EDGAR 10-K Filing

Company CIK: 932781
Filing Year: 2022
Filename: 932781_10-K_2022_0001552781-22-000252.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, 2021, we had approximately $1.6 billion in assets, $863.7 million in loans, $1.4 billion in deposits, and $141.0 million in shareholders’ equity.
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 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 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 Cornerstone Bancorp 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, 2021 June 30, 2021 Market Share
Midlands Region 823,953 $ 26,809,851 $ 957,314 3.57 %
CSRA Region 539,254 $ 10,317,182 $ 179,071 1.74 %
Upstate Region 864,301 $ 22,725,822 $ 157,413 0.69 %
(1) Population data is 2022 total population from S&P Global Market Intelligence.
(2) All deposit data is based on June 30, 2021 data sourced from S&P Global Market Intelligence.
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 S&P Global Market Intelligence, 2022 median household incomes for each of the counties in the regions noted above were as follows:
Richland County, SC $ 58,822
Lexington County, SC $ 68,245
Newberry County, SC $ 49,798
Kershaw County SC $ 60,407
Greenville County, SC $ 70,306
Anderson County, SC $ 61,821
Pickens County SC $ 55,821
Aiken County SC $ 60,331
Richmond County, GA $ 48,465
Columbia County, GA $ 96,346
The county estimates noted above compare to 2022 statewide median household income estimates of $62,822 and $68,363 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, Lexington Medical Center, Southern Freight Lines, Lexington County School District One, and Medical Services of America. 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, NSA Augusta, Augusta University Hospitals, Richmond County School System, University Hospital, 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, Bon Secours St. Francis Health System, AnMed Health Medical Center, Clemson University, Duke Energy Corp., GE Power & Water, and the Greenville County Government. 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, 2021, the maximum amount we could lend to one borrower is $21.6 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, 2021, there were 24 financial institutions operating approximately 159 offices in the Midlands market, 20 financial institutions operating 96 branches in the CSRA market, and 35 financial institutions operating 224 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, 2021, the company had 247 full-time employees and three part-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 a 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. During 2021, we transitioned back to a more normal operating environment with the flexibility to make adjustments as needed.
Information about the 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 16, 2022, are as follows:
Name (age)
Position and Five Year History with Company
With the
Company
Since
Michael C. Crapps (63)
Chief Executive Officer and President, Director
John T. Nissen (60)
Chief Banking Officer; formerly Chief Commercial and Retail Banking Officer
Robin D. Brown (54)
Chief Human Resources and Marketing Officer
Tanya A. Butts (63)
Chief Operations Officer/Chief Risk Officer
John F. (Jack) Walker (56)
Chief Credit Officer, formerly Senior Vice President and Loan Approval and Special Assets Officer
D. Shawn Jordan (54)
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.
We experienced heightened regulatory requirements and scrutiny following the 2008 global financial crisis, and as a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) and the Economic Growth, Regulatory Reform and Consumer Protection Act (“Regulatory Relief Act”). In addition, newer regulatory developments implemented in response to the COVID-19 pandemic, including the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) and the Consolidated Appropriations Act, 2021, which enhanced and expanded certain provisions of the CARES Act, had an impact on our operations.
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 Responses to the COVID-19 Pandemic
The COVID-19 pandemic has continued to cause extensive disruptions to the global economy, to businesses, and to the lives of individuals throughout the world. On March 27, 2020, the CARES Act was signed into law. The CARES Act was a $2.2 trillion economic stimulus bill that was intended to provide relief in the wake of the COVID-19 pandemic. There have also been a number of regulatory actions intended to help mitigate the adverse economic impact of the COVID-19 pandemic on borrowers, including several mandates from the bank regulatory agencies, requiring financial institutions to work constructively with borrowers affected by the COVID-19 pandemic. Although these programs generally have expired, governmental authorities may take additional actions in the future to limit the adverse impact of COVID-19 on borrowers and tenants.
The Paycheck Protection Program (“PPP”), originally established under the CARES Act and extended under the Coronavirus Response and Relief Supplemental Appropriations Act of 2021, authorized financial institutions to make federally-guaranteed loans to qualifying small businesses and non-profit organizations. These loans carry an interest rate of 1% per annum and a maturity of two years for loans originated prior to June 5, 2020 and five years for loans originated on or after June 5, 2020. The PPP provides that such loans may be forgiven if the borrowers meet certain requirements with respect to maintaining employee headcount and payroll and the use of the loan proceeds after the loan is originated. The initial phase of the PPP, after being extended multiple times by Congress, expired on August 8, 2020. However, on January 11, 2021, the SBA reopened the PPP for First Draw PPP loans to small businesses and non-profit organizations that did not receive a loan through the initial PPP phase. Further, on January 13, 2021, the SBA reopened the PPP for Second Draw PPP loans to small businesses and non-profit organizations that did receive a loan through the initial PPP phase. Maximum loan amounts were also increased for accommodation and food service businesses. Although the PPP ended in accordance with its terms on May 31, 2021, outstanding PPP loans continue to go through the process of either obtaining forgiveness from the SBA or pursuing claims under the SBA guaranty.
The CARES Act, as extended by certain provisions of the Consolidated Appropriations Act of 2021, also initially permitted banks to suspend requirements under GAAP for loan modifications to borrowers affected by COVID-19 that would otherwise had been characterized as troubled debt restructurings and suspended any determination related thereto if (i) the borrower was not more than 30 days past due as of December 31, 2019, (ii) the modifications were related to COVID-19, and (iii) the modification occurred 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.
Capital and Related Requirements.
Regulatory capital rules known as the Basel III rules or Basel III, impose minimum capital requirements for bank holding companies and banks. 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 regulatory minimum capital requirements, which must consist entirely of Common Equity Tier 1 capital, which was phased in over several years. 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 Basel III, 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.
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.
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 and, if applicable, is considered to have met the “well capitalized” ratio requirements for purposes of its primary federal regulator’s prompt corrective action rules, discussed below. 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.
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 relief has been extended and will expire on the sooner of January 1, 2023, or the effective date of a final Federal Reserve rule having a revision to Regulation O that addresses the treatment of extensions of credit by a bank to fund complex-controlled portfolio companies that are insiders of a bank.
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%.
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, 2021, 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”) issued a notice of proposed rulemaking intended to (i) clarify which activities qualify for CRA credit; (ii) update where activities count for CRA credit; (iii) create a more transparent and objective method for measuring CRA performance; and (iv) provide for more transparent, consistent, and timely CRA-related data collection, recordkeeping, and reporting. However, the Federal Reserve has not joined the proposed rulemaking. In May 2020, the OCC issued its final CRA rule, which was later rescinded in December 2021. The FDIC has not finalized any revisions to its CRA rule. In September 2020, the Federal Reserve issued an advance notice of proposed rulemaking that seeks public comment on ways to modernize the Federal Reserve’s CRA regulations. The effects on the Company and the Bank of any potential change to the CRA rules will depend on the final form of any federal rulemaking and cannot be predicted at this time. Management will continue to evaluate any changes to the CRA’s regulations and their impact to the Company and the Bank.
Fair Lending Requirements. We are subject to certain fair lending requirements and reporting obligations involving lending operations. A number of laws and regulations provide these fair lending requirements and reporting obligations, including, at the federal level, the Equal Credit Opportunity Act (“ECOA”), as amended by the Dodd-Frank Act, and Regulation B, as well as the Fair Housing Act (“FHA”) and regulations implementing FHA found at 24 C.F.R. Part 100. ECOA and Regulation B prohibit discrimination in any aspect of a credit transaction based on a number of prohibited factors, including race or color, religion, national origin, sex, marital status, age, the applicant’s receipt of income derived from public assistance programs, and the applicant’s exercise, in good faith, of any right under the Consumer Credit Protection Act. ECOA and Regulation B include lending acts and practices that are specifically prohibited, permitted, or required, and these laws and regulations proscribe data collection requirements, legal action statute of limitations, and disclosure of the consumer’s ability to receive a copy of any appraisal(s) and valuation(s) prepared in connection with certain loans secured by dwellings. FHA prohibits discrimination in all aspects of residential real-estate related transactions based on prohibited factors, including race or color, national origin, religion, sex, familial status, and handicap.
In addition to prohibiting discrimination in credit transactions on the basis of prohibited factors, these laws and regulations can cause a lender to be liable for policies that result in a disparate treatment of or have a disparate impact on a protected class of persons. If a pattern or practice of lending discrimination is alleged by a regulator, then the matter may be referred by the agency to the U.S. Department of Justice (“DOJ”) for investigation. In December 2012, the DOJ and CFPB entered into a Memorandum of Understanding under which the agencies have agreed to share information, coordinate investigations, and have generally committed to strengthen their coordination efforts.
In addition to substantive penalties and corrective measures that may be required for a violation of certain fair lending laws, the federal banking agencies may take compliance with fair lending requirements into account when regulating and supervising other activities of the bank, including in acting on expansionary proposals.
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-both at the federal and state levels-designed to protect consumers. This includes Title X of the Dodd-Frank Act, which prohibits engaging in any unfair, deceptive, or abusive acts or practices (“UDAAP”). UDAAP claims involve detecting and assessing risks to consumers and to markets for consumer financial products and services. 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 Consumer Financial Protection Bureau (“CFPB”), an independent regulatory authority housed within the Federal Reserve, which has broad rule-making authority over a wide range of consumer laws that apply to insured depository institutions;
· the Truth-In-Lending Act (“TILA”) and Regulation Z, governing disclosures of credit terms to consumer borrowers and including substantial requirements for mortgage lending and servicing, as mandated by the Dodd-Frank Act;
· the Home Mortgage Disclosure Act (“HMDA”) and Regulation C, 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, and requiring collection and disclosure of data about applicant and borrower characteristics to assist in identifying possible discriminatory lending patterns and enforcing antidiscrimination statutes;
· the Equal Credit Opportunity Act (“ECOA”) and Regulation B, prohibiting discrimination on the basis of race, color, religion, or other prohibited factors in any aspect of a credit transaction;
· the Fair Credit Reporting Act, as amended by the Fair and Accurate Credit Transactions Act, and Regulation V, governing the use of consumer reports, provision of information to credit reporting agencies, certain identity theft protections, and certain credit and other disclosures, and requiring Bank to have in place an “identity theft red flags” program to detect, prevent and mitigate identity theft.
· the Fair Debt Collection Practices Act and Regulation F, governing the manner in which consumer debts may be collected by collection agencies and intending to eliminate abusive, deceptive, and unfair debt collection practices;
· the Real Estate Settlement Procedures Act (“RESPA”) and Regulation X, which governs various aspects of residential mortgage loans, including the settlement and servicing process, dictates certain disclosures to be provided to consumers, and imposes other requirements related to compensation of service providers, insurance escrow accounts, and loss mitigation procedures;
· The Secure and Fair Enforcement for Mortgage Licensing Act (“SAFE Act”) which mandates a nationwide licensing and registration system for residential mortgage loan originators. The SAFE Act also prohibits individuals from engaging in the business of a residential mortgage loan originator without first obtaining and maintaining annually registration as either a federal or state licensed mortgage loan originator;
· The Homeowners Protection Act (“HPA”), or the PMI Cancellation Act, provides requirements relating to private mortgage insurance (PMI) on residential mortgages, including the cancelation and termination of PMI, disclosure and notification requirements, and the requirement to return unearned premiums;
· The Fair Housing Act (“FHA”) prohibits discrimination in all aspects of residential real-estate related transactions based on race or color, national origin, religion, sex, and other prohibited factors;
· The Servicemembers Civil Relief Act (“SCRA”) and Military Lending Act (“MLA”), providing certain protections for servicemembers, members of the military, and their respective spouses, dependents and others;
· Section 106(c)(5) of the Housing and Urban Development Act requires making home ownership available to eligible homeowners; 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 laws, such as the following federal laws:
· the FDIA, which, among other things, imposes a minimum 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 the rights, liabilities, and responsibilities of consumers and financial institutions using electronic fund transfer services, and which generally mandates disclosure requirements, establishes limitations on liability applicable to consumers for unauthorized electronic fund transfers, dictates certain error resolution processes, and applies other requirements relating to automatic deposits to and withdrawals from deposit accounts;
· 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;
· The Expedited Funds Availability Act (“EFA Act”) and Regulation CC, setting forth requirements to make funds deposited into transaction accounts available according to specified time schedules, disclose funds availability policies to customers, and relating to the collection and return of checks and electronic checks, including the rules regarding the creation or receipt of substitute checks; and
· the Truth in Savings Act (“TISA”) and Regulation DD, which requires depository institutions to provide disclosures so that consumers can make meaningful comparisons about depository institutions and accounts.
The CFPB has broad authority to regulate the offering and provision of consumer financial products and services. 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. In addition, states are permitted to adopt consumer protection laws and regulations that are stricter than the regulations promulgated by the CFPB.
The CFPB has issued a number of significant rules that impact nearly every aspect of the lifecycle of consumer financial products and services, including rules regarding residential mortgage loans. These rules implement Dodd-Frank Act amendments to ECOA, TILA and 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; the USA Patriot Act; the Office of Foreign Asset Control. 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 program must comply with the anti-money laundering provisions of the Bank Secrecy Act (“BSA”). 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, foreign customers, and other high risk 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 certain laws provide law enforcement authorities with increased access to financial information maintained by banks. Financial institutions must comply with requirements regarding risk-based procedures for conducing ongoing customer due diligence, which requires the institutions to take appropriate steps to understand the nature and purpose of customer relationships and identify and verify the identity of the beneficial owners of legal entity customers.
