timetable.
Insurance of Accounts and Regulation by the FDIC. The Bank’s deposits are insured up to applicable limits by the Deposit Insurance Fund of the FDIC. As insurer, the FDIC imposes deposit insurance premiums and is authorized to conduct examinations of and to require reporting by FDIC insured institutions. It also may prohibit any FDIC insured institution from engaging in any activity the FDIC determines by regulation or order to pose a serious risk to the insurance fund. The FDIC also has the authority to initiate enforcement actions against savings institutions, after giving the bank’s regulatory authority an opportunity to take such action, and may terminate the deposit insurance if it determines that the institution has engaged in unsafe or unsound practices or is in an unsafe or unsound condition.
As an FDIC-insured bank, the Bank must pay deposit insurance assessments to the FDIC based on its average total assets minus its average tangible equity. The Bank’s assessment rates are currently based on its risk classification (i.e., the level of risk it poses to the FDIC’s deposit insurance fund). Institutions classified as higher risk pay assessments at higher rates than institutions that pose a lower risk.
In addition to the ordinary assessments described above, the FDIC has the ability to impose special assessments in certain instances. For example, under the Dodd-Frank Act, the minimum designated reserve ratio for the deposit insurance fund was increased to 1.35% of the estimated total amount of insured deposits. On September 30, 2018, the deposit insurance fund reached 1.36%, exceeding the statutorily required minimum reserve ratio of 1.35%. On reaching the minimum reserve ratio of 1.35%, FDIC regulations provided for two changes to deposit insurance assessments: (i) surcharges on insured depository institutions with total consolidated assets of $10 billion or more (large institutions) ceased; and (ii) small banks will receive assessment credits for the portion of their assessments that contributed to the growth in the reserve ratio from between 1.15% and 1.35%, to be applied when the reserve ratio is at or above 1.38%. These assessment credits started with the June 30, 2019 assessment invoiced in September 2019 and the FDIC continued to apply the assessment credits so long as the reserve ratio was at least 1.35%. The reserve ratio fell to 1.30% as of June 30, 2020 as a result of extraordinary insured deposit growth caused by an unprecedented inflow of more than $1 trillion in estimated insured deposits in the first half of 2020 stemming mainly from the COVID-19 pandemic, specifically monetary policy actions, direct government assistance to consumers and businesses, and an overall reduction in spending. Therefore, on September 15, 2020, the FDIC waived the provision of the FDIC’s assessment regulations requiring that the reserve ratio must be at least 1.35% for the FDIC to remit the full nominal value of an insured depository institution’s remaining assessment credits. All remaining small bank credits were refunded on the September 30, 2020 assessment invoice effectively ending the application of small bank credits. Assessment rates are expected to decrease if the reserve ratio increases such that it exceeds 2%.
The FDIC may terminate the deposit insurance of any insured depository institution, including the Bank, if it determines after a hearing that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. It also may suspend deposit insurance temporarily during the hearing process for the permanent termination of insurance, if the institution has no tangible capital. If insurance of accounts is terminated, the accounts at the institution at the time of the termination, less subsequent withdrawals, shall continue to be insured for a period of six months to two years, as determined by the FDIC. Management is not aware of any practice, condition or violation that might lead to termination of the Bank’s deposit insurance.
Incentive Compensation. The Dodd-Frank Act requires the federal bank regulators and the SEC to establish joint regulations or guidelines prohibiting incentive-based payment arrangements at specified regulated entities having at least $1 billion in total assets that encourage inappropriate risks by providing an executive officer, employee, director or principal shareholder with excessive compensation, fees, or benefits or that could lead to material financial loss to the entity. In addition, these regulators must establish regulations or guidelines requiring enhanced disclosure to regulators of incentive-based compensation arrangements. The agencies proposed such regulations in April 2011. However, the 2011 proposal was replaced with a new proposal in May 2016, which makes explicit that the involvement of risk management and control personnel includes not only compliance, risk management and internal audit, but also legal, human resources, accounting, financial reporting and finance roles responsible for identifying, measuring, monitoring or controlling risk-taking. A final rule had not been adopted as of December 31, 2020.
In June 2010, the Federal Reserve, the FDIC and the OCC issued a comprehensive final guidance on incentive compensation policies intended to ensure that the incentive compensation policies of banking organizations do not undermine the safety and soundness of such organizations by encouraging excessive risk-taking. The guidance, which covers all employees that have the ability to materially affect the risk profile of an organization, either individually or as part of a group, is based upon the key principles that a banking organization’s incentive compensation arrangements should (i) provide incentives that do not encourage risk-taking beyond the organization’s ability to effectively identify and manage risks, (ii) be compatible with effective internal controls and risk management, and (iii) be supported by strong corporate governance, including active and effective oversight by the organization’s board of directors.
The Federal Reserve will review, as part of the regular, risk-focused examination process, the incentive compensation arrangements of banking organizations, such as the Company, that are not “large, complex banking organizations.” These reviews will be tailored to each organization based on the scope and complexity of the organization’s activities and the prevalence of incentive compensation arrangements. The findings of the supervisory initiatives will be included in reports of examination. Deficiencies will be incorporated into the organization’s supervisory ratings, which can affect the organization’s ability to make acquisitions and take other actions. Enforcement actions may be taken against a banking organization if its incentive compensation arrangements, or related risk-management control or governance processes, pose a risk to the organization’s safety and soundness and the organization is not taking prompt and effective measures to correct the deficiencies.
In addition, the Tax Cuts and Jobs Act (the “Tax Act”), which was signed into law in December 2017, contains certain provisions affecting performance-based compensation. Specifically, the pre-existing exception to the $1.0 million deduction limitation applicable to performance-based compensation was repealed. The deduction limitation is now applied to all compensation exceeding $1.0 million, for our covered employees, regardless of how it is classified, which could have an adverse effect on our income tax expense and net income.
Concentrations in Commercial Real Estate. Concentration risk exists when FDIC-insured institutions deploy too many assets to any one industry or segment. A concentration in commercial real estate is one example of regulatory concern. The interagency Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices guidance (“CRE Guidance”) provides supervisory criteria, including the following numerical indicators, to assist bank examiners in identifying banks with potentially significant commercial real estate loan concentrations that may warrant greater supervisory scrutiny: (i) total non-owner-occupied commercial real estate loans, including loans secured by apartment buildings, investor commercial real estate, and construction and land loans, exceeding 300% or more of an institution’s total risk-based capital and the outstanding balance of the commercial real estate loan portfolio has increased by 50% or more in the preceding three years or (ii) construction and land development loans exceeding 100% of total risk-based capital. The CRE Guidance does not limit banks’ levels of commercial real estate lending activities, but rather guides institutions in developing risk management practices and levels of capital that are commensurate with the level and nature of their commercial real estate concentrations. On December 18, 2015, the federal banking agencies issued a statement to reinforce prudent risk-management practices related to commercial real estate lending, having observed substantial growth in many commercial real estate asset and lending markets, increased competitive pressures, rising commercial real estate concentrations in banks, and an easing of commercial real estate underwriting standards. The federal bank agencies reminded FDIC-insured institutions to maintain underwriting discipline and exercise prudent risk-management practices to identify, measure, monitor and manage the risks arising from commercial real estate lending. In addition, FDIC-insured institutions must maintain capital commensurate with the level and nature of their commercial real estate concentration risk. Based on the Bank’s loan portfolio as of December 31, 2020, its non-owner occupied commercial loans and its construction and land development loans were approximately 270% and 85% of total risk-based capital, respectively. Management will continue to monitor the level of the concentration in commercial real estate loans within the bank’s loan portfolio.

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ITEM 1A. RISK FACTORS
Item 1A. Risk Factors.
There are risks, many beyond our control, which could cause our results to differ significantly from management’s expectations. Some of these risk factors are described below. Any factor described in this Annual Report on Form 10-K could, by itself or together with one or more other factors, adversely affect our business, results of operations and/or financial condition. Additional risks and uncertainties not currently known to us or that we currently consider to not be material also may materially and adversely affect us. In assessing these risks, you should also refer to other information disclosed in our SEC filings, including the financial statements and notes thereto. The risks discussed below also include forward-looking statements, and actual results may differ substantially from those discussed or implied in these forward-looking statements.
Economic and Geographic-Related Risks
The global COVID-19 pandemic has adversely affected our business, financial condition and results of operations, and the ultimate affect of the pandemic on our business, financial condition and results of operations will depend on future developments and other factors that are highly uncertain.
The global COVID-19 pandemic and related government-imposed and other measures intended to control the spread of the disease, including restrictions on travel and the conduct of business, such as stay-at-home orders, quarantines, travel bans, border closings, business and school closures and other similar measures, have had a significant impact on global economic conditions and have negatively impacted certain aspects of our business, financial condition and results of operations, and may continue to do so in the future. The governmental and social response to the COVID-19 pandemic has resulted in an unprecedented slow-down in economic activity and a related increase in unemployment. The COVID-19 pandemic, and related efforts to contain it, have also caused significant disruptions in the functioning of the financial markets and have increased economic and market uncertainty and volatility.
Given the ongoing, dynamic and unprecedented nature of the COVID-19 pandemic, it is difficult to predict the full impact the pandemic will have on our business. While certain factors point to improving economic conditions, uncertainty remains regarding the path of the economic recovery, the mitigating impacts of government interventions, the success of vaccine distribution and the efficacy of administered vaccines, as well as the effects of the change in leadership resulting from the recent elections. The COVID-19 pandemic may subject us to any of the following risks, any of which could have a material adverse effect on our business, financial condition, liquidity, results of operations, risk-weighted assets and regulatory capital:
· because the incidence of reported COVID-19 cases and related hospitalizations and deaths varies significantly by state and locality, the economic downturn caused by the pandemic may be deeper and more sustained in certain areas, including those in which we do business, relative to other areas of the country;
· our ability to market our products and services may be impaired by a variety of external factors, including a prolonged reduction in economic activity and continued economic and financial market volatility, which could cause demand for our products and services to decline, in turn making it difficult for us to grow assets and income;
· if the economy is unable to substantially reopen and high levels of unemployment continue for an extended period of time, loan delinquencies, problem assets, and foreclosures may increase, resulting in increased charges and reduced income;
· collateral for loans, especially real estate, may decline in value, which may reduce our ability to liquidate such collateral and could cause loan losses to increase and impair our ability over the long run to maintain our targeted loan origination volume;
· our allowance credit losses may have to be increased if borrowers experience financial difficulties beyond forbearance periods, which will adversely affect our net income;
· an increase in non-performing loans due to the COVID-19 pandemic would result in a corresponding increase in the risk-weighting of assets and therefore an increase in required regulatory capital;
· the net worth and liquidity of borrowers and loan guarantors may decline, impairing their ability to honor commitments to us;
· as the result of the reduction of the Federal Reserve’s target federal funds rate to near 0%, the yield on our assets may decline to a greater extent than the decline in our cost of interest-bearing liabilities, reducing our net interest margin and spread and reducing net income;
· deposits could decline if customers need to draw on available balances as a result of the economic downturn;
· a material decrease in net income or a net loss over several quarters could result in a decrease in the rate of our quarterly cash dividend;
· the borrowing needs of our clients may increase, especially during this challenging economic environment, which could result in increased borrowing against our contractual obligations to extend credit;
· we face heightened cybersecurity risk in connection with our operation of a remote working environment, which risks include, among others, greater phishing, malware, and other cybersecurity attacks, vulnerability to disruptions of our information technology infrastructure and telecommunications systems, increased risk of unauthorized dissemination of confidential information, limited ability to restore our systems in the event of a systems failure or interruption, greater risk of a security breach resulting in destruction or misuse of valuable information, and potential impairment of our ability to perform critical functions-all of which could expose us to risks of data or financial loss, litigation and liability and could seriously disrupt our operations and the operations of any impacted customers;
· we rely on third party vendors for certain services and the unavailability of a critical service or limitations on the business capacities of our vendors for extended periods of time due to the COVID-19 pandemic could have an adverse effect on our operations; and
· as a result of the COVID-19 pandemic, there may be unexpected developments in financial markets, legislation, regulations and consumer and customer behavior.
Even after the COVID-19 outbreak has subsided, we may continue to experience materially adverse impacts to our business as a result of the virus’s global economic impact, including the availability of credit, adverse impacts on our liquidity and any recession that has occurred or may occur in the future. There are no comparable recent events that provide guidance as to the effect the spread of COVID-19 as a global pandemic may have, and, as a result, the ultimate impact of the outbreak is highly uncertain and subject to change. We do not yet know the full extent of the impacts on our business, our operations or the global economy as a whole. However, the effects could have a material impact on our results of operations and heighten many of our known risks described herein.
Our business may be adversely affected by economic conditions generally.
Our financial performance generally, and in particular the ability of borrowers to pay interest on and repay principal of outstanding loans and the value of collateral securing those loans, as well as demand for loans and other products and services we offer and whose success we rely on to drive our growth, is highly dependent upon the business environment in the primary markets where we operate and in the U.S. as a whole. Unlike larger banks that are more geographically diversified, we are a regional bank that provides banking and financial services to customers primarily in South Carolina and Georgia. The economic conditions in these local markets may be different from, and in some instances worse than, the economic conditions in the U.S. as a whole.
Some elements of the business environment that affect our financial performance include short-term and long-term interest rates, the prevailing yield curve, inflation and price levels, monetary and trade policy, unemployment and the strength of the domestic economy and the local economy in the markets in which we operate. Unfavorable market conditions can result in a deterioration in the credit quality of our borrowers and the demand for our products and services, an increase in the number of loan delinquencies, defaults and charge-offs, foreclosures, additional provisions for loan losses, adverse asset values of the collateral securing our loans and an overall material adverse effect on the quality of our loan portfolio. The majority of our loan portfolio is secured by real estate. A decline in real estate values can negatively impact our ability to recover our investment should the borrower become delinquent. Loans secured by stock or other collateral may be adversely impacted by a downturn in the economy and other factors that could reduce the recoverability of our investment. Unsecured loans are dependent on the solvency of the borrower, which can deteriorate, leaving us with a risk of loss. Unfavorable or uncertain economic and market conditions can be caused by declines in economic growth, business activity or investor or business confidence; limitations on the availability or increases in the cost of credit and capital; increases in inflation or interest rates; high unemployment; natural disasters; epidemics and pandemics (such as COVID-19); or a combination of these or other factors.
The impact of the COVID-19 pandemic is fluid and continues to evolve and there is pervasive uncertainty surrounding the future economic conditions that will emerge in the months and years following the onset of the pandemic. Even after the COVID-19 pandemic subsides, the U.S. economy will likely require some time to recover from its effects, the length of which is unknown, and during which we may experience a recession. In addition, there are continuing concerns related to, among other things, the level of U.S. government debt and fiscal actions that may be taken to address that debt, depressed oil prices and a potential resurgence of economic and political tensions with China that may have a destabilizing effect on financial markets and economic activity. Economic pressure on consumers and overall economic uncertainty may result in changes in consumer and business spending, borrowing and saving habits. These economic conditions and/or other negative developments in the domestic or international credit markets may significantly affect the markets in which we do business, the value of our loans and investments, and our ongoing operations, costs and profitability. Declines in real estate values and sales volumes and high unemployment may also result in higher than expected loan delinquencies, increases in our levels of nonperforming and classified assets and a decline in demand for our products and services. These negative events may cause us to incur losses and may adversely affect our capital, liquidity and financial condition.
Credit and Interest Rate Risk
Our decisions regarding credit risk and reserves for loan losses may materially and adversely affect our business.
Making loans and other extensions of credit is an essential element of our business. Although we seek to mitigate risks inherent in lending by adhering to specific underwriting practices, our loans and other extensions of credit may not be repaid. The risk of nonpayment is affected by a number of factors, including:
· the duration of the credit;
· credit risks of a particular customer;
· changes in economic and industry conditions; and
· in the case of a collateralized loan, risks resulting from uncertainties about the future value of the collateral.
We attempt to maintain an appropriate allowance for loan losses to provide for potential losses in our loan portfolio. We periodically determine the amount of the allowance based on consideration of several factors, including:
· an ongoing review of the quality, mix, and size of our overall loan portfolio;
· our historical loan loss experience;
· evaluation of economic conditions;
· regular reviews of loan delinquencies and loan portfolio quality; and
· the amount and quality of collateral, including guarantees, securing the loans.
There is no precise method of predicting credit losses; therefore, we face the risk that charge-offs in future periods will exceed our allowance for loan losses and that additional increases in the allowance for loan losses will be required. Additions to the allowance for loan losses would result in a decrease of our net income, and possibly our capital.
Federal and state regulators periodically review our allowance for loan losses and may require us to increase our provision for loan losses or recognize further loan charge-offs, based on judgments different than those of our management. Any increase in the amount of our provision or loans charged-off as required by these regulatory agencies could have a negative effect on our operating results.
We may have higher loan losses than we have allowed for in our allowance for loan losses.
Our actual loan losses could exceed our allowance for loan losses. Our average loan size continues to increase and reliance on our historic allowance for loan losses may not be adequate. As of December 31, 2020, approximately 85.6% of our loan portfolio (excluding loans held for sale) is composed of construction (11.3%), commercial mortgage (67.9%) and commercial (excluding PPP) (6.4%) loans. Repayment of such loans is generally considered more subject to market risk than residential mortgage loans. Industry experience shows that a portion of loans will become delinquent and a portion of loans will require partial or entire charge-off. Regardless of the underwriting criteria utilized, losses may be experienced as a result of various factors beyond our control, including among other things, changes in market conditions affecting the value of loan collateral and problems affecting the credit of our borrowers.
While the fiscal stimulus and relief programs appear to have delayed any materially adverse financial impact to the Bank, once these stimulus programs have been exhausted, we believe our credit metrics could worsen and loan losses could ultimately materialize. Any potential loan losses will be contingent upon a number of factors beyond our control, such as the resurgence of the virus, including any new strains, offset by the potency of the vaccine along with its extensive distribution, and the ability for customers and businesses to return to their pre-pandemic routines.
We have a concentration of credit exposure in commercial real estate and challenges faced by the commercial real estate market could adversely affect our business, financial condition, and results of operations.
As of December 31, 2020, we had approximately $655.5 million in loans outstanding to borrowers whereby the collateral securing the loan was commercial real estate, representing approximately 77.7% of our total loans outstanding as of that date. Approximately 28.7%, or $242.1 million, of this real estate is owner-occupied properties. Commercial real estate loans are generally viewed as having more risk of default than residential real estate loans. They are also typically larger than residential real estate loans and consumer loans and depend on cash flows from the owner’s business or the property to service the debt. Cash flows may be affected significantly by general economic conditions, and a downturn in the local economy or in occupancy rates in the local economy where the property is located could increase the likelihood of default. Because our loan portfolio contains a number of commercial real estate loans with relatively large balances, the deterioration of one or a few of these loans could cause a significant increase in our level of non-performing loans. An increase in non-performing loans could result in a loss of earnings from these loans, an increase in the related provision for loan losses and an increase in charge-offs, all of which could have a material adverse effect on our financial condition and results of operations.
Our commercial real estate loans have grown 11.6% or $68 million, since December 31, 2019. The banking regulators are giving commercial real estate lending greater scrutiny, and may require banks with higher levels of commercial real estate loans to implement more stringent underwriting, internal controls, risk management policies and portfolio stress testing, as well as possibly higher levels of allowances for losses and capital levels as a result of commercial real estate lending growth and exposures.
Imposition of limits by the bank regulators on commercial and multi-family real estate lending activities could curtail our growth and adversely affect our earnings.
In 2006, the FDIC, the Federal Reserve and the Office of the Comptroller of the Currency issued joint guidance entitled “Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices” (the “CRE Guidance”). Although the CRE Guidance did not establish specific lending limits, it provides that a bank’s commercial real estate lending exposure could receive increased supervisory scrutiny where (i) total non-owner-occupied commercial real estate loans, including loans secured by apartment buildings, investor commercial real estate, and construction and land loans, represent 300% or more of an institution’s total risk-based capital, and the outstanding balance of the commercial real estate loan portfolio has increased by 50% or more during the preceding 36 months, or (ii) construction and land development loans exceed 100% of total risk-based capital. Our total non-owner-occupied commercial real estate loans represented 270% of the Bank’s total risk-based capital at December 31, 2020, and our construction and land development loans represented 85% of the Bank’s total risk-based capital at December 31, 2020.
In December 2015, the regulatory agencies released a new statement on prudent risk management for commercial real estate lending (the “2015 Statement”). In the 2015 Statement, the regulatory agencies, among other things, indicated their intent to continue “to pay special attention” to commercial real estate lending activities and concentrations going forward. If the FDIC, our primary federal regulator, were to impose restrictions on the amount of commercial real estate loans we can hold in our portfolio, for reasons noted above or otherwise, our earnings would be adversely affected.
Repayment of our commercial business loans is often dependent on the cash flows of the borrower, which may be unpredictable, and the collateral securing these loans may fluctuate in value.
At December 31, 2020, commercial business loans excluding PPP loans comprised 6.4% of our total loan portfolio. Our commercial business loans are originated primarily based on the identified cash flow and general liquidity of the borrower and secondarily on the underlying collateral provided by the borrower and/or repayment capacity of any guarantor. The borrower’s cash flow may be unpredictable, and collateral securing these loans may fluctuate in value. Although commercial business loans are often collateralized by equipment, inventory, accounts receivable, or other business assets, the liquidation of collateral in the event of default is often an insufficient source of repayment because accounts receivable may be uncollectible and inventories may be obsolete or of limited use. In addition, business assets may depreciate over time, may be difficult to appraise, and may fluctuate in value based on the success of the business. Accordingly, the repayment of commercial business loans depends primarily on the cash flow and credit worthiness of the borrower and secondarily on the underlying collateral value provided by the borrower and liquidity of the guarantor.
Our focus on lending to small to mid-sized community-based businesses may increase our credit risk.
Most of our commercial business and commercial real estate loans are made to small business or middle market customers. These businesses generally have fewer financial resources in terms of capital or borrowing capacity than larger entities and have a heightened vulnerability to economic conditions. If general economic conditions in the markets in which we operate negatively impact this important customer sector, our results of operations and financial condition and the value of our common stock may be adversely affected. Moreover, a portion of these loans have been made by us in recent years and the borrowers may not have experienced a complete business or economic cycle. Furthermore, the deterioration of our borrowers’ businesses may hinder their ability to repay their loans with us, which could have a material adverse effect on our financial condition and results of operations.
Our underwriting decisions may materially and adversely affect our business.
While we generally underwrite the loans in our portfolio in accordance with our own internal underwriting guidelines and regulatory supervisory guidelines, in certain circumstances we have made loans which exceed either our internal underwriting guidelines, supervisory guidelines, or both. As of December 31, 2020, approximately $36.6 million of our loans, or 28.6% of the Bank’s regulatory capital, had loan-to-value ratios that exceeded regulatory supervisory guidelines, of which only one loan totaling approximately $210 thousand had loan-to-value ratios of 100% or more. In addition, supervisory limits on commercial loan-to-value exceptions are set at 30% of the Bank’s capital. At December 31, 2020, $27.6 million of our commercial loans, or 21.1% of the Bank’s regulatory capital, exceeded the supervisory loan-to-value ratio. The number of loans in our portfolio with loan-to-value ratios in excess of supervisory guidelines, our internal guidelines, or both could increase the risk of delinquencies and defaults in our portfolio.
We depend on the accuracy and completeness of information about clients and counterparties and our financial condition could be adversely affected if we rely on misleading information.
In deciding whether to extend credit or to enter into other transactions with clients and counterparties, we may rely on information furnished to us by or on behalf of clients and counterparties, including financial statements and other financial information, which we do not independently verify. We also may rely on representations of clients and counterparties as to the accuracy and completeness of that information and, with respect to financial statements, on reports of independent auditors. For example, in deciding whether to extend credit to clients, we may assume that a customer’s audited financial statements conform with GAAP and present fairly, in all material respects, the financial condition, results of operations and cash flows of the customer. Our financial condition and results of operations could be negatively impacted to the extent we rely on financial statements that do not comply with GAAP or are materially misleading.
If we fail to effectively manage credit risk and interest rate risk, our business and financial condition will suffer.
We must effectively manage credit risk. There are risks inherent in making any loan, including risks with respect to the period of time over which the loan may be repaid, risks relating to proper loan underwriting and guidelines, risks resulting from changes in economic and industry conditions, risks inherent in dealing with individual borrowers and risks resulting from uncertainties as to the future value of collateral. Many of these risks have been and may further be exacerbated by the effects of the COVID-19 pandemic. There is no assurance that our credit risk monitoring and loan approval procedures are or will be adequate or will reduce the inherent risks associated with lending. Our credit administration personnel, policies and procedures may not adequately adapt to changes in economic or any other conditions affecting customers and the quality of our loan portfolio. Any failure to manage such credit risks may materially adversely affect our business and our consolidated results of operations and financial condition.
Changes in prevailing interest rates may reduce our profitability.
Our results of operations depend in large part upon the level of our net interest income, which is the difference between interest income from interest-earning assets, such as loans and mortgage-backed securities (“MBSs”), and interest expense on interest-bearing liabilities, such as deposits and other borrowings. Depending on the terms and maturities of our assets and liabilities, we believe a significant change in interest rates could potentially have a material adverse effect on our profitability. Many factors cause changes in interest rates, including governmental monetary policies and domestic and international economic and political conditions. While we intend to manage the effects of changes in interest rates by adjusting the terms, maturities, and pricing of our assets and liabilities, our efforts may not be effective and our financial condition and results of operations could suffer.
Capital and Liquidity Risks
Changes in the financial markets could impair the value of our investment portfolio.
Our investment securities portfolio is a significant component of our total earning assets. Total investment securities averaged $300.9 million in 2020, as compared to $257.6 million in 2019. This represents 25.1% and 25.3% of the average earning assets for the years ended December 31, 2020 and 2019, respectively. At December 31, 2020, the portfolio was 27.9% of earning assets. Turmoil in the financial markets could impair the market value of our investment portfolio, which could adversely affect our net income and possibly our capital.
As of December 31, 2020 and 2019, securities which have unrealized losses were not considered to be “other than temporarily impaired,” and we believe it is more likely than not we will be able to hold these until they mature or recover our current book value. We currently maintain substantial liquidity which supports our ability to hold these investments until they mature, or until there is a market price recovery. However, if we were to cease to have the ability and intent to hold these investments until maturity or the market prices do not recover, and we were to sell these securities at a loss, it could adversely affect our net income and possibly our capital.
We are subject to strict capital requirements, which could be amended to be more stringent, in the future.
We are subject to regulatory requirements specifying minimum amounts and types of capital that we must maintain and an additional capital conservation buffer. From time to time, the regulators change these regulatory capital adequacy guidelines. If we fail to meet these capital guidelines and other regulatory requirements, we or our subsidiaries may be restricted in the types of activities we may conduct and we may be prohibited from taking certain capital actions, such as paying dividends, repurchasing or redeeming capital securities, and paying certain bonuses.
In particular, the capital requirements applicable to the Bank under the Basel III rules became fully phased-in on January 1, 2019. The Bank is now required to satisfy additional, more stringent, capital adequacy standards than it had in the past. While we expect to meet the requirements of the Basel III rules, we may fail to do so. Failure to meet minimum capital requirements could result in certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have an adverse material effect on our financial condition and results of operations. In addition, these requirements could have a negative impact on our ability to lend, grow deposit balances, make acquisitions, make capital distributions in the form of dividends or share repurchases, or pay certain bonuses needed to attract and retain key personnel. Higher capital levels could also lower our return on equity.
Risks Related to Our Industry
The phase-out of LIBOR could negatively impact our net interest income and require significant operational work.
The United Kingdom’s Financial Conduct Authority, which regulates the London Interbank Offered Rate (“LIBOR”), has announced that it will not compel panel banks to contribute to LIBOR after 2021. It is likely that banks will not continue to provide submissions for the calculation of LIBOR after 2021 and possibly prior to then. The discontinuance of LIBOR has resulted in significant uncertainty regarding the transition to suitable alternative reference rates and could adversely impact our business, operations, and financial results. Although the full impact of transition remains unclear, this change may have an adverse impact on the value of, return on and trading markets for a broad array of financial products, including any LIBOR-based securities, loans and derivatives that are included in our financial assets and liabilities. If LIBOR is discontinued after 2021 as expected, there will be uncertainty or differences in the calculation of the applicable interest rate or payment amount depending on the terms of the governing instruments, which may also impact our net interest income and account and service fees. In addition, LIBOR may perform differently during the phase-out period than in the past which could result in lower interest earned on certain assets and a reduction in the value of certain assets. The Federal Reserve Board, in conjunction with the Alternative Reference Rates Committee, a steering committee comprised of large U.S. financial institutions, has endorsed replacing the U.S. dollar LIBOR with a new index calculated by short-term repurchase agreements, backed by Treasury securities (“SOFR”). SOFR is observed and backward looking, which stands in contrast with LIBOR under the current methodology, which is an estimated forward-looking rate and relies, to some degree, on the expert judgment of submitting panel members. Given that SOFR is a secured rate backed by government securities, it will be a rate that does not take into account bank credit risk (as is the case with LIBOR). In November 2020, the federal banking agencies issued a statement that says that banks may use any reference rate for its loans that the bank determines to be appropriate for its funding model and customer needs.
As of December 31, 2020, we had $20.6 million in LIBOR-based loans, $71.3 million in securities, and $15.0 million in junior subordinated debt indexed to LIBOR. Uncertainty as to the nature of alternative reference rates and as to potential changes or other reforms to LIBOR may adversely affect LIBOR rates and the value of LIBOR-based loans, if such loans do not mature or pre-pay before the transition. For new loan originations and renewals with maturities greater than one year, we have generally ceased relying on LIBOR and have moved to alternative indices.
Higher FDIC deposit insurance premiums and assessments could adversely affect our financial condition.
Our deposits are insured up to applicable limits by the Deposit Insurance Fund of the FDIC and are subject to deposit insurance assessments to maintain deposit insurance. As an FDIC-insured institution, we are required to pay quarterly deposit insurance premium assessments to the FDIC. Although we cannot predict what the insurance assessment rates will be in the future, either deterioration in our risk-based capital ratios or adjustments to the base assessment rates could have a material adverse impact on our business, financial condition, results of operations, and cash flows.
We could experience a loss due to competition with other financial institutions or nonbank companies.
We face substantial competition in all areas of our operations from a variety of different competitors, both within and beyond our principal markets, many of which are larger and may have more financial resources. Such competitors primarily include national, regional, community and internet banks within the various markets in which we operate. We also face competition from many other types of financial institutions, including, without limitation, savings and loans, credit unions, finance companies, brokerage firms, insurance companies, and other financial intermediaries. The financial services industry could become even more competitive as a result of legislative and regulatory changes and continued consolidation. In addition, as customer preferences and expectations continue to evolve, technology has lowered barriers to entry and made it possible for banks to offer products and services in more areas in which they do not have a physical location and for nonbanks, such as FinTech companies, to offer products and services traditionally provided by banks, such as automatic transfer and automatic payment systems. Banks, securities firms, and insurance companies can merge under the umbrella of a financial holding company, which can offer virtually any type of financial service, including banking, securities underwriting, insurance (both agency and underwriting), and merchant banking. Many of our competitors have fewer regulatory constraints and may have lower cost structures. Additionally, due to their size, many competitors may be able to achieve economies of scale and, as a result, may offer a broader range of products and services as well as better pricing for those products and services than we can.
Our ability to compete successfully depends on a number of factors, including, among other things:
· our ability to develop, maintain, and build upon long-term customer relationships based on top quality service, high ethical standards, and safe, sound assets;
· our ability to expand our market position;
· the scope, relevance, and pricing of the products and services we offer to meet our customers’ needs and demands;
· the rate at which we introduce new products and services relative to our competitors;
· customer satisfaction with our level of service; and
· industry and general economic trends.
Failure to perform in any of these areas could significantly weaken our competitive position, which could adversely affect our growth and profitability, which, in turn, could have a material adverse effect on our business, financial condition and results of operations.
We may be adversely affected by the soundness of other financial institutions.
Financial services institutions are interrelated as a result of trading, clearing, counterparty, or other relationships. We have exposure to many different industries and counterparties, and routinely execute transactions with counterparties in the financial services industry, including commercial banks, brokers and dealers, investment banks, and other institutional clients. Many of these transactions expose us to credit risk in the event of a default by a counterparty or client. In addition, our credit risk may be exacerbated when the collateral held by the bank cannot be realized upon or is liquidated at prices not sufficient to recover the full amount of the credit or derivative exposure due to the bank. Any such losses could have a material adverse effect on our financial condition and results of operations.
Failure to keep pace with technological change could adversely affect our business.
The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology-driven products and services. The effective use of technology increases efficiency and enables financial institutions to better serve customers and to reduce costs. Our future success depends, in part, upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in our operations. Many of our competitors have substantially greater resources to invest in technological improvements. We may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to our customers. In addition, we depend on internal and outsourced technology to support all aspects of our business operations. Failure to successfully keep pace with technological change affecting the financial services industry could have a material adverse impact on our business, financial condition and results of operations.
New lines of business or new products and services may subject us to additional risk.
From time to time, we may implement new lines of business or offer new products and services within existing lines of business. There are substantial risks and uncertainties associated with these efforts, particularly in instances where the markets are not fully developed. In developing and marketing new lines of business and/or new products and services, we may invest significant time and resources. Initial timetables for the introduction and development of new lines of business and/or new products or services may not be achieved and price and profitability targets may not prove feasible. External factors, such as compliance with regulations, competitive alternatives, and shifting market preferences, may also impact the successful implementation of a new line of business and/or a new product or service. Furthermore, any new line of business and/or new product or service could have a significant impact on the effectiveness of our system of internal controls. Failure to successfully manage these risks in the development and implementation of new lines of business and/or new products or services could have a material adverse effect on our business, financial condition and results of operations.
Consumers may decide not to use banks to complete their financial transactions.
Technology and other changes are allowing parties to complete financial transactions through alternative methods that historically have involved banks. For example, consumers can now maintain funds that would have historically been held as bank deposits in brokerage accounts, mutual funds or general-purpose reloadable prepaid cards. Consumers can also complete transactions such as paying bills and/or transferring funds directly without the assistance of banks. The process of eliminating banks as intermediaries, known as “disintermediation,” could result in the loss of fee income, as well as the loss of customer deposits and the related income generated from those deposits. The loss of these revenue streams and the lower cost of deposits as a source of funds could have a material adverse effect on our financial condition and results of operations.
Risks Related to Our Strategy
We may be adversely affected by risks associated with future mergers and acquisitions, including execution risk, which could disrupt our business and dilute shareholder value.
From time to time, we may seek to acquire other financial institutions or parts of those institutions. We may also expand into new markets or lines of business or offer new products or services. These activities would involve a number of risks, including:
· the potential inaccuracy of the estimates and judgments used to evaluate credit, operations, management, and market risks with respect to a target institution;
· regulatory approvals could be delayed, impeded, restrictively conditioned or denied due to existing or new regulatory issues we have, or may have, with regulatory agencies, including, without limitation, issues related to anti-money laundering/Bank Secrecy Act compliance, fair lending laws, fair housing laws, consumer protection laws, unfair, deceptive, or abusive acts or practices regulations, CRA issues, and other similar laws and regulations;
· the time and costs of evaluating new markets, hiring or retaining experienced local management, and opening new offices and the time lags between these activities and the generation of sufficient assets and deposits to support the costs of the expansion;
· difficulty or unanticipated expense associated with converting the operating systems of the acquired or merged company into ours;
· the incurrence and possible impairment of goodwill and other intangible assets associated with an acquisition or merger and possible adverse effects on our results of operations; and
· the risk of loss of key employees and customers of the Company or the acquired or merged company.
If we do not successfully manage these risks, our merger and acquisition activities could have a material adverse effect on our business, financial condition, and results of operations, including short-term and long-term liquidity, and our ability to successfully implement our strategic plan.
We may be exposed to difficulties in combining the operations of acquired businesses into our own operations, which may prevent us from achieving the expected benefits from our acquisition activities.