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 (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.
The USA PATRIOT Act amended the Bank Secrecy Act and provides, in part, 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; (iv) filing suspicious activities reports if a bank believes a customer may be violating U.S. laws and regulations; and (v) 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 regulators can provide 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 applicable governmental authorities.
On January 1, 2021, Congress overrode former President Trump’s veto and thereby enacted the National Defense Authorization Act for Fiscal Year 2021 (“NDAA”). The NDAA provides for one of the most significant overhauls of the BSA and related anti-money laundering laws since the USA Patriot Act. Notably, changes include:
· expansion of coordination and information sharing efforts among the agencies tasked with administering anti-money laundering and countering the financing of terrorism requirements, including the Financial Crimes Enforcement Network (“FinCEN”), the primary federal banking regulators, federal law enforcement agencies, national security agencies, the intelligence community, and financial institutions;
· providing additional penalties with respect to violations of BSA and enhancing the powers of FinCEN;
· significant updates to the beneficial ownership collection rules and the creation of a registry of beneficial ownership which will track the beneficial owners of reporting companies which may be shared with law enforcement and financial institutions conducting due diligence under certain circumstances;
· improvements to existing information sharing provisions that permit financial institutions to share information relating to suspicious activity reports with foreign branches, subsidiaries, and affiliates (except those located in China, Russia, or certain other jurisdictions) for the purpose of combating illicit finance risks; and
· enhanced whistleblower protection provisions, allowing whistleblower(s) who provide original information which leads to successful enforcement of anti-money laundering laws in certain judicial or administrative actions resulting in certain monetary sanctions to receive up to 30 percent of the amount that is collected in monetary sanctions as well as increased protections.
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 ensure 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 publishes lists of names of persons and organizations with which the Bank is prohibited from engaging in business. 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 and Data Security. There are a number of state and federal laws and regulations that govern financial privacy and cybersecurity. At the federal level, this includes the privacy protection provisions of the Gramm-Leach-Bliley Act (“GLBA”) and related regulations, including Regulation P, which govern the treatment of nonpublic personal information. Under these privacy protection provisions, we are limited in our ability to disclose non-public information about consumers to nonaffiliated third parties. These limitations require disclosure of privacy policies and notices to consumers and, in some circumstances, allow consumers to prevent disclosure of certain personal information to a nonaffiliated third party.
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. Guidance includes the establishment of information security standards and cybersecurity programs for implementing safeguards. This guidance, along with related regulatory materials, increasingly focus on risk management and processes related to information technology and the use of third parties in the provision of financial services. The agencies are likely to devote more resources to this part of their safety and soundness examination than they have in the past.
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 July 31, 2019, September 18, 2019 and October 30, 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 3, 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 15, 2020, the FMOC decreased the federal funds target rate by 100 basis points to the current target range of 0.00% to 0.25%.
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, the Dodd-Frank Act increased the minimum target Deposit Insurance Fund ratio from 1.15% of estimated insured deposits to 1.35% of estimated insured deposits. The FDIC was required to seek to achieve the 1.35% ratio by September 30, 2020. The FDIC indicated that the 1.35% ratio was exceeded in November 2018. Insured institutions of less than $10 billion of assets received credits for the portion of their assessments that contributed to the reserve ratio between 1.15% and 1.35%. 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 required 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. No final rule has been issued yet.
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, 2021, its non-owner occupied commercial loans and its construction and land development loans were approximately 258% and 69% 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.
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.

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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 ongoing COVID-19 pandemic could have an adverse impact on our financial performance and results of operations.
As the COVID-19 pandemic has evolved from its emergence in early 2020, so has its global impact. Many countries have re-instituted, or strongly encouraged, varying levels of quarantines and restrictions on travel and in some cases have at times limited operations of certain businesses and taken other restrictive measures designed to help slow the spread of COVID-19 and its variants. Governments and businesses have also instituted vaccine mandates and testing requirements for employees. While vaccine availability and uptake has increased, the longer-term macro-economic effects on global supply chains, inflation, labor shortages and wage increases continue to impact many industries, including the collateral underlying certain of our loans. Moreover, with the potential for new strains of COVID-19 to emerge, governments and businesses may re-impose aggressive measures to help slow its spread in the future. For this reason, among others, as the COVID-19 pandemic continues, the potential global impacts are uncertain and difficult to assess.
The COVID-19 pandemic may have a material adverse impact on our financial condition, liquidity and results of operations and the market price of our common stock, among other things. Although financial markets have largely rebounded from the significant declines that occurred earlier in the pandemic and global economic conditions showed signs of improvement during the second half of 2020 and throughout 2021, many of the circumstances that arose or became more pronounced after the onset of the COVID-19 pandemic persist, which may subject us to any of the following risks:
· lower loan demand and an increased risk of loan delinquencies, defaults, and foreclosures due a number of factors, including continuing supply chain issues, decreased consumer and business confidence and economic activity;
· 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;
· volatility in financial and capital markets, interest rates, and exchange rates;
· a significant decline in the market value of our common stock, which may result in us recording a goodwill impairment charge, which could adversely affect our results of operations;
· increased demands on capital and liquidity;
· a reduction in the value of the assets that we manage or otherwise administer or service for others, affecting related fee income and demand for our services;
· heightened cybersecurity, information security, and operational risks as cybercriminals attempt to profit from the disruption resulting from the pandemic given increased online and remote activity, including as a result of work-from-home arrangements;
· disruptions to business operations experienced by counterparties and service providers;
· increased risk of business disruption from the loss of employees due to their inability to work effectively because of illness, quarantines, government actions, failures in systems or technology that disrupt work-from-home arrangements, or other effects of the COVID-19 pandemic (including the increase in employee resignations currently taking place throughout the United States in connection with the COVID-19 pandemic, which is commonly referred to as the “great resignation”); and
· decreased demands for our products and services.
In addition, COVID-19 initially caused us to materially increase our allowance for credit losses. During the year ended December 31, 2020, we recorded a $3.8 million net increase in our allowance for loan losses, bringing our total allowance to $10.4 million or 1.23% of loans held-for- investment as of December 31, 2020. During the year ended December 31, 2021, we recorded a $790 thousand net increase in our allowance for loan losses, bringing our total allowance to $11.2 million or 1.29% of loans held-for-investment. Our allowance as a percentage of loans held-for-investment excluding PPP loans was 1.30% at both December 31, 2021 and December 31, 2020. The increase in the allowance for loan losses compared to December 31, 2020 is primarily related to loan growth of $19.5 million ($60.3 million growth in non-PPP loans partially offset by $40.8 million reduction in PPP loans); $455 thousand in net recoveries; an increase in our economic conditions qualitative factor by four basis points during 2021 due to higher inflation, supply chain bottlenecks, and labor shortages in certain industries; and a one basis point increase in our change in legal or regulatory requirements qualitative factor. These increases were partially offset by a reduction in the loss emergence period assumption on our COVID-19 qualitative factor, which was added to our allowance for loan losses methodology during 2020, to 21 months at December 31, 2021 from 24 months at December 31, 2020. Our COVID-19 qualitative factor represented $1.9 million of our allowance for loan losses at December 31, 2021. The allowance for loan losses reflects, among other things, the macroeconomic impact of the COVID-19 pandemic. If the macroeconomic effects of the COVID-19 pandemic improve or worsen, we may materially decrease or increase our allowance for loan losses, which may have a material effect on our business, financial condition and results of operations.
The immediately preceding outcomes are those we consider to be most material as a result of the pandemic. We have also experienced and may experience other negative impacts to our business as a result of the pandemic that could exacerbate other risks discussed in this “Risk Factors” section.
The ongoing fluidity of this situation precludes any prediction as to the ultimate adverse impact of COVID-19 on economic and market conditions, and, as a result, presents material uncertainty and risk with respect to us. The full extent of the impact and effects of COVID-19 will depend on future developments, including, among other factors, the duration and spread of the virus and its variants, availability, acceptance and effectiveness of vaccines along with related travel advisories, quarantines and restrictions, the recovery time of the disrupted supply chains and industries, the impact of labor market interruptions, the impact of government interventions, and uncertainty with respect to the duration of the global economic slowdown. COVID-19 and the current financial, economic and capital markets environment, and future developments in these and other areas present uncertainty and risk with respect to our performance and results of operations.
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. Moreover, as economic conditions relating to the pandemic have improved over time, the Federal Reserve has shifted its focus to limiting inflationary and other potentially adverse effects of the extensive pandemic-related government stimulus, which signals the potential for a continued period of economic uncertainty even if the pandemic subsides. 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, the potential resurgence of economic and political tensions with China, the Russian invasion of Ukraine and increasing oil prices due to Russian supply disruptions, each of which 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, 2021, approximately 90.4% of our loan portfolio (excluding loans held for sale) is composed of construction (11.0%), commercial mortgage (71.5%) and commercial (excluding PPP) (7.9%) 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. If we suffer loan losses that exceed our allowance for loans losses, our financial condition, liquidity or results of operations could be materially and adversely affected.
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, 2021, we had approximately $703.3 million in loans outstanding to borrowers whereby the collateral securing the loan was commercial real estate, representing approximately 81.4% of our total loans outstanding as of that date. Approximately $244.0 million or 28.3% of our total loans and 34.7% of our commercial real estate loans are secured by 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 7.3%, or $47.8 million, since December 31, 2020. The banking regulators give 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 258% of the Bank’s total risk-based capital at December 31, 2021, and our construction and land development loans represented 69% of the Bank’s total risk-based capital at December 31, 2021.
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, 2021, commercial business loans excluding PPP loans comprised 7.9% 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. If these borrowers do not have sufficient cash flows or resources to pay these loans as they come due or the value of the underlying collateral is insufficient to fully secure these loans, we may suffer losses on these loans that exceed our allowance for loan losses.
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, 2021, approximately $17.6 million of our loans, or 12.2% of the Bank’s regulatory capital, had loan-to-value ratios that exceeded regulatory supervisory guidelines, of which two loans totaling approximately $2.0 million 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, 2021, $13.4 million of our commercial loans, or 9.3% 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, which could have a material adverse effect on our financial condition and results of operations.
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 investment securities, which include 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 $456.8 million in 2021, as compared to $300.9 million in 2020. This represents 32.2% and 25.1% of the average earning assets for the years ended December 31, 2021 and 2020, respectively. At December 31, 2021, the portfolio was 38.2% of earning assets compared to 27.9% of earning assets at December 31, 2020. 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, 2021 and 2020, 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.
The Bank is subject to strict capital requirements, which could be amended to be more stringent, in the future.
The Bank is 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 under the Basel III require the Bank to satisfy additional, more stringent, capital adequacy standards than it had in the past. 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 (“FCA”) regulates the London Interbank Offered Rate (“LIBOR”), the reference rate previously used for many of our transactions, including our lending and borrowing and our purchase and sale of securities, as well as the derivatives that we use to manage risk related to such transactions. The FCA announced in July 2017 that the sustainability of LIBOR could not be guaranteed. Accordingly, although the FCA confirmed the extension of overnight and 1-, 3-, 6-, and 12-month LIBOR through June 30, 2023 in order to accord financial institutions greater time with which to manage the transition from LIBOR, the FCA is no longer persuading, or compelling, banks to submit to LIBOR. The federal banking agencies, including the OCC, previously determined that banks must cease entering into any new contract that uses LIBOR as a reference rate by no later than December 31, 2021. In addition, banks have been encouraged to identify contracts that extend beyond June 30, 2023 and implement plans to identify and address insufficient contingency provisions in those contracts. 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.
The discontinuation of LIBOR, changes in LIBOR, or changes in market perceptions of the acceptability of LIBOR as a benchmark could result in changes to our risk exposures (for example, if the anticipated discontinuation of LIBOR adversely affects the availability or cost of floating-rate funding and, therefore, our exposure to fluctuations in interest rates) or otherwise result in losses on a product or having to pay more or receive less on securities that we own or have issued. In addition, such uncertainty could result in pricing volatility and increased capital requirements, loss of market share in certain products, adverse tax or accounting impacts, and compliance, legal and operational costs and risks associated with client disclosures, discretionary actions taken or negotiation of fallback provisions, systems disruption, business continuity, and model disruption. The implementation of LIBOR reform proposals may result in increased compliance costs and operational costs, including costs related to continued participation in LIBOR and the transition to a replacement reference rate or rates. We cannot reasonably estimate the expected cost.
As of December 31, 2021, we had $19.4 million in LIBOR-based loans, $64.7 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 changes 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.
Nevertheless, these investments may prove insufficient and fraudulent activity could result in losses to us or our customers; loss of business and/or customers; damage to our reputation; the incurrence of additional expenses (including the cost of notification to consumers, credit monitoring and forensics, and fees and fines imposed by the card networks); disruption to our business; our inability to grow our online services or other businesses; additional regulatory scrutiny or penalties; or our exposure to civil litigation and possible financial liability any of which could have a material adverse effect on our business, financial condition and results of operations.
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 the 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 the 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. The 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”), the 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. The 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 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 was a unified Democratic control of the White House and both chambers of Congress, and consequently Democrats are able to set the agenda both legislatively, in the Administration, and in the regulatory agencies that have rulemaking and supervisory authority over the financial services industry generally and the Company and the Bank specifically. Congressional committees with jurisdiction over the banking sector have pursued oversight and legislative initiatives in a variety of areas, including addressing climate-related risks, promoting diversity and equality within the banking industry and addressing other Environmental, Social, and Governance matters, improving competition in the banking sector and enhancing oversight of bank mergers and acquisitions, establishing a regulatory framework for digital assets and markets, and oversight of the COVID-19 pandemic response and economic recovery. The prospects for the enactment of major banking reform legislation are unclear at this time.
Moreover, the turnover of the presidential administration resulted in certain changes in the leadership and senior staffs of the federal banking agencies, the CFPB, CFTC, SEC, and the Treasury Department, with certain significant leadership positions yet to be filled, including the Comptroller of the Currency, the Chair of the FDIC and three vacancies among the Governors of the Federal Reserve Board, including the Vice Chair for Supervision. These changes have impacted the rulemaking, supervision, examination and enforcement priorities and policies of the agencies and likely will continue to do so over the next several years. The potential impact of any changes in agency personnel, policies and priorities on the financial services sector, including the Company and 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, 2021, we had net deferred tax assets of $1.8 million. 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, 2021. 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. 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 we 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, 2022, there were approximately 1,854 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, 2021 $ 22.00 $ 16.18 $ 0.12
Quarter ended June 30, 2021 $ 20.85 $ 18.00 $ 0.12
Quarter ended September 30, 2021 $ 21.49 $ 18.57 $ 0.12
Quarter ended December 31, 2021 $ 23.42 $ 19.21 $ 0.12
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
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.
The Company’s 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 Amended and Restated 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 quarterly to the director’s account 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 of such calendar quarter. In general, a director’s vested account balance will be distributed in a lump sum of our common stock on the 30th day following the participants separation from service. During the year ended December 31, 2021, we credited an aggregate of 7,050 deferred stock units, gross of 9,697 deferred stock units converted to common stock due to the retirement of Mr. J. Thomas Johnson, chairman of our board of directors, to accounts for directors who elected to defer monthly fees or annual retainer fees for 2021. 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
On April 12, 2021, we announced that our Board of Directors approved the repurchase of up to 375,000 shares of our common stock (the “2021 Repurchase Plan”), which represented approximately 5% of our 7,548,638 shares outstanding as of December 31, 2021. No share repurchases have been made under the 2021 Repurchase Plan as of December 31, 2021. The 2021 Repurchase Plan expires at the market close on March 31, 2022. We intend to seek approval in 2022 for a new repurchase plan of up to 375,000 shares of common stock to replace the expiring 2021 Repurchase Plan.

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ITEM 6. SELECTED FINANCIAL DATA
Item 6. [Reserved].

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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). On March 1, 2022, we announced the hiring of a team of experienced lenders in Rock Hill, South Carolina. We intend to establish a loan production office in Rock Hill, South Carolina, subject to prior notice and nonobjection from the Office of the Commissioner of Banking of South Carolina. Thereafter, we may open a full-service banking office in Rock Hill, South Carolina, subject to approval by our regulators.
The following discussion describes our results of operations for 2021, as compared to 2020 and 2019, and also analyzes our financial condition as of December 31, 2021, as compared to December 31, 2020. 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 2021, 2020 and 2019 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.
COVID-19 Pandemic
The COVID-19 pandemic and variants of the virus continue to create disruptions to the global economy and financial markets and to businesses and the lives of individuals throughout the world. The impact of the COVID-19 pandemic and its related variants is fluid and continues to evolve, adversely affecting many of our customers. 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. The unprecedented and rapid spread of COVID-19 and its variants and their associated impacts on trade (including supply chains and export levels), travel, employee productivity, unemployment, consumer spending, and other economic activities have resulted and continue to result in less economic activity, and volatility and disruption in financial markets.
Commercial activity has improved, but has not returned to the levels existing before the outbreak of the pandemic, which may result in our borrowers’ inability to meet their loan obligations. Economic pressures and uncertainties related to the COVID-19 pandemic have also resulted in changes in consumer spending behaviors, which may negatively impact the demand for loans and other services we offer. In addition, our loan portfolio includes customers in industries such as hotels, restaurants and assisted living facilities, all of which have been significantly impacted by the COVID-19 pandemic. We recognize that these industries may take longer to recover as consumers may be hesitant to return to full social interaction or may change their spending habits on a more permanent basis as a result of the pandemic. We continue to monitor these customers closely.
In addition, due to the COVID-19 pandemic, market interest rates declined to historical lows; however, market interest rates are expected to increase in 2022 and future periods. The reductions in interest rates, low interest rate environment, and the other effects of the COVID-19 pandemic have had, and are expected to continue to have, adverse effects on our business, financial condition and results of operations.
As the COVID-19 pandemic has evolved from its emergence in early 2020, so has its impact. While vaccine availability and uptake has increased, the longer-term macro-economic effects on global supply chains, inflation, labor shortages and wage increases continue to impact many industries, including the collateral underlying certain of our loans. Moreover, with the potential for new strains of COVID-19 to emerge, governments and businesses may re-impose aggressive measures to help slow its spread in the future. For this reason, among others, as the COVID-19 pandemic continues, the potential or lasting impacts on our business, financial condition and results of operations remains uncertain and difficult to assess.
Lending Operations and Accommodations to Borrowers; Impact of COVID-19 on Asset Quality and Value of Investment Securities
Beginning in March 2020, we proactively offered payment deferrals for up to 90 days to our loan customers regardless of the impact of the pandemic on their business or personal finances. As a result of payments being resumed at the conclusion of their payment deferral period, loans in which payments were being 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, to $8.7 million at March 31, 2021, to $4.5 million at June 30, 2021, to $4.1 million at September 30, 2021, and to zero at December 31, 2021. We had no loans on which payments have been deferred at December 31, 2021 compared to $16.1 million at December 31, 2020.
We were also a small business administration approved lender and participated in the PPP, established under the CARES Act. During 2020 and 2021, we originated 1,417 PPP loans totaling $88.5 million, which includes 843 PPP loans totaling $51.2 million originated in 2020 and 574 PPP loans totaling $37.3 million originated in 2021. Furthermore, during 2020, we facilitated the origination of 111 PPP loans totaling $31.2 million for our customers through a third party prior to establishing our own PPP platform. As of December 31, 2021, 1,406 PPP loans totaling $87.0 million (840 PPP loans totaling $51.2 million originated in 2020 and 566 PPP loans totaling $35.8 million originated in 2021) were forgiven through the SBA PPP forgiveness process.
Our asset quality metrics as of December 31, 2021 remained sound. At December 31, 2021, our non-performing assets were not yet materially impacted by the economic pressures of the COVID-19 pandemic. The non-performing asset ratio was 0.09% of total assets with the nominal level of $1.4 million in non-performing assets at December 31, 2021 compared to 0.50% and $7.0 million at December 31, 2020. The decline in the non-performing asset ratio was related to the successful resolution of several non-accrual and accruing loans past due of 90 days or more. Non-accrual loans declined $4.3 million to $250 thousand at December 31, 2021 from $4.6 million at December 31, 2020. We had no accruing loans past due 90 days or more at December 31, 2021 compared to $1.3 million at December 31, 2021. Loans past due 30 days or more represented 0.03% of the loan portfolio at December 31, 2021 compared to 0.23% at December 31, 2020. The ratio of classified loans plus OREO and repossessed assets declined to 6.27% of total bank regulatory risk-based capital at December 31, 2021 from 6.89% at December 31, 2020. During the twelve months ended December 31, 2021, we experienced net loan recoveries of $478 thousand and net overdraft charge-offs of $22 thousand.
We are also monitoring the impact of the COVID-19 pandemic on the operations and value of our investments. We mark to market our available-for-sale 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, 2021. 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.
Capital and Liquidity
Our capital remained strong. Each of the regulatory capital ratios for the Bank exceeds the well capitalized minimum levels currently required by regulatory statute at December 31, 2021 and December 31, 2020. 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 intend to monitor developments and potential impacts on our capital.
We believe that we have ample liquidity to meet the needs of our customers 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 (“FHLB”).
Critical Accounting 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 and income taxes and deferred tax assets, 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. 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 credit worthiness of borrowers, 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.
As discussed above, the CECL model will become effective for us on January 1, 2023. However, for now, we account for our allowance for loan losses under the incurred loss model. 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 0.18%, 0.03% and 0.00%, 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 allowance represents management’s best estimate, [and we believe our estimate has been reasonably accurate in determining allowance for loan loss adequacy], but significant downturns in circumstances relating to loan quality and economic conditions could result in a requirement for additional allowance. Likewise, an upturn in loan quality and improved economic conditions may allow a reduction in the required allowance. In either instance, unanticipated changes could have a significant impact on results of operations. In addition, regulatory agencies, as an integral part of their examination process, periodically review our allowance for loan losses. Such agencies may require us to recognize additions to the allowances based on their judgments about information available to them at the time of their examination.
Income Taxes, Deferred Tax Assets, and Deferred Tax Liabilities
We are subject to the income tax laws of the U.S., its states, and the municipalities in which we operate. These tax laws are complex and subject to different interpretations by the taxpayer and the relevant government taxing authorities.
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.
In establishing our provision for income taxes, our deferred tax assets and liabilities, and our valuation allowance, we must make judgments and interpretations about the application of these inherently complex tax laws. We must also make estimates about when in the future certain items will affect taxable income in the various tax jurisdictions. Disputes over interpretations of the tax laws may be subject to review/adjudication by the court systems of the various tax jurisdictions or may be settled with the taxing authority upon examination or audit. Although we believe that the judgments and estimates used are reasonable, and we believe our estimates have been reasonably accurate, actual results could differ, and we may be exposed to losses or gains that could be material. To the extent we prevail in matters for which reserves have been established, or are required to pay amounts in excess of our reserves, our effective income tax rate in a given financial statement period could be materially affected. An unfavorable tax settlement would result in an increase in our effective income tax rate in the period of resolution. A favorable tax settlement would result in a reduction in our effective income tax rate in the period of resolution.
Financial Highlights
As of or For the Years Ended December 31,
(Dollars in thousands except per share amounts)
Balance Sheet Data:
Total assets $ 1,584,508 $ 1,395,382 $ 1,170,279
Loans held for sale 7,120 45,020 11,155
Loans 863,702 844,157 737,028
Deposits 1,361,291 1,189,413 988,201
Total common shareholders’ equity 140,998 136,337 120,194
Total shareholders’ equity 140,998 136,337 120,194
Average shares outstanding, basic 7,491 7,446 7,510
Average shares outstanding, diluted 7,549 7,482 7,588
Results of Operations:
Interest income $ 47,520 $ 43,778 $ 42,630
Interest expense 2,241 3,755 5,781
Net interest income 45,279 40,023 36,849
Provision for loan losses 3,663
Net interest income after provision for loan losses 44,944 36,360 36,710
Non-interest income 13,904 13,769 11,736
Non-interest expenses 39,201 37,534 34,617
Income before taxes 19,647 12,595 13,829
Income tax expense 4,182 2,496 2,858
Net income 15,466 10,099 10,971
Net income available to common shareholders 15,466 10,099 10,971
Per Share Data:
Basic earnings per common share $ 2.06 $ 1.36 $ 1.46
Diluted earnings per common share 2.05 1.35 1.45
Book value at period end 18.68 18.18 16.16
Tangible book value at period end (non-GAAP) 16.62 16.08 13.99
Dividends per common share 0.48 0.48 0.44
Asset Quality Ratios:
Non-performing assets to total assets(3) 0.09 % 0.50 % 0.32 %
Non-performing loans to period end loans 0.03 % 0.69 % 0.31 %
Net charge-offs (recoveries) to average loans (0.05 )% (0.01 )% (0.03 )%
Allowance for loan losses to period-end total loans 1.29 % 1.23 % 0.90 %
Allowance for loan losses to non-performing assets 789.98 % 148.10 % 177.23 %
Selected Ratios:
Return on average assets 1.02 % 0.78 % 0.98 %
Return on average common equity: 11.22 % 7.84 % 9.38 %
Return on average tangible common equity (non-GAAP): 12.65 % 8.94 % 10.91 %
Efficiency Ratio (non-GAAP)(1) 66.09 % 69.99 % 70.51 %
Noninterest income to operating revenue(2) 23.49 % 25.60 % 24.16 %
Net interest margin (tax equivalent) 3.23 % 3.37 % 3.65 %
Equity to assets 8.90 % 9.77 % 10.27 %
Tangible common shareholders’ equity to tangible assets (non-GAAP) 8.00 % 8.74 % 9.02 %
Tier 1 risk-based capital (Bank)(4) 14.00 % 12.83 % 13.47 %
Total risk-based capital (Bank)(4) 15.80 % 13.94 % 14.26 %
Leverage (Bank)(4) 8.45 % 8.84 % 9.97 %
Average loans to average deposits(5) 68.77 % 76.79 % 78.65 %
(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, losses on early extinguishment of debt, gains on insurance proceeds, and collection of summary judgments on loans charged-off at a bank we acquired. 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, losses on early extinguishment of debt, gains on insurance proceeds, and collection of summary judgments on loans charged off at a bank we acquired. 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
Tangible common equity per common share (non-GAAP) $ 16.62 $ 16.08 $ 13.99
Effect to adjust for intangible assets 2.06 2.10 2.17
Book value per common share (GAAP) $ 18.68 $ 18.18 $ 16.16
Return on average tangible common equity
Return on average tangible common equity (non-GAAP) 12.65 % 8.94 % 10.91 %
Effect to adjust for intangible assets (1.43 )% (1.10 )% (1.53 )%
Return on average common equity (GAAP) 11.22 % 7.84 % 9.38 %
Tangible common shareholders’ equity to tangible assets
Tangible common equity to tangible assets (non-GAAP) 8.00 % 8.74 % 9.02 %
Effect to adjust for intangible assets 0.90 % 1.03 % 1.25 %
Common equity to assets (GAAP) 8.90 % 9.77 % 10.27 %
Results of Operations
Year Ended December 31, 2021 and
Our net income for the twelve months ended December 31, 2021 was $15.5 million, or $2.05 diluted earnings per common share, as compared to $10.1 million, or $1.35 diluted earnings per common share, for the twelve months ended December 31, 2020. The $5.4 million increase in net income between the two periods is primarily due to a $5.3 million increase in net interest income, a $135 thousand increase in non-interest income, and a $3.3 million reduction in provision for loan losses partially offset by a $1.7 million increase in non-interest expense and $1.7 million increase in income tax expense.