We may not be able to fully achieve the strategic objectives and operating efficiencies that we anticipate in our acquisition activities. Inherent uncertainties exist in integrating the operations of an acquired business. In addition, the markets and industries in which we and our potential acquisition targets operate are highly competitive. We may lose customers or the customers of acquired entities as a result of an acquisition. We also may lose key personnel from the acquired entity as a result of an acquisition. We may not discover all known and unknown factors when examining a company for acquisition during the due diligence period. These factors could produce unintended and unexpected consequences for us. Undiscovered factors as a result of acquisitions, pursued by non-related third party entities, could bring civil, criminal, and financial liabilities against us, our management, and the management of those entities acquired. These factors could contribute to us not achieving the expected benefits from acquisitions within desired time frames.
New or acquired banking office facilities and other facilities may not be profitable.
We may not be able to identify profitable locations for new banking offices. The costs to start up new banking offices or to acquire existing branches, and the additional costs to operate these facilities, may increase our non-interest expense and decrease our earnings in the short term. If branches of other banks become available for sale, we may acquire those offices. It may be difficult to adequately and profitably manage our growth through the establishment or purchase of additional banking offices and we can provide no assurance that any such banking offices will successfully attract enough deposits to offset the expenses of their operation. In addition, any new or acquired banking offices will be subject to regulatory approval, and there can be no assurance that we will succeed in securing such approval.
Risks Related to Our Human Capital
We are dependent on key individuals, and the loss of one or more of these key individuals could curtail our growth and adversely affect our prospects.
Michael C. Crapps, our president and chief executive officer, has extensive and long-standing ties within our primary market area and substantial experience with our operations, and he has contributed significantly to our business. If we lose the services of Mr. Crapps, he would be difficult to replace and our business and development could be materially and adversely affected.
Our success also depends, in part, on our continued ability to attract and retain experienced loan originators, as well as other management personnel. Competition for personnel is intense, and we may not be successful in attracting or retaining qualified personnel. Our failure to compete for these personnel, or the loss of the services of several of such key personnel, could adversely affect our business strategy and materially and adversely affect our business, results of operations, and financial condition.
Operational Risks
A failure in or breach of our operational or security systems or infrastructure, or those of our third party vendors and other service providers or other third parties, including as a result of cyber attacks, could disrupt our businesses, result in the disclosure or misuse of confidential or proprietary information, damage our reputation, increase our costs, and cause losses.
We rely heavily on communications and information systems to conduct our business. Information security risks for financial institutions such as ours have generally increased in recent years in part because of the proliferation of new technologies, the use of the internet and telecommunications technologies to conduct financial transactions, and the increased sophistication and activities of organized crime, hackers, and terrorists, activists, and other external parties. As customer, public, and regulatory expectations regarding operational and information security have increased, our operating systems and infrastructure must continue to be safeguarded and monitored for potential failures, disruptions, and breakdowns. Our business, financial, accounting, and data processing systems, or other operating systems and facilities may stop operating properly or become disabled or damaged as a result of a number of factors, including events that are wholly or partially beyond our control. For example, there could be electrical or telecommunication outages; natural disasters such as earthquakes, tornadoes, and hurricanes; disease pandemics; events arising from local or larger scale political or social matters, including terrorist acts; and as described below, cyber attacks.
As noted above, our business relies on our digital technologies, computer and email systems, software and networks to conduct its operations. Although we have information security procedures and controls in place, our technologies, systems, networks, and our customers’ devices may become the target of cyber attacks or information security breaches that could result in the unauthorized release, gathering, monitoring, misuse, loss, or destruction of our or our customers’ or other third parties’ confidential information. Third parties with whom we do business or that facilitate our business activities, including financial intermediaries, or vendors that provide service or security solutions for our operations, and other unaffiliated third parties, including the South Carolina Department of Revenue, which had customer records exposed in a 2012 cyber attack, could also be sources of operational and information security risk to us, including from breakdowns or failures of their own systems or capacity constraints.
While we have disaster recovery and other policies, plans and procedures designed to prevent or limit the effect of the failure, interruption or security breach of our information systems, there can be no assurance that any such failures, interruptions or security breaches will not occur or, if they do occur, that they will be adequately addressed. Our risk and exposure to these matters remains heightened because of the evolving nature of these threats. As a result, cyber security and the continued development and enhancement of our controls, processes, and practices designed to protect our systems, computers, software, data, and networks from attack, damage or unauthorized access remain a focus for us. As threats continue to evolve, we may be required to expend additional resources to continue to modify or enhance our protective measures or to investigate and remediate information security vulnerabilities. Disruptions or failures in the physical infrastructure or operating systems that support our businesses and clients, or cyber attacks or security breaches of the networks, systems or devices that our clients use to access our products and services could result in client attrition, regulatory fines, penalties or intervention, reputation damage, reimbursement or other compensation costs, and/or additional compliance costs, any of which could have a material effect on our results of operations or financial condition.
We are at risk of increased losses from fraud.
Criminals committing fraud increasingly are using more sophisticated techniques and in some cases are part of larger criminal rings, which allow them to be more effective.
The fraudulent activity has taken many forms, ranging from check fraud, mechanical devices attached to ATM machines, social engineering and phishing attacks to obtain personal information or impersonation of our clients through the use of falsified or stolen credentials. Additionally, an individual or business entity may properly identify themselves, particularly when banking online, yet seek to establish a business relationship for the purpose of perpetrating fraud. Further, in addition to fraud committed against us, we may suffer losses as a result of fraudulent activity committed against third parties. Increased deployment of technologies, such as chip card technology, defray and reduce aspects of fraud; however, criminals are turning to other sources to steal personally identifiable information, such as unaffiliated healthcare providers and government entities, in order to impersonate the consumer to commit fraud. Many of these data compromises are widely reported in the media. As a result of the increased sophistication of fraud activity, we have increased our spending on systems and controls to detect and prevent fraud. This will result in continued ongoing investments in the future.
Our use of third party vendors and our other ongoing third party business relationships are subject to increasing regulatory requirements and attention.
We regularly use third party vendors as part of our business. We also have substantial ongoing business relationships with other third parties. These types of third party relationships are subject to increasingly demanding regulatory requirements and attention by our federal bank regulators. Recent regulation requires us to enhance our due diligence, ongoing monitoring and control over our third party vendors and other ongoing third party business relationships. We expect that our regulators will hold us responsible for deficiencies in our oversight and control of our third party relationships and in the performance of the parties with which we have these relationships. As a result, if our regulators conclude that we have not exercised adequate oversight and control over our third party vendors or other ongoing third party business relationships or that such third parties have not performed appropriately, we could be subject to enforcement actions, including civil money penalties or other administrative or judicial penalties or fines as well as requirements for customer remediation, any of which could have a material adverse effect on our business, financial condition or results of operations.
Negative public opinion surrounding our Bank and the financial institutions industry generally could damage our reputation and adversely impact our earnings.
Reputation risk, or the risk to our business, earnings and capital from negative public opinion surrounding our Bank and the financial institutions industry generally, is inherent in our business. Negative public opinion can result from our actual or alleged conduct in any number of activities, including lending practices, corporate governance, mergers and acquisitions, and from actions taken by government regulators and community organizations in response to those activities. Negative public opinion can adversely affect our ability to keep and attract clients and employees, could impair the confidence of our investors, counterparties and business partners and can affect our ability to effect transactions and can expose us to litigation and regulatory action. Although we take steps to minimize reputation risk in dealing with our clients and communities, this risk will always be present given the nature of our business.
Legal, Accounting, Regulatory and Compliance Risks
We are subject to extensive regulation that could restrict our activities, have an adverse impact on our operations, and impose financial requirements or limitations on the conduct of our business.
We operate in a highly regulated industry and are subject to examination, supervision, and comprehensive regulation by various regulatory agencies. We are subject to Federal Reserve regulation. Our Bank is subject to extensive regulation, supervision, and examination by our primary federal regulator, the FDIC, the regulating authority that insures customer deposits; and by our state regulator, the S.C. Board. Also, as a member of the Federal Home Loan Bank (the “FHLB”), our Bank must comply with applicable regulations of the Federal Housing Finance Board and the FHLB. Regulation by these agencies is intended primarily for the protection of our depositors and the deposit insurance fund and not for the benefit of our shareholders. Our Bank’s activities are also regulated under consumer protection laws applicable to our lending, deposit, and other activities. A sufficient claim against us under these laws could have a material adverse effect on our results of operations.
Failure to comply with laws, regulations or policies could also result in heightened regulatory scrutiny and in sanctions by regulatory agencies (such as a memorandum of understanding, a written supervisory agreement or a cease and desist order), civil money penalties and/or reputation damage. Any of these consequences could restrict our ability to expand our business or could require us to raise additional capital or sell assets on terms that are not advantageous to us or our shareholders and could have a material adverse effect on our business, financial condition and results of operations. While we have policies and procedures designed to prevent any such violations, such violations may occur despite our best efforts.
Federal, state and local consumer lending laws may restrict our ability to originate certain mortgage loans or increase our risk of liability with respect to such loans and could increase our cost of doing business.
Federal, state and local laws have been adopted that are intended to eliminate certain lending practices considered “predatory.” These laws prohibit practices such as steering borrowers away from more affordable products, selling unnecessary insurance to borrowers, repeatedly refinancing loans and making loans without a reasonable expectation that the borrowers will be able to repay the loans irrespective of the value of the underlying property. Loans with certain terms and conditions and that otherwise meet the definition of a “qualified mortgage” may be protected from liability to a borrower for failing to make the necessary determinations. In either case, we may find it necessary to tighten our mortgage loan underwriting standards in response to the CFPB rules, which may constrain our ability to make loans consistent with our business strategies. It is our policy not to make predatory loans and to determine borrowers’ ability to repay, but the law and related rules create the potential for increased liability with respect to our lending and loan investment activities. They increase our cost of doing business and, ultimately, may prevent us from making certain loans and cause us to reduce the average percentage rate or the points and fees on loans that we do make.
We are subject to federal and state fair lending laws, and failure to comply with these laws could lead to material penalties.
Federal and state fair lending laws and regulations, such as the Equal Credit Opportunity Act and the Fair Housing Act, impose nondiscriminatory lending requirements on financial institutions. The Department of Justice, CFPB and other federal and state agencies are responsible for enforcing these laws and regulations. Private parties may also have the ability to challenge an institution’s performance under fair lending laws in private class action litigation. A successful challenge to our performance under the fair lending laws and regulations could adversely impact our rating under the CRA and result in a wide variety of sanctions, including the required payment of damages and civil money penalties, injunctive relief, imposition of restrictions on merger and acquisition activity and restrictions on expansion activity, which could negatively impact our reputation, business, financial condition and results of operations.
Changes in accounting standards could materially affect our financial statements.
Our accounting policies and methods are fundamental to how we record and report our financial condition and results of operations. From time to time, FASB, the SEC and our bank regulators change the financial accounting and reporting standards, or the interpretation thereof, and guidance that govern the preparation and disclosure of external financial statements. Such changes are beyond our control, can be hard to predict and could materially impact how we report and disclose our financial condition and results of operations. In some cases, we could be required to apply a new or revised standard retrospectively, or apply an existing standard differently, also retrospectively, which under some circumstances could potentially result in a need to revise or restate prior period financial statements.
New accounting standards will likely require us to increase our allowance for loan losses and may have a material adverse effect on our financial condition and results of operations.
The measure of our allowance for loan losses is dependent on the adoption and interpretation of accounting standards. The Financial Accounting Standards Board (the “FASB”) has issued a new credit impairment model, the Current Expected Credit Loss, or CECL model, which will become applicable to us in 2023. Under the CECL model, we will be required to present certain financial assets carried at amortized cost, such as loans held for investment and held-to-maturity debt securities, at the net amount expected to be collected. The measurement of expected credit losses is to be based on information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. This measurement will take place at the time the financial asset is first added to the balance sheet and periodically thereafter. This differs significantly from the “incurred loss” model currently required under GAAP, which delays recognition until it is probable a loss has been incurred. Accordingly, we expect that the adoption of the CECL model will materially affect how we determine our allowance for loan losses and could require us to significantly increase our allowance. Moreover, the CECL model may create more volatility in the level of our allowance for loan losses. If we are required to materially increase our level of allowance for loan losses for any reason, such increase could adversely affect our business, financial condition and results of operations.
The new CECL standard will become effective for us on January 1, 2023 and for interim periods within that year. We are currently evaluating the impact the CECL model will have on our accounting, but we expect to recognize a one-time cumulative-effect adjustment to our allowance for loan losses as of the beginning of the first reporting period in which the new standard is effective, consistent with regulatory expectations set forth in interagency guidance issued at the end of 2016. We cannot yet determine the magnitude of any such one-time cumulative adjustment or of the overall impact of the new standard on our business, financial condition and results of operations.
The Federal Reserve may require us to commit capital resources to support the Bank.
The Federal Reserve requires a bank holding company to act as a source of financial and managerial strength to a subsidiary bank and to commit resources to support such subsidiary bank. Under the “source of strength” doctrine, the Federal Reserve may require a bank holding company to make capital injections into a troubled subsidiary bank and may charge the bank holding company with engaging in unsafe and unsound practices for failure to commit resources to such a subsidiary bank. In addition, the Dodd-Frank Act directs the federal bank regulators to require that all companies that directly or indirectly control an insured depository institution serve as a source of strength for the institution. Under these requirements, in the future, we could be required to provide financial assistance to our Bank if the Bank experiences financial distress.
A capital injection may be required at times when we do not have the resources to provide it, and therefore we may be required to borrow the funds. In the event of a bank holding company’s bankruptcy, the bankruptcy trustee will assume any commitment by the holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank. Moreover, bankruptcy law provides that claims based on any such commitment will be entitled to a priority of payment over the claims of the holding company’s general unsecured creditors, including the holders of its note obligations. Thus, any borrowing that must be done by the holding company in order to make the required capital injection becomes more difficult and expensive and will adversely impact the holding company’s cash flows, financial condition, results of operations and prospects.
We face risks related to the adoption of future legislation and potential changes in federal regulatory agency leadership, policies, and priorities.
With a new Congress taking office in January 2021, Democrats have retained control of the U.S. House of Representatives, and have gained control of the U.S. Senate, albeit with a majority found only in the tie-breaking vote of Vice President Harris. However slim the majorities, though, the net result is unified Democratic control of the White House and both chambers of Congress, and consequently Democrats will be able to set the agenda both legislatively and in the Administration. We expect that Democratic-led Congressional committees will pursue greater oversight and will also pay increased attention to the banking sector’s role in providing COVID-19-related assistance. The prospects for the enactment of major banking reform legislation under the new Congress are unclear at this time.
Moreover, the turnover of the presidential administration has produced, and likely will continue to produce, certain changes in the leadership and senior staffs of the federal banking agencies, the CFPB, SEC, and the Treasury Department. These changes could impact the rulemaking, supervision, examination and enforcement priorities and policies of the agencies. Of note, promptly after taking office, President Biden issued an Executive Order instituting a “freeze” of certain recently-finalized and pending regulations to allow for review by incoming Administration officials. As a result of this Executive Order, recently-adopted regulations may be subject to further notice-and-comment rulemaking and, more broadly, agency rulemaking agendas may be disrupted. The potential impact of any changes in agency personnel, policies and priorities on the financial services sector, including the Bank, cannot be predicted at this time. Regulations and laws may be modified at any time, and new legislation may be enacted that will affect us. Any future changes in federal and state laws and regulations, as well as the interpretation and implementation of such laws and regulations, could affect us in substantial and unpredictable ways, including those listed above or other ways that could have a material adverse effect on our business, financial condition or results of operations.
We are party to various claims and lawsuits incidental to our business. Litigation is subject to many uncertainties such that the expenses and ultimate exposure with respect to many of these matters cannot be ascertained.
From time to time, we, our directors and our management are or may be the subject of various claims and legal actions by customers, employees, shareholders and others. Whether such claims and legal actions are legitimate or unfounded, if such claims and legal actions are not resolved in our favor, they may result in significant financial liability and/or adversely affect the market perception of us and our products and services as well as impact customer demand for those products and services. In light of the potential cost, reputational damage and uncertainty involved in litigation, we have in the past and may in the future settle matters even when we believe we have a meritorious defense. Certain claims may seek injunctive relief, which could disrupt the ordinary conduct of our business and operations or increase our cost of doing business. Our insurance or indemnities may not cover all claims that may be asserted against us. Any judgments or settlements in any pending litigation or future claims, litigation or investigation could have a material adverse effect on our business, reputation, financial condition and results of operations.
From time to time we are, or may become, involved in suits, legal proceedings, information-gatherings, investigations and proceedings by governmental and self-regulatory agencies that may lead to adverse consequences.
Many aspects of the banking business involve a substantial risk of legal liability. From time to time, we are, or may become, the subject of information-gathering requests, reviews, investigations and proceedings, and other forms of regulatory inquiry, including by bank regulatory agencies, self-regulatory agencies, the SEC and law enforcement authorities. The results of such proceedings could lead to significant civil or criminal penalties, including monetary penalties, damages, adverse judgements, settlements, fines, injunctions, restrictions on the way we conduct our business or reputational harm.
We could be adversely affected by changes in tax laws and regulations or the interpretations of such laws and regulations.
We are subject to the income tax laws of the U.S., and its states and municipalities in which we do business. These tax laws are complex and may be subject to different interpretations. We must make judgments and interpretations about the application of these inherently complex tax laws when determining our provision for income taxes, our deferred tax assets and liabilities, and our valuation allowance. Changes to the tax laws, administrative rulings or court decisions could increase our provision for income taxes and reduce our net income.
In addition, our ability to continue to record our deferred tax assets is dependent on our ability to realize their value through future projected earnings. Future changes in tax laws or regulations could adversely affect our ability to record our deferred tax assets. Loss of part or all of our deferred tax assets would have a material adverse effect on our financial condition and results of operations.
Our ability to realize deferred tax assets may be reduced, which may adversely impact our results of operations.
Deferred tax assets are reported as assets on our balance sheet and represent the decrease in taxes expected to be paid in the future because of net operating losses (“NOLs”) and tax credit carryforwards and because of future reversals of temporary differences in the bases of assets and liabilities as measured by enacted tax laws and their bases as reported in the financial statements. As of December 31, 2019, we had net deferred tax assets of $1.0 million, which included deferred tax assets for a federal net operating loss carryforward of $331 thousand that is expected to expire in 2037. Realization of deferred tax assets is dependent upon the generation of sufficient future taxable income during the periods in which existing deferred tax assets are expected to become deductible for federal income tax purposes. Based on projections of future taxable income in periods in which deferred tax assets are expected to become deductible, management determined that the realization of our net deferred tax asset was more likely than not. As a result, we did not recognize a valuation allowance on our net deferred tax asset as of December 31, 2019 or December 31, 2018. If it becomes more likely than not that some portion or the entire deferred tax asset will not be realized, a valuation allowance must be recognized. In December 2017, the Tax Act was enacted, which reduced the corporate federal income tax rate to 21% and resulted in an approximate $1.2 million write-down of our deferred tax asset in the fourth quarter of 2017, through income tax expense. These tax rate changes, in conjunction with our net income in 2018 and 2019, have resulted in a significant reduction of the deferred tax asset over the last two years. Our deferred tax asset may be further reduced in the future if estimates of future income or our tax planning strategies do not support the amount of the deferred tax assets. Charges to establish a valuation allowance with respect to our deferred tax asset could have a material adverse effect on our financial condition and results of operations.
Risks Related to an Investment in Our Common Stock
Our ability to pay cash dividends is limited, and we may be unable to pay future dividends even if we desire to do so.
The Federal Reserve has issued a policy statement regarding the payment of dividends by bank holding companies. In general, the Federal Reserve’s policies provide that dividends should be paid only out of current earnings and only if the prospective rate of earnings retention by the bank holding company appears consistent with the organization’s capital needs, asset quality and overall financial condition. The Federal Reserve’s policies also require that a bank holding company serve as a source of financial strength to its subsidiary banks by standing ready to use available resources to provide adequate capital funds to those banks during periods of financial stress or adversity and by maintaining the financial flexibility and capital-raising capacity to obtain additional resources for assisting its subsidiary banks where necessary. In addition, under the prompt corrective action regulations, the ability of a bank holding company to pay dividends may be restricted if a subsidiary bank becomes undercapitalized. These regulatory policies could affect our ability to pay dividends or otherwise engage in capital distributions.
Our ability to pay cash dividends may be limited by regulatory restrictions, by our Bank’s ability to pay cash dividends to the Company and by our need to maintain sufficient capital to support our operations. As a South Carolina-chartered bank, the Bank is subject to limitations on the amount of dividends that it is permitted to pay. Unless otherwise instructed by the S.C. Board, the Bank is generally permitted under South Carolina state banking regulations to pay cash dividends of up to 100% of net income in any calendar year without obtaining the prior approval of the S.C. Board. If our Bank is not permitted to pay cash dividends to us, it is unlikely that we would be able to pay cash dividends on our common stock. Moreover, holders of our common stock are entitled to receive dividends only when, and if declared by our board of directors. Although we have historically paid cash dividends on our common stock, we are not required to do so and our board of directors could reduce or eliminate our common stock dividend in the future.
Our stock price may be volatile, which could result in losses to our investors and litigation against us.
Our stock price has been volatile in the past and several factors could cause the price to fluctuate substantially in the future. These factors include but are not limited to: actual or anticipated variations in earnings, changes in analysts’ recommendations or projections, our announcement of developments related to our businesses, operations and stock performance of other companies deemed to be peers, new technology used or services offered by traditional and non-traditional competitors, news reports of trends, irrational exuberance on the part of investors, new federal banking regulations, and other issues related to the financial services industry. Our stock price may fluctuate significantly in the future, and these fluctuations may be unrelated to our performance. General market declines or market volatility in the future, especially in the financial institutions sector, could adversely affect the price of our common stock, and the current market price may not be indicative of future market prices. Stock price volatility may make it more difficult for you to resell your common stock when you want and at prices you find attractive. Moreover, in the past, securities class action lawsuits have been instituted against some companies following periods of volatility in the market price of its securities. We could in the future be the target of similar litigation. Securities litigation could result in substantial costs and divert management’s attention and resources from our normal business.
Future sales of our stock by our shareholders or the perception that those sales could occur may cause our stock price to decline.
Although our common stock is listed for trading on The NASDAQ Capital Market, the trading volume in our common stock is lower than that of other larger financial services companies. A public trading market having the desired characteristics of depth, liquidity and orderliness depends on the presence in the marketplace of willing buyers and sellers of our common stock at any given time. This presence depends on the individual decisions of investors and general economic and market conditions over which we have no control. Given the relatively low trading volume of our common stock, significant sales of our common stock in the public market, or the perception that those sales may occur, could cause the trading price of our common stock to decline or to be lower than it otherwise might be in the absence of those sales or perceptions.
Economic and other circumstances may require us to raise capital at times or in amounts that are unfavorable to us. If we have to issue shares of common stock, they will dilute the percentage ownership interest of existing shareholders and may dilute the book value per share of our common stock and adversely affect the terms on which we may obtain additional capital.
We may need to incur additional debt or equity financing in the future to make strategic acquisitions or investments or to strengthen our capital position. Our ability to raise additional capital, if needed, will depend on, among other things, conditions in the capital markets at that time, which are outside of our control and our financial performance. We cannot provide assurance that such financing will be available to us on acceptable terms or at all, or if we do raise additional capital that it will not be dilutive to existing shareholders.
If we determine, for any reason, that we need to raise capital, subject to applicable NASDAQ rules, our board generally has the authority, without action by or vote of the shareholders, to issue all or part of any authorized but unissued shares of stock for any corporate purpose, including issuance of equity-based incentives under or outside of our equity compensation plans. Additionally, we are not restricted from issuing additional common stock or preferred stock, including any securities that are convertible into or exchangeable for, or that represent the right to receive, common stock or preferred stock or any substantially similar securities. The market price of our common stock could decline as a result of sales by us of a large number of shares of common stock or preferred stock or similar securities in the market or from the perception that such sales could occur. If we issue preferred stock that has a preference over the common stock with respect to the payment of dividends or upon liquidation, dissolution or winding-up, or if we issue preferred stock with voting rights that dilute the voting power of the common stock, the rights of holders of the common stock or the market price of our common stock could be adversely affected. Any issuance of additional shares of stock will dilute the percentage ownership interest of our shareholders and may dilute the book value per share of our common stock. Shares we issue in connection with any such offering will increase the total number of shares and may dilute the economic and voting ownership interest of our existing shareholders.
Provisions of our articles of incorporation and bylaws, South Carolina law, and state and federal banking regulations, could delay or prevent a takeover by a third party.
Our articles of incorporation and bylaws could delay, defer, or prevent a third party takeover, despite possible benefit to the shareholders, or otherwise adversely affect the price of our common stock. Our governing documents:
· authorize a class of preferred stock that may be issued in series with terms, including voting rights, established by the board of directors without shareholder approval;
· authorize 20,000,000 shares of common stock and 10,000,000 shares of preferred stock that may be issued by the board of directors without shareholder approval;
· classify our board with staggered three year terms, preventing a change in a majority of the board at any annual meeting;
· require advance notice of proposed nominations for election to the board of directors and business to be conducted at a shareholder meeting;
· grant the board of directors the discretion, when considering whether a proposed merger or similar transaction is in the best interests of the Company and our shareholders, to take into account the effect of the transaction on our employees, clients and suppliers and upon the communities in which our are located, to the extent permitted by South Carolina law;
· provide that the number of directors shall be fixed from time to time by resolution adopted by a majority of the directors then in office, but may not consist of fewer than nine nor more than 25 members; and
· provide that no individual who is or becomes a “business competitor” or who is or becomes affiliated with, employed by, or a representative of any individual, corporation, or other entity which the board of directors, after having such matter formally brought to its attention, determines to be in competition with us or any of our subsidiaries (any such individual, corporation, or other entity being a “business competitor”) shall be eligible to serve as a director if the board of directors determines that it would not be in our best interests for such individual to serve as a director (any financial institution having branches or affiliates within the counties in which we operate is presumed to be a business competitor unless the board of directors determines otherwise).
In addition, the South Carolina business combinations statute provides that a 10% or greater shareholder of a resident domestic corporation cannot engage in a “business combination” (as defined in the statute) with such corporation for a period of two years following the date on which the 10% shareholder became such, unless the business combination or the acquisition of shares is approved by a majority of the disinterested members of such corporation’s board of directors before the 10% shareholder’s share acquisition date. This statute further provides that at no time (even after the two-year period subsequent to such share acquisition date) may the 10% shareholder engage in a business combination with the relevant corporation unless certain approvals of the board of directors or disinterested shareholders are obtained or unless the consideration given in the combination meets certain minimum standards set forth in the statute. The law is very broad in its scope and is designed to inhibit unfriendly acquisitions but it does not apply to corporations whose articles of incorporation contain a provision electing not to be covered by the law. Our articles of incorporation do not contain such a provision. An amendment of our articles of incorporation to that effect would, however, permit a business combination with an interested shareholder even though such status was obtained prior to the amendment.
Finally, the Change in Bank Control Act and the Bank Holding Company Act generally require filings and approvals prior to certain transactions that would result in a party acquiring control of the Company or the Bank.
An investment in our common stock is not an insured deposit.
Our common stock is not a bank deposit and, therefore, is not insured against loss by the FDIC, any other deposit insurance fund or by any other public or private entity. An investment in our common stock is inherently risky for the reasons described in this “Risk Factors” section and elsewhere in this report and is subject to the same market forces that affect the price of common stock in any company. As a result, if you acquire our common stock, you may lose some or all of your investment.
General Risk Factors
Our historical operating results may not be indicative of our future operating results.
We may not be able to sustain our historical rate of growth, and, consequently, our historical results of operations will not necessarily be indicative of our future operations. Various factors, such as economic conditions, regulatory and legislative considerations, and competition, may also impede our ability to expand our market presence. If we experience a significant decrease in our historical rate of growth, our results of operations and financial condition may be adversely affected because a high percentage of our operating costs are fixed expenses.
A downgrade of the U.S. credit rating could negatively impact our business, results of operations and financial condition.
In August 2011, Standard & Poor’s Ratings Services lowered its long-term sovereign credit rating on the U.S. from “AAA” to “AA+”. If U.S. debt ceiling, budget deficit or debt concerns, domestic or international economic or political concerns, or other factors were to result in further downgrades to the U.S. government’s sovereign credit rating or its perceived creditworthiness, it could adversely affect the U.S. and global financial markets and economic conditions. A downgrade of the U.S. government’s credit rating or any failure by the U.S. government to satisfy its debt obligations could create financial turmoil and uncertainty, which could weigh heavily on the global banking system. It is possible that any such impact could have a material adverse effect on our business, results of operations and financial condition.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
Item 1B. Unresolved Staff Comments.
Not applicable.

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ITEM 2. PROPERTIES
Item 2. Properties.
Our principal place of business as well as the Bank’s is located at 5455 Sunset Boulevard, Lexington, South Carolina 29072. In addition, we currently operate 21 full-service offices located in the South Carolina counties of Lexington County (6 offices), Richland County (4 offices), Newberry County (2 offices), Kershaw County (1 office), Aiken County (1 office), Greenville County (2 offices), Anderson County (1 office), Pickens County (1 office), and in the Georgia counties of Richmond County (2 offices) and Columbia County (1 office). All of these properties are owned by the Bank except for the Downtown Augusta, Georgia (Richmond County) and Greenville, South Carolina full service branch offices, which are leased by the Bank. Although the properties owned are generally considered adequate, we have a continuing program of modernization, expansion and, when necessary, occasional replacement of facilities.

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ITEM 3. LEGAL PROCEEDINGS
Item 3. Legal Proceedings.
In the ordinary course of operations, we may be a party to various legal proceedings from time to time. We do not believe that there is any pending or threatened proceeding against us, which, if determined adversely, would have a material effect on our business, results of operations, or financial condition.

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ITEM 4. MINE SAFETY DISCLOSURE
Item 4. Mine Safety Disclosures.
Not applicable.
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters, and Issuer Purchases of Equity Securities.
As of February 28, 2021, there were approximately 1,936 shareholders of record of our common stock. Our common stock trades on The NASDAQ Capital Market under the trading symbol of “FCCO.”
Quarterly Common Stock Price Ranges and Dividends
The following table sets forth the high and low sales price information as reported by NASDAQ for the periods indicated, and the dividends per share declared on our common stock in each such quarter. All information has been adjusted for any stock splits and stock dividends effected during the periods presented.
High
Low
Dividends
Quarter ended March 31, 2020
$ 21.89
$ 12.60
$ 0.12
Quarter ended June 30, 2020
$ 16.80
$ 13.11
$ 0.12
Quarter ended September 30, 2020
$ 15.32
$ 12.23
$ 0.12
Quarter ended December 31, 2020
$ 19.00
$ 12.95
$ 0.12
Quarter ended March 31, 2019
$ 22.79
$ 17.93
$ 0.11
Quarter ended June 30, 2019
$ 20.28
$ 17.08
$ 0.11
Quarter ended September 30, 2019
$ 20.45
$ 17.55
$ 0.11
Quarter ended December 31, 2019
$ 22.00
$ 18.48
$ 0.11
Dividend Policy
We currently intend to continue to pay quarterly cash dividends on our common stock, subject to approval by our board of directors, although we may elect not to pay dividends or to change the amount of such dividends. The payment of dividends is a decision of our board of directors based upon then-existing circumstances, including our rate of growth, profitability, financial condition, existing and anticipated capital requirements, the amount of funds legally available for the payment of cash dividends, regulatory constraints and such other factors as the board determines relevant. The Company is a legal entity separate and distinct from the Bank. The Federal Reserve has issued a policy statement on the payment of cash dividends by bank holding companies, which expresses the Federal Reserve’s view that a bank holding company generally should pay cash dividends only to the extent that the holding company’s net income for the past year is sufficient to cover both the cash dividends and a rate of earnings retention that is consistent with the holding company’s capital needs, asset quality, and overall financial condition. The Federal Reserve has also indicated that a bank holding company should not maintain a level of cash dividends that places undue pressure on the capital of its bank subsidiaries, or that can be funded only through additional borrowings or other arrangements that undermine the bank holding company’s ability to act as a source of strength.
Our ability to pay dividends is generally limited by the ability of the Bank to pay dividends to the Company. As a South Carolina-chartered bank, the Bank is subject to limitations on the amount of dividends that it is permitted to pay. Unless otherwise instructed by the S.C. Board, the Bank is generally permitted under South Carolina state banking regulations to pay cash dividends of up to 100% of net income in any calendar year without obtaining the prior approval of the S.C. Board. In addition, the Bank must maintain a capital conservation buffer, above its regulatory minimum capital requirements, consisting entirely of Common Equity Tier 1 capital, in order to avoid restrictions with respect to its payment of dividends to the Company.
Unregistered Sales of Equity Securities
Pursuant to our 2006 Non-Employee Director Deferred Compensation Plan, non-employee directors may elect to defer all or any part of annual retainer fees payable in respect of the following calendar year to the director for his or her service on the board of directors or any committee of the board of directors. During the year, a number of deferred stock units are credited to the director’s account at the time such compensation would otherwise have been payable absent the election to defer equal to (i) the otherwise payable amount divided by (ii) the fair market value of a share of our common stock on the last trading day preceding the credit date. In general, a director’s vested account balance will be distributed in a lump sum of our common stock on the 30th day following termination of service on the board and on the board of directors of all of our subsidiaries, including termination of service as a result of death or disability. During the year ended December 31, 2020, we credited an aggregate of 8,841 deferred stock units to accounts for directors who elected to defer monthly fees or annual retainer fees for 2020. These deferred stock units include dividend equivalents in the form of additional stock units. The deferred stock units were issued pursuant to an exemption from registration under the Securities Act of 1933 in reliance upon Section 4(a)(2) of the Securities Act of 1933.
Repurchases of Equity Securities
In September 2019, we announced that our board of directors approved the repurchase of up to 200,000 additional shares of our common stock (the “New Repurchase Plan”), which were in addition to the shares repurchased under the repurchase program we announced in May 2019 for 300,000 shares of our common stock (the “Prior Repurchase Plan”). We completed the repurchase of all 300,000 shares covered by the Prior Repurchase Plan at a cost of $5.6 million with an average price per share of $18.79 prior to our adoption of the New Repurchase Plan.
No share repurchases were made under the New Repurchase Plan prior to its expiration date of December 31, 2020.