· The increase in net interest income results from an increase of $220.3 million in average earning assets partially offset by a 15-basis point decline in the net interest margin between the two periods. The increase in non-interest income is primarily related to increases in investment advisory fees and non-deposit commissions of $1.3 million, ATM/debit card income of $412 thousand, rental income of $40 thousand, gain on bank premises held-for-sale of $104 thousand, gain on sale of bank owned land of $13 thousand, gain on insurance proceeds of $24 thousand, and the collection of summary judgments of $147 thousand related to two loans charged off at a bank we acquired, partially offset by lower mortgage loan fees of $1.2 million, lower deposit service charges of $144 thousand, lower loan late charges of $33 thousand, lower gain on sale of securities of $99 thousand, lower gain on sale of other real estate owned of $70 thousand, lower non-recurring bank owned life insurance (BOLI) income of $311 thousand, and lower recurring BOLI income of $31 thousand.
· The reduction in provision for loan losses is primarily related to net recoveries of $455 thousand during the twelve months ended December 31, 2021 compared to net recoveries of $99 thousand during the same period in 2020; and a reduction in the qualitative factors in our allowance for loan losses methodology during 2021 related to the economic uncertainties caused by the COVID-19 pandemic and the change in total past due, rated, and non-accrual loans; partially offset by increases in the qualitative factors for the change in economic conditions and the change in legal or regulatory requirements; and loan growth of $19.5 million including PPP Loans and $60.3 million excluding PPP Loans. We reduced the loss emergence period assumption on our COVID-19 qualitative factor, which was added to our allowance for loan losses methodology during 2020, to 18 months at June 30, 2021 from 24 months at December 31, 2020 due to reductions in the number of COVID-19 cases, hospitalizations, and deaths in our markets. However, we increased the loss emergence period to 21 months at December 31, 2021 due to the prevalence of the highly transmittable COVID-19 Omicron variant. We partially offset these reductions by increasing our economic conditions qualitative factor by four basis points during 2021 (two basis points at June 30, 2021 and two basis points at September 30, 2021) due to higher inflation, supply chain bottlenecks, and labor shortages in certain industries; and we increased our change in legal or regulatory requirements qualitative factor by one basis point at December 31, 2021 due to the resignation of the Chair of the FDIC on December 31, 2021, which may lead to regulatory changes that negatively affect banks.
· The increase in non-interest expense is primarily related to increased salaries and employee benefits expense of $468 thousand, increased occupancy expense of $238 thousand, increased marketing and public relations expense of $130 thousand, increased FDIC assessment of $214 thousand, increased director fees and benefits of $165 thousand, increased third party broker dealer expenses of $90 thousand related to our higher investment advisory fees and non-deposit commissions, and increased ATM/debit card and computer processing expense of $700 thousand partially offset by lower legal and professional fees of $180 thousand and lower amortization of intangibles of $162 thousand.
· Our effective tax rate was 21.27% during the twelve months of 2021 compared to 19.82% during the same period in 2020.
Year Ended December 31, 2020 and
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 the 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 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.
Year Ended December 31, 2021 and
Net interest income increased $5.3 million, or 13.1%, to $45.3 million for the twelve months ended December 31, 2021 from $40.0 million for the twelve months ended December 31, 2020. Our net interest income has been trending up over the last two years as net interest income totaled $45.3 million in 2021, $40.0 million in 2020, and $36.8 million in 2019. The yield on earning assets was 3.35%, 3.65%, and 4.19% in 2021, 2020, and 2019, respectively. The rate paid on interest-bearing liabilities was 0.24%, 0.46%, and 0.80% in 2021, 2020, and 2019, respectively. The fully taxable equivalent net interest margin was 3.23% in 2021, 3.37% in 2020, and 3.65% in 2019.
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 62.6% in 2021, 69.7% in 2020, and 72.2% in 2019. Loans held-for-investment as a percentage of earning assets declined to 58.2% at December 31, 2021 from 65.1% at December 31, 2020. Our loan (including loans held-for-sale) to deposit ratio on average during 2021 was 68.8%, as compared to 76.8% during 2020, and 78.7% during 2019. The loan to deposit ratio declined to 64.0% at December 31, 2021 as compared to 74.8% at December 31, 2020. This decline was due to our deposit growth of $171.9 million exceeding our loan (including loans held-for-sale) decline of $18.4 million and loan (excluding loans held-for-sale) growth of $19.5 million from December 31, 2020 to December 31, 2021.
Our net interest margin declined by 15 basis points to 3.19% during the twelve months ended December 31, 2021 from 3.34% during the twelve months ended December 31, 2020. Our net interest margin, on a taxable equivalent basis, was 3.23% for the twelve months ended December 31, 2021 compared to 3.37% for the twelve months ended December 31, 2020. Average earning assets increased $220.3 million, or 18.4%, to $1.4 billion for the twelve months ended December 31, 2021 compared to $1.2 billion in the same period of 2020. The increase in net interest income was 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 twice totaling 150 basis points during the first quarter of 2020 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 and 2021.
The net interest margin was positively affected by PPP loans and a $140 thousand interest recovery on a non-accrual loan that was successfully resolved during the twelve months ended December 31, 2021. We earned $3.3 million in PPP loan interest income, which includes $3.0 million in accretion of PPP deferred fees net of deferred costs, on an average balance of $36.8 million during the twelve months ended December 31, 2021 compared to $1.1 million in PPP loan interest income, which includes $738 thousand in accretion of PPP deferred loan fees net of deferred costs, on an average balance of $32.3 million during the twelve months ended December 31, 2020. Excluding PPP loans, our net margin declined by 31 basis points to 3.03% during the twelve months ended December 31, 2021 from 3.34% during the twelve months ended December 31, 2020. Excluding PPP loans, our net interest margin, on a taxable equivalent basis, was 3.07% for the twelve months ended December 31, 2021 compared to 3.37% for the twelve months ended December 31, 2020.
Average loans increased $53.9 million, or 6.5%, to $889.0 million for the twelve months ended December 31, 2021 from $835.1 million for the same period in 2020. Average PPP loans increased $4.5 million to $36.8 million and average Non-PPP loans increased $49.4 million to $852.1 million for the twelve months ended December 31, 2021. Average loans represented 62.6% of average earning assets during the twelve months ended December 31, 2021 compared to 69.7% of average earning assets during the same period in 2020. The decline in average loans as a percentage of average earning assets was primarily due to increases in deposits of $205.3 million and securities sold under agreements to repurchase of $12.7 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 the amount of our FHLB advances. The yield on loans increased two basis points to 4.46% during the twelve months ended December 31, 2021 from 4.44% during the same period in 2020. Excluding PPP loans, the yield on Non-PPP loans declined 22 basis points to 4.26% during the twelve months ended December 31, 2021 from 4.48% during the same period in 2020. The yield on loans during the twelve months ended December 31, 2021 also included $140 thousand in interest recoveries on a non-accrual relationship that was successfully resolved during the third quarter of 2021. The yield on PPP loans was 9.07% during the twelve months ended December 31, 2021 compared to 3.32% during the same period in 2020. PPP loans declined to $1.5 million at December 31, 2021 from $42.2 million at December 31, 2020 due to PPP loans forgiven through the SBA PPP forgiveness process. When PPP loans are forgiven any remaining deferred fees net of deferred costs are recognized in interest income through accelerated accretion of the deferred fees net of deferred costs. Interest income on PPP loans increased $2.3 million to $3.3 million during the twelve months of 2021 from $1.1 million during the same period in 2020. The $3.3 million in interest income on PPP loans during the twelve months ended December 31, 2021 includes $3.0 million in accretion of deferred fees net of deferred costs.
Average securities and average other short-term investments for the twelve months ended December 31, 2021 increased $155.9 million and $10.5 million, respectively, from the prior year period. The yield on our securities portfolio declined to 1.69% for the twelve months ended December 31, 2021 from 2.15% for the same period in 2020; and the yield on our other short-term investments declined to 0.18% for the twelve months ended December 31, 2021 from 0.44% for the same period in 2020. 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, 2021 and 2020 was 3.35% and 3.65%, respectively. The cost of interest-bearing liabilities was at 24 basis points during the twelve months ended December 31, 2021 compared to 46 basis points during the same period in 2020.
The cost of deposits, including demand deposits, was 13 basis points during the twelve months ended December 31, 2021 compared to 28 basis points during the same period in 2020. The cost of funds, including demand deposits, was 16 basis points during the twelve months ended December 31, 2021 compared to 33 basis points during the same period in 2020. We continue to focus on growing our pure deposits (demand deposits, interest-bearing transaction accounts, savings deposits, money market accounts, and IRAs) as these accounts tend to be low-cost deposits and assist us in controlling our overall cost of funds. During the twelve months ended December 31, 2021, these deposits averaged 90.1% of total deposits as compared to 87.4% during the same period of 2020. This increase was due to PPP loan proceeds, other stimulus funds related to the COVID-19 pandemic, and organic deposit growth.
Year Ended December 31, 2020 and
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.
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 $ 36,837 $ 3,340 9.07 % $ 32,312 $ 1,073 3.32 % $ - $ - N/A
Non-PPP loans 852,136 36,331 4.26 % 802,779 35,964 4.48 % 735,343 35,447 4.82 %
Total loans(1) $ 888,973 $ 39,671 4.46 % $ 835,091 $ 37,037 4.44 % $ 735,343 $ 35,447 4.82 %
Non-Taxable Securities 425,523 6,993 1.64 % 286,979 6,102 2.13 % 254,364 6,549 2.57 %
Taxable Securities 31,282 2.32 % 13,915 2.61 % 3,223 2.70
Int Bearing Deposits in Other Banks 72,823 0.18 % 62,313 0.44 % 24,860 2.14 %
Fed Funds Sold 0.00 % 0.14 % 2.13 %
Total earning assets 1,419,165 47,520 3.35 % 1,198,887 43,778 3.65 % 1,018,510 42,630 4.19 %
Cash and due from banks 23,668
15,552
14,362
Premises and equipment 33,780
34,769
35,893
Goodwill and other intangible assets 15,649
15,922
16,376
Other assets 38,846
39,541
37,513
Allowance for loan losses (10,750 )
(8,590 )
(6,437 )
Total assets $ 1,520,358
$ 1,296,081
$ 1,116,217
Liabilities
Interest-bearing liabilities
Interest-bearing transaction accounts $ 303,633 $ 196 0.06 % $ 246,385 $ 284 0.12 % $ 208,750 $ 591 0.28 %
Money market accounts 273,005 0.17 % 217,018 0.38 % 181,695 1,690 0.93 %
Savings deposits 134,980 0.06 % 113,255 0.07 % 104,236 0.13 %
Time deposits 158,053 0.63 % 166,791 1,833 1.10 % 176,243 2,139 1.21 %
Fed Funds Purchased 2.14 % 0.61 % 3.07 %
Securities Sold Under Agreements to Repurchase 62,194 0.14 % 49,537 0.38 % 34,229 1.12 %
Other Short-Term Debt 0.18 % 2,020 0.39 % 3,196 2.39 %
Other Long-Term Debt 14,964 2.78 % 14,964 3.58 % 14,964 5.08 %
Total interest-bearing liabilities $ 946,829 $ 2,241 0.24 % $ 809,977 $ 3,755 0.46 % $ 723,351 $ 5,781 0.80 %
Demand deposits 423,056
343,999
264,017
Other liabilities 12,607
13,242
11,869
Shareholders’ equity $ 137,866
$ 128,863
$ 116,980
Total liabilities and shareholders’ equity $ 1,520,358
$ 1,296,081
$ 1,116,217
Net interest spread
3.11 %
3.19 %
3.39 %
Net interest income/margin
$ 45,279 3.19 %
$ 40,023 3.34 %
$ 36,849 3.62 %
Net interest margin
(tax equivalent)(3)
$ 45,776 3.23 %
$ 40,413 3.37 %
$ 37,208 3.65 %
(1) All loans and deposits are domestic. Average loan balances include non-accrual loans and loans held for sale.
(3) Based on a 21.0% marginal tax rate.
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.
2021 versus 2020
Increase (decrease) due to 2020 versus 2019
Increase (decrease) due to
(In thousands) Volume Rate Net Volume Rate Net
Assets
Earning assets
Loans $ 2,403 $ 231 $ 2,634 $ 3,872 $ (2,282 ) $ 1,590
Investment securities 2,133 (879 ) 1,254 (13,452 ) 13,281 (171 )
Other short-term investments (203 ) (146 ) (595 ) (271 )
Total earning assets 6,826 (3,084 ) 3,742 4,105 (2,957 ) 1,148
Interest-bearing liabilities
Interest-bearing transaction accounts (186 ) (88 ) (441 ) (307 )
Money market accounts (664 ) (349 ) (1,294 ) (870 )
Savings deposits (46 ) (6 ) (67 ) (54 )
Time deposits (92 ) (746 ) (838 ) (111 ) (195 ) (306 )
Other short-term borrowings (381 ) (233 ) (999 ) (489 )
Total interest-bearing liabilities (2,312 ) (1,514 ) (2,834 ) (2,026 )
Net interest income
$ 5,256
$ 3,174
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.
We employ a monitoring technique to measure 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, 2021.
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) $ 313,271 $ 244,479 $ 155,205 $ 139,302 $ 852,257
Loans Held for Sale 7,120 - - - 7,120
Securities(2) 247,558 36,738 46,758 211,551 542,605
Federal funds sold, securities purchased under agreements to resell and other earning assets 46,299 - - - 46,299
Total earning assets 614,248 281,217 201,963 350,853 1,448,281
Liabilities
Interest bearing liabilities
Interest bearing deposits
Interest checking accounts 131,551 - - 643,143 774,694
Money market accounts 182,068 - - 105,351 287,419
Savings deposits 39,890 - - 105,506 145,396
Time deposits 117,612 28,279 7,789 153,780
Total interest-bearing deposits 471,121 28,279 7,789 854,100 1,361,289
Other borrowings 69,180 - - - 69,180
Total interest-bearing liabilities 540,301 28,279 7,789 854,100 1,430,469
Period gap $ 73,947 $ 252,938 $ 194,174 $ (403,830 ) $ 117,229
Cumulative gap $ 73,947 $ 326,885 $ 521,059 $ 117,229 $ 117,229
Ratio of cumulative gap to total earning assets 8.82 % 36.50 % 47.48 % 123.92 % 186.21 %
(1) Loans classified as non-accrual as of December 31, 2021 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, 2021 and 2020 over the subsequent 12 months. At December 31, 2021, we are asset sensitive. As a result, our modeling reflects an increase in net interest income in a rising interest rate environment and a reduction in net interest income in a declining interest rate environment. In a declining rate environment, the decline in net interest income is primarily due to 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 3.04 % -0.73 %
+100bp 2.12 % +0.08 %
Flat - -
-100bp -5.12 % -3.37 %
-200bp -9.81 % -3.58 %
During the second 12-month period after 100 basis point and 200 basis point simultaneous and parallel increases in interest rates along the entire yield curve, our net interest income is projected to increase 7.82% and 15.00%, respectively.
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, 2021 and 2020, the PVE exposure in a plus 200 basis point increase in market interest rates was estimated to be 9.73% and 11.47%, respectively. The PVE exposure in a down 100 basis point decrease was estimated to be (9.86)% at December 31, 2021 compared to (14.32)% at December 31, 2020.
Provision and Allowance for Loan Losses
We account for our allowance for loan losses under the incurred loss model. At December 31, 2021, the allowance for loan losses was $11.2 million, or 1.29% of total loans (excluding loans held-for-sale), compared to $10.4 million, or 1.23% of total loans (excluding loans held-for-sale) at December 31, 2020. Excluding PPP loans and loans held-for-sale, the allowance for loan losses was 1.30% of total loans at December 31, 2021 compared to 1.30% of total loans at December 31, 2020. The increase in the allowance for loan losses compared to December 31, 2020 is primarily related to loan growth of $19.5 million; $455 thousand in net recoveries; an increase in our economic conditions qualitative factor by four basis points during 2021 due to higher inflation, supply chain bottlenecks, and labor shortages in certain industries; and a one basis point increase in our change in legal or regulatory requirements qualitative factor. These increases were partially offset by a reduction in the loss emergence period assumption on our COVID-19 qualitative factor, which was added to our allowance for loan losses methodology during 2020, to 21 months at December 31, 2021 from 24 months at December 31, 2020. At June 30, 2021, we reduced the loss emergence period in the COVID-19 qualitative factor to 18 months from 24 months due to a reduction in the number of COVID-19 related cases, hospitalizations, and deaths within our markets. However, we increased the loss emergence period to 21 months at December 31, 2021 due to the prevalence of the highly transmittable COVID-19 Omicron variant.
Loans that we acquired in our acquisition of Cornerstone Bancorp, otherwise referred to herein as Cornerstone, in 2017 as well as in our 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, 2021 and December 31, 2020, the remaining credit component on loans attributable to acquired loans in the Cornerstone and Savannah River transactions was $130 thousand and $264 thousand, respectively.
Our provision for loan losses was $335 thousand for the twelve months ended December 31, 2021 compared to $3.7 million during the same period in 2020. The decline in the provision for loan losses is primarily related to an increase during the twelve months of 2020 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. As discussed above, during the twelve months of 2020, we added a qualitative factor for the COVID-19 pandemic to our allowance for loan losses methodology. This new qualitative factor was based on the dollar amount of our deferrals and a one-year loss emergence period based on the highest period of annual historical loss rate since the Bank’s inception. As the pandemic worsened, we added our exposure to certain industry segments most impacted by the COVID-19 pandemic (hotels, restaurants, assisted living, and retail) to the COVID-19 qualitative factor and we extended the loss emergence period to two years based on the highest two periods of annual historical loss rates since the Bank’s inception. At December 31, 2021, the COVID-19 qualitative factor represented $1.9 million of our allowance for loan losses.
We also recognized $455 thousand in net recoveries during the twelve months ended December 31, 2021. These items were partially offset by $19.5 million in loan growth; a four basis points increase (two basis points at June 30, 2021 and two basis points at September 30, 2021) in our qualitative factor related to economic conditions due to an increase in inflation, supply chain bottlenecks, and labor shortages in our markets; and a one basis point increase in our change in legal or regulatory requirements qualitative factor at December 31, 2021 due to the resignation of the Chair of the FDIC on December 31, 2021, which may lead to regulatory changes that negatively affect banks.
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 or national economies, 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. 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 0.18%, 0.03% and 0.00%, 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. At December 31, 2021 and December 31, 2020, approximately 90.9% and 87.5%, respectively, of the loan portfolio had real estate collateral. The increase in the percent of our loan portfolio with real estate as the underlying collateral is due to a $46.1 million increase in loans with real estate as the underlying collateral and a $40.8 million decline in PPP loans, which declined to $1.5 million at December 31, 2021 from $42.2 at December 31, 2020. 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.
The non-performing asset ratio was 0.09% of total assets with the nominal level of $1.4 million in non-performing assets at December 31, 2021 compared to 0.50% and $7.0 million at December 31, 2020. The decline in the non-performing asset ratio was related to the successful resolution of several non-accrual and accruing loans past due of 90 days or more. Non-accrual loans declined $4.3 million to $250 thousand at December 31, 2021 from $4.6 million at December 31, 2020. Accruing loans past due 90 days or more declined to none at December 31, 2021 from $1.3 million at December 31, 2020. Loans past due 30 days or more represented 0.03% of the loan portfolio at December 31, 2021 compared to 0.23% at December 31, 2020. The ratio of classified loans plus OREO and repossessed assets declined to 6.27% of total bank regulatory risk-based capital at December 31, 2021 from 6.89% at December 31, 2020.
We continue to monitor the impact of the COVID-19 pandemic on our customer base of local businesses and professionals. There were seven loans totaling $250 thousand (0.03% of total loans) included on non-performing status (non-accrual loans and loans past due 90 days and still accruing) at December 31, 2021. All seven of these loans were on non-accrual status. The largest loan included on non-accrual status is in the amount of $103 thousand. The average balance of the remaining six loans on non-accrual status is approximately $25 thousand with a range between $3 and $87 thousand, and the majority of these loans are secured by first mortgage liens. Furthermore, we had $1.4 million in accruing trouble debt restructurings, or TDRs, at December 31, 2021 compared to $1.6 million at December 31, 2020. 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, 2021, we had 10 impaired loans totaling $1.7 million compared to 23 impaired loans totaling $6.1 million at December 31, 2020. 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, 2021, we had loans totaling $235 thousand that were delinquent 30 days to 89 days representing 0.03% of total loans compared to $665 thousand or 0.08% of total loans at December 31, 2020.
Beginning in March 2020, we proactively offered payment deferrals for up to 90 days to our loan customers regardless of the impact of the pandemic on their business or personal finances. As a result of payments being resumed at the conclusion of their payment deferral period, loans in which payments were being 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, to $8.7 million at March 31, 2021, to $4.5 million at June 30, 2021, to $4.1 million at September 30, 2021, and to zero at December 31, 2021. We had no loans on which payments have been deferred at December 31, 2021 compared to $16.1 million at December 31, 2020. The $16.1 million in deferrals at December 31, 2020 consisted of seven loans on which only principal was being deferred. 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)
Average loans outstanding (excluding loans held-for-sale) $ 871,551 $ 806,583 $ 726,279
Loans outstanding at period end (excluding loans held-for-sale) $ 863,702 $ 844,157 $ 737,028
Total nonaccrual loans $ 250 $ 4,562 $ 2,329
Loans past due 90 days and still accruing $ - $ 1,260 $ -
Beginning balance of allowance $ 10,389 $ 6,627 $ 6,263
Loans charged-off:
1-4 family residential mortgage - -
Real Estate - Construction -
Real Estate Mortgage - Residential - - -
Real Estate Mortgage - Commercial -
Consumer - Home equity - -
Commercial - -
Consumer - Other
Overdrafts - -
Total loans charged-off
Recoveries:
1-4 family residential mortgage - - -
Real Estate - Construction - -
Real Estate Mortgage - Residential -
Real Estate Mortgage - Commercial
Consumer - Home equity
Commercial
Consumer - Other
Total recoveries
Net loans recovered (charged off)
Provision for loan losses 3,663
Balance at period end $ 11,179 $ 10,389 $ 6,627
Net charge -offs (recoveries) to average loans and loans held for sale (0.05 )% (0.01 )% (0.03 )%
Allowance as percent of total loans 1.29 % 1.23 % 0.90 %
Non-performing loans as% of total loans 0.09 % 0.50 % 0.31 %
Allowance as% of non-performing loans 4,471.60 % 178.23 % 285.54 %
Nonaccrual loans as% of total loans
0.03 %
0.54 %
0.32 %
Allowance as % of nonaccrual loans
4,473.93 %
227.79 %
284.56 %
The following table details net charge-offs to average loans outstanding by loan category for the years ended December 31,
(Dollars in thousands)
Commercial, financial & agricultural
Net charge-offs (recoveries) $ (39 ) $ (130 ) $ 9
Average loans for the year $ 98,301 $ 82,191 $ 53,589
Net charge-offs (recoveries)/average loans (0.04 )% (0.16 )% 0.02 %
Real estate:
Construction
Net charge-offs (recoveries) $ - $ - $ -
Average loans for the year $ 98,196 $ 86,089 $ 60,873
Net charge-offs (recoveries)/average loans 0.00 % 0.00 % 0.00 %
Mortgage-residential
Net charge-offs (recoveries) $ (10 ) $ - $ 12
Average loans for the year $ 42,880 $ 46,024 $ 49,358
Net charge-offs (recoveries)/average loans (0.02 )% 0.00 % 0.02 %
Mortgage-commercial
Net charge-offs (recoveries) $ (363 ) $ (22 ) $ (307 )
Average loans for the year $ 597,721 $ 555,090 $ 523,577
Net charge-offs (recoveries)/average loans (0.06 )% 0.00 % (0.06 )%
Consumer:
Home Equity
Net charge-offs (recoveries) $ (69 ) $ (2 ) $ (14 )
Average loans for the year $ 26,399 $ 27,904 $ 29,146
Net charge-offs (recoveries)/average loans (0.26 )% (0.01 )% (0.05 )%
Other
Net charge-offs (recoveries) $ 26 $ 55 $ 75
Average loans for the year $ 8,054 $ 9,286 $ 9,736
Net charge-offs (recoveries)/average loans 0.32 % 0.59 % 0.77 %
Total:
Net charge-offs (recoveries) $ (455 ) $ (99 ) $ (225 )
Average loans for the year $ 871,551 $ 806,583 $ 726,279
Net charge-offs (recoveries)/average loans (0.05 )% (0.01 )% (0.03 )%
(1) Average loans exclude loans held for sale
The following table presents an allocation of the allowance for loan losses at the end of each of the past three 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
(Dollars in thousands) Amount % of
loans
in
category Amount % of
loans
in
category Amount % of
loans
in
category
Commercial, Financial and Agricultural $ 853 8.1 % $ 778 8.0 % $ 427 7.3 %
Real Estate Construction 1.1 % 1.5 % 1.9 %
Real Estate Mortgage: - - - - - -
Commercial 8,570 81.2 % 7,855 80.4 % 4,602 78.7 %
Residential 8.4 % 8.8 % 10.4 %
Consumer 1.2 % 1.3 % 1.7 %
Unallocated N/A N/A N/A
Total $ 11,179 100.0 % $ 10,389 100.0 % $ 6,627 100.0 %
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 $9.5 million and $16.7 million at December 31, 2021 and 2020, 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 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 during the twelve months ended December 31, 2021 was $13.9 million compared to $13.8 million during the same period in 2020. Deposit service charges declined $144 thousand during the twelve months ended December 31, 2021 compared to the same period in 2020 primarily due to lower overdraft fees. Mortgage banking income declined by $1.2 million to $4.3 million during the twelve months ended December 31, 2021 from $5.6 million during the same period in 2020 due to a reduction in mortgage production partially offset by an increase in the gain-on-sale margin. Mortgage production during the twelve months ended December 31, 2021 was $142.1 million compared to $199.3 million during the same period in 2020. The gain on sale margin was 3.04% in the twelve months ended December 31, 2021 compared to 2.79% during the same period in 2020. The gain on sale margin was limited during 2020 and the first quarter of 2021 as we worked on certain loans not yet sold, in an effort to resolve processing and delivery issues. We anticipate the future gain-on-sale margin will be approximately 3.25%.