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ITEM 6. SELECTED FINANCIAL DATA
Item 6. Selected Financial Data
As of or For the Years Ended December 31,
(Dollars in thousands except per share amounts) 2017
Balance Sheet Data:
Total assets	 $ 1,395,382 $ 1,170,279 $ 1,091,595 $ 1,050,731 $ 914,793
Loans held for sale	 45,020 11,155 3,223 5,093 5,707
Loans	 844,157 737,028 718,462 646,805 546,709
Deposits	 1,189,413 988,201 925,523 888,323 766,622
Total common shareholders’ equity	 136,337 120,194 112,497 105,663 81,861
Total shareholders’ equity	 136,337 120,194 112,497 105,663 81,861
Average shares outstanding, basic	 7,446 7,510 7,581 6,849 6,617
Average shares outstanding, diluted	 7,482 7,588 7,731 6,998 6,787
Results of Operations:
Interest income	 $ 43,778 $ 42,630 $ 39,729 $ 32,156 $ 29,506
Interest expense	 3,755 5,781 3,981 2,762 3,047
Net interest income	 40,023 36,849 35,748 29,394 26,459
Provision for loan losses	 3,663 774
Net interest income after provision for loan losses	 36,360 36,710 35,402 28,864 25,685
Non-interest income	 13,769 11,736 10,644 9,639 8,940
Non-interest expenses	 37,534 34,617 32,123 29,358 25,776
Income before taxes	 12,595 13,829 13,923 9,145 8,849
Income tax expense	 2,496 2,858 2,694 3,330 2,167
Net income	 10,099 10,971 11,229 5,815 6,682
Net income available to common shareholders	 10,099 10,971 11,229 5,815 6,682
Per Share Data:
Basic earnings per common share	 $ 1.36 $ 1.46 $ 1.48 $ 0.85 $ 1.01
Diluted earnings per common share	 1.35 1.45 1.45 0.83 0.98
Book value at period end	 18.18 16.16 14.73 13.93 12.24
Tangible book value at period end (non-GAAP)	 16.08 13.99 12.55 11.66 11.31
Dividends per common share	 0.48 0.44 0.40 0.36 0.32
Asset Quality Ratios:
Non-performing assets to total assets(3) 0.50 % 0.32 % 0.37 % 0.51 % 0.57 %
Non-performing loans to period end loans	 0.69 % 0.31 % 0.36 % 0.52 % 0.75 %
Net charge-offs (recoveries) to average loans	 (0.01 )% (0.03 )% (0.02 )% (0.01 )% 0.03 %
Allowance for loan losses to period-end total loans	 1.23 % 0.90 % 0.87 % 0.89 % 0.94 %
Allowance for loan losses to non-performing assets	 148.10 % 177.23 % 155.14 % 79.52 % 99.35 %
Selected Ratios:
Return on average assets	 0.78 % 0.98 % 1.04 % 0.62 % 0.75 %
Return on average common equity:	 7.84 % 9.38 % 10.48 % 6.56 % 8.08 %
Return on average tangible common equity (non-GAAP):	 8.94 % 10.91 % 12.44 % 7.22 % 8.76 %
Efficiency Ratio (non-GAAP)(1) 69.99 % 70.51 % 68.20 % 74.69 % 72.09 %
Noninterest income to operating revenue(2) 25.60 % 24.16 % 24.94 % 24.69 % 25.26 %
Net interest margin (tax equivalent)	 3.37 % 3.65 % 3.69 % 3.52 % 3.35 %
Equity to assets	 9.77 % 10.27 % 10.31 % 10.06 % 8.95 %
Tangible common shareholders’ equity to tangible assets (non-GAAP)	 8.74 % 9.02 % 8.92 % 8.56 % 8.33 %
Tier 1 risk-based capital (Bank)(4) 12.83 % 13.47 % 13.19 % 13.40 % 13.84 %
Total risk-based capital (Bank)(4) 13.94 % 14.26 % 13.96 % 14.18 % 14.66 %
Leverage (Bank)(4) 8.84 % 9.97 % 9.98 % 9.66 % 9.77 %
Average loans to average deposits(5) 76.79 % 78.65 % 75.01 % 73.08 % 69.62 %
(1) The efficiency ratio is a key performance indicator in our industry. The ratio is calculated by dividing non-interest expense less merger expenses by net interest income on a tax equivalent basis and non-interest income, excluding gains (losses) on sales of securities and other assets, write-downs on premises held-for-sale, non-recurring bank owned life insurance (BOLI) income, and losses on early extinguishment of debt. The efficiency ratio is a measure of the relationship between operating expenses and net revenue.
(2) Operating revenue is defined as net interest income plus noninterest income.
(3) Includes non-accrual loans, loans > 90 days delinquent and still accruing interest and other real estate owned (“OREO”).
(4) As a small bank holding company, we are generally not subject to the capital requirements at the holding company level unless otherwise advised by the Federal Reserve; however, our Bank remains subject to capital requirements.
(5) Includes loans held for sale.
Certain financial information presented above is determined by methods other than in accordance with GAAP. These non-GAAP financial measures include “efficiency ratio,” “tangible book value at period end,” “return on average tangible common equity” and “tangible common shareholders’ equity to tangible assets.” The “efficiency ratio” is defined as non-interest expense less merger expenses, divided by the sum of net interest income on a tax equivalent basis and non-interest income, excluding gains (losses) on sales of securities and other assets, write-downs on premises held-for-sale, non-recurring bank owned life insurance (BOLI) income, and losses on early extinguishment of debt. The efficiency ratio is a measure of the relationship between operating expenses and net revenue. “Tangible book value at period end” is defined as total equity reduced by recorded intangible assets divided by total common shares outstanding. “Tangible common shareholders’ equity to tangible assets” is defined as total common equity reduced by recorded intangible assets divided by total assets reduced by recorded intangible assets. Our management believes that these non-GAAP measures are useful because they enhance the ability of investors and management to evaluate and compare our operating results from period-to-period in a meaningful manner. Non-GAAP measures have limitations as analytical tools, and investors should not consider them in isolation or as a substitute for analysis of our results as reported under GAAP.
The table below provides a reconciliation of non-GAAP measures to GAAP for the five years ended December 31:
Tangible book value per common share 2017
Tangible common equity per common share (non-GAAP)	 $ 16.08 $ 13.99 $ 12.55 $ 11.66 $ 11.31
Effect to adjust for intangible assets	 2.10 2.17 2.18 2.27 0.93
Book value per common share (GAAP)	 $ 18.18 $ 16.16 $ 14.73 $ 13.93 $ 12.24
Return on average tangible common equity
Return on average tangible common equity (non-GAAP)	 8.94 % 10.91 % 12.44 % 7.22 % 8.76 %
Effect to adjust for intangible assets	 (1.10 )% (1.53 )% (1.96 )% (0.66 )% (0.68 )%
Return on average common equity (GAAP)	 7.84 % 9.38 % 10.48 % 6.56 % 8.08 %
Tangible common shareholders’ equity to tangible assets
Tangible common equity to tangible assets (non-GAAP)	 8.74 % 9.02 % 8.92 % 8.56 % 8.33 %
Effect to adjust for intangible assets	 1.03 % 1.25 % 1.39 % 1.50 % 0.62 %
Common equity to assets (GAAP)	 9.77 % 10.27 % 10.31 % 10.06 % 8.95 %

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis identifies significant factors that have affected our financial position and operating results during the periods included in the accompanying financial statements. We encourage you to read this discussion and analysis in conjunction with the financial statements and the related notes and the other statistical information also included in this Annual Report on Form 10-K.
Overview
We are headquartered in Lexington, South Carolina and serve as the bank holding company for the Bank. We engage in a general commercial and retail banking business characterized by personalized service and local decision making, emphasizing the banking needs of small to medium-sized businesses, professional concerns and individuals. We operate from our main office in Lexington, South Carolina, and our 21 full-service offices located in the South Carolina counties of Lexington County (6 offices), Richland County (4 offices), Newberry County (2 offices), Kershaw County (1 office), Aiken County (1 office), Greenville County (2 offices), Anderson County (1 office), and Pickens County (1 office); and in the Georgia counties of Richmond County (2 offices) and Columbia County (1 office).
The following discussion describes our results of operations for 2020, as compared to 2019 and 2018, and also analyzes our financial condition as of December 31, 2020, as compared to December 31, 2019. Like most community banks, we derive most of our income from interest we receive on our loans and investments. A primary source of funds for making these loans and investments is our deposits, on which we pay interest. Consequently, one of the key measures of our success is our amount of net interest income, or the difference between the income on our interest-earning assets, such as loans and investments, and the expense on our interest-bearing liabilities, such as deposits and borrowings.
We have included a number of tables to assist in our description of these measures. For example, the “Average Balances” table shows the average balance during 2020, 2019 and 2018 of each category of our assets and liabilities, as well as the yield we earned or the rate we paid with respect to each category. A review of this table shows that our loans typically provide higher interest yields than do other types of interest earning assets, which is why we intend to channel a substantial percentage of our earning assets into our loan portfolio. Similarly, the “Rate/Volume Analysis” table helps demonstrate the impact of changing interest rates and changing volume of assets and liabilities during the years shown. We also track the sensitivity of our various categories of assets and liabilities to changes in interest rates, and we have included a “Sensitivity Analysis Table” to help explain this. Finally, we have included a number of tables that provide detail about our investment securities, our loans, and our deposits and other borrowings.
There are risks inherent in all loans, so we maintain an allowance for loan losses to absorb probable losses on existing loans that may become uncollectible. We establish and maintain this allowance by charging a provision for loan losses against our operating earnings. In the following section, we have included a detailed discussion of this process, as well as several tables describing our allowance for loan losses and the allocation of this allowance among our various categories of loans.
In addition to earning interest on our loans and investments, we earn income through fees and other expenses we charge to our customers. We describe the various components of this noninterest income, as well as our noninterest expense, in the following discussion. The discussion and analysis also identifies significant factors that have affected our financial position and operating results during the periods included in the accompanying financial statements. We encourage you to read this discussion and analysis in conjunction with the financial statements and the related notes and the other statistical information also included in this report.
Recent Events - COVID-19 Pandemic
Our financial performance generally, and in particular the ability of our borrowers to repay their loans, the value of collateral securing those loans, as well as demand for loans and other products and services we offer, is highly dependent on the business environment in our primary markets where we operate and in the United States as a whole. The COVID-19 pandemic continues to create extensive disruptions to the global economy and financial markets and to businesses and the lives of individuals throughout the world. In particular, the COVID-19 pandemic has severely restricted the level of economic activity in our markets. Federal and state governments have taken, and may continue to take, unprecedented actions to contain the spread of the disease, including quarantines, travel bans, shelter-in-place orders, closures of businesses and schools, fiscal stimulus, and legislation designed to deliver monetary aid and other relief to businesses and individuals impacted by the pandemic. Although in various locations certain activity restrictions have been relaxed and businesses and schools have reopened with some level of success, in many states and localities the number of individuals diagnosed with COVID-19 has increased significantly, which may cause a freezing or, in certain cases, a reversal of previously announced relaxation of activity restrictions and may prompt the need for additional aid and other forms of relief.
The impact of the COVID-19 pandemic is fluid and continues to evolve. The unprecedented and rapid spread of COVID-19 and its associated impacts on trade (including supply chains and export levels), travel, employee productivity, unemployment, consumer spending, and other economic activities has resulted in less economic activity, significant volatility and disruption in financial markets. In addition, due to the COVID-19 pandemic, market interest rates have declined significantly, with the 10-year Treasury bond falling below 1.00% on March 3, 2020, for the first time. The 10-year Treasury bond was 0.69% at September 30, 2020 compared to 0.66% at June 30, 2020 and 1.92% at December 31, 2019. Further, long-term bond yields have recently begun to rise, nearing where they were before the pandemic in February 2020. In March 2020, the Federal Open Market Committee reduced the targeted federal funds interest rate range to 0% to 0.25%. These reductions in interest rates and the other effects of the COVID-19 pandemic have had, and are expected to continue to have, possibly materially, an adverse effect on our business, financial condition and results of operations. For instance, the pandemic has had negative effects on the Bank’s net interest margin, provision for loan losses, deposit service charges, salaries and benefits, occupancy expense, and equipment expense. The ultimate extent of the impact of the COVID-19 pandemic on our business, financial condition and results of operations is currently uncertain and will depend on various developments and other factors, including the effect of governmental and private sector initiatives, the effect of the recent rollout of vaccinations for the virus, whether such vaccinations will be effective against any resurgence of the virus, including any new strains, and the ability for customers and businesses to return to their pre-pandemic routine.
Our business, financial condition and results of operations generally rely upon the ability of our borrowers to repay their loans, the value of collateral underlying our secured loans, and demand for loans and other products and services we offer, which are highly dependent on the business environment in our primary markets where we operate and in the United States as a whole. We have a business continuity plan that covers a variety of potential impacts to business operations. These plans are periodically reviewed and tested and have been designed to protect the ongoing viability of bank operations in the event of a disruption such as a pandemic. Beginning in March 2020, we activated our pandemic preparedness plan and began to roll it out in phases related to the COVID-19 pandemic.
Following recommendations from the Centers for Disease Control and Prevention and the South Carolina Department of Health and Environmental Control, we implemented enhanced cleaning of bank facilities and provided guidance to employees and customers on best practices to minimize the spread of the virus. As part of our efforts to exercise social distancing, we modified our delivery channels with a shift to drive thru only service at the banking offices supplemented by appointments for service in the office lobbies. We have encouraged the use of online and mobile channels and have seen the number of online banking users increase, as well as the dollar volume of bill payment, Zelle, and mobile deposit transactions trend higher. To support the health and well-being of our employees, a portion of our workforce is working from home. We have enhanced our remote work capabilities by providing additional laptops and various audio and video meeting technologies. Communication channels for employees and customers were created to provide periodic updates during this rapidly changing environment. These are still in place and in use.
We are focused on servicing the financial needs of our commercial and consumer customers with flexible loan payment arrangements, including short-term loan modifications or forbearance payments and reducing or waiving certain fees on deposit accounts. Future governmental actions may require these and other types of customer-related responses. Beginning in March 2020, we proactively offered payment deferrals for up to 90 days to our loan customers. We continue to consider potential deferrals with respect to certain customers, which we evaluate on a case-by-case basis. Loans on which payments have been deferred declined to $16.1 million at December 31, 2020 from $27.3 million at September 30, 2020. At its peak, which occurred during the second quarter of 2020, we granted payment deferments on loans totaling $206.9 million. As a result of payments being resumed at the conclusion of their payment deferral period, loans in which payments have been deferred decreased from the peak of $206.9 million to $175.0 million at June 30, 2020, to $27.3 million at September 30, 2020, to $16.1 million at December 31, 2020, and to $8.7 million at March 5, 2021. We had no loans on which payments were deferred related to the COVID-19 pandemic at December 31, 2019. We had no loans remaining on initial deferral status in which both principal and interest were deferred at December 31, 2020 and March 5, 2021. The $16.1 million in deferrals at December 31, 2020 consists of seven loans on which only principal is being deferred. We had three loans totaling $8.7 million in continuing deferral status in which only principal is being deferred at March 5, 2021. Two of the continuing deferrals at March 5, 2021 totaling $4.5 million are in the retail industry segment identified by us as one of the industry segments most impacted by the COVID-19 pandemic; the other continuing deferral totaling $4.2 million is a mixed use office space that we do not consider to be in an industry segment most impacted by the COVID-19 pandemic. Some of these deferments were to businesses that temporarily closed or reduced operations and some were requested as a pre-cautionary measure to conserve cash. We proactively offered deferrals to our customers regardless of the impact of the pandemic on their business or personal finances.
We are also a small business administration approved lender and participated in the PPP, established under the CARES Act. We had PPP loans totaling $43.3 million gross of deferred fees and costs and $42.2 million net of deferred fees and costs at December 31, 2020. We had PPP loans totaling $58.5 million gross of deferred fees and costs and $57.1 million net of deferred fees and costs at January 31, 2021. The PPP deferred fees net of deferred costs will be recognized as interest income over the remaining life of the PPP loans.
Our asset quality metrics as of December 31, 2020 remained sound. The non-performing asset ratio was 0.50% of total assets with the nominal level of $7.0 million in non-performing assets. Loans past due 30 days or more represented 0.23% of the loan portfolio. The ratio of classified loans plus OREO was 6.89% of total bank regulatory risk-based capital. During the twelve months ended December 31, 2020, we experienced net loan recoveries of $142 thousand and net overdraft charge-offs of $43 thousand.
At December 31, 2020, our non-performing assets were not yet materially impacted by the economic pressures of the COVID-19 pandemic. However, the increase in non-performing assets to $7.0 million at December 31, 2020 from $3.7 million at December 31, 2019 was related to one credit relationship, which was impacted by the COVID-19 pandemic. As we closely monitor credit risk and our exposure to increased loan losses resulting from the impact of COVID-19 on our customers, we evaluated and identified our exposure to certain industry segments most impacted by the COVID-19 pandemic as of December 31, 2020:
Industry Segments Outstanding % of Loan Avg. Loan Avg. Loan to
(Dollars in millions) Loan Balance Portfolio Size Value
Hotels $ 32.0 3.8 % $ 2.3 70 %
Restaurants $ 19.0 2.4 % $ 0.7 69 %
Assisted Living $ 8.9 1.1 % $ 1.5 47 %
Retail $ 80.8 9.6 % $ 0.7 57 %
We are also monitoring the impact of the COVID-19 pandemic on the operations and value of our investments. We mark to market our publicly traded investments and review our investment portfolio for impairment at, a minimum, quarterly. We do not consider any securities in our investment portfolio to be other-than-temporarily impaired at December 31, 2020. However, because of changing economic and market conditions affecting issuers, we may be required to recognize future impairments on the securities we hold as well as reductions in other comprehensive income. We cannot currently determine the ultimate impact of the pandemic on the long-term value of our portfolio.
Our capital remained strong and exceeded the well-capitalized regulatory requirements at December 31, 2020. Total shareholders’ equity increased $16.1 million or 13.4% to $136.3 million at December 31, 2020 from $120.2 million at December 31, 2019. In 2018, the Federal Reserve increased the asset size to qualify as a small bank holding company. As a result of this change, we are generally not subject to the Federal Reserve capital requirements unless advised otherwise. The Bank remains subject to capital requirements including a minimum leverage ratio and a minimum ratio of “qualifying capital” to risk weighted assets. These requirements are essentially the same as those that applied to the Company prior to the change in the definition of a small bank holding company. Each of the regulatory capital ratios for the Bank exceeds the well capitalized minimum levels currently required by regulatory statute at December 31, 2020 and December 31, 2019. Refer to the Liquidity Management section for more details.
Dollars in thousands
Prompt Corrective Action
(PCA) Requirements
Excess Capital $s of
PCA Requirements
Capital Ratios
Actual
Well
Capitalized
Adequately
Capitalized
Well
Capitalized
Adequately
Capitalized
December 31, 2020
Leverage Ratio
8.84 %
5.00 %
4.00 %
$ 52,270
$ 65,893
Common Equity Tier 1 Capital Ratio
12.83 %
6.50 %
4.50 %
59,406
78,169
Tier 1 Capital Ratio
12.83 %
8.00 %
6.00 %
45,334
64,097
Total Capital Ratio
13.94 %
10.00 %
8.00 %
36,961
55,723
December 31, 2019
Leverage Ratio
9.97 %
5.00 %
4.00 %
$ 56,197
$ 67,508
Common Equity Tier 1 Capital Ratio
13.47 %
6.50 %
4.50 %
58,345
75,086
Tier 1 Capital Ratio
13.47 %
8.00 %
6.00 %
45,789
62,530
Total Capital Ratio
14.26 %
10.00 %
8.00 %
35,675
52,416
Based on our strong capital, conservative underwriting, and internal stress testing, we expect to remain well capitalized throughout the COVID-19 pandemic. However, the Bank’s reported regulatory capital ratios could be adversely impacted by future credit losses related to the COVID-19 pandemic. We recognize that we face extraordinary circumstances, and we intend to monitor developments and potential impacts on our capital.
We believe that we have ample liquidity to meet the needs of our customers and to manage through the COVID-19 pandemic through our low cost deposits; our ability to borrow against approved lines of credit (federal funds purchased) from correspondent banks; and our ability to obtain advances secured by certain securities and loans from the Federal Home Loan Bank.
Critical Accounting Policies and Estimates
We have adopted various accounting policies that govern the application of accounting principles generally accepted in the United States and with general practices within the banking industry in the preparation of our financial statements. Our significant accounting policies are described in the notes to our consolidated financial statements in this report.
Certain accounting policies inherently involve a greater reliance on the use of estimates, assumptions and judgments and, as such, have a greater possibility of producing results that could be materially different than originally reported, which could have a material impact on the carrying values of our assets and liabilities and our results of operations. We consider these accounting policies and estimates to be critical accounting policies. We have identified the determination of the allowance for loan losses, goodwill and other intangibles, income taxes and deferred tax assets, other-than-temporary impairment, business combinations, and method of accounting for loans acquired to be the accounting areas that require the most subjective or complex judgments and, as such, could be most subject to revision as new or additional information becomes available or circumstances change, including overall changes in the economic climate and/or market interest rates. Therefore, management has reviewed and approved these critical accounting policies and estimates and has discussed these policies with our Audit and Compliance Committee.
Allowance for Loan Losses
We believe the allowance for loan losses is the critical accounting policy that requires the most significant judgment and estimates used in preparation of our consolidated financial statements. Some of the more critical judgments supporting the amount of our allowance for loan losses include judgments about the credit worthiness of borrowers, the estimated value of the underlying collateral, the assumptions about cash flow, determination of loss factors for estimating credit losses, the impact of current events and conditions, and other factors impacting the level of probable inherent losses. Under different conditions or using different assumptions, the actual amount of credit losses incurred by us may be different from management’s estimates provided in our consolidated financial statements. Refer to the portion of this discussion that addresses our allowance for loan losses for a more complete discussion of our processes and methodology for determining our allowance for loan losses.
FASB has issued a new credit impairment model, the Current Expected Credit Loss, or CECL model. The CECL model will become effective for us on January 1, 2023 and for interim periods within that year. Under the CECL model, we will be required to present certain financial assets carried at amortized cost, such as loans held for investment and held-to-maturity debt securities, at the net amount expected to be collected. The measurement of expected credit losses is to be based on information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. This measurement will take place at the time the financial asset is first added to the balance sheet and periodically thereafter. This differs significantly from the “incurred loss” model currently required under GAAP, which delays recognition until it is probable a loss has been incurred. Accordingly, we expect that the adoption of the CECL model will materially affect how we determine our allowance for loan losses and could require us to significantly increase our allowance. Moreover, the CECL model may create more volatility in the level of our allowance for loan losses. If we are required to materially increase our level of allowance for loan losses for any reason, such increase could adversely affect our business, financial condition and results of operations.
We are currently evaluating the impact the CECL model will have on our accounting, but we expect to recognize a one-time cumulative-effect adjustment to our allowance for loan losses as of the beginning of the first reporting period in which the new standard is effective, consistent with regulatory expectations set forth in interagency guidance issued at the end of 2016. We cannot yet determine the magnitude of any such one-time cumulative adjustment or of the overall impact of the new standard on our business, financial condition and results of operations.
On December 21, 2018, the federal banking agencies issued a joint final rule to revise their regulatory capital rules to (i) address the implementation of CECL; (ii) provide an optional three-year phase-in period for the day-one adverse regulatory capital effects that banking organizations are expected to experience upon adopting CECL; and (iii) require for certain banking organizations that are subject to stress testing, the use of CECL in stress tests beginning with the 2020 capital planning and stress testing cycle.
Goodwill and Other Intangibles
Goodwill represents the excess of the purchase price over the sum of the estimated fair values of the tangible and identifiable intangible assets acquired less the estimated fair value of the liabilities assumed. Goodwill has an indefinite useful life and is evaluated for impairment annually or more frequently if events and circumstances indicate that the asset might be impaired. An impairment loss is recognized to the extent that the carrying amount exceeds the asset’s fair value. Qualitative factors are assessed to first determine if it is more likely than not (more than 50%) that the carrying value of goodwill is less than fair value. These qualitative factors include but are not limited to overall deterioration in general economic conditions, industry and market conditions, and overall financial performance. If determined that it is more likely than not that there has been a deterioration in the fair value of the carrying value then the first of a two-step process would be performed. The first step, used to identify potential impairment, involves comparing each reporting unit’s estimated fair value to its carrying value, including goodwill. If the estimated fair value of a reporting unit exceeds its carrying value, goodwill is considered not to be impaired. If the carrying value exceeds estimated fair value, there is an indication of potential impairment and the second step is performed to measure the amount of impairment.
If required, the second step involves calculating an implied fair value of goodwill for each reporting unit for which the first step indicated impairment. The implied fair value of goodwill is determined in a manner similar to the amount of goodwill calculated in a business combination, by measuring the excess of the estimated fair value of the reporting unit, as determined in the first step, over the aggregate estimated fair values of the individual assets, liabilities and identifiable intangibles as if the reporting unit was being acquired in a business combination. If the implied fair value of goodwill exceeds the carrying value of goodwill assigned to the reporting unit, there is no impairment. If the carrying value of goodwill assigned to a reporting unit exceeds the implied fair value of the goodwill, an impairment charge is recorded for the excess. An impairment loss cannot exceed the carrying value of goodwill assigned to a reporting unit, and the loss establishes a new basis in the goodwill. Subsequent reversal of goodwill impairment losses is not permitted. Management has determined that the Company has four reporting units.
In January 2017, the FASB issued ASU No. 2017-04, which simplifies the accounting for goodwill impairment for all entities by requiring impairment charges to be based on the first step in the two-step impairment test under ASC Topic 350 and eliminating the second step from the goodwill impairment test. This guidance was effective for us as of January 1, 2020.
Core deposit intangibles represent the estimated value of long-term deposit relationships acquired in bank or branch acquisition transactions. These costs are amortized over the estimated useful lives of the deposit accounts acquired on a method that we believe reasonably approximates the anticipated benefit stream from the accounts. The estimated useful lives are periodically reviewed for reasonableness.
We performed our required annual goodwill impairment test as of December 31, 2020 and there was no impairment. Throughout 2020, financial institution stocks in general as well as our market capitalization declined because of events surrounding the COVID-19 pandemic. As a result, we performed qualitative goodwill impairment analyses as of March 31, 2020, June 30, 2020, September 30, 2020, and December 31, 2020. These qualitative analyses included a review of our earnings, pretax pre-provision earnings (PTPPE), net interest income, mortgage banking income, investment advisory fees and non-deposit commissions, non-PPP loan growth and asset quality trends, loan charge-offs and recoveries, deposit growth, capital levels, and the economic conditions in our markets. Based on our analyses, we do not believe the decline in our publicly-traded common stock is indicative of a permanent deterioration of the fundamental value of the Company. Furthermore, our common stock has traded above both book value and tangible book value during the first quarter of 2021. As such, we do not believe that it is more-likely-than-not a goodwill impairment exists at December 31, 2020, September, 30, 2020, June 30, 2020, and March 31, 2020. Depending on, among other things, the duration and severity of the impacts of the COVID-19 pandemic, we may have to reevaluate our financial condition and potential impairment of our goodwill.
Income Taxes, Deferred Tax Assets, and Deferred Tax Liabilities
Income taxes are provided for the tax effects of the transactions reported in our consolidated financial statements and consist of taxes currently due plus deferred taxes related to differences between the tax basis and accounting basis of certain assets and liabilities, including available-for-sale securities, allowance for loan losses, write-downs of OREO properties, write-downs on premises held-for-sale, accumulated depreciation, net operating loss carry forwards, accretion income, deferred compensation, intangible assets, and pension plan and post-retirement benefits. The deferred tax assets and liabilities represent the future tax return consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. Deferred tax assets and liabilities are reflected at income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. A valuation allowance is recorded when it is “more likely than not” that a deferred tax asset will not be realized. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. We file a consolidated federal income tax return for the Bank. We were in a $538 thousand net deferred tax liability position at December 31, 2020 and a $1.0 million net deferred tax asset position at December 31, 2019. The change to a net deferred tax liability position at December 31, 2020 from a net deferred tax asset position at December 31, 2019 is primarily due to the deferred tax impact related to an $11.1 million increase in our pretax unrealized gains net of unrealized losses on our available-for-sale investments to $14.3 million at December 31, 2020 from $3.2 million at December 31, 2019. The $11.1 million increase in our pretax unrealized gains net of unrealized losses on our available-for-sale securities was primarily due to a reduction in market interest rates at December 31, 2020 compared to December 31, 2019.
Other-Than-Temporary Impairment
We evaluate securities for other-than-temporary impairment at least on a quarterly basis. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) the outlook for receiving the contractual cash flows of the investments, (4) the anticipated outlook for changes in the general level of interest rates, and (5) our intent and ability to retain our investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value or for a debt security whether it is more-likely-than-not that we will be required to sell the debt security prior to recovering its fair value (See Note 4 to the Consolidated Financial Statements). Our management has determined there are no other-than-temporary impaired securities as of December 31, 2020 and that we have the ability to hold any of the securities in which the fair value is less than cost until maturity or until these securities recover their book value.
Business Combinations, Method of Accounting for Loans Acquired
We account for acquisitions under FASB ASC Topic 805, Business Combinations, which requires the use of the acquisition method of accounting. All identifiable assets acquired, including loans, are recorded at fair value. No allowance for loan losses related to the acquired loans is recorded on the acquisition date because the fair value of the loans acquired incorporates assumptions regarding credit risk.
Acquired credit-impaired loans are accounted for under the accounting guidance for loans and debt securities acquired with deteriorated credit quality, found in FASB ASC Topic 310-30, Receivables-Loans and Debt Securities Acquired with Deteriorated Credit Quality and initially measured at fair value, which includes estimated future credit losses expected to be incurred over the life of the loans. Loans acquired in business combinations with evidence of credit deterioration are considered impaired. Loans acquired through business combinations that do not meet the specific criteria of FASB ASC Topic 310-30, but for which a discount is attributable, at least in part to credit quality, are also accounted for under this guidance. Certain acquired loans, including performing loans and revolving lines of credit (consumer and commercial), are accounted for in accordance with FASB ASC Topic 310-20, where the discount is accreted through earnings based on estimated cash flows over the estimated life of the loan.
Results of Operations
Our net income for the twelve months ended December 31, 2020 was $10.1 million, or $1.35 diluted earnings per common share, as compared to $11.0 million, or $1.45 diluted earnings per common share, for the twelve months ended December 31, 2019. The $872 thousand decrease in net income between the two periods is primarily due to increases in provision for loan losses expense of $3.5 million and non-interest expense of $2.9 million, partially offset by an increase in net interest income of $3.2 million, an increase in non-interest income of $2.0 million, and a decrease in income tax expense of $362 thousand. The increase in provision for loan losses is primarily related to an increase in the qualitative factors in our allowance for loan losses methodology related to the deteriorating economic conditions and economic uncertainties caused by the COVID-19 pandemic. The increase in non-interest expense is primarily related to increased salaries and employee benefits expense of $2.8 million, FDIC assessments of $347 thousand, other real estate expense of $120 thousand, and data processing expense of $289 thousand, partially offset by a lower equipment expense of $256 thousand and amortization of intangibles of $160 thousand. The increase in net interest income results from an increase of $180.4 million in average earning assets partially offset by a 28 basis point decline in the net interest margin between the two periods. The increase in non-interest income is primarily related to increases in mortgage banking income of $1.0 million, investment advisory fees and non-deposit commissions of $699 thousand, gains on sale of securities of $99 thousand, gains on sale of other real estate owned of $147 thousand, non-recurring bank owned life insurance (BOLI) income of $311 thousand, and ATM debit card income of $197 thousand, partially offset by a $528 thousand decrease in deposit service charges. Our effective tax rate was 19.82% during twelve months of 2020 compared to 20.67% during the twelve months of 2019. The $311 thousand in non-recurring BOLI income was recorded as non-taxable income.
Net income was $11.0 million, or $1.45 diluted earnings per common share, for the year ended December 31, 2019, as compared to net income of $11.2 million, or $1.45 diluted earnings per common share, for the year ended December 31, 2018. Net interest income increased $1.1 million, or 3.1% to $36.8 million, in 2019 from $35.7 million in 2018. The increase in net interest income is primarily due to a $37.3 million increase in average earning assets, which was partially offset by a four basis points decline in the net interest margin in 2019 as compared to 2018. Net interest margin on a fully tax equivalent basis was 3.65% in 2019 as compared to 3.69% in 2018. Provision for loan losses declined $207 thousand to $139 thousand in 2019 from $346 thousand in 2018. Noninterest income increased $1.1 million, or 10.3% to $11.7 million, in 2019 from $10.6 million in 2018. The increase in noninterest income was primarily due to increases in mortgage banking income, investment advisory fees and non-deposit commissions, gains/(losses) on sale of securities, and ATM debit card income, which were partially offset by lower deposit service charges and a write-down on bank premises held-for-sale. We conducted business from a mortgage loan production office in Richland County, South Carolina until January 24, 2020 and have since consolidated such business with other existing Bank offices. This closure and consolidation resulted in a write-down of the real estate of $282 thousand during the fourth quarter of 2019 based on the appraised value of the real estate less estimated selling costs. The real estate is recorded at $591 thousand in Premises held-for-sale at December 31, 2019. Once the real estate is sold, our occupancy expense will decline by approximately $91 thousand annually. Noninterest expense increased $2.5 million, or 7.8% to $34.6 million, in 2019 from $32.1 million in 2018. The increase in noninterest expense was primarily due to increases in salaries and employee benefits, occupancy expense, ATM/debit card and data processing expense, and marketing and public relations expense, which were partially offset by lower FDIC /FICO premiums in 2019 as compared to 2018. During 2019, we made significant strategic investments in our franchise, including two new full-service offices, our mobile and digital banking platforms, and hiring additional team members. Income tax expense increased $164 thousand, or 6.1%, to $2.9 million, in 2019 as compared to $2.7 million in 2018. Our effective tax rate was 20.67% in 2019 as compared to 19.35% in 2018.
Net Interest Income
Net interest income is our primary source of revenue. Net interest income is the difference between income earned on assets and interest paid on deposits and borrowings used to support such assets. Net interest income is determined by the rates earned on our interest-earning assets and the rates paid on our interest-bearing liabilities, the relative amounts of interest-earning assets and interest-bearing liabilities, and the degree of mismatch and the maturity and repricing characteristics of our interest-earning assets and interest-bearing liabilities.
Net interest income increased $3.2 million, or 8.6%, to $40.0 million for the twelve months ended December 31, 2020 from $36.8 million for the twelve months ended December 31, 2019. Our net interest margin declined by 28 basis points to 3.34% during the twelve months of 2020 from 3.62% during the twelve months of 2019. Our net interest margin, on a taxable equivalent basis, was 3.37% for the twelve months of 2020 compared to 3.65% for the twelve months of 2019. Average earning assets increased $180.4 million, or 17.7%, to $1.2 billion for the twelve months ended December 31, 2020 as compared to $1.0 billion in the same period of 2019. The increase in net interest income was primarily due to a higher level of average earning assets partially offset by lower net interest margin. The increase in average earning assets was due to increases in loans, securities, and other short-term investments primarily due to Non-PPP loan growth, PPP loans, organic deposit growth, and excess liquidity from PPP loan proceeds and other stimulus funds related to the COVID-19 pandemic. The decline in net interest margin was primarily due to the Federal Reserve reducing the target range of the federal funds rate three times totaling 75 basis points during 2019 and two times totaling 150 basis points during the first quarter of 2020, lower yields on PPP loans, and the excess liquidity generated from PPP loan proceeds and other stimulus funds related to the COVID-19 pandemic being deployed in lower yielding securities and other short-term investments. Lower market rates, the competitive loan pricing environment, and the COVID-19 pandemic put downward pressure on our net interest margin during 2020.
Average loans increased $99.7 million, or 13.6%, to $835.1 million for the twelve months of 2020 from $735.3 million for the twelve months of 2019. Average PPP loans increased $32.3 million and average Non-PPP loans increased $67.4 million to $32.3 million and $802.8 million, respectively, for the twelve months of 2020. We had no PPP loans at December 31, 2019. Average loans represented 69.7% of average earning assets during the twelve months of 2020 compared to 72.2% of average earning assets during the twelve months of 2019. The decline in average loans as a percentage of average earning assets was primarily due to increases in deposits of $152.5 million and securities sold under agreements to repurchase of $14.1 million. The growth in our deposits and securities sold under agreements to repurchase was higher than the growth in our loans, which resulted in the excess funds being deployed in our securities portfolio and other short-term investments and to reduce our Federal Home Loan Bank advances. The yield on loans declined 38 basis points to 4.44% in the twelve months of 2020 from 4.82% in the twelve months of 2019. The yield on PPP loans was 3.32% and the yield on Non-PPP loans was 4.48% in the twelve months of 2020. Average securities and average other short-term investments for the twelve months ended December 31, 2020 increased $43.3 million and $37.3 million, respectively, from the prior year period. The yield on our securities portfolio declined to 2.15% for the twelve months ended December 31, 2020 from 2.58% for the same period in 2019 while the yield on our other short-term investments declined to 0.44% for the twelve months ended December 31, 2020 from 2.14% for the same period in 2019. These declines were primarily related to the Federal Reserve reducing the target range of the federal funds rate as described above. The yield on earning assets for the twelve months ended December 31, 2020 and 2019 was 3.65% and 4.19%, respectively. The cost of interest-bearing liabilities was at 46 basis points in the twelve months of 2020 compared to 80 basis points in the twelve months of 2019. We continue to focus on growing our pure deposits (demand deposits, interest-bearing transaction accounts, savings deposits and money market accounts) as these accounts tend to be low-cost deposits and assist us in controlling our overall cost of funds. In the twelve months of 2020, these deposits averaged 84.7% of total deposits as compared to 81.1% in the same period of 2019.