Investment advisory fees increased $1.3 million to $4.0 million during the twelve months ended December 31, 2021 from $2.7 million during the same period in 2020. Total assets under management increased to $650.9 million at December 31, 2021 compared to $501.6 million at December 31, 2020 due to both organic growth and higher equity markets. Management continues to focus on increasing both the mortgage banking income as well as the investment advisory fees and commissions.
We had no gain on sale of securities during the twelve months ended December 31, 2021 compared to $99 thousand during the same period in 2020. We had a (i)$13 thousand gain on the sale of bank owned land during the twelve months ended December 31, 2021 compared to zero during the prior year period; (ii)$104 thousand gain on the sale of bank premises held-for-sale during the twelve months ended December 31, 2021 compared to zero during the prior year period; and (iii) $77 thousand gain on sale of other real estate owned during the twelve months ended December 31, 2021 compared to $147 thousand during the prior year period. Other non-recurring income includes a $24 thousand gain on insurance proceeds during the twelve months ended December 31, 2021 compared to zero during the prior year period; $147 thousand received from the collection of summary judgments during the twelve months ended December 31, 2021 related to two loans charged off at a bank we acquired; $311 thousand in non-recurring bank owned life insurance (BOLI) income during the twelve months ended December 31, 2020. 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.
Non-interest income, other increased $434 thousand during the twelve months ended December 31, 2021 compared to the same period in 2020 primarily due increases in ATM debit card income of $412 thousand and rental income of $40 thousand partially offset by lower recurring BOLI income of $31 thousand and lower loan late charges of $33 thousand.
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.
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 $ 2,669 $ 2,257 $ 2,060
Recurring income on bank owned life insurance
Rental income
Loan late charges
Safe deposit fees
Wire transfer fees
Other
Total $ 4,248 $ 3,814 $ 3,660
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 $1.7 million during the twelve months ended December 31, 2021 to $39.2 million compared to $37.5 million during the same period in 2020. Salary and benefit expense increased $468 thousand to $24.5 million during the twelve months ended December 31, 2021 from $24.0 million during the same period in 2020. This increase is primarily a result of the normal salary adjustments and increased financial planning and investment advisory commissions. We had 250 employees at December 31, 2021 compared to 244 at December 31, 2020. Occupancy expense increased $238 thousand to $2.9 million during the twelve months ended December 31, 2021 compared to $2.7 million during the same period in 2020. Marketing and public relations expense increased $130 thousand to $1.2 million during the twelve months ended December 31, 2021 from $1.0 million during the same period in 2020 due to the production of new ad campaigns and related creative materials. FDIC assessments increased $214 thousand due to a higher assessment rate in 2021 related to a decrease in our leverage ratio and an increase in our assessment base due to higher average assets as well as $39 thousand of small bank assessment credits utilized in the twelve months ended December 31, 2020. 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 FDIC small bank assessment credits during the twelve months ended December 31, 2020 compared to none during the same period in 2021. The FDIC small bank assessment credits were fully utilized during the first quarter of 2020. Other real estate expense declined $96 thousand to $105 thousand during the twelve months ended December 31, 2021 compared to $201 thousand during the same period in 2020. Amortization of intangibles declined $162 thousand to $201 thousand during the twelve months ended December 31, 2021 compared to $363 thousand during the same period in 2020.
Non-interest expense, other increased $816 thousand during the 12 months ended December 31, 2021 as compared to the same period in 2020 primarily due to increased director fees and benefits of $165 thousand, increased third party broker dealer expenses of $90 thousand related to our higher investment advisory fees and non-deposit commissions, and increased ATM/debit card and computer processing expense of $700 thousand due to higher ATM/debit card transactions, which resulted in higher income and expense, partially offset by lower legal and professional fees of $180 thousand.
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.
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 $ 24,494 $ 24,026 $ 21,261
Occupancy 2,947 2,709 2,696
Furniture and Equipment 1,296 1,237 1,493
Marketing and public relations 1,173 1,043 1,114
ATM/debit card and data processing* 3,823 3,123 2,834
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 1,666 1,417 1,525
$ 39,201 $ 37,534 $ 34,617
*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 2021 was $4.2 million as compared to income tax expense for the year ended December 31, 2020 of $2.5 million and $2.9 million for the year ended December 31, 2019 (see Note 14 “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. 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 21.25% to 21.75%.
Financial Position
Assets totaled $1.6 billion at December 31, 2021 and $1.4 billion at December 31, 2020. Loans (excluding loans held-for-sale) increased $19.5 million to $863.7 million at December 31, 2021 from $844.2 million at December 31, 2020.
Total loan production excluding PPP loans and a PPP related credit facility was $217.1 million during the twelve months ended December 31, 2021 compared to $177.1 million during the same period in 2020. Loans held-for-sale declined to $7.1 million at December 31, 2021 from $45.0 million at December 31, 2020 due to an improvement in mortgage processing, which has resulted in a reduction in the number of days to sell loans to investors, and the movement of 30 loans totaling $7.6 million to loans held-for-investment. Mortgage production was $142.1 million during the twelve months ended December 31, 2021 compared to $199.3 million during the same period in 2020. The loan-to-deposit ratio (including loans held-for-sale) at December 31, 2021 and December 31, 2020 was 64.0% and 74.8%, respectively. The loan-to-deposit ratio (excluding loans held-for-sale) at December 31, 2021 and December 31, 2020 was 63.4% and 71.0%, respectively. Investment securities increased to $566.6 million at December 31, 2021 from $361.9 million at December 31, 2020. Other short-term investments increased to $47.0 million at December 31, 2021 from $46.1 million at December 31, 2020. The increases in investments and other short-term investments are primarily due to organic deposit growth, excess liquidity from customer’s PPP loan proceeds and other stimulus funds related to the COVID-19 pandemic, and from forgiven PPP loans.
Non-PPP loans increased $60.3 million to $862.2 million at December 31, 2021 from $801.9 million at December 31, 2020. PPP loans declined $40.8 million to $1.5 million at December 31, 2021 from $42.2 million at December 31, 2020. PPP loans totaled $1.5 million gross of deferred fees and costs and $1.5 million net of deferred fees and costs at December 31, 2021. The $55 thousand in PPP deferred fees net of deferred costs at December 31, 2021 will be recognized as interest income over the remaining life of the PPP loans.
During 2020 and 2021, we originated 1,417 PPP loans totaling $88.5 million, which includes 843 PPP loans totaling $51.2 million originated in 2020 and 574 PPP loans totaling $37.3 million originated in 2021. Furthermore, during 2020, we facilitated the origination of 111 PPP loans totaling $31.2 million for our customers through a third party prior to establishing our own PPP platform. As of December 31, 2021, 1,406 PPP loans totaling $87.0 million (840 PPP loans totaling $51.2 million originated in 2020 and 566 PPP loans totaling $35.8 million originated in 2021) were forgiven through the SBA PPP forgiveness process.
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 $171.9 million to $1.4 billion at December 31, 2021 compared to $1.2 billion at December 31, 2020. Our pure deposits, which are defined as total deposits less certificates of deposits, increased $177.9 million to $1.2 billion at December 31, 2021 from $1.1 billion at December 31, 2020. 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. We had no brokered deposits and no listing services deposits at December 31, 2021. Our securities sold under agreements to repurchase, which are related to our customer cash management accounts, increased $13.3 million to $54.2 million at December 31, 2021 from $40.9 million at December 31, 2020.
Total shareholders’ equity increased $4.7 million, or 3.4%, to $141.0 million at December 31, 2021 from $136.3 million at December 31, 2020. The $4.7 million increase was due to an $11.9 million increase in retention of earnings less dividends paid, a $0.3 million increase due to employee and director stock awards, and a $0.4 million increase due to dividend reinvestment plan (DRIP) purchases partially offset by an $8.0 million reduction in accumulated other comprehensive income. The decline in accumulated other comprehensive income was due to an increase in longer-term market interest rates, which resulted in a reduction 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 this repurchase plan prior to its expiration on December 31, 2020. On April 12, 2021, we announced that our Board of Directors approved the repurchase of up to 375,000 shares of our common stock (the “2021 Repurchase Plan”), which represents approximately 5% of our 7,548,638 shares outstanding as of December 31, 2021. No share repurchases have been made under the 2021 Repurchase Plan as of December 31, 2021. The 2021 Repurchase Plan expires at the market close on March 31, 2022. We intend to seek approval in 2022 for a new repurchase plan of up to 375,000 shares of common stock to replace the expiring 2021 Repurchase Plan.
Earning Assets
Loans and loans held for sale
Loans typically provide higher yields than the other types of earning assets. During 2021, loans accounted for 62.6% of average earning assets. The loan portfolio (including held-for-sale) averaged $889.0 million in 2021 as compared to $835.1 million in 2020. Quality loan portfolio growth continued to be a strategic focus of ours in 2021. 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 2021, we funded new loans (excluding loans originated for sale, PPP loans, and a PPP related credit facility) of approximately $217.1 million, as compared to $177.1 million in 2020. We originated $37.3 million in PPP loans in 2021; and $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 $1.5 million and the PPP related credit facility was $0 at December 31, 2021 compared to $42.2 million and $5.2 million, respectively, at December 31, 2020. 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:
(In thousands)
Commercial, financial & agricultural $ 69,952 $ 96,688 $ 51,805
Real estate:
Construction 94,969 95,282 73,512
Mortgage-residential 45,498 43,928 45,357
Mortgage-commercial 617,464 573,258 527,447
Consumer:
Home equity 27,116 26,442 28,891
Other 8,703 8,559 10,016
Total gross loans 863,702 844,157 737,028
Allowance for loan losses (11,179 ) (10,389 ) (6,627 )
Total net loans $ 852,523 $ 833,768 $ 730,401
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 2021 and 2020 were commercial mortgage loans in the amount of $617.5 million and $573.3 million, respectively, representing 71.5% and 67.9% 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, 2021.
Loan Maturity Schedule and Sensitivity to Changes in Interest Rates
December 31, 2021
(In thousands) One Year
or Less Over One Year
Through Five
Years Over Five Years
Through Fifteen
years Over Fifteen
Years Total
Commercial, financial and agricultural $ 8,188 $ 32,428 $ 29,336 $ - $ 69,952
Real Estate and Home Equity 79,575 323,771 356,829 24,873 785,047
All other loan 2,387 5,642 8,703
$ 90,150 $ 361,841 $ 386,447 $ 25,264 $ 863,702
Loans maturing after one year with:
Variable Rate $ 103,550
Fixed Rate 670,002
$ 773,552
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 $456.8 million in 2021, as compared to $300.9 million in 2020, which represents 32.2% and 25.1% of the average earning assets for the years ended December 31, 2021 and 2020, respectively. At December 31, 2021 and 2020, our investment securities portfolio amounted to $564.8 million and $359.9 million, respectively. The increase in investment securities in 2021 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, 2021, the estimated weighted average life of our investment portfolio was approximately 6.8 years, duration of approximately 3.6, and a weighted average tax equivalent yield of approximately 1.73%. 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%.
We held no debt securities rated below investment grade at December 31, 2021.
The following table shows the investment portfolio composition.
December 31,
(Dollars in thousands)
Securities available-for-sale at fair value:
US Treasury Securities $ 15,436 $ 1,502 $ 7,203
Government sponsored enterprises 2,501 1,006 1,001
Small Business Administration pools 31,273 35,498 45,343
Mortgage-backed securities 397,729 229,929 183,586
State and local government 109,848 88,603 49,648
Corporate and Other Securities 8,052 3,328
Total $ 564,839 $ 359,866 $ 286,800
We hold other investments carried at cost totaling $1.8 million and $2.1 million at December 31, 2021 and 2020, respectively, which includes our investment in FHLB stock. Our investment in FHLB stock amounted to $698.4 thousand and $1.1 million at December 31, 2021 and 2020, respectively.