Net interest income totaled $40.0 million in 2020, $36.8 million in 2019, and $35.7 million in 2018. The yield on earning assets was 3.65%, 4.19%, and 4.05% in 2020, 2019, and 2018, respectively. The rate paid on interest-bearing liabilities was 0.46%, 0.80%, and 0.55% in 2020, 2019, and 2018, respectively. The fully taxable equivalent net interest margin was 3.37% in 2020, 3.65% in 2019, and 3.69% in 2018. Loans typically provide a higher yield than other types of earning assets and, thus, one of our goals continues to be growing the loan portfolio as a percentage of earning assets in order to improve the overall yield on earning assets and the net interest margin. Our average loan portfolio (including loans held-for-sale) as a percentage of average earning assets was 69.7% in 2020, 72.2% in 2019, and 70.0% in 2018. The loan portfolio as a percentage of earning assets declined to 65.1% at December 31, 2020 from 68.9% at December 31, 2019. Our loan (including loans held-for-sale) to deposit ratio on average during 2020 was 76.8%, as compared to 78.7% during 2019, and 75.0% during 2018. The loan to deposit ratio declined to 74.8% at December 31, 2020 as compared to 75.7% at December 31, 2019. This decline was due to our deposit growth of $201.2 million exceeding our loan growth of $141.0 million from December 31, 2019 to December 31, 2020.
The net interest margin and the net interest margin on a fully tax equivalent basis declined by two basis points and four basis points, respectively, in 2019 as compared to 2018. The yield on earning assets increased by 14 basis points while our cost of interest-bearing liabilities increased by 25 basis points in 2019 as compared to 2018. The decline in net interest margin in 2019 as compared to 2018 was partially a result of the Federal Reserve reducing the federal funds target rate in 2019 after increasing it in 2018 and a flat-to-inverted yield curve during periods of 2019. In 2018, the federal funds target rate was increased four times. These increases over time positively impact our net interest margin because the yields on our variable rate assets in the loan and investment portfolios, and our short term investments reprice at higher rates faster than the rates that we pay on our interest-bearing liabilities reprice higher in a rising rate environment. However, the Federal Reserve reduced the target range for the federal funds rate by 25 basis points at each of its meetings in in July 2019, September 2019, and October 2019, which resulted in a total reduction of 75 basis points during 2019. These reductions, along with a flat-to-inverted yield curve during periods of 2019, negatively impacted our net interest margin during the second half of 2019 because the yields on our variable rate assets in the loan and investment portfolios, and our short term investments reprice at lower rates faster than the rates that we pay on our interest-bearing liabilities reprice lower in a declining rate environment. Furthermore, the three reductions in the federal funds target rate, the flat-to-inverted yield curve during periods of 2019, and the competitive environment put downward pressure on the pricing of new loan originations in 2019. The yield on our earning assets increased 14 basis points to 4.19% in 2019 from 4.05% in 2018. However, the cost of our interest-bearing liabilities increased 25 basis points to 0.80% in 2019 from 0.55% in 2018. The positive impact from the 2018 federal funds target rate increases were more than offset by the negative impacts from the 2019 federal funds target rate reductions, the flat-to-inverted yield curve, and the competitive loan pricing environment during periods of 2019. The average loan balance as a percentage of average earning assets was 72.2% in 2019 as compared to 70.0% in 2018. This increase in earning asset mix along with the increases in short term rates noted previously accounted for the improved yield on our earning assets. Our lower cost funding sources include non-interest bearing transaction accounts, interest-bearing transaction accounts, money-market accounts and savings deposits. During 2018, the average balance in these accounts represented 79.5% of total deposits whereas in 2019 they represented 81.1% of total deposits. Our average other borrowings, which are typically a higher cost funding source, increased $6.3 million in 2019 as compared to 2018. Managing this interest rate risk continues to be a primary focus of management (see discussion of Market Rate and Interest Rate Sensitivity discussion below).
Average Balances, Income Expenses and Rates. The following table depicts, for the periods indicated, certain information related to our average balance sheet and our average yields on assets and average costs of liabilities. Such yields are derived by dividing income or expense by the average balance of the corresponding assets or liabilities. Average balances have been derived from daily averages.
Year ended December 31,
(Dollars in thousands)
Average
Balance
Income/
Expense
Yield/
Rate
Average
Balance
Income/
Expense
Yield/
Rate
Average
Balance
Income/
Expense
Yield/
Rate
Assets
Earning assets
PPP loans
$ 32,312
$ 1,073
3.32 %
$ -
$ -
N/A
$ -
$ -
N/A
Non-PPP loans
802,779
35,964
4.48 %
735,343
35,447
4.82 %
686,438
32,789
4.78 %
Total loans(1)
$ 835,091
$ 37,037
4.44 %
$ 735,343
$ 35,447
4.82 %
$ 686,438
$ 32,789
4.78 %
Securities
300,893
6,465
2.15 %
257,587
6,636
2.58 %
271,621
6,522
2.40 %
Other short-term investments(2)
62,903
0.44 %
25,580
2.14 %
23,156
1.81 %
Total earning assets
1,198,887
43,778
3.65 %
1,018,510
42,630
4.19 %
981,215
39,729
4.05 %
Cash and due from banks
15,552
14,362
13,446
Premises and equipment
34,769
35,893
34,905
Goodwill and other intangible assets
15,922
16,376
16,881
Other assets
39,541
37,513
36,299
Allowance for loan losses
(8,590 )
(6,437 )
(6,075 )
Total assets
$ 1,296,081
$ 1,116,217
$ 1,076,671
Liabilities
Interest-bearing liabilities
Interest-bearing transaction accounts
$ 246,385
$
0.12 %
$ 208,750
$
0.28 %
$ 192,420
$
0.23 %
Money market accounts
217,018
0.38 %
181,695
1,690
0.93 %
184,413
0.47 %
Savings deposits
113,255
0.07 %
104,236
0.13 %
106,752
0.13 %
Time deposits
166,791
1,833
1.10 %
176,243
2,139
1.21 %
188,023
1,450
0.77 %
Other borrowings
66,528
1.10 %
52,427
1,223
2.33 %
46,155
1,076
2.34 %
Total interest-bearing liabilities
$ 809,977
$ 3,755
0.46 %
$ 723,351
$ 5,781
0.80 %
$ 717,763
$ 3,981
0.55 %
Demand deposits
343,999
264,017
243,530
Other liabilities
13,242
11,869
8,200
Shareholders’ equity
$ 128,863
$ 116,980
$ 107,178
Total liabilities and shareholders’ equity
$ 1,296,081
$ 1,116,217
$ 1,076,671
Net interest spread
3.19 %
3.39 %
3.49 %
Net interest income/margin
$ 40,023
3.34 %
$ 36,849
3.62 %
$ 35,748
3.64 %
Net interest margin
(tax equivalent)(3)
3.37 %
3.65 %
3.69 %
(1) All loans and deposits are domestic. Average loan balances include non-accrual loans and loans held for sale.
(2) The computation includes federal funds sold, securities purchased under agreement to resell and interest bearing deposits.
(3) Based on a 21.0% marginal tax rate for 2020, 2019 and 2018.
The following table presents the dollar amount of changes in interest income and interest expense attributable to changes in volume and the amount attributable to changes in rate. The combined effect related to volume and rate which cannot be separately identified, has been allocated proportionately, to the change due to volume and the change due to rate.
2020 versus 2019
Increase (decrease) due to 2019 versus 2018
Increase (decrease) due to
(In thousands) Volume Rate Net Volume Rate Net
Assets
Earning assets
Loans	 $ 3,872 $ (2,282 ) $ 1,590 $ 2,356 $ 302 $ 2,658
Investment securities	 (13,452 ) 13,281 (171 ) (278 )
Other short-term investments	 (595 ) (271 )
Total earning assets	 4,105 (2,957 ) 1,148 1,538 1,363 2,901
Interest-bearing liabilities
Interest-bearing transaction accounts	 (441 ) (307 )
Money market accounts	 (1,294 ) (870 ) (13 )
Savings deposits	 (67 ) (54 ) (3 ) (2 ) (5 )
Time deposits	 (111 ) (195 ) (306 ) (84 )
Other short-term borrowings	 (999 ) (489 ) (1 )
Total interest-bearing liabilities	 (2,834 ) (2,026 ) 1,769 1,800
Net interest income	
$ 3,174
$ 1,101
Market Risk and Interest Rate Sensitivity
Market risk reflects the risk of economic loss resulting from adverse changes in market prices and interest rates. The risk of loss can be measured in either diminished current market values or reduced current and potential net income. Our primary market risk is interest rate risk. We have established an Asset/Liability Management Committee (the “ALCO”) to monitor and manage interest rate risk. The ALCO monitors and manages the pricing and maturity of our assets and liabilities in order to diminish the potential adverse impact that changes in interest rates could have on our net interest income. The ALCO has established policy guidelines and strategies with respect to interest rate risk exposure and liquidity.
A monitoring technique employed by us is the measurement of our interest sensitivity “gap,” which is the positive or negative dollar difference between assets and liabilities that are subject to interest rate repricing within a given period of time. Simulation modeling is performed to assess the impact varying interest rates and balance sheet mix assumptions will have on net interest income. We model the impact on net interest income for several different changes, to include a flattening, steepening and parallel shift in the yield curve. For each of these scenarios, we model the impact on net interest income in an increasing and decreasing rate environment of 100 and 200 basis points. We also periodically stress certain assumptions such as loan prepayment rates, deposit decay rates and interest rate betas to evaluate our overall sensitivity to changes in interest rates. Policies have been established in an effort to maintain the maximum anticipated negative impact of these modeled changes in net interest income at no more than 10% and 15%, respectively, in a 100 and 200 basis point change in interest rates over a 12-month period. Interest rate sensitivity can be managed by repricing assets or liabilities, selling securities available-for-sale, replacing an asset or liability at maturity or by adjusting the interest rate during the life of an asset or liability. Managing the amount of assets and liabilities repricing in the same time interval helps to hedge the risk and minimize the impact on net interest income of rising or falling interest rates. Neither the “gap” analysis or asset/liability modeling are precise indicators of our interest sensitivity position due to the many factors that affect net interest income including, the timing, magnitude and frequency of interest rate changes as well as changes in the volume and mix of earning assets and interest-bearing liabilities.
The following table illustrates our interest rate sensitivity at December 31, 2020.
Interest Sensitivity Analysis
(Dollars in thousands) Within
One
Year One to
Three
Years Three to
Five
Years Over
Five
Years Total
Assets
Earning assets
Loans(1) $ 373,517 $ 240,324 $ 123,343 $ 91,967 $ 829,150
Loans Held for Sale	 45,020 - - - 45,020
Securities(2) 126,524 47,123 32,291 145,205 351,143
Federal funds sold, securities purchased under agreements to resell and other earning assets	 43,562 - - - 43,562
Total earning assets	 588,623 287,447 155,634 237,172 1,268,876
Liabilities
Interest bearing liabilities
Interest bearing deposits
Interest checking accounts	 107,830 - - 554,193 662,023
Money market accounts	 153,093 - - 89,036 242,128
Savings deposits	 33,971 - - 90,626 124,597
Time deposits	 113,803 40,337 6,509 - 160,650
Total interest-bearing deposits	 408,696 40,337 6,509 733,855 1,189,398
Other borrowings	 55,878 - - - 55,878
Total interest-bearing liabilities	 464,574 40,337 6,509 733,855 1,245,275
Period gap	 $ 129,671 $ 247,109 $ 149,125 $ (396,207 ) $ 129,699
Cumulative gap	 $ 129,671 $ 376,781 $ 525,906 $ 129,699 $ 129,699
Ratio of cumulative gap to total earning assets	 22.03 % 43.01 % 50.97 % 10.22 % 10.22 %
(1) Loans classified as non-accrual as of December 31, 2020 are not included in the balances.
(2) Securities based on amortized cost.
Based on the many factors and assumptions used in simulating the effect of changes in interest rates, the following table estimates the hypothetical percentage change in net interest income at December 31, 2020 and 2019 over the subsequent 12 months. At December 31, 2020, we are slightly liability sensitive over the first three month period and over the balance of a 12-month period are asset sensitive on a cumulative basis. As a result, our modeling reflects slight exposure to falling rates and our rising rate exposure trends from neutral to slightly liability sensitive as rates move higher over the first 12 months. This negative impact of rising rates reverses and net interest income is favorably impacted over a 24-month period. In a declining rate environment, the model reflects a decline in net interest income. This primarily results from the current level of interest rates being paid on our interest bearing transaction accounts as well as money market accounts. The interest rates on these accounts are at a level where they cannot be repriced in proportion to the change in interest rates. The increase and decrease of 100 and 200 basis points, respectively, reflected in the table below assume a simultaneous and parallel change in interest rates along the entire yield curve.
Net Interest Income Sensitivity
Change in short-term interest rates
Hypothetical
percentage change in
net interest income
December 31,
+200bp	
-0.73 %
-2.30 %
+100bp	
+0.08 %
-1.09 %
Flat	
-
-
-100bp	
-3.37 %
-1.88 %
-200bp	
-3.58 %
-5.08 %
We perform a valuation analysis projecting future cash flows from assets and liabilities to determine the Present Value of Equity (“PVE”) over a range of changes in market interest rates. The sensitivity of PVE to changes in interest rates is a measure of the sensitivity of earnings over a longer time horizon. At December 31, 2020 and 2019, the PVE exposure in a plus 200 basis point increase in market interest rates was estimated to be 11.47% and 5.85%, respectively. The PVE exposure in a down 100 basis point decrease was estimated to be (14.32)% at December 31, 2020 compared to (7.68)% at December 31, 2019.
Provision and Allowance for Loan Losses
We account for our allowance for loan losses under the incurred loss model. As discussed above, the CECL model will become effective for us on January 1, 2023. At December 31, 2020, the allowance for loan losses was $10.4 million, or 1.23% of total loans (excluding loans held-for-sale), compared to $6.6 million, or 0.90% of total loans (excluding loans held-for-sale) at December 31, 2019. Excluding PPP loans and loans held-for-sale, the allowance for loan losses was 1.30% of total loans at December 31, 2020. The increase in the allowance for loan losses is primarily related to an increase in the qualitative factors in our allowance for loan losses methodology related to the deteriorating economic conditions and economic uncertainties caused by the COVID-19 pandemic.
Loans that were acquired in the acquisition of Cornerstone Bancorp, otherwise referred to herein as Cornerstone, in 2017 as well as in the acquisition of Savannah River Financial Corp., otherwise referred to herein as Savannah River, in 2014 are accounted for under FASB ASC 310-30. These acquired loans were initially measured at fair value, which includes estimated future credit losses expected to be incurred over the life of the loans. The credit component on loans related to cash flows not expected to be collected is not subsequently accreted (non-accretable difference) into interest income. Any remaining portion representing the excess of a loan’s or pool’s cash flows expected to be collected over the fair value is accreted (accretable difference) into interest income. At December 31, 2020 and December 31, 2019, the remaining credit component on loans attributable to acquired loans in the Cornerstone and Savannah River transactions was $264 thousand and $534 thousand, respectively.
Our provision for loan losses was $3.7 million in 2020, $139 thousand in 2019, and $346 thousand in 2018. The increase in the provision for loan losses is primarily related to an increase in the qualitative factors in our allowance for loan losses methodology related to the deteriorating economic conditions and economic uncertainties caused by the COVID-19 pandemic.
The allowance for loan losses represents an amount which we believe will be adequate to absorb probable losses on existing loans that may become uncollectible. Our judgment as to the adequacy of the allowance for loan losses is based on assumptions about future events, which we believe to be reasonable, but which may or may not prove to be accurate. Our determination of the allowance for loan losses is based on evaluations of the collectability of loans, including consideration of factors such as the balance of impaired loans, the quality, mix, and size of our overall loan portfolio, the knowledge and depth of lending personnel, economic conditions (local and national) that may affect the borrower’s ability to repay, the amount and quality of collateral securing the loans, our historical loan loss experience, and a review of specific problem loans. We also consider qualitative factors such as changes in the lending policies and procedures, changes in the local/national economy, changes in volume or type of credits, changes in volume/severity of problem loans, quality of loan review and board of director oversight, and concentrations of credit. During the first quarter of 2020, we added a new qualitative factor related to the economic uncertainties caused by the COVID-19 pandemic. We charge recognized losses to the allowance and add subsequent recoveries back to the allowance for loan losses. There can be no assurance that charge-offs of loans in future periods will not exceed the allowance for loan losses as estimated at any point in time or that provisions for loan losses will not be significant to a particular accounting period, especially considering the uncertainties related to the COVID-19 pandemic.
We perform an analysis quarterly to assess the risk within the loan portfolio. The portfolio is segregated into similar risk components for which historical loss ratios are calculated and adjusted for identified changes in current portfolio characteristics. Historical loss ratios are calculated by product type and by regulatory credit risk classification (See Note 4 to the Consolidated Financial Statements). The annualized weighted average loss ratios over the last 36 months for loans classified as substandard, special mention and pass have been approximately 0.05%, 0.00% and 0.01%, respectively. The allowance consists of an allocated and unallocated allowance. The allocated portion is determined by types and ratings of loans within the portfolio. The unallocated portion of the allowance is established for losses that exist in the remainder of the portfolio and compensates for uncertainty in estimating the loan losses. The allocated portion of the allowance is based on historical loss experience as well as certain qualitative factors as explained above. The qualitative factors have been established based on certain assumptions made as a result of the current economic conditions and are adjusted as conditions change to be directionally consistent with these changes. The unallocated portion of the allowance is composed of factors based on management’s evaluation of various conditions that are not directly measured in the estimation of probable losses through the experience formula or specific allowances. The overall risk as measured in our three-year lookback, both quantitatively and qualitatively, does not encompass a full economic cycle. Net charge-offs in the 2009 to 2011 period averaged 63 basis points annualized in our loan portfolio. Over the most recent three-year period, our net charge-offs have experienced a modest net recovery. We currently believe the unallocated portion of our allowance represents potential risk associated throughout a full economic cycle; however, the COVID-19 pandemic and the government and economic responses thereto may materially affect the risk within our loan portfolios.
We have a significant portion of our loan portfolio with real estate as the underlying collateral (see Note 16 to the Consolidated Financial Statements for concentrations of credit). At December 31, 2020 and December 31, 2019, approximately 87.5% and 91.6%, respectively, of the loan portfolio had real estate collateral. The reduction in the percent of our loan portfolio with real estate as the underlying collateral is due to the increase in PPP loans, which increased to $42.2 million at December 31, 2020 from $0 at December 31, 2019. When loans, whether commercial or personal, are granted, they are based on the borrower’s ability to generate repayment cash flows from income sources sufficient to service the debt. Real estate is generally taken to reinforce the likelihood of the ultimate repayment and as a secondary source of repayment. We work closely with all our borrowers that experience cash flow or other economic problems, and we believe that we have the appropriate processes in place to monitor and identify problem credits. There can be no assurance that charge-offs of loans in future periods will not exceed the allowance for loan losses as estimated at any point in time or that provisions for loan losses will not be significant to a particular accounting period. The allowance is also subject to examination and testing for adequacy by regulatory agencies, which may consider such factors as the methodology used to determine adequacy and the size of the allowance relative to that of peer institutions. Such regulatory agencies could require us to adjust our allowance based on information available to them at the time of their examination.
Non-performing assets were $7.0 million (0.50% of total assets) at December 31, 2020 as compared to $3.7 million (0.32% of total assets) at December 31, 2019, and $4.0 million (0.37% of total assets) at December 31, 2018. This increase was related to one credit relationship, which was impacted by the COVID-19 pandemic. While this is the appropriate recognition of the current status of this credit, there are encouraging signs of ultimate resolution of this matter and based on current appraisals, this credit relationship is well collateralized. While we believe the non-performing assets to total assets ratios are favorable in comparison to current industry results (both nationally and locally), we continue to monitor the impact of the COVID-19 pandemic on our customer base of local businesses and professionals. There were 19 loans totaling $4.6 million (0.54% of total loans) included in non-performing status (non-accrual loans and loans past due 90 days and still accruing) at December 31, 2020. The largest loan included in non-accrual status is in the amount of $1.7 million and is secured by commercial real estate located in North Augusta, South Carolina. The average balance of the remaining 18 loans is approximately $160 thousand with a range between $3 and $1.2 million, and the majority of these loans are secured by first mortgage liens. Furthermore, we had $1.6 million in accruing trouble debt restructurings, or TDRs, at December 31, 2020 compared to $1.7 million at December 31, 2019. We consider a loan impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due, including both principal and interest, according to the contractual terms of the loan agreement. Nonaccrual loans and accruing TDRs are considered impaired. At December 31, 2020, we had 23 impaired loans totaling $6.1 million compared to 33 impaired loans totaling $4.0 million at December 31, 2019. These loans were measured for impairment under the fair value of collateral method or present value of expected cash flows method. For collateral dependent loans, the fair value of collateral method is used and the fair value is determined by an independent appraisal less estimated selling costs. At December 31, 2020, we had loans totaling $665 thousand that were delinquent 30 days to 89 days representing 0.08% of total loans compared to $476 thousand or 0.06% of total loans at December 31, 2019.
During the ongoing COVID-19 pandemic and because of our proactive offering of payment deferrals, loans on which payments have been deferred declined to $16.1 million at December 31, 2020, from $27.3 million at September 30, 2020, from $175.0 million at June 30, 2020 and from $118.3 million at March 31, 2020. We had no loans on which payments were deferred related to the COVID-19 pandemic at December 31, 2019. The $16.1 million in deferrals at December 31, 2020 consist of seven loans on which only principal is being deferred. We had three loans totaling $8.7 million in continuing deferral status in which only principal is being deferred at March 5, 2021. Two of the continuing deferrals at March 5, 2021 totaling $4.5 million are in the retail industry segment identified by us as one of the industry segments most impacted by the COVID-19 pandemic; the other continuing deferral totaling $4.2 million is a mixed use office space that we do not consider to be in an industry segment most impacted by the COVID-19 pandemic. Some of these deferments were to businesses that temporarily closed or reduced operations and some were requested as a pre-cautionary measure to conserve cash. We proactively offered initial deferrals to our customers regardless of the impact of the pandemic on their business or personal finances. We obtained additional information from customers who requested second deferrals and we performed additional analyses to justify the need for the second deferral requests. Our management continuously monitors non-performing, classified and past due loans to identify deterioration regarding the condition of these loans and given the ongoing and uncertain impact of the COVID-19 pandemic, we will continue to monitor our loan portfolio for potential risks.
The following table summarizes the activity related to our allowance for loan losses.
Allowance for Loan Losses
(Dollars in thousands) 2017
Average loans and loans held for sale outstanding	 $ 835,091 $ 735,343 $ 686,438 $ 577,730 $ 514,766
Loans and loans held for sale outstanding at period end	 $ 844,157 $ 748,183 $ 721,685 $ 651,898 $ 552,416
Total nonaccrual loans	 $ 4,562 $ 2,329 $ 2,545 $ 3,342 $ 4,049
Loans past due 90 days and still accruing	 $ 1,260 $ - $ 31 $ 32 $ 53
Beginning balance of allowance	 $ 6,627 $ 6,263 $ 5,797 $ 5,214 $ 4,596
Loans charged-off:
1-4 family residential mortgage	 - -
Real Estate - Construction
Real Estate Mortgage - Residential - - -
Real Estate Mortgage - Commercial	 - - -
Consumer - Home equity	 - 19
Commercial	 - - -
Consumer - Other	 112
Overdrafts	 - 12
Total loans charged-off	 173
Recoveries:
1-4 family residential mortgage	 - -
Real Estate - Construction - -
Real Estate Mortgage - Residential - 21
Real Estate Mortgage - Commercial	 24
Consumer - Home equity	 5
Commercial	 19
Consumer - Other	 1
Total recoveries	 226
Net loans recovered (charged off)	 53 (156 )
Provision for loan losses	 3,663 774
Balance at period end	 $ 10,389 $ 6,627 $ 6,263 $ 5,797 $ 5,214
Net charge -offs to average loans and loans held for sale	 (0.01 )% (0.03 )% (0.02 )% (0.01 )% 0.03 %
Allowance as percent of total loans	 1.23 % 0.90 % 0.87 % 0.89 % 0.94 %
Non-performing loans as% of total loans	 0.50 % 0.31 % 0.77 % 0.52 % 0.75 %
Allowance as% of non-performing loans	 178.23 % 285.54 % 112.32 % 171.81 % 127.11 %
The following table presents an allocation of the allowance for loan losses at the end of each of the past five years. The allocation is calculated on an approximate basis and is not necessarily indicative of future losses or allocations. The entire amount is available to absorb losses occurring in any category of loans.
Allocation of the Allowance for Loan Losses
2017
(Dollars in
thousands) Amount % of
loans
in
category Amount % of
loans
in
category Amount % of
loans
in
category Amount % of
loans
in
category Amount % of
loans
in
category
Commercial, Financial and Agricultural $ 778 8.0 % $ 427 7.3 % $ 430 7.7 % $ 221 7.9 % $ 145 7.8 %
Real Estate Construction 1.5 % 1.9 % 1.6 % 7.0 % 8.4 %
Real Estate Mortgage: - - - - - - - - - -
Commercial 7,855 80.4 % 4,602 78.7 % 4,318 76.8 % 3,077 71.2 % 2,793 67.9 %
Residential 8.8 % 10.4 % 12.3 % 7.2 % 8.7 %
Consumer 1.3 % 1.7 % 1.6 % 6.7 % 7.2 %
Unallocated N/A N/A N/A 1,594 N/A 1,454 N/A
Total $ 10,389 100.0 % $ 6,627 100.0 % $ 6,263 100.0 % $ 5,797 100.0 % $ 5,214 100.0 %
Loans acquired in the Cornerstone transaction are excluded from our evaluation of the adequacy of the allowance as they were measured at fair value at acquisition. The assumptions used in this evaluation included a credit component and an interest rate component. These loans amounted to approximately $16.7 million and $26.0 million at December 31, 2020 and 2019, respectively.
Accrual of interest is discontinued on loans when we believe, after considering economic and business conditions and collection efforts that a borrower’s financial condition is such that the collection of interest is doubtful. A delinquent loan is generally placed in nonaccrual status when it becomes 90 days or more past due. At the time a loan is placed in nonaccrual status, all interest, which has been accrued on the loan but remains unpaid, is reversed and deducted from earnings as a reduction of reported interest income. No additional interest is accrued on the loan balance until the collection of both principal and interest becomes reasonably certain.
Non-interest Income and Expense
Non-interest Income. A significant source of noninterest income is service charges on deposit accounts. We also originate and sell residential loans on a servicing released basis in the secondary market. These loans are fixed rate residential loans that are originated in our name. The loans have locked in price commitments to be purchased by investors at the time of closing. Therefore, these loans present very little market risk for us. We typically deliver to, and receive funding from, the investor within 30 days. Other sources of noninterest income are derived from investment advisory fees and commissions on non-deposit investment products, ATM/debit card fees, commissions on check sales, safe deposit box rent, wire transfer and official check fees.
Non-interest income was $13.8 million in 2020 as compared to $11.7 million during the same period in 2019. Deposit service charges decreased $528 thousand during the twelve months of 2020 as compared to the same period in 2019 primarily due to customers holding higher balances in their deposit accounts due to proceeds from PPP loans and other stimulus funds related to the COVID-19 pandemic. Mortgage banking income increased by $1.0 million from $4.6 million in 2019 to $5.6 million in 2020. Mortgage production including loans held-for-sale and portfolio loans in 2020 was $199.3 million as compared to $139.7 million in the same period of 2019. With the decline in mortgage interest rates, refinance activity increased during 2020 and represented 55.5% of production. The gain on sale margin declined to 2.79% from 3.26% due to disruptions in the mortgage market causing certain loans not to be sold. As capacity rebuilds, this issue will be mitigated. Investment advisory fees increased $699 thousand to $2.7 million in 2020 from $2.0 million in 2019. Total assets under management, or AUM, were $502 million at December 31, 2020 as compared to $370 million at December 31, 2019. Management continues to focus on increasing both the mortgage banking income as well as the investment advisory fees and commissions. Gain on sale of securities was $99 thousand in 2020 compared to $136 thousand in 2019. Gain on sale of other assets was $147 thousand in 2020 compared to a $3 thousand loss on sale of other assets in 2019. The $147 thousand gain on sale of other assets in 2020 is primarily due to the sale of an other real estate owned property. The $311 thousand in non-recurring BOLI income was due to insurance benefits on two former members of the boards of directors of acquired banks who passed away during the third quarter of 2020. Noninterest income other increased $154 thousand to $3.8 million in 2020 from $3.7 million in 2019 primarily due to increases in ATM debit card income and recurring BOLI income.
Non-interest income was $11.7 million and $10.6 million in 2019 and 2018, respectively. From 2019 to 2018, the deposit service charges decreased by $120 thousand, or 6.8%. Changes in the regulatory requirements related to overdraft protection fees continue to contribute to the decrease in the overall fees from deposit service charges. Our mortgage banking income increased $660 thousand in 2019, as compared to 2018. Mortgage loan production was $139.6 million in 2019 (including construction to permanent loans to be sold upon completion of construction) as compared to $119.7 million in 2018. Investment advisory fees and non-deposit commissions increased by $338 thousand in 2019 compared to 2018. Total assets under management at December 31, 2019 were $369.7 million as compared to $288.5 million at December 31, 2018. The net gain on sale of securities for 2019 amounted to $136 thousand as compared to a loss of $342 thousand in 2018. The sales in 2019 and 2018 resulted from modest restructurings of the investment portfolio. These sales were made after evaluating specific investments and comparing them to an alternative asset or liability strategy. We recognized a gain on sale of other real estate of $24 thousand in 2018 as compared to a loss of $3 thousand in 2019. ATM debit card income increased by $216 thousand or 11.7% in 2019 as compared to 2018. The overall increase in ATM debit card fees was due to the increase in transaction accounts. Further, a write-down of Bank premises held-for-sale decreased our Non-interest income by $282 thousand in 2019. Income on recurring BOLI declined from $649 thousand in 2018 to $687 thousand in 2019. Non-interest income other decreased from $535 thousand in 2018 to $361 thousand in 2019. In addition, we received proceeds of approximately $73 thousand related to a death benefit on BOLI, which was credited to “Non-recurring BOLI income” in 2018.
The following table sets forth for the periods indicated the primary components of other noninterest income:
Year ended December 31,
(In thousands)
ATM debit card income	 $ 2,257 $ 2,060 $ 1,844
Recurring income on bank owned life insurance	
Rental income	
Loan late charges	
Safe deposit fees	
Wire transfer fees	
Other	
Total	 $ 3,814 $ 3,660 $ 3,542
Non-interest Expense. In the very competitive financial services industry, we recognize the need to place a great deal of emphasis on expense management and continually evaluate and monitor growth in discretionary expense categories in order to control future increases.
Non-interest expense increased $2.9 million to $37.5 million in 2020 from $34.6 million in 2019 primarily due to increases in salaries and benefits expense, FDIC assessments, other real estate owned expense, data processing expense, insurance, legal and professional fees, and COVID-19 related expenses partially offset by lower equipment expense, marketing and public relations, amortization of intangibles, telephone expense, subscriptions, and loss on limited partnership interest. Salary and benefit expense increased $2.8 million from $21.2 million in 2019 to $24.0 million in 2020 primarily due to increased production and new hires in the mortgage line of business, normal salary adjustments, temporary bonuses related to the COVID-19 pandemic paid to certain employees, and the opening of our full-service de novo office in June 2019 in Evans, Georgia in Columbia County, a suburb of Augusta, Georgia, which was partially offset by a reduction in salaries and benefits related to deferred origination costs on PPP loans originated in 2020. We had 244 full time equivalent employees at December 31, 2020 compared to 237 at December 31, 2019. Furthermore, we incurred COVID-19 related expenses in occupancy expense for additional cleaning of our offices and personal protective equipment for our employees and offices and in equipment expense for laptops and other technology to promote a remote work environment. FDIC assessments increased $347 thousand due to a higher assessment rate in 2020 related to a reduction in our leverage ratio and an increase in our assessment base due to higher average assets. Both the reduction in our leverage ratio and the increase in our assessment base were partially related to PPP loans and the excess liquidity generated from PPP loan proceeds and other stimulus funds related to the COVID-19 pandemic. Furthermore, we received more FDIC small bank assessment credits during the twelve months in 2019 compared to the twelve months in 2020. The FDIC small bank assessment credits were fully utilized during the first quarter of 2020. Other real estate owned expense increased $120 thousand in 2020 compared to 2019 primarily due to write-downs on several other real estate owned properties.
Non-interest expense, other increased $159 thousand in 2020 as compared to the same period in 2019 primarily due to higher data processing expense, which includes ATM debit card expense, insurance, and legal and professional fees.
Total non-interest expense increased $2.5 million in 2019 to $34.6 million as compared to $32.1 million in in 2018. Salary and benefit expense increased $1.8 million to $21.3 million in 2019 as compared to $19.5 million in 2018. This increase is primarily a result of the normal salary adjustments, as well as the addition of two new full-service offices opened in the first half of 2019. In February 2019, we opened a downtown Greenville, South Carolina office and later in June 2019, we opened an Evans, Georgia office. Prior to opening, we hired staff for these offices, as such, the cost for such staffing and benefits impacts substantially all of 2019. At December 31, 2019 and 2018, we had 242 and 226 full time equivalent employees, respectively. Our Occupancy expense increased $316 thousand from $2.4 million in 2018 to $2.7 million in 2019, which was a result of the two additional offices opened during 2019. Our ATM/debit card and Data processing expense increased by $534 thousand in 2019 compared to 2018, which was largely due to our increased investment in our mobile platform and growing customer base. Our FDIC assessments decreased by $318 thousand in 2019 as compared to 2018 due to outstanding credits as a result of overpayments.
The following table sets forth for the periods indicated the primary components of noninterest expense:
Year ended December 31,
(In thousands)
Salary and employee benefits	 $ 24,026 $ 21,261 $ 19,515
Occupancy	 2,709 2,696 2,380
Furniture and Equipment	 1,237 1,493 1,513
Marketing and public relations	 1,043 1,114
ATM/debit card and data processing* 3,123 2,834 2,300
Supplies	
Telephone	
Courier	
Correspondent services	
Subscriptions	
FDIC/FICO premium	
Insurance	
Other real estate expenses including OREO write downs	
Legal and Professional fees	 1,058
Loss on limited partnership interest	 -
Postage	
Director fees	
Amortization of intangibles	
Shareholder expense	
Other 1,417 1,525 1,505
$ 37,534 $ 34,617 $ 32,123
*Data processing includes core processing, bill payment, online banking, remote deposit capture, and postage costs for mailing customer notices and statements.
Income Tax Expense
Our Income tax expense for 2020 was $2.5 million as compared to income tax expense for the year ended December 31, 2019 of $2.9 million and $2.7 million for the year ended December 31, 2018 (see Note 15 “Income Taxes” to the Consolidated Financial Statements for additional information). We recognize deferred tax assets for future deductible amounts resulting from differences in the financial statement and tax bases of assets and liabilities and operating loss carry forwards. The deferred tax assets are established based on the amounts expected to be paid/recovered at existing tax rates. A valuation allowance is established to reduce the deferred tax asset to the level that it is more likely than not that the tax benefit will be realized. In 2018, we purchased a $205 thousand South Carolina rehabilitation tax credit. We did not purchase any tax credits in 2019 or 2020. The cost of this credit for 2018 was $164 thousand and is included in “Other” non-interest expense. As a result of our current level of tax exempt securities in our investment portfolio and our BOLI holdings, assuming the current corporate rate remains unchanged, our effective tax rate is expected to be approximately 20.5% to 21.0%.