Investment Securities Maturity Distribution and Yields
The following table shows, at amortized cost, the expected maturities and weighted average yield, which is calculated using amortized cost as the weight and tax-equivalent book yield, of securities held at December 31, 2021:
(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 Securities $ - - $ - - $ 15,736 1.21 % $ - -
Government sponsored enterprises 2,499 0.58 % - - - - - -
Small Business Administration pools 1.90 % 22,398 1.84 % 5,613 2.27 % 2,359 1.87 %
Mortgage-backed securities 12,828 2.04 % 129,221 1.31 % 135,147 1.65 % 120,931 1.08 %
State and local government 4,244 1.35 % 18,667 2.99 % 78,435 2.33 % 4,123 3.18 %
Corporate and other securities - - 5,029 3.82 % 2,984 4.18 % 3.70 %
Total investment securities available-for-sale $ 20,037 1.71 % $ 175,315 1.63 % $ 237,915 1.89 % $ 127,422 1.16 %
Short-Term Investments
Short-term investments, which consist of federal funds sold, securities purchased under agreements to resell and interest bearing deposits, averaged $73.4 million in 2021, as compared to $62.9 million in 2020. The increase in short-term investments in 2021 is primarily due to organic deposit growth, excess liquidity from customer’s PPP loan proceeds and other stimulus funds related to the COVID-19 pandemic, and forgiven PPP loans. 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, 2021, short-term investments including funds on deposit at the Federal Reserve totaled $45.9 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 $1.3 billion during 2021, compared to $1.1 billion during 2020. Average interest-bearing deposits were $869.7 million during 2021, as compared to $743.4 million during 2020. 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 $ 444,688 32.7 % $ 385,511 32.4 % $ 289,828 29.3 %
Interest bearing checking accounts 331,638 24.4 % 278,077 23.4 % 229,168 23.2 %
Money market accounts 287,419 21.1 % 242,128 20.4 % 194,089 19.6 %
Savings accounts 143,765 10.6 % 123,032 10.3 % 104,456 10.6 %
Time deposits less than $100,000 74,489 5.5 % 78,794 6.6 % 84,730 8.6 %
Time deposits more than $100,000 79,792 5.8 % 81,871 6.9 % 85,930 8.7 %
$ 1,361,291 100.0 % $ 1,189,413 100.0 % $ 988,201 100.0 %
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 $1.3 billion and $1.1 billion at December 31, 2021 and 2020, respectively. Time deposits greater than $250 thousand, the FDIC deposit insurance coverage limit, amounted to $27.9 million and $28.6 million at December 31, 2021 and December 31, 2020, 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 $250,000 or More
At December 31, 2021, time deposits in excess of the FDIC insurance limit were as follows:
December 31, 2021
(In thousands) Within Three
Months After Three
Through
Six Months After Six
Through
Twelve Months After
Twelve
Months Total
Time deposits of $250,000 or more $ 1,586 $ 1,399 $ 1,458 $ 5,206 $ 9,649
Borrowed funds. Borrowed funds consist of fed funds purchased, 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 $62.2 million, $49.5 million and $34.2 million during 2021, 2020 and 2019, respectively. The maximum month-end balances during 2021, 2020 and 2019 were $72.4 million, $73.0 million and $36.7 million, respectively. The average rates paid during these periods were 0.14%, 0.38% and 1.12%, respectively. The balances of securities sold under agreements to repurchase were $54.2 million and $40.9 million at December 31, 2021 and 2020, 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 2021 and 2020, the average outstanding advances amounted to $0 and $2.0 million, respectively.
There were no FHLB Advances scheduled to mature as of December 31, 2021 and 2020:
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
Our capital remained strong and exceeded the well-capitalized regulatory requirements at December 31, 2021. Total shareholders’ equity increased $4.7 million, or 3.4%, to $141.0 million at December 31, 2021 from $136.3 million at December 31, 2020. The $4.7 million increase was due to an $11.9 million increase in retention of earnings less dividends paid, a $0.3 million increase due to employee and director stock awards, and a $0.4 million increase due to dividend reinvestment plan (DRIP) purchases partially offset by a $8.0 million reduction in accumulated other comprehensive income. The decline in accumulated other comprehensive income was due to an increase in longer-term market interest rates, which resulted in a reduction 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. On April 12, 2021, we announced that our Board of Directors approved the repurchase of up to 375,000 shares of our common stock (the “2021 Repurchase Plan”), which represents approximately 5% of our 7,548,638 shares outstanding as of December 31, 2021. No share repurchases have been made under the 2021 Repurchase Plan as of December 31, 2021. The 2021 Repurchase Plan expires at the market close on March 31, 2022. We intend to seek approval in 2022 for a new repurchase plan of up to 375,000 shares of common stock to replace the expiring 2021 Repurchase Plan.
During each quarter in 2019, we paid an $0.11 per share dividend on our common stock. During each quarter in 2020 and 2021, we paid an $0.12 per share dividend on our common stock. On January 19, 2022, we announced a $0.13 per share dividend payable on February 15, 2022 to shareholders of record of our common stock on February 1, 2022.
In addition, we have a dividend reinvestment plan that 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, 2021.
Return on average assets 1.02 % 0.78 % 0.98 %
Return on average common equity 11.22 % 7.84 % 9.38 %
Equity to assets ratio 8.90 % 9.77 % 10.27 %
Dividend Payout Ratio 23.24 % 35.38 % 30.29 %
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. 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, 2021 and 2020, as set forth in the following table:
(In thousands) Required
Amount % Actual
Amount % Excess
Amount %
The Bank(1)(2):
December 31, 2021
Risk Based Capital
Tier 1 $ 57,075 6.0 % $ 132,918 14.0 % $ 75,843 8.0 %
Total Capital 76,101 8.0 % 144,097 15.1 % 67,996 7.1 %
CET1 42,807 4.5 % 132,918 14.0 % 90,111 9.5 %
Tier 1 Leverage 62,897 4.0 % 132,918 8.5 % 70,021 4.5 %
December 31, 2020
Risk Based Capital
Tier 1 $ 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 %
(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) Required Amounts and Required 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, 2021, 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, 2021. We believe that we have ample liquidity to meet the needs of our customers 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 FHLB.
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. Furthermore, we believe that we will have access to adequate liquidity and capital to support the long-term operations of the Bank. Shareholders’ equity declined to 8.9% of total assets at December 31, 2021 from 9.8% at December 31, 2020 due to total asset growth of $189.1 million compared to total shareholders’ equity growth of $4.7 million. The growth in total assets was primarily due to excess liquidity from customer’s PPP loans, other stimulus funds related to the COVID-19 pandemic, organic deposit growth, and loan growth. The $4.7 million increase in shareholder’s equity was due to an $11.9 million increase in retention of earnings less dividends paid, a $0.3 million increase due to employee and director stock awards, and a $0.4 million increase due to dividend reinvestment plan (DRIP) purchases partially offset by a $8.0 million reduction in accumulated other comprehensive income. The decline in accumulated other comprehensive income was due to an increase in longer-term market interest rates, which resulted in a reduction in the net unrealized gains in our investment securities portfolio. 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, 2021 and $10 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.
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, 2021, we had issued commitments to extend unused credit of $137.4 million, including $42.9 million in unused home equity lines of credit, through various types of lending arrangements. 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. 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 prior participation in the PPP as a participating lender. We had PPP loans totaling $1.5 million gross of deferred fees and costs and $1.5 million net of deferred fees and costs at December 31, 2021 compared to $43.3 million gross of deferred fees and costs and $42.2 million net of deferred fees and costs at December 31, 2020. 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 15 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 23.
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, 2021. 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, 2021, 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 Financial Statements
We have audited the accompanying consolidated balance sheets of First Community Corporation and its subsidiary (the Company) as of December 31, 2021 and 2020, the related consolidated statements of income, comprehensive income, changes in shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2021, and the related notes to the consolidated financial statements (collectively, the consolidated financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, 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 4 to the Company’s financial statements, the Company has a loan portfolio, net of deferred fees of approximately $863.7 million and related allowance for loan losses of approximately $11.2 million as of December 31, 2021. As described by the Company in Note 2, 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 validated the completeness and accuracy of the underlying data used to develop the factors.
· We validated the mathematical accuracy of the calculation.
· 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, as well as other audit evidence gathered.
· Analytical procedures were performed to evaluate the directional consistency of changes that occurred in the allowance for loan losses for loans collectively evaluated for impairment.
/s/ Elliott Davis, LLC
Firm ID: 149
We have served as the Company’s auditor since 2006.
Columbia, South Carolina
March 16, 2022
FIRST COMMUNITY CORPORATION
Consolidated Balance Sheets
December 31,
(Dollars in thousands, except par values)
ASSETS
Cash and due from banks $ 21,973 $ 18,930
Interest-bearing bank balances 47,049 46,062
Investment securities available-for-sale 564,839 359,866
Other investments, at cost 1,785 2,053
Loans held-for-sale 7,120 45,020
Loans held-for-investment 863,702 844,157
Less, allowance for loan losses 11,179 10,389
Net loans held-for-investment 852,523 833,768
Property and equipment - net 32,831 34,458
Lease right-of-use asset 2,842 3,032
Premises held-for-sale -
Bank owned life insurance 29,231 27,688
Other real estate owned 1,165 1,194
Intangible assets 1,120
Goodwill 14,637 14,637
Other assets 7,594 6,963
Total assets $ 1,584,508 $ 1,395,382
LIABILITIES
Deposits:
Non-interest bearing $ 444,688 $ 385,511
Interest bearing 916,603 803,902
Total deposits 1,361,291 1,189,413
Securities sold under agreements to repurchase 54,216 40,914
Junior subordinated debt 14,964 14,964
Lease liability 2,950 3,114
Other liabilities 10,089 10,640
Total liabilities 1,443,510 1,259,045
Commitments and Contingencies (Note 15)
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 7,548,638 at December 31, 2021 and 7,500,338 at December 31, 2020 7,549 7,500
Nonvested restricted stock (294 ) (283 )
Additional paid in capital 92,139 91,380
Retained earnings 38,325 26,453
Accumulated other comprehensive income 3,279 11,287
Total shareholders’ equity 140,998 136,337
Total liabilities and shareholders’ equity $ 1,584,508 $ 1,395,382
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 $ 39,671 $ 37,037 $ 35,447
Investment securities - taxable 6,155 5,011 5,271
Investment securities - non taxable 1,564 1,454 1,365
Other short term investments
Total interest income 47,520 43,778 42,630
Interest expense:
Deposits 1,740 3,021 4,558
Securities sold under agreement to repurchase
Other borrowed money
Total interest expense 2,241 3,755 5,781
Net interest income 45,279 40,023 36,849
Provision for loan losses 3,663
Net interest income after provision for loan losses 44,944 36,360 36,710
Non-interest income:
Deposit service charges 1,121 1,649
Mortgage banking income 4,319 5,557 4,555
Investment advisory fees and non-deposit commissions 3,995 2,720 2,021
Gain on sale of securities -
Gain (loss) on sale of other real estate owned (3 )
Gain on sale of other assets - -
Write-down on premises held for sale - - (282 )
Other non-recurring income -
Other 4,248 3,814 3,660
Total non-interest income 13,904 13,769 11,736
Non-interest expense:
Salaries and employee benefits 24,494 24,026 21,261
Occupancy 2,947 2,709 2,696
Equipment 1,296 1,237 1,493
Marketing and public relations 1,173 1,043 1,114
FDIC Insurance assessments
Other real estate expense
Amortization of intangibles
Other 8,367 7,551 7,392
Total non-interest expense 39,201 37,534 34,617
Net income before tax 19,647 12,595 13,829
Income tax expense 4,182 2,496 2,858
Net income $ 15,465 $ 10,099 $ 10,971
Basic earnings per common share $ 2.06 $ 1.36 $ 1.46
Diluted earnings per common share $ 2.05 $ 1.35 $ 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 $ 15,465 $ 10,099 $ 10,971
Other comprehensive income (loss):
Unrealized gain (loss) during the period on available for sale securities, net of tax benefit (expense) of $2,128, ($2,360) and ($1,311), respectively (8,008 ) 8,875 4,931
Less: Reclassification adjustment for gain included in net income, net of tax of $0, $21, and $29, respectively - (78 ) (107 )
Other comprehensive income (8,008 ) 8,797 4,824
Comprehensive income $ 7,457 $ 18,896 $ 15,795
See Notes to Consolidated Financial Statements
FIRST COMMUNITY CORPORATION
Consolidated Statements of Changes in Shareholders’ Equity
Common Stock
Accumulated
(Dollars and shares in thousands) Number
Shares
Issued Common
Stock Common
Stock
Warrants Additional
Paid-in
Capital Nonvested
Restricted
Stock Retained
Earnings Other
Comprehensive
Income (loss) Total
Balance, December 31, 2018 7,639 $ 7,639 $ 31 $ 95,048 $ (149 ) $ 12,262 $ (2,334 ) $ 112,497
Net income - - - - - 10,971 - 10,971
Other comprehensive income net of tax expense of $1,282 - - - - - - 4,824 4,824
Issuance of restricted stock - (170 ) - - -
Exercise of stock warrants (31 ) (15 ) - - - -
Shares forfeited (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 expense 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 forfeited (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
Net income - - - - - 15,465 - 15,465
Other comprehensive income net of tax benefit of $2,128 -
- - - - (8,008 ) (8,008 )
Issuance of restricted stock - (374 ) - - -
Issuance of common stock - - - -
Issuance of common stock-deferred compensation - - - -
Amortization of compensation on restricted stock - - - - - -
Shares forfeited (4 ) (4 ) - (66 ) - - - (70 )
Dividends: Common ($0.48 per share) - - - - - (3,593 ) - (3,593 )
Dividend reinvestment plan - - - -
Balance, December 31, 2021 7,549 $ 7,549 $ - $ 92,139 $ (294 ) $ 38,325 $ 3,279 $ 140,998
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 $ 15,465 $ 10,099 $ 10,971
Adjustments to reconcile net income to net cash (used) provided in operating activities
Depreciation 1,714 1,637 1,598
Net premium amortization 2,317 2,016 2,042
Provision for loan losses 3,663
Write-downs of other real estate owned -
Loss (gain) loss on sale of other real estate owned (77 ) (147 )
Originations of HFS loans (139,773 ) (197,608 ) (139,640 )
Sales of HFS loans 177,673 163,743 131,708
Amortization of intangibles
Gain on sale of securities - (99 ) (136 )
Loss on fair value of equity investments (4 ) - -
Accretion on acquired loans (135 ) (271 ) (492 )
Write-down of premises held for sale - -
Gain on sale of other assets (117 ) - -
(Increase) decrease in other assets (911 ) (5,227 )
Increase (decrease) in other liabilities (715 ) 3,054
Net cash (used) provided in operating activities 57,928 (17,046 ) 4,825
Cash flows from investing activities:
Proceeds from sale of securities available-for-sale - 1,200 44,398
Purchase of investment securities available-for-sale (271,293 ) (111,972 ) (113,064 )
Purchase of other investment securities (87 ) (70 ) (36 )
Maturity/call of investment securities available-for-sale 53,872 46,933 40,170
Proceeds from sale of other investments - -
Increase in loans (19,100 ) (106,874 ) (18,219 )
Proceeds from sale of other real estate owned
Proceeds from sale of fixed assets 1,414 -
Purchase of property and equipment (813 ) (1,087 ) (2,793 )
Net disposal of property and equipment - -
Purchase of BOLI (850 ) - (2 )
Net cash used in investing activities (236,282 ) (171,521 ) (49,198 )
Cash flows from financing activities:
Increase in deposit accounts 171,878 201,213 62,716
Advances from the Federal Home Loan Bank - 34,001 82,000
Repayment of advances from the Federal Home Loan Bank - (34,212 ) (82,020 )
Increase in securities sold under agreements to repurchase 13,302 7,618 5,274
Deferred compensation shares
Shares Retired (70 ) (15 ) (159 )
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 (3,593 ) (3,573 ) (3,306 )
Net cash provided in financing activities 182,384 205,867 59,872
Net increase in cash and cash equivalents 4,030 17,300 15,424
Cash and cash equivalents at beginning of year 64,992 47,692 32,268
Cash and cash equivalents at end of year $ 69,022 $ 64,992 $ 47,692
Supplemental disclosure:
Cash paid during the period for: interest $ 3,312 $ 4,258 $ 5,471
Income Taxes $ 5,097 $ 3,043 $ 2,410
Non-cash investing and financing activities:
Unrealized gain (loss) on securities available-for-sale, net of tax $ (8,008 ) $ 8,797 $ 4,824
Transfer of loans to other real estate owned $ 145 $ 114 $ -
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.