Financial Position
Assets totaled $1.4 billion at December 31, 2020 and $1.2 billion at December 31, 2019. Loans (excluding loans held-for-sale) increased $107.1 million, or 14.5%, to $844.2 million at December 31, 2020 from $737.0 million at December 31, 2019. Non-PPP loans increased $64.9 million, or 8.8%, to $801.9 million at December 31, 2020 from $737.0 million at December 31, 2019. PPP loans totaled $43.3 million gross of deferred fees and costs and $42.2 million net of deferred fees and costs at December 31, 2020. We originated 843 PPP loans totaling $51.2 million gross of deferred fees and costs and $49.8 million net of deferred fees and costs in 2020. Furthermore, we facilitated the origination of 111 PPP loans totaling $31.2 million related to our customers with a third party prior to establishing our own PPP platform. 159 PPP loans totaling $8.0 million were forgiven through the SBA PPP forgiveness process in 2020. As of March 10, 2021, there were 326 PPP loans totaling $17.8 million that were forgiven. We had no PPP loans at December 31, 2019. The $1.0 million in PPP deferred fees net of deferred costs at December 31, 2020 will be recognized as interest income over the remaining life of the PPP loans. Total loan production excluding PPP loans and a PPP related credit facility was $177.1 million during the twelve months of 2020 compared to $137.8 million during the same period in 2019. Loans held-for-sale increased to $45.0 million at December 31, 2020 from $11.2 million at December 31, 2019 due to strong mortgage production of $199.3 million during the twelve months of 2020 compared to $139.6 million during the same period in 2019. The loan-to-deposit ratio (including loans held-for-sale) at December 31, 2020 and December 31, 2019 was 74.8% and 75.7%, respectively. The loan-to-deposit ratio (excluding loans held-for-sale) at December 31, 2020 and December 31, 2019 was 71.0% and 74.6%, respectively. Investment securities increased to $361.9 million at December 31, 2020 from $288.8 million at December 31, 2019. Other short-term investments increased to $46.1 million at December 31, 2020 from $32.7 million at December 31, 2019. The increases in investments and other short-term investments are primarily due to organic deposit growth and excess liquidity from customer’s PPP loan proceeds and other stimulus funds related to the COVID-19 pandemic.
One of our goals as a community bank has been, and continues to be, to grow our assets through quality loan growth by providing credit to small and mid-size businesses and individuals within the markets we serve. We remain committed to meeting the credit needs of our local markets.
Deposits increased $201.2 million, or 20.4%, to $1.2 billion at December 31, 2020 as compared to $988.2 million at December 31, 2019. Our pure deposits, which are defined as total deposits less certificates of deposits, increased $211.6 million, or 25.0%, to $1.1 billion at December 31, 2020 from $847.3 million at December 31, 2019. The increase in pure deposits was primarily due to organic deposit growth and customer’s proceeds from PPP loans and other stimulus funds related to the COVID-19 pandemic. We had no brokered deposits and no listing services deposits at December 31, 2020. Our securities sold under agreements to repurchase, which are related to our customer cash management accounts, increased $7.6 million, or 22.9%, to $40.9 million at December 31, 2020 from $33.3 million at December 31, 2019. We continue to focus on growing our pure deposits as a percentage of total deposits in order to better manage our overall cost of funds.
Total shareholders’ equity increased $16.1 million, or 13.4%, to $136.3 million at December 31, 2020 from $120.2 million at December 31, 2019. The increase in shareholders’ equity is primarily due to an increase in retention of earnings less dividends paid of $6.5 million, an increase in accumulated other comprehensive income of $8.8 million, $0.4 thousand related to executive and director stock awards, and $0.4 thousand related to our dividend reinvestment plan. The increase in accumulated other comprehensive income was due to a reduction in market interest rates, which resulted in an increase in the net unrealized gains in our investment securities portfolio. During 2019, we completed a repurchase plan approved in May 2019 of 300,000 shares of our outstanding common stock at a cost of approximately $5.6 million with an average price of $18.79 per share. As of June 30, 2019, we repurchased 185,361 shares of our outstanding common stock of approximately $3.4 million with an average price of $18.41 per share. The remaining 114,639 shares were repurchased in July 2019. We announced during the third quarter of 2019 the approval of a new share repurchase plan, which was the second share repurchase plan announced during 2019, of up to 200,000 shares of our outstanding common stock. No share repurchases were made under this second share repurchase plan prior to its expiration on December 31, 2020.
Earning Assets
Loans and loans held for sale
Loans typically provide higher yields than the other types of earning assets. During 2020, loans accounted for 69.7% of average earning assets. The loan portfolio (including held-for-sale) averaged $835.1 million in 2020 as compared to $735.3 million in 2019. Quality loan portfolio growth continued to be a strategic focus of ours in 2020. However, with the higher loan yields, there are inherent credit and liquidity risks, which we attempt to control and counterbalance. One of our goals as a community bank continues to be to grow our assets through quality loan growth by providing credit to small and mid-size businesses, as well as individuals within the markets we serve. In 2020, we funded new loans (excluding loans originated for sale, PPP loans, and a PPP related credit facility) of approximately $137.8 million, as compared to $177.1 million in 2019. We originated $51.7 million in PPP loans and $10.0 million in a PPP related credit facility in 2020. PPP loans net of deferred fees and costs were $42.2 million and the PPP related credit facility was $5.2 million at December 31, 2020. We did not have any PPP loans or the PPP related credit facility at December 31, 2019. We remain committed to meeting the credit needs of our local markets, but adverse national and local economic conditions, as well as deterioration of our asset quality, could significantly impact our ability to grow our loan portfolio. Significant increases in regulatory capital expectations beyond the traditional “well capitalized” ratios and significantly increased regulatory burdens could impede our ability to leverage our balance sheet and expand the loan portfolio.
The following table shows the composition of the loan portfolio by category:
December 31,
(In thousands) 2017
Commercial, financial & agricultural	 $ 96,688 $ 51,805 $ 53,933 $ 51,040 $ 42,704
Real estate:
Construction	 95,282 73,512 58,440 45,401 45,746
Mortgage-residential	 43,928 45,357 52,764 46,901 47,472
Mortgage-commercial	 573,258 527,447 513,833 460,276 371,112
Consumer:
Home equity	 26,442 28,891 29,583 32,451 31,368
Other	 8,559 10,016 9,909 10,736 8,307
Total gross loans	 844,157 737,028 718,462 646,805 546,709
Allowance for loan losses	 (10,389 ) (6,627 ) (6,263 ) (5,797 ) (5,214 )
Total net loans	 $ 833,768 $ 730,401 $ 712,199 $ 641,008 $ 541,495
In the context of this discussion, a real estate mortgage loan is defined as any loan, other than loans for construction purposes, secured by real estate, regardless of the purpose of the loan. We follow the common practice of financial institutions in our market area of obtaining a security interest in real estate whenever possible, in addition to any other available collateral. This collateral is taken to reinforce the likelihood of the ultimate repayment of the loan and tends to increase the magnitude of the real estate loan components. Generally, we limit the loan-to-value ratio to 80%. The principal components of our loan portfolio at year-end 2020 and 2019 were commercial mortgage loans in the amount of $573.3 million and $527.4 million, respectively, representing 67.9% and 71.6% of the portfolio, respectively, excluding loans held for sale. Significant portions of these commercial mortgage loans are made to finance owner-occupied real estate. We continue to maintain a conservative philosophy regarding our underwriting guidelines, and believe it will reduce the risk elements of the loan portfolio through strategies that diversify the lending mix.
The previously referenced PPP loans and PPP related credit facility are included in “Commercial, financial & agricultural” loans above.
The repayment of loans in the loan portfolio as they mature is a source of liquidity. The following table sets forth the loans maturing within specified intervals at December 31, 2020.
Loan Maturity Schedule and Sensitivity to Changes in Interest Rates
December 31, 2020
(In thousands)
One Year
or Less
Over one Year
Through Five
Years
Over five
years
Total
Commercial, financial and agricultural	
$ 10,237
$ 79,589
$ 6,862
$ 96,688
Real Estate and Home Equity
100,937
316,640
321,333
738,910
All other loan	
1,812
6,214
8,559
$ 112,986
$ 402,443
$ 328,728
$ 844,157
Loans maturing after one year with:
Variable Rate	
$ 111,411
Fixed Rate	
619,760
$ 731,171
The information presented in the above table is based on the contractual maturities of the individual loans, including loans which may be subject to renewal at their contractual maturity. Renewal of such loans is subject to review and credit approval, as well as modification of terms upon their maturity.
Investment Securities
Our investment securities portfolio is a significant component of our total earning assets. Total investment securities averaged $300.9 million in 2020, as compared to $257.6 million in 2019, which represents 25.1% and 25.3% of the average earning assets for the years ended December 31, 2020 and 2019, respectively. At December 31, 2020 and 2019, our investment securities portfolio amounted to $359.9 million and $286.8 million, respectively. The increase in investment securities in 2020 is primarily due to organic deposit growth and excess liquidity from customer’s PPP loan proceeds and other stimulus funds related to the COVID-19 pandemic.
At December 31, 2020, the estimated weighted average life of our investment portfolio was approximately 5.3 years, duration of approximately 3.7, and a weighted average tax equivalent yield of approximately 2.16%. At December 31, 2019, the estimated weighted average life of our investment portfolio was approximately 5.1 years, duration of approximately 3.3, and a weighted average tax equivalent yield of approximately 2.71%.
We held no debt securities rated below investment grade at December 31, 2020.
The following table shows the investment portfolio composition.
December 31,
(Dollars in thousands)
Securities available-for-sale at fair value:
US Treasury	
$ 1,502
$ 7,203
$ 15,457
US Government sponsored enterprises	
1,006
1,001
1,100
Small Business Administration pools	
35,498
45,343
55,336
Mortgage-backed securities	
229,929
183,586
115,475
State and local government	
88,603
49,648
50,506
Corporate & Other Securities	
3,328
$ 359,866
$ 286,800
$ 237,893
Securities held-to-maturity at amortized cost:
State and local government	
$ -
$ -
$ 16,174
Total	
$ 359,866
$ 286,800
$ 254,067
We hold other investments carried at cost which represents our investment in FHLB stock. This investment amounted to $1.1 million and $991.4 thousand at December 31, 2020 and 2019, respectively.
Investment Securities Maturity Distribution and Yields
The following table shows, at amortized cost, the expected maturities and average yield of securities held at December 31, 2020:
(In thousands)
After One But
After Five But
Within One Year
Within Five Years
Within Ten Years
After Ten Years
Available-for-sale:
Amount
Yield
Amount
Yield
Amount
Yield
Amount
Yield
US Treasury	
$ 1,501
1.48 % $ -
-
$ -
-
$ -
-
Government sponsored enterprises	
2.86 %
-
-
-
-
-
-
Small Business Administration pools	
1.30 %
25,096
1.89 %
7,547
2.27 %
1,420
1.80 %
Mortgage-backed securities	
6,786
1.64 %
97,318
1.86 %
69,228
2.06 %
49,405
1.24 %
State and local government	
1,216
1.57 %
15,966
3.00 %
61,226
2.56 %
4,087
3.19 %
Corporate and other securities
-
-
1,284
5.24 %
1,981
4.66 %
3.70 %
Total investment securities available-for-sale	
$ 11,013
1.71 % $ 139,664
2.03 % $ 139,982
2.33 % $ 54,921
1.40 %
(1) Yield calculated on tax equivalent basis
Short-Term Investments
Short-term investments, which consist of federal funds sold, securities purchased under agreements to resell and interest bearing deposits, averaged $62.9 million in 2020, as compared to $25.6 million in 2019. The increase in short-term investments in 2020 is primarily due to organic deposit growth and excess liquidity from customer’s PPP loan proceeds and other stimulus funds related to the COVID-19 pandemic. We maintain the majority of our short term overnight investments in our account at the Federal Reserve rather than in federal funds at various correspondent banks due to the lower regulatory capital risk weighting. At December 31, 2020, short-term investments including funds on deposit at the Federal Reserve totaled $46.1 million. These funds are an immediate source of liquidity and are generally invested in an earning capacity on an overnight basis.
Deposits and Other Interest-Bearing Liabilities
Deposits. Average deposits were $1.1 billion during 2020, compared to $934.9 million during 2019. Average interest-bearing deposits were $743.4 million during 2020, as compared to $670.9 million during 2019. These increases are primarily due to organic deposit growth and PPP loan proceeds and other stimulus funds related to the COVID-19 pandemic being held in customers deposit accounts.
The following table sets forth the deposits by category:
December 31,
(In thousands)
Amount
% of
Deposits
Amount
% of
Deposits
Amount
% of
Deposits
Demand deposit accounts	
$ 388,868
32.6 % $ 289,828
29.3 % $ 244,686
26.4 %
Interest bearing checking accounts	
278,077
23.3 %
229,168
23.2 %
201,936
21.8 %
Money market accounts	
242,128
20.3 %
194,089
19.6 %
191,537
20.7 %
Savings accounts	
123,032
10.3 %
104,456
10.6 %
108,369
11.7 %
Time deposits less than $100,000	
78,794
6.6 %
84,730
8.6 %
93,480
10.1 %
Time deposits more than $100,000	
81,871
6.9 %
85,930
8.7 %
85,515
9.3 %
$ 1,192,770
100.0 % $ 988,201
100.0 % $ 925,523
100.0 %
Large certificate of deposit customers, whom we identify as those of $100 thousand or more, tend to be extremely sensitive to interest rate levels, making these deposits less reliable sources of funding for liquidity planning purposes than core deposits. Core deposits, which exclude time deposits of $100 thousand or more, provide a relatively stable funding source for the loan portfolio and other earning assets. Core deposits were $1.1 billion and $902.3 million at December 31, 2020 and 2019, respectively. Time deposits greater than $250 thousand, the FDIC deposit insurance coverage limit, amounted to $28.6 million and $32.2 million at December 31, 2020 and December 31, 2019, respectively.
A stable base of deposits is expected to continue to be the primary source of funding to meet both our short-term and long-term liquidity needs in the future. The maturity distribution of time deposits is shown in the following table.
Maturities of Certificates of Deposit and Other Time Deposit of $100,000 or more
December 31, 2020
(In thousands)
Within Three
Months
After Three
Through
Six Months
After Six
Through
Twelve Months
After
Twelve
Months
Total
Time deposits of $100,000 or more	
$ 11,981
$
$ 69,235
$
$ 81,872
Borrowed funds. Borrowed funds consist of securities sold under agreements to repurchase, FHLB advances and long-term debt as a result of issuing $15.0 million in trust preferred securities. Short-term borrowings in the form of securities sold under agreements to repurchase averaged $49.5 million, $34.2 million and $27.0 million during 2020, 2019 and 2018, respectively. The maximum month-end balances during 2020, 2019 and 2018 were $73.0 million, $36.7 million and $33.4 million, respectively. The average rates paid during these periods were 0.38%, 1.12% and 1.08%, respectively. The balances of securities sold under agreements to repurchase were $40.9 million and $33.3 million at December 31, 2020 and 2019, respectively. The repurchase agreements all mature within one to four days and are generally originated with customers that have other relationships with us and tend to provide a stable and predictable source of funding. As a member of the FHLB, the Bank has access to advances from the FHLB for various terms and amounts. During 2020 and 2019, the average outstanding advances amounted to $2.0 million and $3.2 million, respectively.
The following is a schedule of the maturities for FHLB Advances as of December 31, 2020 and 2019:
December 31,
(In thousands)
Maturing
Amount
Rate
Amount
Rate
-
-
1.00 %
In addition to the above borrowings, we issued $15.5 million in trust preferred securities on September 16, 2004. During the fourth quarter of 2015, we redeemed $500 thousand of these securities. The securities accrue and pay distributions quarterly at a rate of three month LIBOR plus 257 basis points. The remaining debt may be redeemed in full anytime with notice and matures on September 16, 2034.
Capital Adequacy and Dividend Policy
Capital Adequacy
Total shareholders’ equity as of December 31, 2020 was $136.3 million as compared to $120.2 million as of December 31, 2019. The increase in shareholders’ equity is primarily due to an increase in retention of earnings less dividends paid of $6.5 million, an increase in accumulated other comprehensive income of $8.8 million, $0.4 thousand related to executive and director stock awards, and $0.4 thousand related to our dividend reinvestment plan. The increase in accumulated other comprehensive income was due to a reduction in market interest rates, which resulted in an increase in the net unrealized gains in our investment securities portfolio. During the third quarter of 2019, we completed the repurchase of 300,000 shares of our outstanding common stock at a cost of approximately $5.6 million with an average price per share of $18.79. We also announced during the third quarter of 2019 the approval of a new repurchase plan of up to 200,000 shares of our outstanding common stock. No share repurchases were made under the new repurchase plan prior to its expiration on December 31, 2020.
In 2018, we paid a dividend of $0.10 per share each quarter and during each quarter of 2019, we paid a dividend on our common stock of $0.11 per share. During each quarter in 2020, we paid an $0.12 per share dividend on our common stock.
In addition, a dividend reinvestment plan was implemented in the third quarter of 2003. The plan allows existing shareholders the option of reinvesting cash dividends as well as making optional purchases of up to $5,000 in the purchase of common stock per quarter.
The following table shows the return on average assets (net income divided by average total assets), return on average equity (net income divided by average equity), and equity to assets ratio for the three years ended December 31, 2020.
Return on average assets	
0.78 %
0.98 %
1.04 %
Return on average common equity	
7.84 %
9.38 %
10.48 %
Equity to assets ratio	
9.77 %
10.27 %
10.31 %
Dividend Payout Ratio	
35.38 %
30.29 %
27.02 %
While the Company is currently a small bank holding company and so generally is not subject to Basel III capital requirements, our Bank remains subject to such capital requirements. As of December 31, 2018, the Company and the Bank met all capital adequacy requirements under the Basel III rules. See “Supervision and Regulation-Basel Capital Standards” for additional information on Basel III and the Dodd-Frank Act.
The Bank exceeded the regulatory capital ratios at December 31, 2020 and 2019, as set forth in the following table:
(In thousands)
Required
Amount
%
Actual
Amount
%
Excess
Amount
%
The Bank(1)(2):
December 31, 2020
Risk Based Capital
Tier
$ 56,288
6.0 %
$ 120,385
12.8 %
$ 64,097
6.8 %
Total Capital	
75,051
8.0 %
130,774
13.9 %
55,723
5.9 %
CET1	
42,216
4.5 %
120,385
12.8 %
78,169
8.3 %
Tier 1 Leverage	
54,492
4.0 %
120,385
8.8 %
65,893
4.8 %
December 31, 2019
Risk Based Capital
Tier
$ 50,224
6.0 %
$ 112,754
13.5 %
$ 62,530
7.5 %
Total Capital	
66,965
8.0 %
119,381
14.3 %
52,416
6.3 %
CET1	
37,668
4.5 %
112,754
13.5 %
75,086
9.0 %
Tier 1 Leverage	
45,246
4.0 %
112,754
10.0 %
67,508
6.0 %
(1) As a small bank holding company, the Company is generally not subject to the Basel III capital requirements unless otherwise advised by the Federal Reserve.
(2) Ratios do not include the capital conservation buffer of 2.5%.
Dividend Policy
Since we are a bank holding company, our ability to declare and pay dividends is dependent on certain federal and state regulatory considerations, including the guidelines of the Federal Reserve. The Federal Reserve has issued a policy statement regarding the payment of dividends by bank holding companies. In general, the Federal Reserve’s policies provide that dividends should be paid only out of current earnings and only if the prospective rate of earnings retention by the bank holding company appears consistent with the organization’s capital needs, asset quality and overall financial condition. The Federal Reserve’s policies also require that a bank holding company serve as a source of financial strength to its subsidiary banks by standing ready to use available resources to provide adequate capital funds to those banks during periods of financial stress or adversity and by maintaining the financial flexibility and capital-raising capacity to obtain additional resources for assisting its subsidiary banks where necessary. In addition, under the prompt corrective action regulations, the ability of a bank holding company to pay dividends may be restricted if a subsidiary bank becomes undercapitalized. These regulatory policies could affect our ability to pay dividends or otherwise engage in capital distributions.
Because the Company is a legal entity separate and distinct from the Bank and does not conduct stand-alone operations, the Company’s ability to pay dividends depends on the ability of the Bank to pay dividends to the Company, which is also subject to regulatory restrictions. As a South Carolina-chartered bank, the Bank is subject to limitations on the amount of dividends that it is permitted to pay. Unless otherwise instructed by the S.C. Board, the Bank is generally permitted under South Carolina state banking regulations to pay cash dividends of up to 100% of net income in any calendar year without obtaining the prior approval of the S.C. Board. In addition, the Bank must maintain a capital conservation buffer, above its regulatory minimum capital requirements, consisting entirely of Common Equity Tier 1 capital, in order to avoid restrictions with respect to its payment of dividends to First Community Corporation. The FDIC also has the authority under federal law to enjoin a bank from engaging in what in its opinion constitutes an unsafe or unsound practice in conducting its business, including the payment of a dividend under certain circumstances.
Liquidity Management
Liquidity management involves monitoring sources and uses of funds in order to meet our day-to-day cash flow requirements while maximizing profits. Liquidity represents our ability to convert assets into cash or cash equivalents without significant loss and to raise additional funds by increasing liabilities. Liquidity management is made more complicated because different balance sheet components are subject to varying degrees of management control. For example, the timing of maturities of the investment portfolio is very predictable and subject to a high degree of control at the time investment decisions are made. However, net deposit inflows and outflows are far less predictable and are not subject to nearly the same degree of control. Asset liquidity is provided by cash and assets which are readily marketable, or which can be pledged, or which will mature in the near future. Liability liquidity is provided by access to core funding sources, principally the ability to generate customer deposits in our market area. In addition, liability liquidity is provided through the ability to borrow against approved lines of credit (federal funds purchased) from correspondent banks and to borrow on a secured basis through securities sold under agreements to repurchase. The Bank is a member of the FHLB and has the ability to obtain advances for various periods of time. These advances are secured by eligible securities pledged by the Bank or assignment of eligible loans within the Bank’s portfolio.
As of December 31, 2020, we have not experienced any unusual pressure on our deposit balances or our liquidity position as a result of the COVID-19 pandemic. We had no brokered deposits and no listing services deposits at December 31, 2020. We believe that we have ample liquidity to meet the needs of our customers and to manage through the COVID-19 pandemic through our low cost deposits; our ability to borrow against approved lines of credit (federal funds purchased) from correspondent banks; and our ability to obtain advances secured by certain securities and loans from the Federal Home Loan Bank.
We generally maintain a high level of liquidity and adequate capital, which along with continued retained earnings, we believe will be sufficient to fund the operations of the Bank for at least the next 12 months. Shareholders’ equity declined to 9.8% of total assets at December 31, 2020 from 10.3% at December 31, 2019 primarily due to PPP loans and excess liquidity from customer’s PPP loan proceeds and other stimulus funds related to the COVID-19 pandemic. The Bank maintains federal funds purchased lines in the total amount of $60.0 million with two financial institutions, although these were not utilized at December 31, 2020 and $10.0 million through the Federal Reserve Discount Window. The FHLB of Atlanta has approved a line of credit of up to 25% of the Bank’s assets, which, when utilized, is collateralized by a pledge against specific investment securities and/or eligible loans. We had PPP loans totaling $43.3 million gross of deferred fees and costs and $42.2 million net of deferred fees and costs at December 31, 2020. Furthermore, the Federal Reserve provided us a lending facility, the PPPLF, that permitted us to obtain funding specifically for loans that we made under the PPP; however, the Bank had sufficient liquidity to fund PPP loans without accessing the PPPLF. The PPP program expired on August 8, 2020.
Through the operations of our Bank, we have made contractual commitments to extend credit in the ordinary course of our business activities. These commitments are legally binding agreements to lend money to our customers at predetermined interest rates for a specified period of time. At December 31, 2020, we had issued commitments to extend unused credit of $142.6 million, including $42.3 million in unused home equity lines of credit, through various types of lending arrangements. At December 31, 2019, we had issued commitments to extend unused credit of $135.7 million, including $39.8 million in unused home equity lines of credit, through various types of lending arrangements. We evaluate each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by us upon extension of credit, is based on our credit evaluation of the borrower. Collateral varies but may include accounts receivable, inventory, property, plant and equipment, commercial and residential real estate. We manage the credit risk on these commitments by subjecting them to normal underwriting and risk management processes.
We regularly review our liquidity position and have implemented internal policies establishing guidelines for sources of asset-based liquidity and evaluate and monitor the total amount of purchased funds used to support the balance sheet and funding from noncore sources. Although uncertain, we may encounter stress on liquidity management as a direct result of the COVID-19 pandemic and the Bank’s participation in the PPP as a participating lender. As customers manage their own liquidity stress, we could experience an increase in the utilization of existing lines of credit.
Off-Balance Sheet Arrangements
In the normal course of operations, we engage in a variety of financial transactions that, in accordance with GAAP, are not recorded in the financial statements, or are recorded in amounts that differ from the notional amounts. These transactions involve, to varying degrees, elements of credit, interest rate, and liquidity risk. Such transactions are used by the company for general corporate purposes or for customer needs. Corporate purpose transactions are used to help manage credit, interest rate, and liquidity risk or to optimize capital. Customer transactions are used to manage customers’ requests for funding. Please refer to Note 16 of our financial statements for a discussion of our off-balance sheet arrangements.
Impact of Inflation
Unlike most industrial companies, the assets and liabilities of financial institutions such as the Company and the Bank are primarily monetary in nature. Therefore, interest rates have a more significant effect on our performance than do the effects of changes in the general rate of inflation and change in prices. In addition, interest rates do not necessarily move in the same direction or in the same magnitude as the prices of goods and services. As discussed previously, we continually seek to manage the relationships between interest sensitive assets and liabilities in order to protect against wide interest rate fluctuations, including those resulting from inflation.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Not Applicable

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Item 8. Financial Statements and Supplementary Data.
Additional information required under this Item 8 may be found under the accompanying Financial Statements and Notes to Financial Statements under Note 25.
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) promulgated under the Securities Exchange Act of 1934 as a process designed by, or under the supervision of, our principal executive and principal financial officers and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles and includes those policies and procedures that:
· Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;
· Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
· Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our management assessed the effectiveness of our internal controls over financial reporting as of December 31, 2020. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework issued in 2013.
Based on that assessment, we believe that, as of December 31, 2020, our internal control over financial reporting is effective based on those criteria.
/s/ Michael C. Crapps
/s/ D. Shawn Jordan
Chief Executive Officer and President
Executive Vice President and Chief Financial Officer
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of First Community Corporation:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of First Community Corporation and its subsidiary (the “Company”) as of December 31, 2020 and 2019 and the related consolidated statements of income, comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2020, and the related notes to the consolidated financial statements and schedules (collectively, the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Allowance for Loan Losses
As described in Note 5 to the Company’s financial statements, the Company has a gross loan portfolio of approximately $844.2 million and related allowance for loan losses of approximately $10.4 million as of December 31, 2020. As described by the Company in Note 1, the evaluation of the allowance for loan losses is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. The allowance for loan losses is evaluated on a regular basis and is based upon the Company’s review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic conditions.
We identified the Company’s estimate of the allowance for loan losses as a critical audit matter. The principal considerations for our determination of the allowance for loan losses as a critical audit matter related to the high degree of subjectivity in the Company’s judgments in determining the qualitative factors. Auditing these complex judgments and assumptions by the Company involves especially challenging auditor judgment due to the nature and extent of audit evidence and effort required to address these matters, including the extent of specialized skill or knowledge needed.
The primary procedures we performed to address this critical audit matter included the following:
· We evaluated the relevance and the reasonableness of assumptions related to evaluation of the loan portfolio, current economic conditions, and other risk factors used in development of the qualitative factors for collectively evaluated loans.
· We evaluated the reasonableness of assumptions and data used by the Company in developing the qualitative factors by comparing these data points to internally developed and third-party sources, and other audit evidence gathered.
/s/ Elliott Davis, LLC
We have served as the Company’s auditor since 2006.
Columbia, South Carolina
March 12, 2021
FIRST COMMUNITY CORPORATION
Consolidated Balance Sheets
December 31,
(Dollars in thousands, except par values)
ASSETS
Cash and due from banks	 $ 18,930 $ 14,951
Interest-bearing bank balances	 46,062 32,741
Investment securities available-for-sale	 359,866 286,800
Other investments, at cost	 2,053 1,992
Loans held-for-sale	 45,020 11,155
Total Loans held-for-investment	 844,157 737,028
Less, allowance for loan losses	 10,389 6,627
Net loans held-for-investment 833,768 730,401
Property and equipment - net	 34,458 35,008
Lease right-of-use asset	 3,032 3,215
Premises held-for-sale
Bank owned life insurance	 27,688 28,041
Other real estate owned	 1,194 1,410
Intangible assets	 1,120 1,483
Goodwill	 14,637 14,637
Other assets	 6,963 7,854
Total assets	 $ 1,395,382 $ 1,170,279
LIABILITIES
Deposits:
Non-interest bearing $ 385,511 $ 289,829
Interest bearing	 803,902 698,372
Total deposits	 1,189,413 988,201
Securities sold under agreements to repurchase	 40,914 33,296
Federal Home Loan Bank Advances	 -
Junior subordinated debt	 14,964 14,964
Lease liability	. 3,114 3,266
Other liabilities	 10,640 10,147
Total liabilities	 1,259,045 1,050,085
Commitments and Contingencies (Note 16)
SHAREHOLDERS’ EQUITY
Preferred stock, par value $1.00 per share; 10,000,000 shares authorized; 0 issued and outstanding	 - -
Common stock, par value $1.00 per share; 20,000,000 shares authorized; issued and outstanding 7,500,338 at December 31, 2020 and 7,440,026 at December 31, 2019	 7,500 7,440
Nonvested restricted stock	 (283 ) (151 )
Additional paid in capital	 91,380 90,488
Retained earnings	 26,453 19,927
Accumulated other comprehensive income 	 11,287 2,490
Total shareholders’ equity	 136,337 120,194
Total liabilities and shareholders’ equity	 $ 1,395,382 $ 1,170,279
See Notes to Consolidated Financial Statements
FIRST COMMUNITY CORPORATION
Consolidated Statements of Income
Year Ended December 31,
(Dollars in thousands except per share amounts)
Interest income:
Loans, including fees	 $ 37,037 $ 35,447 $ 32,789
Investment securities - taxable	 5,011 5,271 4,755
Investment securities - non taxable	 1,454 1,365 1,767
Other short term investments	
Total interest income	 43,778 42,630 39,729
Interest expense:
Deposits	 3,021 4,558 2,905
Securities sold under agreement to repurchase	
Other borrowed money	
Total interest expense	 3,755 5,781 3,981
Net interest income	 40,023 36,849 35,748
Provision for loan losses	 3,663
Net interest income after provision for loan losses	 36,360 36,710 35,402
Non-interest income:
Deposit service charges	 1,121 1,649 1,769
Mortgage banking income	 5,557 4,555 3,895
Investment advisory fees and non-deposit commissions	 2,720 2,021 1,683
Gain (loss) on sale of securities	 (342 )
Gain (loss) on sale of other assets	 (3 )
Write-down on premises held for sale - (282 ) -
Non-recurring BOLI income -
Other	 3,814 3,660 3,542
Total non-interest income	 13,769 11,736 10,644
Non-interest expense:
Salaries and employee benefits	 24,026 21,261 19,515
Occupancy	 2,709 2,696 2,380
Equipment	 1,237 1,493 1,513
Marketing and public relations	 1,043 1,114
FDIC Insurance assessments	
Other real estate expense	
Amortization of intangibles	
Other	 7,551 7,392 6,760
Total non-interest expense	 37,534 34,617 32,123
Net income before tax	 12,595 13,829 13,923
Income tax expense	 2,496 2,858 2,694
Net income	 $ 10,099 $ 10,971 $ 11,229
Basic earnings per common share	 $ 1.36 $ 1.46 $ 1.48
Diluted earnings per common share	 $ 1.35 $ 1.45 $ 1.45
See Notes to Consolidated Financial Statements
FIRST COMMUNITY CORPORATION
Consolidated Statements of Comprehensive Income
(Dollars in thousands) Year ended December 31,
Net income	 $ 10,099 $ 10,971 $ 11,229
Other comprehensive income (loss):
Unrealized gain (loss) during the period on available for sale securities, net of tax of ($2,360), ($1,311) and 574, respectively	 8,875 4,931 (2,160 )
Less: Reclassification adjustment for loss (gain) included in net income, net of tax of $21, $29, and ($72), respectively	 (78 ) (107 )
Other comprehensive income (loss)	 8,797 4,824 (1,890 )
Comprehensive income	 $ 18,896 $ 15,795 $ 9,339
See Notes to Consolidated Financial Statements
FIRST COMMUNITY CORPORATION
Consolidated Statements of Changes in Shareholders’ Equity
Common Stock
(Dollars and shares in thousands)
Number
Shares
Issued
Common
Stock
Common
Stock
Warrants
Additional
Paid-in
Capital
Nonvested
Restricted
Stock
Retained
Earnings
Accumulated
Other
Comprehensive
Income (loss)
Total
Balance, December 31, 2017
7,588
$ 7,588
$
$ 94,516
$ (109 ) $ 4,066
$ (444 ) $ 105,663
Net income	
11,229
11,229
Other comprehensive loss net of tax of $502
(1,890 )
(1,890 )
Issuance of restricted stock	
(244 )
-
Exercise of stock warrants	
(15 )
(10 )
-
Shares retired	
(2 )
(2 )
(55 )
(57 )
Exercise of deferred compensation	
Amortization of compensation on restricted stock	
Dividends: Common ($0.40 per share)	
(3,033 )
(3,033 )
Dividend reinvestment plan	
Balance, December 31, 2018
7,639
$ 7,639
$
$ 95,048
$ (149 ) $ 12,262
$ (2,334 ) $ 112,497
Net income	
10,971
10,971
Other comprehensive income net of tax of $1,282
4,824
4,824
Issuance of restricted stock	
(170 )
-
Exercise of stock warrants	
(31 )
(15 )
-
Shares retired	
(8 )
(8 )
(151 )
(159 )
Amortization of compensation on restricted stock	
Stock repurchase plan
(300 )
(300 )
(5,336 )
(5,636 )
Shares issued-deferred compensation
Dividends: Common ($0.44 per share)	
(3,306 )
(3,306 )
Dividend reinvestment plan	
Balance, December 31, 2019
7,440
$ 7,440
$ -
$ 90,488
$ (151 ) $ 19,927
$ 2,490
$ 120,194
Net income	
10,099
10,099
Other comprehensive income net of tax of $2,339
-
8,797
8,797
Issuance of restricted stock	
(391 )
-
Issuance of common stock
Issuance of common stock-deferred compensation
Amortization of compensation on restricted stock	
Shares retired
(1 )
(1 )
(14 )
(15 )
Dividends: Common ($0.48 per share)	
(3,573 )
(3,573 )
Dividend reinvestment plan	
Balance, December 31, 2020
7,500
$ 7,500
$ -
$ 91,380
$ (283 ) $ 26,453
$ 11,287
$ 136,337
See Notes to Consolidated Financial Statements
FIRST COMMUNITY CORPORATION
Consolidated Statements of Cash Flows
(Amounts in thousands) Year Ended December 31,
Cash flows from operating activities:
Net income	 $ 10,099 $ 10,971 $ 11,229
Adjustments to reconcile net income to net cash (used) provided in operating activities
Depreciation	 1,637 1,598 1,519
Net premium amortization	 2,016 2,042 2,243
Provision for loan losses	 3,663
Write-downs of other real estate owned	 - -
Loss (gain) loss on sale of other real estate owned	 (147 ) (24 )
Originations of HFS loans	 (197,608 ) (139,640 ) (114,959 )
Sales of HFS loans	 163,743 131,708 116,829
Amortization of intangibles	
(Gain) loss on sale of securities	 (99 ) (136 )
Accretion on acquired loans	 (271 ) (492 ) (620 )
Write-down of premises held for sale	 - -
Write-down of fixed assets	 - -
Gain on sale of fixed assets	 - - (123 )
(Increase) decrease in other assets	 (911 ) (5,227 )
Increase in other liabilities	 3,054 2,097
Net cash (used) provided in operating activities	 (17,046 ) 4,825 19,973
Cash flows from investing activities:
Proceeds from sale of securities available-for-sale	 1,200 44,398 44,299
Proceeds from sale of securities held-to-maturity	 - -
Purchase of investment securities available-for-sale	 (111,972 ) (113,064 ) (64,146 )
Purchase of other investment securities	 (70 ) (36 )
Maturity/call of investment securities available-for-sale	 46,933 40,170 41,564
Proceeds from sale of other investments	 - -
Increase in loans	 (106,874 ) (18,219 ) (71,266 )
Proceeds from sale of other real estate owned	
Proceeds from sale of fixed assets	 - 1,145
Purchase of property and equipment	 (1,087 ) (2,793 ) (1,465 )
Purchase of BOLI	 - (2 ) -
Net cash used in investing activities	 (171,521 ) (49,198 ) (47,814 )
Cash flows from financing activities:
Increase in deposit accounts	 201,213 62,716 37,290
Advances from the Federal Home Loan Bank	 34,001 82,000 79,000
Repayment of advances from the Federal Home Loan Bank	 (34,212 ) (82,020 ) (93,019 )
Increase in securities sold under agreements to repurchase	 7,618 5,274 8,752
Deferred compensation shares	
Shares Retired	 (15 ) (159 ) (57 )
Change in non-vested restricted stock
Dividend reinvestment plan	
Repurchase of common stock	 - (5,636 ) -
Proceeds from issuance of common stock - -
Dividends paid on Common Stock	 (3,573 ) (3,306 ) (3,033 )
Net cash provided in financing activities	 205,867 59,872 29,518
Net increase in cash and cash equivalents	 17,300 15,424 1,677
Cash and cash equivalents at beginning of year	 47,692 32,268 30,591
Cash and cash equivalents at end of year	 $ 64,992 $ 47,692 $ 32,268
Supplemental disclosure:
Cash paid during the period for: interest	 $ 4,258 $ 5,471 $ 3,592
Income Taxes	 $ 3,043 $ 2,410 $ 2,215
Non-cash investing and financing activities:
Unrealized gain (loss) on securities available-for-sale, net of tax	 $ 8,797 $ 4,824 $ (1,890 )
Transfer of loans to other real estate owned	 $ 114 $ - $ 346
Recognition of operating lease right of use asset $ - $ 3,260 $ -
Recognition of operating lease liability $ - $ 3,291 $ -
Transfer of investment securities held-to-maturity to available-for-sale $ - $ 16,144 $ -
See Notes to Consolidated Financial Statements
FIRST COMMUNITY CORPORATION
Notes to Consolidated Financial Statements
Note 1-ORGANIZATION AND BASIS OF PRESENTATION
The consolidated financial statements include the accounts of First Community Corporation (the “Company”) and its wholly owned subsidiary, First Community Bank (the “Bank”). The Company owns all of the common stock of FCC Capital Trust I. All material intercompany transactions are eliminated in consolidation. The Company was organized on November 2, 1994, as a South Carolina corporation, and was formed to become a bank holding company. The Bank opened for business on August 17, 1995. FCC Capital Trust I is an unconsolidated special purpose subsidiary organized for the sole purpose of issuing trust preferred securities.
Risk and Uncertainties
The coronavirus (COVID-19) pandemic, which was declared a national emergency in the United States in March 2020, continues to create extensive disruptions to the global economy and financial markets and to businesses and the lives of individuals throughout the world. In particular, the COVID-19 pandemic has severely restricted the level of economic activity in our markets. Federal and state governments have taken, and may continue to take, unprecedented actions to contain the spread of the disease, including quarantines, travel bans, shelter-in-place orders, closures of businesses and schools, fiscal stimulus, and legislation designed to deliver monetary aid and other relief to businesses and individuals impacted by the pandemic. Although in various locations certain activity restrictions have been relaxed and businesses and schools have reopened with some level of success, in many states and localities the number of individuals diagnosed with COVID-19 increased significantly during 2020, which may cause a freezing or, in certain cases, a reversal of previously announced relaxation of activity restrictions and may prompt the need for additional aid and other forms of relief.
The impact of the COVID-19 pandemic is fluid and continues to evolve, adversely affecting many of the Bank’s customers. The unprecedented and rapid spread of COVID-19 and its associated impacts on trade (including supply chains and export levels), travel, employee productivity, unemployment, consumer spending, and other economic activities has resulted in less economic activity, significant volatility and disruption in financial markets, and has had an adverse effect on the Company’s business, financial condition and results of operations. The ultimate extent of the impact of the COVID-19 pandemic on the Company’s business, financial condition and results of operations is currently uncertain and will depend on various developments and other factors, including the effect of governmental and private sector initiatives, the effect of the recent rollout of vaccinations for the virus, whether such vaccinations will be effective against any resurgence of the virus, including any new strains, and the ability for customers and businesses to return to their pre-pandemic routine.
The Company’s business, financial condition and results of operations generally rely upon the ability of the Bank’s borrowers to repay their loans, the value of collateral underlying the Bank’s secured loans, and demand for loans and other products and services the Bank offers, which are highly dependent on the business environment in the Bank’s primary markets where it operates and in the United States as a whole.
On March 3, 2020, the Federal Reserve reduced the target federal funds rate by 50 basis points, followed by an additional reduction of 100 basis points on March 16, 2020. These reductions in interest rates and the other effects of the COVID-19 pandemic have had, and are expected to continue to have, possibly materially, an adverse effect on the Company’s business, financial condition and results of operations. For instance, the pandemic has had a negative effect on the Bank’s net interest margin, provision for loan losses, and deposit service charges, salaries and benefits, occupancy expense, and equipment expense. Other financial impacts could occur though such potential impact is unknown at this time.
As of September 30, 2020, the Bank’s capital ratios were in excess of all regulatory requirements. While management believes that the Company has sufficient capital to withstand an extended economic recession brought about by the COVID-19 pandemic, the Bank’s reported and regulatory capital ratios could be adversely impacted by further credit losses.
We believe that we have ample liquidity to meet the needs of our customers and to manage through the COVID-19 pandemic through our low cost deposits; our ability to borrow against approved lines of credit (federal funds purchased) from correspondent banks; and our ability to obtain advances secured by certain securities and loans from the Federal Home Loan Bank.
Beginning in March 2020, we proactively offered payment deferrals for up to 90 days to our loan customers. We continue to consider potential deferrals with respect to certain customers, which we evaluate on a case-by-case basis. At its peak, which occurred during the second quarter of 2020, we granted payment deferments on loans totaling $206.9 million. As a result of payments being resumed at the conclusion of their payment deferral period, loans in which payments have been deferred decreased from the peak of $206.9 million to $175.0 million at June 30, 2020, to $27.3 million at September 30, 2020, to $16.1 million at December 31, 2020, and to $8.7 million at March 5, 2021. Some of these deferments were to businesses that temporarily closed or reduced operations and some were requested as a pre-cautionary measure to conserve cash. We proactively offered deferrals to our customers regardless of the impact of the pandemic on their business or personal finances.
The Company has evaluated its exposure to certain industry segments most impacted by the COVID-19 pandemic as of December 31, 2020:
Industry Segments Outstanding % of Loan Avg. Loan Avg. Loan to
(Dollars in millions) Loan Balance Portfolio Size Value
Hotels $ 32.0 3.8 % $ 2.3 70 %
Restaurants $ 19.9 2.4 % $ 0.7 69 %
Assisted Living $ 8.9 1.1 % $ 1.5 47 %
Retail $ 80.8 9.6 % $ 0.7 57 %
Note 2-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. These principles require management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses. The estimation process includes management’s judgment as to future losses on existing loans based on an internal review of the loan portfolio, including an analysis of the borrower’s current financial position, the consideration of current and anticipated economic conditions and the effect on specific borrowers. In determining the collectability of loans management also considers the fair value of underlying collateral. Various regulatory agencies, as an integral part of their examination process, review the Company’s allowance for loan losses. Such agencies may require the Company to recognize additions to the allowance based on their judgments about information available to them at the time of their examination. Because of these factors it is possible that the allowance for loan losses could change materially.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand, due from banks, interest-bearing bank balances, federal funds sold and securities purchased under agreements to resell. Generally federal funds are sold for a one-day period and securities purchased under agreements to resell mature in less than 90 days.
Investment Securities
Investment securities are classified as either held-to-maturity, available-for-sale or trading securities. In determining such classification, securities that the Company has the positive intent and ability to hold to maturity are classified as held-to maturity and are carried at amortized cost. Securities classified as available-for-sale are carried at estimated fair values with unrealized gains and losses included in shareholders’ equity on an after tax basis. Trading securities are carried at estimated fair value with unrealized gains and losses included in non-interest income (See Note 4).
Gains and losses on the sale of available-for-sale securities and trading securities are determined using the specific identification method. Declines in the fair value of individual held-to-maturity and available-for-sale securities below their cost that are judged to be other than temporary are written down to fair value and charged to income in the Consolidated Statement of Income.
Premiums and discounts are recognized in interest income using the interest method over the period to the earliest call date.
Mortgage Loans Held for Sale
The Company originates fixed rate residential loans on a servicing released basis in the secondary market. Loans closed but not yet settled with an investor, are carried in the Company’s loans held for sale portfolio. These loans are primarily fixed rate residential loans that have been originated in the Company’s name and have closed. Virtually all of these loans have commitments to be purchased by investors at a locked in price with the investors on the same day that the loan was locked in with the Company’s customers. Therefore, these loans present very little market risk for the Company.
The Company usually delivers to, and receives funding from, the investor within 30 days. Commitments to sell these loans to the investor are considered derivative contracts and are sold to investors on a “best efforts” basis. The Company is not obligated to deliver a loan or pay a penalty if a loan is not delivered to the investor. As a result of the short-term nature of these derivative contracts, the fair value of the mortgage loans held for sale in most cases is the same as the value of the loan amount at its origination. These loans are classified as Level 2.
Loans and Allowance for Loan Losses
Loan receivables that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are reported at their outstanding principal balance adjusted for any charge-offs, the allowance for loan losses, and any deferred fees or costs on originated loans. Interest is recognized over the term of the loan based on the loan balance outstanding. Fees charged for originating loans, if any, are deferred and offset by the deferral of certain direct expenses associated with loans originated. The net deferred fees are recognized as yield adjustments by applying the interest method.
The allowance for loan losses is maintained at a level believed to be adequate by management to absorb potential losses in the loan portfolio. Management’s determination of the adequacy of the allowance is based on an evaluation of the portfolio, past loss experience, economic conditions and volume, growth and composition of the portfolio.
The Company considers a loan to be impaired when, based upon current information and events, it is believed that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Loans that are considered impaired are accounted for at the lower of carrying value or fair value. The accrual of interest on impaired loans is discontinued when, in management’s opinion, the borrower may be unable to meet payments as they become due, generally when a loan becomes 90 days past due. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received first to principal and then to interest income.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the asset’s estimated useful life. Estimated lives range up to 39 years for buildings and up to 10 years for furniture, fixtures and equipment.
Goodwill and Other Intangible Assets
Goodwill represents the cost in excess of fair value of net assets acquired (including identifiable intangibles) in purchase transactions. Other intangible assets represent premiums paid for acquisitions of core deposits (core deposit intangibles). Core deposit intangibles are being amortized on a straight-line basis over seven years. Goodwill and identifiable intangible assets are reviewed for impairment annually or whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. The annual valuation is performed on September 30 of each year.
Other Real Estate Owned
Other real estate owned includes real estate acquired through foreclosure. Other real estate owned is carried at the lower of cost (principal balance at date of foreclosure) or fair value minus estimated cost to sell. Any write-downs at the date of foreclosure are charged to the allowance for loan losses. Expenses to maintain such assets, subsequent changes in the valuation allowance, and gains or losses on disposal are included in other expenses.
Comprehensive Income (loss)
The Company reports comprehensive income (loss) in accordance with Accounting Standards Codification (“ASC”) 220, “Comprehensive Income.” ASC 220 requires that all items that are required to be reported under accounting standards as comprehensive income (loss) be reported in a financial statement that is displayed with the same prominence as other financial statements. The disclosures requirements have been included in the Company’s consolidated statements of comprehensive income.
Mortgage Origination Fees
Mortgage origination fees relate to activities comprised of accepting residential mortgage applications, qualifying borrowers to standards established by investors and selling the mortgage loans to the investors under pre-existing commitments. The related fees received by the Company for these services are recognized at the time the loan is closed.
Advertising Expense
Advertising and public relations costs are generally expensed as incurred. External costs incurred in producing media advertising are expensed the first time the advertising takes place. External costs relating to direct mailing costs are expensed in the period in which the direct mailings are sent. Advertising expense totaled $1.0 million, $1.1 million and $919 thousand for the years ended December 31, 2020, 2019, and 2018, respectively.
Income Taxes
A deferred income tax liability or asset is recognized for the estimated future effects attributable to differences in the tax bases of assets or liabilities and their reported amounts in the financial statements as well as operating loss and tax credit carry forwards. The deferred tax asset or liability is measured using the enacted tax rate expected to apply to taxable income in the period in which the deferred tax asset or liability is expected to be realized.
In 2006, the FASB issued guidance related to Accounting for Uncertainty in Income Taxes. This guidance clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB ASC Topic 740-10, “Income Taxes.” It also prescribes a recognition threshold and measurement of a tax position taken or expected to be taken in an enterprise’s tax return.
Stock Based Compensation Cost
The Company accounts for stock based compensation under the fair value provisions of the accounting literature. Compensation expense is recognized in salaries and employee benefits.
The fair value of each grant is estimated on the date of grant using the Black-Sholes option pricing model. No options were granted in 2020, 2019 or 2018.
Earnings Per Common Share
Basic earnings per common share (“EPS”) excludes dilution and is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted EPS is computed by dividing net income available to common shareholders by the weighted average number of shares of common stock and common stock equivalents. Common stock equivalents consist of stock options and warrants and are computed using the treasury stock method.
Business Combinations and Method of Accounting for Loans Acquired
The Company accounts for its acquisitions under FASB ASC Topic 805, “Business Combinations,” which requires the use of the acquisition method of accounting. All identifiable assets acquired, including loans, are recorded at fair value. No allowance for loan losses related to the acquired loans is recorded on the acquisition date because the fair value of the loans acquired incorporates assumptions regarding credit risk. Loans acquired are recorded at fair value in accordance with the fair value methodology prescribed in FASB ASC Topic 820, “Fair Value Measurements and Disclosures.”
Acquired credit-impaired loans are accounted for under the accounting guidance for loans and debt securities acquired with deteriorated credit quality, found in FASB ASC Topic 310-30, “Receivables-Loans and Debt Securities Acquired with Deteriorated Credit Quality,” formerly American Institute of Certified Public Accountants (“AICPA”) Statement of Position (“SOP”) 03-3, “Accounting for Certain Loans or Debt Securities Acquired in a Transfer,” and initially measured at fair value, which includes estimated future credit losses expected to be incurred over the life of the loans. Loans acquired in business combinations with evidence of credit deterioration since origination and for which it is probable that all contractually required payments will not be collected are considered to be credit impaired. Evidence of credit quality deterioration as of purchase dates may include information such as past-due and nonaccrual status, borrower credit scores and recent loan to value percentages. The Company considers expected prepayments and estimates the amount and timing of expected principal, interest and other cash flows for each loan or pool of loans meeting the criteria above, and determines the excess of the loan’s scheduled contractual principal and contractual interest payments over all cash flows expected to be collected at acquisition as an amount that should not be accreted (non-accretable difference). The remaining amount, representing the excess of the loan’s or pool’s cash flows expected to be collected over the fair value for the loan or pool of loans, is accreted into interest income over the remaining life of the loan or pool (accretable difference). Subsequent to the acquisition date, increases in cash flows expected to be received in excess of the Company’s initial estimates are reclassified from non-accretable difference to accretable difference and are accreted into interest income on a level-yield basis over the remaining life of the loan. Decreases in cash flows expected to be collected are recognized as impairment through the provision for loan losses.
Segment Information
ASC Topic 280-10, “Segment Reporting,” requires selected segment information of operating segments based on a management approach. The Company’s four reportable segments represent the distinct product lines the Company offers and are viewed separately for strategic planning by management (see Note 24, Reportable Segments, for further information).
Recently Issued Accounting Standards
In June 2016, the FASB issued guidance to change the accounting for credit losses and modify the impairment model for certain debt securities. The amendments will be effective for the Company for reporting periods beginning after December 15, 2022. Early adoption is permitted for all organizations for periods beginning after December 15, 2018. The Company is currently evaluating the effect that implementation of the new standard will have on its financial position, results of operations, and cash flows.
In November 2019, the FASB issued guidance to defer the effective dates for private companies, not-for-profit organizations, and certain smaller reporting companies applying standards on current expected credit losses (CECL), leases, hedging. The new effective date for CECL will be fiscal years beginning after December 15, 2022 including interim periods within those fiscal years. The Company is evaluating the impact that this will have on its financial statements.
In November 2019, the FASB issued guidance that addresses issues raised by stakeholders during the implementation of ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The amendments affect a variety of topics in the ASC. For entities that have not yet adopted the amendments in ASU 2016-13, the amendments are effective for fiscal years beginning after December 15, 2022 including interim periods within those fiscal years-all other entities. Early adoption is permitted in any interim period as long as an entity has adopted the amendments in ASU 2016-13. The Company is evaluating the impact that this will have on its financial statements.
In December 2019, the FASB issued guidance to simplify accounting for income taxes by removing specific technical exceptions that often produce information investors have a hard time understanding. The amendments also improve consistent application of and simply GAAP for other areas of Topic 740 by clarifying and amending existing guidance. The amendments became effective for the Company for interim and annual periods beginning after December 15, 2020. The Company does not expect these amendments to have a material effect on the its financial statements.
In January 2020, the FASB issued guidance to address accounting for the transition into and out of the equity method and measuring certain purchased options and forward contracts to acquire investments. The amendments became effective for the Company for interim and annual periods beginning after December 15, 2020. The Company does not expect these amendments to have a material effect on its financial statements.
In February 2020, the FASB issued guidance to add and amend SEC paragraphs in the ASC to reflect the issuance of SEC Staff Accounting Bulletin No. 119 related to the new credit losses standard and comments by the SEC staff related to the revised effective date of the new leases .. The amendments were effective upon issuance and did not have a material impact on the Company’s financial statements.
In March 2020, the FASB issued guidance that makes narrow-scope improvements to various aspects of the financial instrument guidance, including the CECL guidance issued in 2016. For public business entities, the amendments were effective upon issuance of the final ASU. For all other entities, the amendments were effective for fiscal years beginning after December 15, 2019, and are effective for interim periods within those fiscal years beginning after December 15, 2020. The effective date of the amendments to ASU 2016-01 were effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. For the amendments related to ASU 2016-13, public business entities that meet the definition of an SEC filer, excluding eligible smaller reporting companies (as defined by the SEC), should adopt the amendments in ASU 2016-13 during 2020. All other entities should adopt the amendments in ASU 2016-13 during 2023. Early adoption is permitted. For entities that have not yet adopted the guidance in ASU 2016-13, the effective dates and the transition requirements for these amendments are the same as the effective date and transition requirements in ASU 2016-13. For entities that have adopted the guidance in ASU 2016-13, the amendments were effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. For those entities, the amendments should be applied on a modified-retrospective basis by means of a cumulative-effect adjustment to opening retained earnings in the statement of financial position as of the date that an entity adopted the amendments in ASU 2016-13. The Company does not expect these amendments to have a material effect on its financial statements.
In March 2020, the FASB issued guidance to provide temporary optional guidance to ease the potential burden in accounting for reference rate reform. The guidance provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. The ASU is intended to help stakeholders during the global market-wide reference rate transition period. The amendments are effective through December 31, 2022. The Company does not expect these amendments to have a material effect on its financial statements.
In August 2020, the FASB issued guidance to improve financial reporting associated with accounting for convertible instruments and contracts in an entity’s own equity. The amendments will be effective the Company for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020. The Company does not expect these amendments to have a material effect on its financial statements.
In October 2020, the FASB issued guidance to clarify the FASB’s intent that an entity should reevaluate whether a callable debt security that has multiple call dates is within the scope of FASB Accounting Standards Codification (FASB ASC) 310-20-35-33 for each reporting period. The amendments will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. The Company does not expect these amendments to have a material effect on its financial statements.
In October 2020, the FASB updated various Topics of the Accounting Standards Codification to align the guidance in various SEC sections of the Codification with the requirements of certain SEC final rules. The amendments were effective upon issuance and did not have a material effect on the financial statements.
In October 2020, the FASB issued amendments to clarify the Accounting Standards Codification and make minor improvements that are not expected to have a significant effect on current accounting practice or create a significant administrative cost to most entities. The amendments are effective for annual periods beginning after December 15, 2020. Early application is permitted for any interim period for which financial statements have not been issued. The Company does not expect these amendments to have a material effect on its financial statements.
Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have a material impact on the Company’s financial position, results of operations or cash flows.
General Risk and Uncertainties
In the normal course of business, the Company encounters two significant types of risks: economic and regulatory. There are three main components of economic risk: interest rate risk, credit risk and market risk. The Company is subject to interest rate risk to the degree that its interest-bearing liabilities mature or reprice at different speeds, or on a different basis, than its interest-earning assets. Credit risk is the risk of default on the Company’s loan and investment portfolios that results from borrowers’ or issuer’s inability or unwillingness to make contractually required payments. Market risk reflects changes in the value of collateral underlying loans and investments and the valuation of real estate held by the Company.
The Company is subject to regulations of various governmental agencies (regulatory risk). These regulations can and do change significantly from period to period. The Company also undergoes periodic examinations by the regulatory agencies, which may subject it to further changes with respect to asset valuations, amounts of required loan loss allowances and operating restrictions from regulators’ judgments based on information available to them at the time of their examination.
Reclassifications
Certain captions and amounts in the 2018 and 2019 consolidated financial statements were reclassified to conform to the 2020 presentation.
Note 3-MERGERS AND ACQUISITIONS
On October 20, 2017, the Company acquired all of the outstanding common stock of Cornerstone Bancorp headquartered in Easley, South Carolina (“Cornerstone”) the bank holding company for Cornerstone National Bank (“CNB”), in a cash and stock transaction. The total purchase price was approximately $27.1 million, consisting of $7.8 million in cash and 877,364 shares of the Company’s common stock valued at $19.3 million based on a provision in the merger agreement that 30% of the outstanding shares of Cornerstone common stock be exchanged for cash and 70% of the outstanding shares of Cornerstone common stock be exchanged for shares of the Company’s common stock. The value of the Company’s common stock issued was determined based on the closing price of the common stock on October 19, 2017 as reported by NASDAQ, which was $22.05. Cornerstone common shareholders received 0.54 shares of the Company’s common stock in exchange for each share of Cornerstone common stock, or $11.00 per share, subject to the limitations discussed above. The Company issued 877,364 shares of its common stock in connection with the merger.
The Cornerstone transaction was accounted for using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed and consideration exchanged were recorded at estimated fair value on the acquisition date based on a third party valuation of significant accounts. Fair values are subject to refinement for up to a year.
The following table presents the assets acquired and liabilities assumed as of October 20, 2017 as recorded by the Company on the acquisition date and initial fair value adjustments.
(Dollars in thousands, except per share data) As Recorded by
Cornerstone Fair Value
Adjustments As Recorded by
the Company
Assets
Cash and cash equivalents	 $ 30,060 $ - $ 30,060
Investment securities	 44,018 (358 )(a) 43,660
Loans	 60,835 (734 )(b) 60,101
Premises and equipment	 4,164 573 (c) 4,737
Intangible assets	 - 1,810 (d) 1,810
Bank owned life insurance	 2,384 - 2,384
Other assets	 3,082 (452 )(e) 2,630
Total assets	 $ 144,543 $ 839 $ 145,382
Liabilities
Deposits:
Non-interest bearing $ 27,296 $ - $ 27,296
Interest-bearing	 99,152 150 (f) 99,302
Total deposits	 126,448 126,598
Securities sold under agreements to repurchase	 -
Other liabilities	 96 (g)
Total liabilities	 127,617 127,863
Net identifiable assets acquired over liabilities assumed	 16,926 17,519
Goodwill	 - 9,558 9,558
Net assets acquired over liabilities assumed	 $ 16,926 $ 10,151 $ 27,077
Consideration:
First Community Corporation common shares issued	 877,364
Purchase price per share of the Company’s common stock	 $ 22.05
$ 19,346
Cash exchanged for stock and fractional shares	 7,731
Fair value of total consideration transferred	 $ 27,077
Explanation of fair value adjustments
(a) Adjustment reflects marking the securities portfolio to fair value as of the acquisition date.
(b) Adjustment reflects the fair value adjustments based on the Company’s evaluation of the acquired loan portfolio and excludes the allowance for loan losses recorded by Cornerstone.
(c) Adjustment reflects the fair value adjustments based on the Company’s evaluation of the acquired premises and equipment.
(d) Adjustment reflects the recording of the core deposit intangible on the acquired deposit accounts.
(e) Adjustment reflects the deferred tax adjustment related to fair value adjustments at 34%.
(f) Adjustment reflects the fair value adjustment on interest-bearing deposits.
(g) Adjustment reflects the fair value adjustment on post-retirement benefits.
The operating results of the Company for the period ended December 31, 2017 include the operating results of the acquired assets and assumed liabilities for the 72 days subsequent to the acquisition date of October 20, 2017. Merger-related charges related to the Cornerstone acquisition of $945 thousand are recorded in the consolidated statement of income and include incremental costs related to closing the acquisition, including legal, accounting and auditing, investment banker, travel, printing, supplies and other costs.
The following table discloses the impact of the merger with Cornerstone (excluding the impact of merger-related expenses) since the acquisition on October 20, 2017 through December 31, 2017. The table also presents certain pro forma information as if Cornerstone had been acquired on January 1, 2017 and January 1, 2016. These results combine the historical results of Cornerstone in the Company’s consolidated statement of income and, while certain adjustments were made for the estimated impact of certain fair value adjustments and other acquisition-related activity, they are not indicative of what would have occurred had the acquisition taken place on January 1, 2017 or January 1, 2016.
(Dollars in thousands) Pro Forma
Twelve Months
Ended
December 31,
Pro Forma
Twelve Months
Ended
December 31,
Total revenues (net interest income plus noninterest income)	 $ 43,602 $ 41,300
Net income	 $ 6,791 $ 7,750
Note 4-INVESTMENT SECURITIES
The amortized cost and estimated fair values of investment securities are summarized below:
AVAILABLE-FOR-SALE:
(Dollars in thousands)
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value
December 31, 2020
US Treasury securities	
$ 1,501
$
$ -
$ 1,502
Government Sponsored Enterprises	
-
1,006
Mortgage-backed securities	
222,739
7,375
229,929
Small Business Administration pools	
34,577
35,498
State and local government	
82,495
6,184
88,603
Corporate and other securities	
3,272
-
3,328
$ 345,580
$ 14,554
$
$ 359,866
(Dollars in thousands)
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value
December 31, 2019
US Treasury securities $ 7,190 $ 16 $ 3 $ 7,203
Government Sponsored Enterprises - 1,001
Mortgage-backed securities 182,736 1,490 183,586
Small Business Administration pools 45,301 45,343
State and local government 47,418 2,371 49,648
Other securities - -
$ 283,648 $ 4,153 $ 1,001 $ 286,800
At December 31, 2020, corporate and other securities available-for-sale included the following at fair value: corporate fixed-to-float bonds at $3.3 million, mutual funds at $8.0 thousand and foreign debt of $10.0 thousand. At December 31, 2019, corporate and other securities available-for-sale included the following at fair value: mutual funds at $8.8 thousand and foreign debt of $10.0 thousand. Other investments, at cost, include Federal Home Loan Bank (“FHLB”) stock in the amount of $1.1 million and corporate stock in the amount of $1.0 million at December 31, 2020. The Company held $991.4 thousand of FHLB stock and $1.0 million in corporate stock at December 31, 2019.
During the first quarter of 2019, the Company reclassified the portfolio of securities listed as held-to-maturity to available-for-sale. At the time of reclassification, the unrealized gain on securities was $124.3 thousand. There were no investment securities listed as held-to-maturity as of December 31, 2020.
During the years ended December 31, 2020 and 2019, the Company received proceeds of $1.2 million and $44.4 million, respectively, from the sale of investment securities available-for-sale. For the year ended December 31, 2020, gross realized gains from the sale of investment securities available-for-sale amounted to $99.1 thousand and there were no gross realized losses. For the year ended December 31, 2019, gross realized gains from the sale of investment securities available-for-sale amounted to $355.6 thousand and gross realized losses amounted to $219.6 thousand. The tax (benefit) provision applicable to the net realized gain (loss) was approximately $21 thousand, 29 thousand, and ($72) thousand for 2020, 2019 and 2018, respectively.
The amortized cost and fair value of investment securities at December 31, 2020, by expected maturity, follow. Expected maturities differ from contractual maturities because borrowers may have the right to call or prepay the obligations with or without prepayment penalties. Mortgage-backed securities are included in the year corresponding with the remaining expected life. There were no Held-to-maturity securities as of December 31, 2020.
(Dollars in thousands) Available-for-sale
Amortized
Cost Fair
Value
Due in one year or less	 $ 11,013 $ 11,163
Due after one year through five years	 139,664 144,358
Due after five years through ten years	 139,982 148,563
Due after ten years	 54,921 55,782
$ 345,580 $ 359,866
Securities with an amortized cost of $155.0 million and fair value of $161.5 million at December 31, 2020 were pledged to secure FHLB advances, public deposits, and securities sold under agreements to repurchase. Securities with an amortized cost of $138.6 million and fair value of $139.3 million at December 31, 2019 were pledged to secure FHLB advances, public deposits, and securities sold under agreements to repurchase.
The following tables show gross unrealized losses and fair values, aggregated by investment category and length of time that individual securities have been in a continuous loss position at December 31, 2020 and December 31, 2019.
Less than 12 months
months or more
Total
December 31, 2020
(Dollars in thousands)
Fair
Value
Unrealized
Loss
Fair
Value
Unrealized
Loss
Fair
Value
Unrealized
Loss
Available-for-sale securities:
Mortgage-Backed Securities	
$ 21,298
$
$ 1,414
$
$ 22,712
$
Small Business Administration pools	
-
-
1,323
1,323
State and local government	
4,930
-
-
4,930
Total	
$ 26,228
$
$ 2,737
$
$ 28,965
$
Less than 12 months
months or more
Total
December 31, 2019
(Dollars in thousands)
Fair
Value
Unrealized
Loss
Fair
Value
Unrealized
Loss
Fair
Value
Unrealized
Loss
Available-for-sale securities:
US Treasury	
$ -
$ -
$ 1,508
$
$ 1,508
$
Mortgage-backed securities	
57,175
12,419
69,594
Small Business Administration pools	
7,891
13,502
21,393
State and local government	
5,695
-
-
5,695
Total	
$ 70,761
$
$ 27,429
$
$ 98,190
$ 1,001
Government Sponsored Enterprise, Mortgage-Backed Securities: The Company owned mortgage-backed securities (“MBSs”), including collateralized mortgage obligations (“CMOs”), issued by government sponsored enterprises (“GSEs”) with an amortized cost of $257.3 million and $182.7 million and approximate fair value of $265.4 million and $183.6 million at December 31, 2020 and December 31, 2019, respectively. As of December 31, 2020, and December 31, 2019, all of the MBSs issued by GSEs were classified as “Available for Sale.” Unrealized losses on certain of these investments are not considered to be “other than temporary,” and we have the intent and ability to hold these until they mature or recover the current book value. The contractual cash flows of the investments are guaranteed by the GSE. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost of the Company’s investment. Because the Company does not intend to sell these securities and it is more likely than not the Company will not be required sell these securities before a recovery of its amortized cost, which may be maturity, the Company does not consider the investments to be other-than-temporarily impaired at December 31, 2020.
Non-agency Mortgage Backed Securities: The Company holds private label mortgage-backed securities (“PLMBSs”), including CMOs, at December 31, 2020 with an amortized cost of $57.4 thousand and approximate fair value of $54.7 thousand. The Company held private label mortgage-backed securities (“PLMBSs”), including CMOs, at December 31, 2019 with an amortized cost of $73.5 thousand and approximate fair value of $73.5 thousand. Management monitors each of these securities on a quarterly basis to identify any deterioration in the credit quality, collateral values and credit support underlying the investments. Management evaluates securities for other-than-temporary impairment (“OTTI”) on at least a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. For securities in an unrealized loss position, management considers the extent and duration of the unrealized loss, the financial condition and near term prospects of the issuer and any collateral underlying the relevant security. Management also assesses whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings. For debt securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: (1) OTTI related to credit loss, which must be recognized in the income statement and (2) OTTI related to other factors, which is recognized in other comprehensive income (loss). The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis.
During the years ended December 31, 2020, December 31, 2019, and December 31, 2018, no OTTI charges were recorded in earnings for the PLMBS portfolio.
State and Local Governments and Other: Management monitors these securities on a quarterly basis to identify any deterioration in the credit quality. Included in the monitoring is a review of the credit rating, a financial analysis and certain demographic data on the underlying issuer. The Company does not consider these securities to be OTTI at December 31, 2020 and December 31, 2019.
Note 5-LOANS
Loans summarized by category are as follows:
December 31,
(Dollars in thousands)
Commercial, financial and agricultural	
$ 96,688
$ 51,805
Real estate:
Construction	
95,282
73,512
Mortgage-residential	
43,928
45,357
Mortgage-commercial	
573,258
527,447
Consumer:
Home equity	
26,442
28,891
Other	
8,559
10,016
Total	
$ 844,157
$ 737,028
Commercial, financial, and agricultural category includes $42.2 million in PPP loans as of December 31, 2020.
Activity in the allowance for loan losses was as follows:
Years ended December 31,
(Dollars in thousands)
Balance at the beginning of year	
$ 6,627
$ 6,263
$ 5,797
Provision for loan losses	
3,663
Charged off loans	
(110 )
(145 )
(164 )
Recoveries	
Balance at end of year	
$ 10,389
$ 6,627
$ 6,263
The detailed activity in the allowance for loan losses and the recorded investment in loans receivable as of and for the years ended December 31, 2020, December 31, 2019 and December 31, 2018 follows:
(Dollars in thousands) Commercial Real estate
Construction Real estate
Mortgage
Residential Real estate
Mortgage
Commercial Consumer
Home
equity Consumer
Other Unallocated Total
Allowance for loan losses:
Beginning balance	 $ 427 $ 111 $ 367 $ 4,602 $ 240 $ 97 $ 783 $ 6,627
Charge-offs	 - (2 ) - (1 ) - (107 ) - (110 )
Recoveries	 - -
Provisions	 3,231 (162 ) 3,663
Ending balance	 $ 778 $ 145 $ 541 $ 7,855 $ 324 $ 125 $ 621 $ 10,389
Ending balances:
Individually evaluated for impairment	 $ - $ - $ - $ 2 $ - $ - $ - $ 2
Collectively evaluated for impairment	 7,853 10,387
Loans receivable:
Ending balance-total	 $ 96,688 $ 95,282 $ 43,928 $ 573,258 $ 26,442 $ 8,559 $ - $ 844,157
Ending balances:
Individually evaluated for impairment	 - - 5,631 - - 6,113
Collectively evaluated for impairment	 96,688 95,282 43,488 567,627 26,400 8,559 - 838,044
(Dollars in thousands) Commercial Real estate
Construction Real estate
Mortgage
Residential Real estate
Mortgage
Commercial Consumer
Home
equity Consumer
Other Unallocated Total
Allowance for loan losses:
Beginning balance	 $ 430 $ 89 $ 431 $ 4,318 $ 261 $ 88 $ 646 $ 6,263
Charge-offs	 (12 ) - (12 ) - (1 ) (120 ) - (145 )
Recoveries	 - - -
Provisions	 (52 ) (23 ) (35 )
Ending balance	 $ 427 $ 111 $ 367 $ 4,602 $ 240 $ 97 $ 783 $ 6,627
Ending balances:
Individually evaluated for impairment	 $ - $ - $ - $ 6 $ - $ - $ - $ 6
Collectively evaluated for impairment	 4,596 6,621
Loans receivable:
Ending balance-total	 $ 51,805 $ 73,512 $ 45,357 $ 527,447 $ 28,891 $ 10,016 $ - $ 737,028
Ending balances:
Individually evaluated for impairment	 - 3,135 - - 3,997
Collectively evaluated for impairment	 51,405 73,512 44,965 524,312 28,821 10,016 - 733,031
(Dollars in thousands) Commercial Real estate
Construction Real estate
Mortgage
Residential Real estate
Mortgage
Commercial Consumer
Home
equity Consumer
Other Unallocated Total
Allowance for loan losses:
Beginning balance	 $ 221 $ 101 $ 461 $ 3,077 $ 308 $ 35 $ 1,594 $ 5,797
Charge-offs	 - - (1 ) - (23 ) (140 ) - (164 )
Recoveries	 - 61 -
Provisions	 (12 ) (33 ) 1,031 (30 ) (948 )
Ending balance	 $ 430 $ 89 $ 431 $ 4,318 $ 261 $ 88 $ 646 $ 6,263
Ending balances:
Individually evaluated for impairment	 $ - $ - $ - $ 14 $ - $ - $ - $ 14
Collectively evaluated for impairment	 4,304 6,249
Loans receivable:
Ending balance-total	 $ 53,933 $ 58,440 $ 52,764 $ 513,833 $ 29,583 $ 9,909 $ - $ 718,462
Ending balances:
Individually evaluated for impairment	 - - 4,030 - - 4,381
Collectively evaluated for impairment	 53,933 58,440 52,442 509,803 29,554 9,909 - 714,081
At December 31, 2020, $16.7 million of loans acquired in the Cornerstone acquisition were excluded in the evaluation of the adequacy of the allowance for loan losses. These loans were recorded at fair value at acquisition which included a credit component of approximately $1.5 million. Loans acquired prior to 2017 have been included in the evaluation of the allowance for loan losses.
The following table presents at December 31, 2020, 2019 and 2018, loans individually evaluated and considered impaired under FASB ASC 310 “Accounting by Creditors for Impairment of a Loan.” Impairment includes performing troubled debt restructurings.
December 31,
(Dollars in thousands)
Total loans considered impaired at year end	
$ 6,113
$ 3,997
$ 4,381
Loans considered impaired for which there is a related allowance for loan loss:
Outstanding loan balance	
$
$
$
Related allowance	
$
$
$
Average impaired loans	
$ 6,375
$ 4,431
$ 4,128
Amount of interest earned during period of impairment	
$
$
$
The following tables are by loan category and present at December 31, 2020, December 31, 2019 and December 31, 2018 loans individually evaluated and considered impaired under FASB ASC 310, “Accounting by Creditors for Impairment of a Loan.” Impairment includes performing troubled debt restructurings.
(Dollars in thousands)
December 31,
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
Average
Recorded
Investment
Interest
Income
Recognized
With no allowance recorded:
Commercial	
$ -
$ -
$ -
$ -
$ -
Real estate:
Construction
-
-
-
-
-
Mortgage-residential	
-
Mortgage-commercial	
5,508
7,980
-
5,770
Consumer:
Home Equity	
-
Other	
-
-
-
-
-
With an allowance recorded:
Commercial	
-
-
-
-
-
Real estate:
Construction	
-
-
-
-
-
Mortgage-residential	
-
-
-
-
-
Mortgage-commercial	
Consumer:
Home Equity	
-
-
-
-
-
Other	
-
-
-
-
-
Total:
Commercial	
-
-
-
-
-
Real estate:
Construction	
-
-
-
-
-
Mortgage-residential	
-
Mortgage-commercial	
5,631
8,103
5,893
Consumer:
Home Equity	
-
Other	
-
-
-
-
-
$ 6,113
$ 8,649
$
$ 6,375
$
(Dollars in thousands)
December 31,
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
Average
Recorded
Investment
Interest
Income
Recognized
With no allowance recorded:
Commercial	
$
$
$ -
$
$
Real estate:
Construction	
-
-
-
-
-
Mortgage-residential	
-
Mortgage-commercial	
2,879
5,539
-
2,961
Consumer:
Home Equity	
-
Other	
-
-
-
-
-
With an allowance recorded:
Commercial	
-
-
-
-
-
Real estate:
Construction	
-
-
-
-
-
Mortgage-residential	
-
-
-
-
-
Mortgage-commercial	
Consumer:
Home Equity	
-
-
-
-
-
Other	
-
-
-
-
-
Total:
Commercial	
-
Real estate:
Construction	
-
-
-
-
-
Mortgage-residential	
-
Mortgage-commercial	
3,135
5,795
3,316
Consumer:
Home Equity	
-
Other	
-
-
-
-
-
$ 3,997
$ 6,728
$
$ 4,431
$
(Dollars in thousands)
December 31,
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
Average
Recorded
Investment
Interest
Income
Recognized
With no allowance recorded:
Commercial	
$ -
$ -
$ -
$ -
$ -
Real estate:
Construction	
-
-
-
-
-
Mortgage-residential	
-
Mortgage-commercial	
3,577
6,173
-
3,232
Consumer:
Home Equity	
-
Other	
-
-
-
-
-
With an allowance recorded:
Commercial	
-
-
-
-
-
Real estate:
Construction	
-
-
-
-
-
Mortgage-residential	
-
-
-
-
-
Mortgage-commercial	
Consumer:
Home Equity	
-
-
-
-
-
Other	
-
-
-
-
-
Total:
Commercial	
-
-
-
-
-
Real estate:
Construction	
-
-
-
-
-
Mortgage-residential	
-
Mortgage-commercial	
4,030
6,626
3,612
Consumer:
Home Equity	
-
Other	
-
-
-
-
-
$ 4,381
$ 7,027
$
$ 4,128
$
The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis is performed on a monthly basis. The Company uses the following definitions for risk ratings:
Special Mention. Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date. Special mention assets are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification.
Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.
Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.
Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be “Pass” rated loans. As of December 31, 2020 and December 31, 2019, and based on the most recent analysis performed, the risk category of loans by class of loans is shown in the table below. As of December 31, 2020 and December 31, 2019, no loans were classified as doubtful.
(Dollars in thousands)
December 31,
Pass
Special
Mention
Substandard
Doubtful
Total
Commercial, financial & agricultural	
$ 96,507
$
$ -
$ -
$ 96,688
Real estate:
Construction	
95,282
-
-
-
95,282
Mortgage - residential	
43,240
-
43,928
Mortgage - commercial	
559,982
7,270
6,006
-
573,258
Consumer:
Home Equity	
25,041
1,306
-
26,442
Other	
8,538
-
-
8,559
Total	
$ 828,590
$ 7,757
$ 7,810
$ -
$ 844,157
(Dollars in thousands)
Special
December 31, 2019 Pass Mention Substandard Doubtful Total
Commercial, financial & agricultural	 $ 51,166 $ 239 $ 400 $ - $ 51,805
Real estate:
Construction	 73,512 - - - 73,512
Mortgage - residential	 44,221 - 45,357
Mortgage - commercial	 521,072 2,996 3,379 - 527,447
Consumer:
Home Equity	 27,450 1,157 - 28,891
Other	 9,981 - - 10,016
Total	 $ 727,402 $ 4,936 $ 4,690 $ - $ 737,028
At December 31, 2020 and 2019, non-accrual loans totaled $4.6 million and $2.3 million, respectively. The gross interest income which would have been recorded under the original terms of the non-accrual loans amounted to $150.5 thousand and $148 thousand in 2020 and 2019, respectively. Interest recorded on non-accrual loans in 2020 and 2019 amounted to $447.5 thousand and $66 thousand, respectively.
Troubled debt restructurings (“TDRs”) that are still accruing are included in impaired loans at December 31, 2020 and 2019 amounted to $1.6 million and $1.7 million, respectively. Interest earned during 2020 and 2019 on these loans amounted to $130.1 thousand and $144 thousand, respectively.
There were loans of $1.3 million and $0.3 thousand that were greater than 90 days delinquent and still accruing interest as of December 31, 2020 and December 31, 2019, respectively.
The following tables are by loan category and present loans past due and on non-accrual status as of December 31, 2020 and December 31, 2019:
(Dollars in thousands)
December 31, 2020
30-59
Days
Past Due
60-89
Days
Past Due
Greater than
90 Days and
Accruing
Nonaccrual
Total Past
Due
Current
Total
Loans
Commercial	
$
$
$ -
$ 4,080
$ 4,272
$ 92,416
$ 96,688
Real estate:
Construction	
-
1,260
-
1,684
93,598
95,282
Mortgage-residential	
-
-
43,481
43,928
Mortgage-commercial	
-
-
-
-
-
573,258
573,258
Consumer:
Home equity	
-
-
-
26,400
26,442
Other	
-
-
8,517
8,559
Total	
$
$
$ 1,260
$ 4,562
$ 6,487
$ 837,670
$ 844,157
(Dollars in thousands)
December 31, 2019
30-59
Days
Past Due
60-89
Days
Past Due
Greater than
90 Days and
Accruing
Nonaccrual
Total Past
Due
Current
Total
Loans
Commercial $ - $ 99 $ - $ 400 $ 499 $ 51,306 $ 51,805
Real estate:
Construction - - - 73,399 73,512
Mortgage-residential - - 44,814 45,357
Mortgage-commercial - - 1,467 1,506 525,941 527,447
Consumer:
Home equity - 28,810 28,891
Other - - 9,953 10,016
$ 345 $ 131 $ - $ 2,329 $ 2,805 $ 734,223 $ 737,028
The CARES Act and Initiatives Related to COVID-19
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act, was signed into law. The CARES Act provided for approximately $2.2 trillion in direct economic relief in response to the public health and economic impacts of COVID-19. Many of the CARES Act’s programs are, and remain, dependent upon the direct involvement of financial institutions like the Bank. These programs have been implemented through rules and guidance adopted by federal departments and agencies, including the U.S. Department of Treasury, the Federal Reserve and other federal bank regulatory authorities, including those with direct supervisory jurisdiction over the Company and the Bank. Furthermore, as the COVID-19 pandemic evolves, federal regulatory authorities continue to issue additional guidance with respect to the implementation, life cycle, and eligibility requirements for the various CARES Act programs, as well as industry-specific recovery procedures for COVID-19. In addition, it is possible that Congress will enact supplementary COVID-19 response legislation, including amendments to the CARES Act or new bills comparable in scope to the CARES Act. We continue to assess the impact of the CARES Act and other statutes, regulations and supervisory guidance related to the COVID-19 pandemic.
Troubled Debt Restructurings and Loan Modifications for Affected Borrowers. The CARES Act, as extended by certain provisions of the Consolidated Appropriations Act, 2021, permits banks to suspend requirements under GAAP for loan modifications to borrowers affected by COVID-19 that may otherwise be characterized as troubled debt restructurings and suspend any determination related thereto if (i) the borrower was not more than 30 days past due as of December 31, 2019, (ii) the modifications are related to COVID-19, and (iii) the modification occurs between March 1, 2020 and the earlier of 60 days after the date of termination of the national emergency or January 1, 2022. Federal bank regulatory authorities also issued guidance to encourage banks to make loan modifications for borrowers affected by COVID-19.
We are focused on servicing the financial needs of our commercial and consumer customers with flexible loan payment arrangements, including short-term loan modifications or forbearance payments and reducing or waiving certain fees on deposit accounts. Future governmental actions may require these and other types of customer-related responses. Beginning in March 2020, we proactively offered payment deferrals for up to 90 days to our loan customers. We continue to consider potential deferrals with respect to certain customers, which we evaluate on a case-by-case basis. At its peak, which occurred during the second quarter of 2020, we granted payment deferments on loans totaling $206.9 million. As a result of payments being resumed at the conclusion of their payment deferral period, loans in which payments have been deferred decreased from the peak of $206.9 million to $175.0 million at June 30, 2020, to $27.3 million at September 30, 2020, to $16.1 million at December 31, 2020, and to $8.7 million at March 5, 2021. We had no loans on which payments were deferred related to the COVID-19 pandemic at December 31, 2019. We had no loans remaining on initial deferral status in which both principal and interest were deferred at December 31, 2020 and March 5, 2021. The $16.1 million in deferrals at December 31, 2020 consist of seven loans on which only principal is being deferred. We had three loans totaling $8.7 million in continuing deferral status in which only principal is being deferred at March 5, 2021. Two of the continuing deferrals at March 5, 2021 totaling $4.5 million are in the retail industry segment identified by us as one of the industry segments most impacted by the COVID-19 pandemic; the other continuing deferral totaling $4.2 million is a mixed use office space that we do not consider to be in an industry segment most impacted by the COVID-19 pandemic. Some of these deferments were to businesses that temporarily closed or reduced operations and some were requested as a pre-cautionary measure to conserve cash. We proactively offered deferrals to our customers regardless of the impact of the pandemic on their business or personal finances.
There were no loans determined to be TDR’s during the twelve month period ended December 31, 2020 and December 31, 2019. Additionally, there were no loans determined to be TDRs in the twelve months ended December 31, 2020 and December 31, 2019 that had subsequent payment defaults. Defaulted loans are those loans that are greater than 90 days past due.
In the determination of the allowance for loan losses, all TDRs are reviewed to ensure that one of the three proper valuation methods (fair market value of the collateral, present value of cash flows, or observable market price) is adhered to. All non-accrual loans are written down to its corresponding collateral value. All TDR accruing loans where the loan balance exceeds the present value of cash flow will have a specific allocation. All nonaccrual loans are considered impaired. Under ASC 310-10, a loan is impaired when it is probable that the Bank will be unable to collect all amounts due including both principal and interest according to the contractual terms of the loan agreement.
Acquired credit-impaired loans are accounted for under the accounting guidance for loans and debt securities acquired with deteriorated credit quality, found in FASB ASC Topic 310-30, (Receivables-Loans and Debt Securities Acquired with Deteriorated Credit Quality), and initially measured at fair value, which includes estimated future credit losses expected to be incurred over the life of the loans. Loans acquired in business combinations with evidence of credit deterioration are considered impaired. Loans acquired through business combinations that do not meet the specific criteria of FASB ASC Topic 310-30, but for which a discount is attributable, at least in part to credit quality, are also accounted for under this guidance. Certain acquired loans, including performing loans and revolving lines of credit (consumer and commercial), are accounted for in accordance with FASB ASC Topic 310-20, where the discount is accreted through earnings based on estimated cash flows over the estimated life of the loan.
A summary of changes in the accretable yield for PCI loans for the years ended December 31, 2020, 2019, and 2018 follows:
(Dollars in thousands)
Year
Ended
December 31,
Year
Ended
December 31,
Year
Ended
December 31,
Accretable yield, beginning of period	
$
$
$
Additions	
-
-
-
Accretion	
(30 )
(30 )
(256 )
Reclassification of non-accretable difference due to improvement in expected cash flows	
-
-
Other changes, net	
-
-
Accretable yield, end of period	
$
$
$
At December 31, 2020 and December 31, 2019, the recorded investment in purchased impaired loans was $110 thousand and $112 thousand, respectively. The unpaid principal balance was $171 thousand and $190 thousand at December 31, 2020 and December 31, 2019, respectively. At December 31, 2020 and December 31, 2019, these loans were all secured by commercial real estate.
Related party loans are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated persons and generally do not involve more than the normal risk of collectability. The following table presents related party loan transactions for the years ended December 31, 2020 and December 31, 2019.
(Dollars in thousands)
For the years ended
December 31,
Balance, beginning of year	
$ 4,108
$ 5,937
New Loans	
Less loan repayments	
1,958
Balance, end of year	
$ 3,297
$ 4,108
Note 6-FAIR VALUE MEASUREMENT
The Company adopted FASB ASC Fair Value Measurement Topic 820, which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. ASC 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:
Level l Quoted prices in active markets for identical assets or liabilities.
Level 2 Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.
FASB ASC 825-10-50 “Disclosure about Fair Value of Financial Instruments”, requires the Company to disclose estimated fair values for its financial instruments. Fair value estimates, methods, and assumptions are set forth below.
Cash and short term investments-The carrying amount of these financial instruments (cash and due from banks, interest-bearing bank balances, federal funds sold and securities purchased under agreements to resell) approximates fair value. All mature within 90 days and do not present unanticipated credit concerns and are classified as Level 1.
Investment Securities-Measurement is on a recurring basis based upon quoted market prices, if available. If quoted market prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for prepayment assumptions, projected credit losses, and liquidity. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, or by dealers or brokers in active over-the-counter markets. Level 2 securities include mortgage-backed securities issued both by government sponsored enterprises and private label mortgage-backed securities. Generally, these fair values are priced from established pricing models. Level 3 securities include corporate debt obligations and asset-backed securities that are less liquid or for which there is an inactive market.
Other investments, at cost-The carrying value of other investments, such as FHLB stock, approximates fair value based on redemption provisions.
Loans Held for Sale-The Company originates fixed rate residential loans on a servicing released basis in the secondary market. Loans closed but not yet settled with an investor, are carried in the Company’s loans held for sale portfolio. These loans are fixed rate residential loans that have been originated in the Company’s name and have closed. Virtually all of these loans have commitments to be purchased by investors at a locked in price with the investors on the same day that the loan was locked in with the Company’s customers. Therefore, these loans present very little market risk for the Company and are classified as Level 2. The carrying amount of these loans approximates fair value.
Loans- The valuation of loans receivable is estimated using the exit price notion which incorporates factors, such as enhanced credit risk, illiquidity risk and market factors that sometimes exist in exit prices in dislocated markets. This credit risk assumption is intended to approximate the fair value that a market participant would realize in a hypothetical orderly transaction. The Company’s loan portfolio is initially fair valued using a segmented approach. The Company divides its loan portfolio into the following categories: variable rate loans, impaired loans and all other loans. The results are then adjusted to account for credit risk as described above.
Other Real Estate Owned (“OREO”)-OREO is carried at the lower of carrying value or fair value on a non-recurring basis. Fair value is based upon independent appraisals or management’s estimation of the collateral and is considered a Level 3 measurement.
Accrued Interest Receivable-The fair value approximates the carrying value and is classified as Level 1.
Deposits-The fair value of demand deposits, savings accounts, and money market accounts is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposits is estimated by discounting the future cash flows using rates currently offered for deposits of similar remaining maturities. Deposits are classified as Level 2.
Federal Home Loan Bank Advances-Fair value is estimated based on discounted cash flows using current market rates for borrowings with similar terms and are classified as Level 2.
Short Term Borrowings-The carrying value of short term borrowings (securities sold under agreements to repurchase and demand notes to the Treasury) approximates fair value. These are classified as Level 2.
Junior Subordinated Debentures-The fair values of junior subordinated debentures is estimated by using discounted cash flow analyses based on incremental borrowing rates for similar types of instruments. These are classified as Level 2.
Accrued Interest Payable-The fair value approximates the carrying value and is classified as Level 1.
Commitments to Extend Credit-The fair value of these commitments is immaterial because their underlying interest rates approximate market.
The carrying amount and estimated fair value by classification Level of the Company’s financial instruments as of December 31, 2020 and December 31, 2019 are as follows:
December 31, 2020
Carrying
Fair Value
(Dollars in thousands)
Amount
Total
Level
Level
Level
Financial Assets:
Cash and short term investments
$ 64,992
$ 64,992
$ 64,992
$ -
$ -
Available-for-sale securities
359,866
359,866
20,564
339,302
-
Other investments, at cost
2,053
2,053
-
-
2,053
Loans held for sale
45,020
45,020
-
45,020
-
Net loans receivable
833,768
829,685
-
-
829,685
Accrued interest
4,167
4,167
4,167
-
-
Financial liabilities:
Non-interest bearing demand
$ 385,511
$ 385,511
$ -
$ 385,511
$ -
Interest bearing demand deposits and money market accounts
520,205
520,205
-
520,205
-
Savings
123,032
123,032
-
123,032
-
Time deposits
160,665
161,505
-
61,505
-
Total deposits
1,189,413
1,190,253
-
1,190,253
-
Federal Home Loan Bank Advances
-
-
-
-
-
Short term borrowings
40,914
40,914
-
40,914
-
Junior subordinated debentures
14,964
11,748
-
11,748
-
Accrued interest payable
-
-
December 31, 2019
Carrying
Fair Value
(Dollars in thousands)
Amount
Total
Level
Level
Level
Financial Assets:
Cash and short term investments
$ 47,692
$ 47,692
$ 47,692
$ -
$ -
Available-for-sale securities
286,800
286,800
23,632
263,168
-
Other investments, at cost
1,992
1,992
-
-
1,992
Loans held for sale
11,155
11,155
-
11,155
-
Net loans receivable
730,401
728,745
-
-
728,745
Accrued interest
3,481
3,481
3,481
-
-
Financial liabilities:
Non-interest bearing demand
$ 289,829
$ 289,829
$ -
$ 289,829
$ -
NOW and money market accounts
423,257
423,257
-
423,257
-
Savings
104,456
104,456
-
104,456
-
Time deposits
170,660
171,558
-
171,558
-
Total deposits
988,201
989,099
-
989,099
-
Federal Home Loan Bank Advances
-
-
-
-
-
Short term borrowings
33,296
33,296
-
33,296
-
Junior subordinated debentures
14,964
13,161
-
13,161
-
Accrued interest payable
1,033
1,033
1,033
-
-
The following table summarizes quantitative disclosures about the fair value for each category of assets carried at fair value as of December 31, 2020 and December 31, 2019 that are measured on a recurring basis. There were no liabilities carried at fair value as of December 31, 2020 or December 31, 2019 that are measured on a recurring basis.
(Dollars in thousands)
Description December 31,
(Level 1) (Level 2) (Level 3)
Available- for-sale securities
US Treasury Securities	 $ 1,502 $ - $ 1,502 $ -
Government Sponsored Enterprises	 1,006 - 1,006 -
Mortgage-backed securities	 229,929 17,029 212,900 -
Small Business Administration pools	 35,498 - 35,498 -
State and local government	 88,603 3,535 85,068 -
Corporate and other securities	 3,328 - 3,328 -
359,866 20,564 339,302 -
Loans held for sale	 45,020 - 45,020 -
Total	 $ 404,886 $ 20,564 $ 384,322 $ -
(Dollars in thousands)
Description December 31,
(Level 1) (Level 2) (Level 3)
Available-for-sale securities
US treasury securities $ 7,203 $ - $ 7,203 $ -
Government sponsored enterprises 1,001 - 1,001 -
Mortgage-backed securities 183,586 18,435 163,344 1,807
Small Business Administration securities 45,343 - 45,343 -
State and local government 49,648 5,188 44,460 -
Corporate and other securities -
286,800 23,632 261,361 1,807
Loans held-for-sale 11,155 - 11,155 -
Total $ 297,955 $ 23,632 $ 272,516 $ 1,807
The following tables summarize quantitative disclosures about the fair value for each category of assets carried at fair value as of December 31, 2020 and December 31, 2019 that are measured on a non-recurring basis. There were no liabilities carried at fair value and measured on a non-recurring basis at December 31, 2020 and 2019.
(Dollars in thousands)
Description
December 31,
(Level 1)
(Level 2)
(Level 3)
Impaired loans:
Commercial & Industrial	
$ -
$ -
$ -
$ -
Real estate:
Mortgage-residential	
-
-
Mortgage-commercial	
5,629
-
-
5,629
Consumer:
Home equity	
-
-
Other	
-
-
-
-
Total impaired	
6,111
-
-
6,111
Other real estate owned:
Construction	
-
-
Mortgage-commercial	
-
-
Total other real estate owned	
1,194
-
-
1,194
Total	
$ 7,305
$ -
$ -
$ 7,305
(Dollars in thousands)
Description December 31,
(Level 1) (Level 2) (Level 3)
Impaired loans:
Commercial & Industrial $ 400 $ - $ - $ 400
Real estate:
Mortgage-residential - -
Mortgage-commercial 3,129 - - 3,129
Consumer:
Home equity - -
Other - - - -
Total impaired 3,991 - - 3,991
Other real estate owned:
Construction - -
Mortgage-residential - -
Total other real estate owned 1,410 - - 1,410
Total $ 5,401 $ - $ - $ 5,401
The Company has a large percentage of loans with real estate serving as collateral. Loans which are deemed to be impaired are primarily valued on a nonrecurring basis at the fair value of the underlying real estate collateral. Such fair values are obtained using independent appraisals, which the Company considers to be Level 3 inputs. Third party appraisals are generally obtained when a loan is identified as being impaired or at the time it is transferred to OREO. This internal process would consist of evaluating the underlying collateral to independently obtained comparable properties. With respect to less complex or smaller credits, an internal evaluation may be performed. Generally, the independent and internal evaluations are updated annually. Factors considered in determining the fair value include geographic sales trends, the value of comparable surrounding properties as well as the condition of the property. The aggregate amount of impaired loans was $6.1 million and $4.0 million for the year ended December 31, 2020 and year ended December 31, 2019, respectively.
For Level 3 assets and liabilities measured at fair value on a non-recurring basis as of December 31, 2020 and December 31, 2019, the significant unobservable inputs used in the fair value measurements were as follows:
(Dollars in thousands)
Fair Value as
of December 31,
Valuation Technique
Significant
Observable
Inputs
Significant
Unobservable
Inputs
OREO
$ 1,194
Appraisal Value/Comparison Sales/Other estimates
Appraisals and or sales of comparable properties
Appraisals discounted 6% to 16% for sales commissions and other holding cost
Impaired loans
$ 6,111
Appraisal Value
Appraisals and or sales of comparable properties
Appraisals discounted 6% to 16% for sales commissions and other holding cost
(Dollars in thousands)
Fair Value as
of December 31,
Valuation Technique
Significant
Observable
Inputs
Significant
Unobservable
Inputs
OREO
$ 1,410
Appraisal Value/Comparison Sales/Other estimates
Appraisals and or sales of comparable properties
Appraisals discounted 6% to 16% for sales commissions and other holding cost
Impaired loans
$ 3,991
Appraisal Value
Appraisals and or sales of comparable properties
Appraisals discounted 6% to 16% for sales commissions and other holding cost
Note 7-PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
December 31,
(Dollars in thousands)
Land	
$ 11,166
$ 11,166
Premises	
29,342
28,995
Equipment	
7,050
6,284
Fixed assets in progress	
Property and equipment, gross
47,620
46,533
Accumulated depreciation	
13,162
11,525
Property and Equipment Net
$ 34,458
$ 35,008
Provision for depreciation included in operating expenses for the years ended December 31, 2020, 2019 and 2018 amounted to $1.6 million, $1.6 million, and $1.5 million, respectively.
Premises held-for-sale was $591 thousand at December 31, 2020. It increased to $591 thousand at December 31, 2019 from $0 at December 31, 2018 due to our consolidation of our mortgage loan production office in Richland County, South Carolina to other existing Bank offices that resulted in a write-down of the real estate of $282 thousand during the fourth quarter of 2019 based on the appraised value of the real estate less estimated selling costs.
Note 8-GOODWILL, CORE DEPOSIT INTANGIBLE AND OTHER ASSETS
Intangible assets (excluding goodwill) consisted of the following:
December 31,
(Dollars in thousands)
Core deposit premiums, gross carrying amount
$ 3,358
$ 3,358
$ 3,358
Other intangibles	
Gross carrying amount
3,896
3,896
3,896
Accumulated amortization	
(2,776 )
(2,413 )
(1,890
)
Net	
$ 1,120
$ 1,483
$ 2,006
Based on the core deposit and other intangibles as of December 31, 2020, the following table presents the aggregate amortization expense for each of the succeeding years ending December 31:
(Dollars in thousands) Amount
$ 201
2025 and thereafter
Total $ 1,120
Amortization of the intangibles amounted to $363 thousand, $523 thousand and $563 thousand for the years ended December 31, 2020, 2019 and 2018, respectively.
On October 20, 2017, we completed our acquisition of Cornerstone and its wholly-owned subsidiary, Cornerstone National Bank. Under the terms of the merger agreement, Cornerstone shareholders received either $11.00 in cash or 0.54 shares of the Company’s common stock, or a combination thereof, for each Cornerstone share they owned immediately prior to the merger, subject to the limitation that 70% of the outstanding shares of Cornerstone common stock were exchanged for shares of the Company’s common stock and 30% of the outstanding shares of Cornerstone were exchanged for cash. The Company issued 877,384 shares of common stock in the merger. Total intangibles, including goodwill of $9.5 million and a core deposit premium of $1.8 million, were recorded in conjunction with the acquisition.
On February 1, 2014, we completed our acquisition of Savannah River Financial Corp. (“Savannah River”) and its wholly-owned subsidiary, Savannah River Banking Company. Under the terms of the merger agreement, Savannah River shareholders received either $11.00 in cash or 1.0618 shares of the Company’s common stock, or a combination thereof, for each Savannah River share they owned immediately prior to the merger, subject to the limitation that 60% of the outstanding shares of Savannah River common stock were exchanged for cash and 40% of the outstanding shares of Savannah River common stock were exchanged for shares of the Company’s common stock. The Company issued 1,274,200 shares of common stock in connection with the merger. Total intangibles, including goodwill of $4.5 million and a core deposit premium of $1.2 million, were recorded in conjunction with the acquisition.
On September 26, 2014, the Bank completed its acquisition and assumption of approximately $40 million in deposits and $8.7 million in loans from First South Bank. This represented all of the deposits and a portion of the loans at First South Bank’s Columbia, South Carolina banking office located at 1333 Main Street. The Bank paid a premium of $714 thousand for the deposits and loans acquired. The deposits and loans from First South Bank have been consolidated into the Bank’s branch located at 1213 Lady Street, Columbia, South Carolina. The premium paid of $714 thousand plus fair value adjustments recorded on loans and deposits acquired resulted in a core deposit intangible of $365.9 thousand and other identifiable intangible assets in the amount of $538.6 thousand being recorded related to this transaction.
As a result of the acquisition of Palmetto South Mortgage Corp. on July 31, 2011, we have recorded goodwill in the amount of $571 thousand.
Total goodwill from acquisitions at December 31, 2020 and 2019 totaled $14.6 million. This amount is made up of the Cornerstone, Savannah River, and Palmetto South Mortgage Corporation acquisitions. The goodwill is tested for impairment annually having identified none as of December 31, 2020 or 2019.
Bank-owned life insurance provides benefits to various bank officers. The carrying value of all existing policies at December 31, 2020 and 2019 was $27.7 million and $28.0 million, respectively.
Note 9-OTHER REAL ESTATE OWNED
The following summarizes the activity in the other real estate owned for the years ended December 31, 2020 and 2019.
December 31,
(In thousands)
Balance-beginning of year	
$ 1,410
$ 1,460
Additions-foreclosures	
-
Write-downs	
(128)
-
Sales	
(202)
(50 )
Balance, end of year	
$ 1,194
$ 1,410
Note 10-DEPOSITS
The Company’s total deposits are comprised of the following at the dates indicated:
December 31,
December 31,
(Dollars in thousands)
Non-interest bearing deposits	
$ 385,511
$ 289,829
Interest bearing demand deposits and money market accounts	
520,205
423,256
Savings	
123,032
104,456
Time deposits	
160,665
170,660
Total deposits	
$ 1,189,413
$ 988,201
At December 31, 2020, the scheduled maturities of time deposits are as follows:
(Dollars in thousands)
$ 113,819
30,413
9,924
3,018
3,491
Time Deposits
$ 160,665
Interest paid on time deposits of $100 thousand or more totaled $993 thousand, $1.1 million, and $717 thousand in 2020, 2019, and 2018, respectively.
Time deposits that meet or exceed the FDIC insurance limit of $250 thousand at year end 2020 and 2019 were $28.6 million and $32.2 million, respectively.
Deposits from directors and executive officers and their related interests at December 31, 2020 and 2019 amounted to approximately $36.3 million and $5.4 million, respectively.
The amount of overdrafts classified as loans at December 31, 2020 and 2019 were $61 thousand and $143 thousand, respectively.
Note 11-SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND OTHER BORROWED MONEY
Securities sold under agreements to repurchase generally mature within one day to four days from the transaction date. The weighted average interest rate at December 31, 2020 and 2019 was 0.20% and 0.84%, respectively. The maximum month-end balance during 2020 and 2019 was $73.0 million and $36.7 million, respectively. The average outstanding balance during the years ended December 31, 2020 and 2019 amounted to $49.5 million and $34.2 million, respectively, with an average rate paid of 0.38% and 1.12%, respectively. Securities sold under agreements to repurchase are collateralized by securities with fair market values exceeding the total balance of the agreement.
At December 31, 2020 and 2019, the Company had unused short-term lines of credit totaling $70.0 million and $30.0 million respectively.
Note 12-ADVANCES FROM FEDERAL HOME LOAN BANK
Advances from the FHLB at December 31, 2020 and 2019, consisted of the following:
December 31,
(In thousands)
Maturing
Amount
Rate
Amount
Rate
-
-%
1.00%
As collateral for its advances, the Company has pledged in the form of blanket liens, eligible loans, in the amount of $22.1 million at December 31, 2020. Securities have been pledged as collateral for advances in the amount of $3.9 million as of December 31, 2020. As collateral for its advances, the Company has pledged in the form of blanket liens, eligible loans, in the amount of $25.9 million at December 31, 2019. Securities have been pledged as collateral for advances in the amount of $5.1 million as of December 31, 2019. Advances are subject to prepayment penalties. The average advances during 2020 and 2019 were $2.0 million and $3.2 million, respectively. The average interest rate for 2020 and 2019 was 0.39% and 2.39%, respectively. The maximum outstanding amount at any month end was $15.0 million and $17.2 million for 2020 and 2019, respectively.
During the years ended December 31, 2020 and December 31, 2019 there were no advances that were prepaid. Accordingly, no losses were realized on early extinguishment.
Note 13-JUNIOR SUBORDINATED DEBT
On September 16, 2004, FCC Capital Trust I (“Trust I”), a wholly owned unconsolidated subsidiary of the Company, issued and sold floating rate securities having an aggregate liquidation amount of $15.0 million. The Trust I securities accrue and pay distributions quarterly at a rate per annum equal to LIBOR plus 257 basis points. The distributions are cumulative and payable in arrears. The Company has the right, subject to events of default, to defer payments of interest on the Trust I securities for a period not to exceed 20 consecutive quarters, provided no extension can extend beyond the maturity date of September 16, 2034. The Trust I securities are mandatorily redeemable upon maturity at September 16, 2034. If the Trust I securities are redeemed on or after September 16, 2009, the redemption price will be 100% of the principal amount plus accrued and unpaid interest. The Trust I security were eligible to be redeemed in whole but not in part, at any time prior to September 16, 2009 following an occurrence of a tax event, a capital treatment event or an investment company event. Currently, these securities qualify under risk-based capital guidelines as Tier 1 capital, subject to certain limitations. The Company has no current intention to exercise its right to defer payments of interest on the Trust I securities. In 2015, the Company redeemed $500 thousand of this Trust I security. This resulted in a gain of $130 thousand received in 2015.
Note 14-LEASES
Effective January 1, 2019, the Company adopted ASC 842 “Leases”. Currently, the Company has operating leases on three of its facilities that are accounted for under this standard. As a result of this standard, the Company recognized a right-of-use asset and a lease liability of $3.1 million, respectively. During the twelve-month period ended December 31, 2020, the Company made cash payments in the amount of $292.2 thousand for operating leases and the lease liability was reduced by $152.1 thousand. The lease expense recognized during the twelve-month period ended December 31, 2020 amounted to $323.0 thousand. The weighted average remaining lease term as of December 31, 2020 is 15.78 years and the weighted average discount rate used is 4.21%. The following table shows future undiscounted lease payments for operating leases with initial terms of one year or more as of December 31, 2020 are as follow:
(Dollars in thousands)
$
Theraeafter	
2,978
Total undiscounted lease payments
$ 4,392
Less effect of discounting
(1,278 )
Present value of estimated lease payments (lease liability)
3,114
Note 15-INCOME TAXES
Income tax expense for the years ended December 31, 2020, 2019 and 2018 consists of the following:
Year ended December 31
(Dollars in thousands)
Current
Federal	
$ 2,724
$ 2,299
$ 2,244
State	
Total
3,247
2,840
2,595
Deferred
Federal	
(751
)
State	
(34
)
-
-
Total
(785
)
Income tax expense	
$ 2,496
$ 2,858
$ 2,694
Reconciliation from expected federal tax expense to effective income tax expense for the periods indicated are as follows:
Year ended December 31
(Dollars in thousands)
Expected federal income tax expense	
$ 2,645
$ 2,904
$ 2,924
State income tax net of federal benefit	
Tax exempt interest	
(316 )
(293 )
(353 )
Increase in cash surrender value life insurance	
(153 )
(144 )
(152 )
Valuation allowance 	
Life Insurance Proceeds
(65
)
-
-
Excess tax benefit of stock compensation	
(1 )
(56 )
(12 )
Other	
(32 )
(32 )
(58 )
Income tax expense
$ 2,496
$ 2,858
$ 2,694
The following is a summary of the tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities:
December 31,
(Dollars in thousands)
Assets:
Allowance for loan losses	
$ 2,235
$ 1,426
Excess tax basis of deductible intangible assets	
Excess tax basis of assets acquired	
-
Net operating loss carry forward	
Compensation expense deferred for tax purposes	
1,125
1,054
Deferred loss on other-than-temporary-impairment charges	
Tax credit carry-forwards	
Other	
Total deferred tax asset	
4,987
4,011
Valuation reserve	
Total deferred tax asset net of valuation reserve	
4,130
3,186
Liabilities:
Tax depreciation in excess of book depreciation	
Excess financial reporting basis of assets acquired	
1,005
1,057
Unrealized gain on available-for-sale securities	
3,149
Total deferred tax liabilities	
4,668
2,171
Net deferred tax asset / (liability) recognized	
$ (538
)
$ 1,015
At December 31, 2020 the Company has approximately $19.2 million in State net operating losses. A valuation allowance is established to fully offset the deferred tax asset related to these net operating losses of the holding company. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which the temporary differences become deductible. Management considers the scheduled reversal of deferred income tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Additional amounts of these deferred tax assets considered to be realizable could be reduced in the near term if estimates of future taxable income during the carry forward period are reduced. The net deferred asset is included in other assets on the consolidated balance sheets.
A portion of the change in the net deferred tax asset relates to unrealized gains and losses on securities available-for-sale. The change in the tax expense related to the change in unrealized gains on these securities of $2.3 million has been recorded directly to shareholders’ equity. The balance in the change in net deferred tax asset results from the current period deferred tax benefit of $785 thousand. At December 31, 2020, the Company had no federal net operating loss carryforward.
Tax returns for 2017 and subsequent years are subject to examination by taxing authorities.
As of December 31, 2020, the Company had no material unrecognized tax benefits or accrued interest and penalties. It is the Company’s policy to account for interest and penalties accrued relative to unrecognized tax benefits as a component of income tax expense.
Note 16-COMMITMENTS, CONCENTRATIONS OF CREDIT RISK AND CONTINGENCIES
The Bank is party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated balance sheets.
The Bank’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual amount of these instruments. The Bank uses the same credit policies in making commitments as for on-balance sheet instruments. At December 31, 2020 and 2019, the Bank had commitments to extend credit including lines of credit of $142.6 million and $135.7 million, respectively.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require a payment of a fee. Since commitments may expire without being drawn upon, the total commitments do not necessarily represent future cash requirements. The Bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management’s credit evaluation of the party. Collateral held varies but may include inventory, property and equipment, residential real estate and income producing commercial properties.
The primary market areas served by the Bank include the Midlands Region of South Carolina to include Lexington, Richland, Newberry and Kershaw Counties; the Central Savannah River Region include Aiken County, South Carolina and Richmond and Columbia Counties in Georgia. With the acquisition of Cornerstone, we also serve Greenville, Anderson and Pickens Counties in South Carolina which we refer to as the Upstate Region. Management closely monitors its credit concentrations and attempts to diversify the portfolio within its primary market area. The Company considers concentrations of credit risk to exist when pursuant to regulatory guidelines, the amounts loaned to multiple borrowers engaged in similar business activities represent 25% or more of the Bank’s risk based capital, or approximately $32.7 million. Based on this criteria, the Bank had five such concentrations at December 31, 2020, including $246.7 million (29.2% of total loans) to lessors of non-residential property, $113.6 million (13.5% of total loans) to lessors of residential properties, $56.8 million (6.7% of total loans) to private households, $45.5 million (5.4% of total loans) to other activities related to real estate and $45.3 million to religious organizations (5.4% of total loans). As reflected above, lessors of non-residential properties and lessors of residential buildings equate to approximately 188.6% and 86.9% of total regulatory capital, respectively. The risk in these portfolios is diversified over a large number of loans approximately 451 for lessors of non-residential properties and 436 loans for lessors of residential buildings. Commercial real estate loans and commercial construction loans represent $656.6 million, or 77.8%, of the portfolio. Approximately $241.8 million, or 36.8%, of the total commercial real estate loans are owner occupied, which can tend to reduce the risk associated with these credits. Although the Bank’s loan portfolio, as well as existing commitments, reflects the diversity of its market areas, a substantial portion of its debtor’s ability to honor their contracts is dependent upon the economic stability of these areas.
The nature of the business of the Company and Bank may at times result in a certain amount of litigation. The Bank is involved in certain litigation that is considered incidental to the normal conduct of business. Management believes that the liabilities, if any, resulting from the proceedings will not have a material adverse effect on the consolidated financial position, consolidated results of operations or consolidated cash flows of the Company.
Note 17-REVENUE RECOGNITION
In accordance with Topic 606, revenues are recognized when control of promised goods or services is transferred to customers in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of Topic 606, the Company performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the Company satisfies a performance obligation.
The Company only applies the five-step model to contracts when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, once the contract is determined to be within the scope of Topic 606, the Company assesses the goods or services that are promised within each contract and identifies those that contain performance obligations, and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.
Deposit Service Charges: The Bank earns fees from its deposit customers for account maintenance, transaction-based and overdraft services. Account maintenance fees consist primarily of account fees and analyzed account fees charged on deposit accounts on a monthly basis. The performance obligation is satisfied and the fees are recognized on a monthly basis as the service period is completed. Transaction-based fees on deposits accounts are charged to deposit customers for specific services provided to the customer, such as non-sufficient funds fees, overdraft fees, and wire fees. The performance obligation is completed as the transaction occurs and the fees are recognized at the time each specific service is provided to the customer.
Check Card Fee Income: Check card fee income represents fees earned when a debit card issued by the Bank is used. The Bank earns interchange fees from debit cardholder transactions through the Mastercard payment network. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided to the cardholder. The performance obligation is satisfied and the fees are earned when the cost of the transaction is charged to the card. Certain expenses directly associated with the debit card are recorded on a net basis with the fee income. This income is recognized within “Other” below.
Gains/Losses on OREO Sales: Gains/losses on the sale of OREO are included in non-interest income and are generally recognized when the performance obligation is complete. This is typically at delivery of control over the property to the buyer at the time of each real estate closing.
(Dollars in thousands)
December 31,
December 31,
Non-Interest Income
Deposit service charges
$ 1,121
$ 1,649
Mortgage banking income(1)
5,557
4,555
Investment advisory fees and non-deposit commissions(1)
2,720
2,021
Gain (loss) on sale of securities(1)
Gain (loss) on sale of other assets
(3 )
Write-down of premises held for sale(1)
-
(282 )
Non-recurring BOLI income
-
Other(2)
3,814
3,660
Total non-interest income
13,769
11,736
(1) Not within the scope of ASC 606
(2) Includes Check Card Fee income discussed above. No other items are within the scope of ASC 606.
Note 18-OTHER EXPENSES
A summary of the components of other non-interest expense is as follows:
Year ended December 31,
(Dollars in thousands)
ATM/debit card, bill payment and data processing	
$ 3,123
$ 2,834
$ 2,300
Supplies	
Telephone	
Courier	
Correspondent services	
Insurance	
Postage	
Loss on limited partnership interest	
-
Director fees	
Legal and Professional fees	
1,058
Shareholder expense	
Other	
1,554
1,718
1,704
Total
$ 7,551
$ 7,392
$ 6,760
Note 19-STOCK OPTIONS, RESTRICTED STOCK, AND DEFERRED COMPENSATION
The Company has adopted a stock option plan whereby shares have been reserved for issuance by the Company upon the grant of stock options or restricted stock awards. At December 31, 2020 and 2019, the Company had 94,910 and 111,049 shares, respectively, reserved for future grants. The 350,000 shares reserved were approved by shareholders at the 2011 annual meeting. The plan provides for the grant of options to key employees and directors as determined by a stock option committee made up of at least two members of the board of directors. Options are exercisable for a period of ten years from date of grant.
There were no stock options outstanding and exercisable as of December 31, 2020, December 31, 2019 and December 31, 2018.
The table below summarizes the common shares of restricted stock granted to each non-employee director in connection with their overall compensation plan in 2020, 2019 and 2018.
Restricted shares granted
Year
Total
per Director
Value
per share
Date shares
vest
2,662
$ 20.64
1/1/21
2,976
$ 20.18
1/1/20
2,990
$ 21.72
1/1/19
In 2020, 2019 and 2018, 11,448, 8,418 and 11,447 restricted shares, respectively, were issued to executive officers in connection with the Bank’s incentive compensation plan. The related compensation expense was $257.2 thousand, $143.9 thousand, and $161.0 thousand for the years ended December 31, 2020, 2019, and 2018 respectively. The shares were valued at $20.64, $20.18 and $21.72 per share/unit, respectively. Restricted shares/units granted to executive officers under the incentive compensation plan cliff vest over a three-year period from the date of grant. The assumptions used in the calculation of these amounts for the awards granted in 2020, 2019 and 2018 are based on the price of the Company’s common stock on the grant date.
In 2014, 29,228 restricted shares were issued to senior officers of Savannah River and retained by the Company in connection with the merger. The shares were valued at $10.55 per share. Restricted shares granted to these officers vested in three equal annual installments beginning on January 31, 2015.
Warrants to purchase 37,130 shares at $5.90 per share were issued in connection with the issuing of subordinated debt on November 15, 2011 with an expiration date of December 16, 2019. All warrants were exercised by the expiration date. The related subordinated debt was paid off in November 2012.
In 2006, the Company established a Non-Employee Director Deferred Compensation Plan, whereby a director may elect to defer all or any part of annual retainer and monthly meeting fees payable with respect to service on the board of directors or a committee of the board. Units of common stock are credited to the director’s account at the time compensation is earned. The non-employee director’s account balance is distributed by issuance of common stock at the time of retirement or resignation from the board of directors. At December 31, 2020 and 2019, there were 88,412 and 97,104 units in the plan, respectively. The accrued liability related to the plan at December 31, 2020 and 2019 amounted to $1.1 million and $1.1 million, respectively, and is included in “Other liabilities” on the balance sheet.
Note 20-EMPLOYEE BENEFIT PLANS
The Company maintains a 401(k) plan, which covers substantially all employees. Participants may contribute up to the maximum allowed by the regulations. During the years ended December 31, 2020, 2019 and 2018, the plan expense amounted to $552 thousand, $528 thousand and $484 thousand, respectively. The Company matches 100% of the employee’s contribution up to 3% and 50% of the employee’s contribution on the next 2% of the employee’s contribution.
The Company acquired various single premium life insurance policies from DutchFork Bankshares that are used to indirectly fund fringe benefits to certain employees and officers. A salary continuation plan was established payable for two key individuals upon attainment of age 63. The plan provides for monthly benefits of $2,500 each for seventeen years for such individuals.
Other plans acquired were supplemental life insurance covering certain key employees. In 2006, the Company established a salary continuation plan which covers six additional key officers. In 2015, the Company established a salary continuation plan to cover additional key employees. In 2017 and 2019 the Company established salary continuation plans for two additional key officers. The plans provide for monthly benefits upon normal retirement age of varying amounts for a period of fifteen years. Single premium life insurance policies were purchased in 2006, 2015, 2017 and 2019 in the amount of $3.5 million, $5.2 million, $1.5 million and $1.6 million, respectively. These policies are designed to offset the funding of these benefits. No new policies were issued in 2020.
The cash surrender value at December 31, 2020 and 2019 of all bank owned life insurance was $27.7 million and $28.0 million, respectively. Expenses accrued for the anticipated benefits under the salary continuation plans for the year ended December 31, 2020, 2019 and 2018 amounted to $470 thousand, $472 thousand, and $460 thousand, respectively.
Note 21-EARNINGS PER COMMON SHARE
The following reconciles the numerator and denominator of the basic and diluted earnings per common share computation:
Year ended December 31,
(Amounts in thousands)
Numerator (Included in basic and diluted earnings per share)	 $ 10,099 $ 10,971 $ 11,229
Denominator
Weighted average common shares outstanding for:
Basic earnings per common share	 7,446 7,510 7,581
Dilutive securities:
Deferred compensation	
Warrants-Treasury stock method	 -
Diluted common shares outstanding	 7,482 7,588 7,730
Basic earnings per common share $ 1.36 $ 1.46 $ 1.48
Diluted earnings per common share $ 1.35 $ 1.45 $ 1.45
The average market price used in calculating assumed number of shares	 $ 15.89 $ 19.32 $ 23.26
On December 16, 2011 there were 107,500 warrants issued in connection with the issuance of $2.5 million in subordinated debt (See Note 17). As shown above, the warrants were dilutive for the periods ended December 31, 2020, December 31, 2019 and December 31, 2018. As of December 31, 2020 there were no warrants outstanding.
Note 22-SHAREHOLDERS’ EQUITY, CAPITAL REQUIREMENTS AND DIVIDEND RESTRICTIONS
The Company and Bank are subject to various federal and state regulatory requirements, including regulatory capital requirements. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary, actions that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and Bank must meet specific guidelines that involve quantitative measures of the Company’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Company and Bank capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weighting, and other factors. The Bank is required to maintain minimum Tier 1 capital, Common Equity Tier I (CET1) capital, total risked based capital and Tier 1 leverage ratios of 6%, 4.5%, 8% and 4%, respectively.
Regulatory capital rules adopted in July 2013 and fully-phased in as of January 1, 2019, which we refer to Basel III, impose minimum capital requirements for bank holding companies and banks. The Basel III rules apply to all national and state banks and savings associations regardless of size and bank holding companies and savings and loan holding companies other than “small bank holding companies,” generally holding companies with consolidated assets of less than $3 billion (such as the Company). In order to avoid restrictions on capital distributions or discretionary bonus payments to executives, a covered banking organization must maintain a “capital conservation buffer” on top of our minimum risk-based capital requirements. This buffer must consist solely of common equity Tier 1, but the buffer applies to all three measurements (common equity Tier 1, Tier 1 capital and total capital). The capital conservation buffer consists of an additional amount of CET1 equal to 2.5% of risk-weighted assets.
Based on the foregoing, as a small bank holding company, we are generally not subject to the capital requirements unless otherwise advised by the Federal Reserve; however, our Bank remains subject to the capital requirements.
On October 20, 2017, we completed our acquisition of Cornerstone and its wholly-owned subsidiary, Cornerstone National Bank. Under the terms of the merger agreement, Cornerstone shareholders received either $11.00 in cash or 0.54 shares of the Company’s common stock, or a combination thereof, for each Cornerstone share they owned immediately prior to the merger, subject to the limitation that 70% of the outstanding shares of Cornerstone common stock were exchanged for shares of the Company’s common stock and 30% of the outstanding shares of Cornerstone were exchanged for cash. The Company issued 877,384 shares of common stock in the merger.
The Bank exceeded the minimum regulatory capital ratios at December 31, 2020 and 2019, as set forth in the following table:
Schedule of actual capital amounts and ratios as well as minimum amounts for each regulatory defined category for the bank and the company
(In thousands)
Minimum
Required
Amount
%
Actual
Amount
%
Excess
Amount
%
The Bank(1)(2):
December 31, 2020
Risk Based Capital
Tier
$ 56,288
6.0%
$ 120,385
12.8%
$ 64,097
6.8%
Total Capital	
$ 75,051
8.0%
$ 130,774
13.9%
$ 55,723
5.9%
CET1	
$ 42,216
4.5%
$ 120,385
12.8%
$ 78,169
8.3%
Tier 1 Leverage	
$ 54,492
4.0%
$ 120,385
8.8%
$ 65,893
4.8%
December 31, 2019
Risk Based Capital
Tier 1	
$ 50,224
6.0%
$ 112,754
13.5%
$ 62,530
7.5%
Total Capital	
$ 66,965
8.0%
$ 119,381
14.3%
$ 52,416
6.3%
CET1	
$ 37,668
4.5%
$ 112,754
13.5%
$ 75,086
9.0%
Tier 1 Leverage	
$ 45,246
4.0%
$ 112,754
10.0%
$ 67,508
6.0%
(1) As a small bank holding company, we are generally not subject to the capital requirements unless otherwise advised by the Federal Reserve.
(2) Ratios do not include the capital conservation buffer of 2.5%.
The Federal Reserve has issued a policy statement regarding the payment of dividends by bank holding companies. In general, the Federal Reserve’s policies provide that dividends should be paid only out of current earnings and only if the prospective rate of earnings retention by the bank holding company appears consistent with the organization’s capital needs asset quality and overall financial condition. The Federal Reserve’s policies also require that a bank holding company serve as a source of financial strength to its subsidiary banks by standing ready to use available resources to provide adequate capital funds to those banks during periods of financial stress or adversity and by maintaining the financial flexibility and capital-raising capacity to obtain additional resources for assisting its subsidiary banks where necessary. In addition, under the prompt corrective action regulations, the ability of a bank holding company to pay dividends may be restricted if a subsidiary bank becomes undercapitalized. These regulatory policies could affect the ability of the Company to pay dividends or otherwise engage in capital distributions.
The Company’s principal source of cash flow, including cash flow to pay dividends to its shareholders, is dividends it receives from the Bank. Statutory and regulatory limitations apply to the Bank’s payment of dividends to the Company. As a South Carolina chartered bank, the Bank is subject to limitations on the amount of dividends that it is permitted to pay. Unless otherwise instructed by the S.C. Board, the Bank is generally permitted under South Carolina State banking regulations to pay cash dividends of up to 100% of net income in any calendar year without obtaining the prior approval of the S.C. Board. The FDIC also has the authority under federal law to enjoin a bank from engaging in what in its opinion constitutes an unsafe or unsound practice in conducting its business, including the payment of a dividend under certain circumstances.
If the Bank is not permitted to pay cash dividends to the Company, it is unlikely that we would be able to pay cash dividends on our common stock. Moreover, holders of the Company’s common stock are entitled to receive dividends only when, and if declared by the board of directors. Although the Company has historically paid cash dividends on its common stock, the Company is not required to do so and the board of directors could reduce or eliminate our common stock dividend in the future.
Note 23-PARENT COMPANY FINANCIAL INFORMATION
The balance sheets, statements of operations and cash flows for First Community Corporation (Parent Only) follow:
Condensed Balance Sheets
At December 31,
(Dollars in thousands)
Assets:
Cash on deposit	
$ 3,357
$ 2,987
Interest bearing deposits	
-
-
Securities purchased under agreement to resell	
-
-
Investment in bank subsidiary	
147,140
131,584
Other	
1,046
Total assets	
$ 151,543
$ 135,380
Liabilities:
Junior subordinated debentures	
$ 14,964
$ 14,964
Other	
Total liabilities	
15,206
15,186
Shareholders’ equity	
136,337
120,194
Total liabilities and shareholders’ equity	
$ 151,543
$ 135,380
Condensed Statements of Operations
Year ended December 31,
(Dollars in thousands)
Income:
Interest and dividend income	
$
$
$
Equity in undistributed earnings of subsidiary	
6,759
4,776
8,348
Dividend income from bank subsidiary	
4,158
7,057
3,721
Total income	
10,934
11,857
12,092
Expenses:
Interest expense	
Other	
Total expense	
1,055
1,141
1,104
Income before taxes	
9,879
10,716
10,988
Income tax benefit	
(219 )
(255 )
(241 )
Net income	
$ 10,099
$ 10,971
$ 11,229
Condensed Statements of Cash Flows
Year ended December 31,
(Dollars in thousands)
Cash flows from operating activities:
Net income	
$ 10,099
$ 10,971
$ 11,229
Adjustments to reconcile net income to net cash provided by operating activities
Equity in undistributed earnings of subsidiary	
(6,759 )
(4,776 )
(8,348 )
Other-net	
Net cash provided by operating activities	
3,382
6,517
2,893
Cash flows from investing activities:
Proceeds from sale of federal funds	
-
-
Net cash provided by investing activities	
-
-
Cash flows from financing activities:
Dividends paid: common stock	
(3,573 )
(3,306 )
(3,033 )
Repurchase of common stock
-
(5,636 )
-
Proceeds from issuance of common stock	
-
-
Dividend Reinvestment Plan
Issuance of restricted stock
-
(75 )
-
Restricted shares surrendered	
(15 )
(159 )
(57 )
Deferred compensation shares	
Net cash used in financing activities	
(3,012 )
(8,341 )
(2,709 )
Increase (decrease) in cash and cash equivalents	
(1,824 )
Cash and cash equivalents at beginning of year	
2,987
4,811
4,498
Cash and cash equivalents at end of year	
$ 3,357
$ 2,987
$ 4,811
Note 24-SUBSEQUENT EVENTS
Subsequent events are events or transactions that occur after the balance sheet date but before financial statements are issued. Recognized subsequent events are events or transactions that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements. Non-recognized subsequent events are events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after that date. Management has reviewed events occurring through the date the financial statements were available to be issued and no subsequent events occurred requiring accrual or disclosure.
Note 25-QUARTERLY FINANCIAL DATA (UNAUDITED)
The following provides quarterly financial data for 2020, 2019 and 2018 (dollars in thousands, except per share amounts).
Fourth
Quarter
Third
Quarter
Second
Quarter
First
Quarter
Interest income	
$ 11,426
$ 10,976
$ 10,666
$ 10,710
Net interest income	
10,687
10,176
9,743
9,417
Provision for loan losses	
1,062
1,250
1,075
Gain on sale of securities	
-
-
-
Income before income taxes	
4,364
3,250
2,749
2,232
Net income	
3,436
2,652
2,217
1,794
Net income available to common shareholders	
3,436
2,652
2,217
1,794
Net income per share, basic	
$ 0.46
$ 0.36
$ 0.30
$ 0.24
Net income per share, diluted	
$ 0.46
$ 0.35
$ 0.30
$ 0.24
Fourth
Quarter
Third
Quarter
Second
Quarter
First
Quarter
Interest income	
$ 10,786
$ 10,864
$ 10,606
$ 10,374
Net interest income	
9,360
9,353
9,116
9,020
Provision for loan losses	
-
Gain on sale of securities	
-
(29 )
Income before income taxes	
3,425
3,651
3,653
3,101
Net income	
2,697
2,898
2,881
2,495
Net income available to common shareholders	
2,698
2,898
2,881
2,495
Net income per share, basic	
$ 0.36
$ 0.39
$ 0.38
$ 0.33
Net income per share, diluted	
$ 0.36
$ 0.39
$ 0.37
$ 0.33
Fourth
Quarter
Third
Quarter
Second
Quarter
First
Quarter
Interest income	
$ 10,595
$ 9,984
$ 9,819
$ 9,331
Net interest income	
9,392
8,882
8,940
8,534
Provision for loan losses	
Gain on sale of securities	
(332 )
-
(104 )
Income before income taxes	
3,389
3,569
3,596
3,369
Net income	
2,686
2,833
3,001
2,709
Net income available to common shareholders	
2,686
2,833
3,001
2,709
Net income per share, basic	
$ 0.35
$ 0.37
$ 0.40
$ 0.36
Net income per share, diluted	
$ 0.35
$ 0.37
$ 0.39
$ 0.35
Note 26-REPORTABLE SEGMENTS
The Company’s reportable segments represent the distinct product lines the Company offers and are viewed separately for strategic planning by management. The Company has four reportable segments:
· Commercial and retail banking: The Company’s primary business is to provide deposit and lending products and services to its commercial and retail customers.
· Mortgage banking: This segment provides mortgage origination services for loans that will be sold to investors in the secondary market.
· Investment advisory and non-deposit: This segment provides investment advisory services and non-deposit products.
· Corporate: This segment includes the parent company financial information, including interest on parent company debt and dividend income received from First Community Bank (the “Bank”).
The following tables present selected financial information for the Company’s reportable business segments for the years ended December 31, 2020, December 31, 2019 and December 31, 2018.
Year ended December 31, 2020
(Dollars in thousands)
Commercial
and Retail
Banking
Mortgage
Banking
Investment
advisory and
non-deposit
Corporate
Eliminations
Consolidated
Dividend and Interest Income	
$ 42,024
$ 1,737
$ -
$ 4,175
$ (4,158 )
$ 43,778
Interest expense	
3,219
-
-
-
3,755
Net interest income	
$ 38,805
$ 1,737
$ -
$ 3,639
$ (4,158 )
$ 40,023
Provision for loan losses	
3,663
-
-
-
-
3,663
Noninterest income	
5,492
5,557
2,720
-
-
13,769
Noninterest expense	
30,113
4,993
1,911
-
37,534
Net income before taxes	
$ 10,521
$ 2,301
$
$ 3,121
$ (4,158 )
$ 12,595
Income tax expense (benefit)	
2,715
-
-
(219 )
-
2,496
Net income	
$ 7,806
$ 2,301
$
$ 3,340
$ (4,158 )
$ 10,099
Year ended December 31, 2019
(Dollars in thousands)
Commercial
and Retail
Banking
Mortgage
Banking
Investment
advisory and
non-deposit
Corporate
Eliminations
Consolidated
Dividend and Interest Income	
$ 41,545
$ 1,061
$ -
$ 7,081
$ (7,057 )
$ 42,630
Interest expense	
5,021
-
-
-
5,781
Net interest income	
$ 36,524
$ 1,061
$ -
$ 6,321
$ (7,057 )
$ 36,849
Provision for loan losses	
-
-
-
-
Noninterest income	
5,160
4,555
2,021
-
-
11,736
Noninterest expense	
28,732
3,771
1,733
-
34,617
Net income before taxes	
$ 12,813
$ 1,845
$
$ 5,940
$ (7,057 )
$ 13,829
Income tax expense (benefit)	
3,114
-
-
(256 )
-
2,858
Net income	
$ 9,699
$ 1,845
$
$ 6,196
$ (7,057 )
$ 10,971
Year ended December 31, 2018
(Dollars in thousands)
Commercial
and Retail
Banking
Mortgage
Banking
Investment
advisory and
non-deposit
Corporate
Eliminations
Consolidated
Dividend and Interest Income	
$ 38,875
$
$ -
$ 3,745
$ (3,721 )
$ 39,729
Interest expense	
3,263
-
-
-
3,981
Net interest income	
$ 35,612
$
$ -
$ 3,027
$ (3,721 )
$ 35,748
Provision for loan losses	
-
-
-
-
Noninterest income	
5,066
3,895
1,683
-
-
10,644
Noninterest expense	
27,095
3,242
1,400
-
32,123
Net income before taxes	
$ 13,237
$ 1,483
$
$ 2,641
$ (3,721 )
$ 13,923
Income tax expense (benefit)	
2,935
-
-
(241 )
-
2,694
Net income	
$ 10,302
$ 1,483
$
$ 2,882
$ (3,721 )
$ 11,229
(Dollars in thousands)
Commercial
and Retail
Banking
Mortgage
Banking
Investment
advisory and
non-deposit
Corporate
Eliminations
Consolidated
Total Assets as of
December 31, 2020	
$ 1,335,320
$ 59,372
$
$ 140,256
$ (139,568 )
$ 1,395,382
Total Assets as of
December 31, 2019	
$ 1,143,934
$ 25,673
$
$ 132,890
$ (132,220 )
$ 1,170,279

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.

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ITEM 9A. CONTROLS AND PROCEDURES
Item 9A. Controls and Procedures.
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2020, in accordance with Rule 13a-15 of the Exchange Act. We applied our judgment in the process of reviewing these controls and procedures, which, by their nature, can provide only reasonable assurance regarding our control objectives. Based upon that evaluation, our Chief Executive Officer and the Chief Financial Officer concluded that our disclosure controls and procedures as of December 31, 2020, were effective to provide reasonable assurance regarding our control objectives.
Management’s Report on Internal Controls over Financial Reporting
We are responsible for establishing and maintaining adequate internal controls over financial reporting. Management’s assessment of the effectiveness of our internal control over financial reporting as of December 31, 2020.
Changes in Internal Controls
There were no changes in our internal controls over financial reporting that occurred during our most recent fiscal quarter that materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

---

ITEM 9B. OTHER INFORMATION
Item 9B. Other Information.
None.
PART III

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Item 10. Directors, Executive Officers and Corporate Governance.
The information required to be disclosed by this item will be disclosed in our definitive proxy statement to be filed no later than 120 days after December 31, 2020 in connection with our 2021 annual meeting of shareholders. The information required by Item 10 is hereby incorporated by reference from our proxy statement for our 2021 annual meeting of shareholders to be held on May 19, 2021.
We have adopted a Code of Ethics that applies to our directors, executive officers (including our principal executive officer and principal financial officer) and employees in accordance with the Sarbanes-Oxley Corporate Responsibility Act of 2002. The Code of Ethics is available on our web site at www.firstcommunitysc.com. We will disclose any future amendments to, or waivers from, provisions of these ethics policies and standards on our website as promptly as practicable, as and to the extent required under NASDAQ Stock Market listing standards and applicable SEC rules.

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ITEM 11. EXECUTIVE COMPENSATION
Item 11. Executive Compensation.
The information required to be disclosed by this item will be disclosed in our definitive proxy statement to be filed no later than 120 days after December 31, 2020 in connection with our 2021 annual meeting of shareholders. The information required by Item 11 is hereby incorporated by reference from our proxy statement for our 2021 annual meeting of shareholders to be held on May 19, 2021.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters.
There are no outstanding options as of December 31, 2020.
The additional information required to be disclosed by this item will be disclosed in our definitive proxy statement to be filed no later than 120 days after December 31, 2020 in connection with our 2021 annual meeting of shareholders. The information required by this Item 12 is set forth under “Security Ownership of Certain Beneficial Owners and Management” and hereby incorporated by reference from our proxy statement for our 2021 annual meeting of shareholders to be held on May 19, 2021.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information required to be disclosed by this item will be disclosed in our definitive proxy statement to be filed no later than 120 days after December 31, 2020 in connection with our 2021 annual meeting of shareholders. The information required by Item 13 is hereby incorporated by reference from our proxy statement for our 2021 annual meeting of shareholders to be held on May 19, 2021.

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Item 14. Principal Accountant Fees and Services.
The information required to be disclosed by this item will be disclosed in our definitive proxy statement to be filed no later than 120 days after December 31, 2020, in connection with our 2021 annual meeting of shareholders. The information required by Item 14 is hereby incorporated by reference from our proxy statement for our 2021 annual meeting of shareholders to be held on May 19, 2021.
PART IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Item 15. Exhibits, Financial Statement Schedules.
(a)(1) Financial Statements
The following consolidated financial statements are located in Item 8 of this report.
· Report of Independent Registered Public Accounting Firm
· Consolidated Balance Sheets as of December 31, 2020 and 2019
· Consolidated Statements of Income for the years ended December 31, 2020, 2019 and 2018
· Consolidated Statements of Comprehensive Income for the years ended December 31, 2020, 2019 and 2018
· Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2020, 2019 and 2018
· Consolidated Statements of Cash Flows for the years ended December 31, 2020, 2019 and 2018
· Notes to the Consolidated Financial Statements
(a)(2) Financial Statement Schedules
These schedules have been omitted because they are not required, are not applicable or have been included in our consolidated financial statements.
(a)(3) Exhibits
The following exhibits are required to be filed with this Report on Form 10-K by Item 601 of Regulation S-K.
Exhibit Index
Exhibit No.
Description of Exhibit
2.1
Agreement and Plan of Merger, dated as of April 11, 2017, by and between First Community Corporation and Cornerstone Bancorp (incorporated by reference to Exhibit 2.1 to the Company’s Form 8-K filed on April 12, 2017).
3.1
Restated Articles of Incorporation (incorporated by reference to Exhibit 3.1 to the Company’s Form 8-K filed on June 27, 2011).
3.2
Articles of Amendment (incorporated by reference to Exhibit 3.1 to the Company’s Form 8-K filed on May 23, 2019).
3.3
Amended and Restated Bylaws dated May 21, 2019 (incorporated by reference to Exhibit 3.1 to the Company’s Form 8-K filed on May 22, 2019).
4.1
Description of the Company’s Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1934 (incorporated by reference to Exhibit 4.1 of the Company’s Form 10-K for the period ended December 31, 2019).
10.4
Dividend Reinvestment Plan dated July 7, 2003 (incorporated by reference to Form S-3/D filed with the SEC on July 14, 2003, File No. 333-107009, April 20, 2011, File No. 333-173612, and January 31, 2019, File No. 333-229442).**
10.5
Form of Salary Continuation Agreement dated August 2, 2006 (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on August 3, 2006).**
10.6
Non-Employee Director Deferred Compensation Plan approved September 30, 2006 and Form of Deferred Compensation Agreement (incorporated by reference to Exhibits 10.1 and 10.2 to the Company’s Form 8-K filed on October 4, 2006).
10.7
Employment Agreement by and between Michael C. Crapps and First Community Corporation dated December 8, 2015 (incorporated by reference to Exhibit 10.7 of the Company’s Form 10-K for the period ended December 31, 2015).**
10.8
Employment Agreement by and between Joseph G. Sawyer and First Community Corporation dated December 8, 2015 (incorporated by reference to Exhibit 10.8 of the Company’s Form 10-K for the period ended December 31, 2015).**
10.9
Employment Agreement by and between David K. Proctor and First Community Corporation dated December 8, 2015 (incorporated by reference to Exhibit 10.9 of the Company’s Form 10-K for the period ended December 31, 2015).**
10.10
Employment Agreement by and between Robin D. Brown and First Community Corporation dated December 8, 2015 (incorporated by reference to Exhibit 10.10 of the Company’s Form 10-K for the period ended December 31, 2015).**
10.11
Employment Agreement by and between J. Ted Nissen and First Community Corporation dated December 8, 2015 (incorporated by reference to Exhibit 10.11 of the Company’s Form 10-K for the period ended December 31, 2015).**
10.12
Employment Agreement by and between Tanya A. Butts and First Community Corporation dated April 22, 2019 (incorporated by reference to Exhibit 10.12 of the Company’s Form 10-K for the period ended December 31, 2019).**
10.13
Employment Agreement by and between Donald Shawn Jordan and First Community Corporation dated November 12, 2019 (incorporated by reference to Exhibit 10.13 of the Company’s Form 10-K for the period ended December 31, 2019).**
10.14
First Community Corporation 2011 Stock Incentive Plan and Form of Stock Option Agreement and Form of Restricted Stock Agreement (incorporated by reference to Appendix A to the Company’s Proxy Statement filed on April 7, 2011).**
10.15
Amendment No. 1 to the First Community Corporation 2011 Stock Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on April 22, 2016).**
10.16
Form of Restricted Stock Unit Agreement (incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K filed on April 22, 2016).**
10.17
First Community Corporation Annual Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on December 16, 2019).**
21.1
Subsidiaries of the Company.*
23.1
Consent of Independent Registered Public Accounting Firm-Elliott Davis, LLC.*
24.1
Power of Attorney (contained on the signature page hereto).*
31.1
Rule 13a-14(a) Certification of the Chief Executive Officer.*
31.2
Rule 13a-14(a) Certification of the Chief Financial Officer.*
Section 1350 Certifications.*
The following materials from the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, formatted in eXtensible Business Reporting Language (XBRL): (i) the Consolidated Balance Sheets as December 31, 2020 and December 31, 2019; (ii) Consolidated Statements of Income for the years ended December 31, 2020, 2019 and 2018; (iii) Consolidated Statements of Comprehensive Income for the years ended December 31, 2020, 2019 and 2018; (iv) Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2020, 2019 and 2018; (v) Consolidated Statements of Cash Flows for the years ended December 31, 2020, 2019 and 2018; and (vi) Notes to the Consolidated Financial Statements.*
Cover Page Interactive Data File (embedded within the Inline XBRL document)*
The Exhibits listed above will be furnished to any security holder free of charge upon written request to the Corporate Secretary, First Community Corporation, 5455 Sunset Blvd., Lexington, South Carolina 29072.
* Filed herewith.
** Management contract or compensatory plan or arrangement required to be filed as an Exhibit to this Annual Report on Form 10-K.
(b) See listing of Exhibits above for an indication of exhibits filed herewith.
(c) Not applicable.