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 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.
Note 2-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 December 31 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 $1.2 million, $1.0 million and $1.1 million for the years ended December 31, 2021, 2020, and 2019, respectively.
Note 2-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 2021, 2020 or 2019.
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 25, Reportable Segments, for further information).
Note 2-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 and did not have a material impact on the Company’s 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 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. During 2021, the Company established a CECL Team to begin the process of implementing CECL. The Company selected Valuant’s ValuCast as its CECL solution. In conjunction with Valuant, the Company developed a detailed roadmap and implementation plan; collected and validated data; and selected loss methodologies. Currently, the Company and Valuant are working on the reasonable and supportable forecast and qualitative factors. The Company plans to perform mock runs during 2022. Dixon Hughes Goodman, LLP has been engaged to perform model validation services prior to implementation. The implementation of CECL may have a material effect on the Company’s 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.
Note 2-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 became effective for the Company for interim and annual periods beginning after December 15, 2020 and did not have a material impact on the Company’s 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 became effective for the Company for annual periods beginning after December 15, 2020 and did not have a material impact on the Company’s financial statements.
In October 2021, the FASB amended the Business Combinations topic in the Accounting Standard Codification to require entities to apply guidance in the Revenue topic to recognize and measure contract assets and contract liabilities acquired in a business combination. The amendments are effective for the fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The amendments are applied prospectively to business combinations occurring on or after the effective date of the amendments. Early adoption of the amendments is permitted, including adoption in an interim period. The Company does not expect these amendments to have a material effect on its financial statements.
In November 2021, the FASB added a topic to the Accounting Standards Codification, Government Assistance, to require certain annual disclosures about transactions with a government that are accounted for by applying grant or contribution accounting model by analogy to other accounting guidance. The guidance is effective for financial statements issued for annual periods beginning after December 15, 2021. 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 2019 and 2020 consolidated financial statements were reclassified to conform to the 2021 presentation.
Note 3-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, 2021
US Treasury securities $ 15,736 $ - $ 300 $ 15,436
Government Sponsored Enterprises 2,499 - 2,501
Mortgage-backed securities 398,125 3,596 3,992 397,729
Small Business Administration pools 30,835 31,273
State and local government 105,469 4,918 109,848
Corporate and other securities 8,024 8,052
Total $ 560,688 $ 9,178 $ 5,027 $ 564,839
(Dollars in thousands) Amortized
Cost Gross
Unrealized
Gains Gross
Unrealized
Losses Fair Value
December 31, 2020
US Treasury securities $ 1,501 $ 1 $ - $ 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
Total $ 345,580 $ 14,554 $ 268 $ 359,866
At December 31, 2021, corporate and other securities available-for-sale included the following at fair value: corporate fixed-to-float bonds at $8.0 million, mutual funds at $11.6 thousand and foreign debt of $10.0 thousand. 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. Other investments, at cost, include Federal Home Loan Bank (“FHLB”) stock in the amount of $698.4 thousand, corporate stock in the amount of $1.0 million, and a venture capital fund in the amount of $86.7 thousand at December 31, 2021. The Company held $1.1 million of FHLB stock and $1.0 million in corporate stock at December 31, 2020.
During the year ended December 31, 2021, the Company did not receive any proceeds from the sale of investment securities available-for-sale. During the year ended December 31, 2020, the Company received $1.2 million from the sale of investment securities available-for-sale. For the year ended December 31, 2021, there were no gross realized gains or losses 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. The tax (benefit) provision applicable to the net realized gain (loss) was approximately $0, $21 thousand, and $29 thousand for 2021, 2020 and 2019, respectively.
The amortized cost and fair value of investment securities at December 31, 2021, 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, 2021.
(Dollars in thousands) Available-for-sale
Amortized
Cost Fair
Value
Due in one year or less $ 20,036 $ 20,176
Due after one year through five years 175,313 177,320
Due after five years through ten years 237,914 241,008
Due after ten years 127,425 126,335
$ 560,688 $ 564,839
Securities with an amortized cost of $128.5 million and fair value of $130.4 million at December 31, 2021 were pledged to secure FHLB advances, public deposits, and securities sold under agreements to repurchase. 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.
Note 3-INVESTMENT SECURITIES (Continued)
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, 2021 and December 31, 2020.
Less than 12 months 12 months or more Total
December 31, 2021
(Dollars in thousands) Fair
Value Unrealized
Loss Fair
Value Unrealized
Loss Fair
Value Unrealized
Loss
Available-for-sale securities:
US Treasury $ 14,479 $ 264 $ 958 $ 36 $ 15,437 $ 300
Mortgage-Backed Securities 200,238 3,156 48,570 248,808 3,992
Small Business Administration pools 7,232 - - 7,232
State and local government 21,261 - - 21,261
Corporate and Other Securities 3,621 - - 3,621
Total $ 246,831 $ 4,155 $ 49,528 $ 872 $ 296,359 $ 5,027
Less than 12 months 12 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:
US Treasury $ - $ - $ - $ - $ - $ -
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 $ 228 $ 2,737 $ 40 $ 28,965 $ 268
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 $429.0 million and $257.3 million and approximate fair value of $429.0 million and $265.4 million at December 31, 2021 and December 31, 2020, respectively. As of December 31, 2021, and December 31, 2020, 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, 2021.
Non-agency Mortgage Backed Securities: The Company holds private label mortgage-backed securities (“PLMBSs”), including CMOs, at December 31, 2021 with an amortized cost of $48.2 thousand and approximate fair value of $46.4 thousand. The Company held 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. 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, 2021, December 31, 2020, and December 31, 2019, 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, 2021 and December 31, 2020.
Note 4-LOANS
The following table summarizes the composition of our loan portfolio. Total loans are recorded net of deferred loan fees and costs, which totaled $1.4 million and $2.2 million as of December 31, 2021 and December 31, 2020, respectively.
Schedule of Loan Portfolio
December 31,
(Dollars in thousands)
Commercial, financial and agricultural $ 69,952 $ 96,688
Real estate:
Construction 94,969 95,282
Mortgage-residential 45,498 43,928
Mortgage-commercial 617,464 573,258
Consumer:
Home equity 27,116 26,442
Other 8,703 8,559
Total $ 863,702 $ 844,157
Commercial, financial, and agricultural category includes $1.5 million and $42.2 million in PPP loans, net of deferred fees and costs, as of December 31, 2021 and December 31, 2020, respectively.
Activity in the allowance for loan losses was as follows:
Years ended December 31,
(Dollars in thousands)
Balance at the beginning of year $ 10,389 $ 6,627 $ 6,263
Provision for loan losses 3,663
Charged off loans (182 ) (110 ) (145 )
Recoveries
Balance at end of year $ 11,179 $ 10,389 $ 6,627
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, 2021, December 31, 2020 and December 31, 2019 follows:
Schedule of activity in the allowance for loan losses and the recorded investment in loans receivable
(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 $ 778 $ 145 $ 541 $ 7,855 $ 324 $ 125 $ 621 $ 10,389
Charge-offs - - - (110 ) - (72 ) - (182 )
Recoveries - 46 -
Provisions (32 ) (60 )
Ending balance $ 853 $ 113 $ 560 $ 8,570 $ 333 $ 126 $ 624 $ 11,179
Ending balances:
Individually evaluated for impairment $ - $ - $ - $ 1 $ - $ - $ - $ -
Collectively evaluated for impairment 8,569 11,179
Loans receivable:
Ending balance-total $ 69,952 $ 94,969 $ 45,498 $ 617,464 $ 27,116 $ 8,703 $ - $ 863,702
Ending balances:
Individually evaluated for impairment - - 1,561 - - - 1,694
Collectively evaluated for impairment 69,952 94,969 45,365 615,903 27,116 8,703 - 862,008
Note 4-LOANS (Continued)
(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
Note 4-LOANS (Continued)
(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
At December 31, 2021, $9.5 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 $125.6 thousand at December 31, 2021. Loans acquired prior to 2017 have been included in the evaluation of the allowance for loan losses.
Note 4-LOANS (Continued)
The following tables are by loan category and present at December 31, 2021, December 31, 2020 and December 31, 2019 loans individually evaluated and considered impaired under FASB ASC 310, “Accounting by Creditors for Impairment of a Loan.” Impairment includes performing troubled debt restructurings.
Schedule of loan category and loans individually evaluated and considered impaired
(Dollars in thousands)
December 31, 2021 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 1,521 3,514 - 1,748
Consumer:
Home Equity - - - - -
Other - - - - -
With an allowance recorded:
Commercial - - - - -
Real estate:
Construction - - - - -
Mortgage-residential - - - - -
Mortgage-commercial 39
Consumer:
Home Equity - - - - -
Other - - - - -
Total:
Commercial - - - - -
Real estate:
Construction - - - - -
Mortgage-residential -
Mortgage-commercial 1,561 3,554 1,787
Consumer:
Home Equity - - - - -
Other - - - - -
$ 1,694 $ 3,705 $ 1 $ 1,918 $ 234
Note 4-LOANS (Continued)
(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
$
Note 4-LOANS (Continued)
(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
$
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.
Note 4-LOANS (Continued)
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, 2021 and December 31, 2020, 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, 2021 and December 31, 2020, no loans were classified as doubtful.
Schedule of loan category and loan by risk categories
(Dollars in thousands)
December 31, 2021 Pass Special
Mention Substandard Doubtful Total
Commercial, financial & agricultural $ 69,833 $ 119 $ - $ - $ 69,952
Real estate: - - -
Construction 94,966 - - 94,969
Mortgage - residential 45,049 - 45,498
Mortgage - commercial 610,001 1,009 6,454 - 617,464
Consumer: - - -
Home Equity 25,751 1,194 - 27,116
Other 8,604 - 8,703
Total $ 854,204 $ 1,626 $ 7,872 $ - $ 863,702
(Dollars in thousands)
Special
December 31, 2020 Pass Mention Substandard Doubtful Total
Commercial, financial & agricultural $ 96,507 $ 181 $ - $ - $ 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
At December 31, 2021 and December 31, 2020, non-accrual loans totaled $250 thousand and $4.7 million, respectively. The gross interest income which would have been recorded under the original terms of the non-accrual loans amounted to $33.0 thousand and $150.5 thousand in 2021 and 2020, respectively. Interest recorded on non-accrual loans in 2021 and 2020 amounted to $453.3 thousand and $447.5 thousand, respectively.
TDRs that are still accruing and included in impaired loans at December 31, 2021 and at December 31, 2020 amounted to $1.4 million and $1.6 million, respectively. Interest earned during 2021 and 2020 on these loans amounted to $120.4 thousand and $130.1 thousand, respectively.
Loans greater than 90 days delinquent and still accruing interest were $0 and $1.3 million at December 31, 2021 and December 31, 2020, respectively.
The following tables are by loan category and present loans past due and on non-accrual status as of December 31, 2021 and December 31, 2020:
Schedule of loan category and present loans past due and on non-accrual status
(Dollars in thousands)
December 31, 2021 30-59
Days
Past Due 60-89
Days
Past Due Greater than
90 Days and
Accruing Nonaccrual Total Past
Due Current Total
Loans
Commercial $ 125 $ 35 $ - $ 118 $ 278 $ 69,674 $ 69,952
Real estate:
Construction - - - - - 94,969 94,969
Mortgage-residential - 45,354 45,498
Mortgage-commercial - - - - - 617,464 617,464
Consumer:
Home equity - - - 27,054 27,116
Other - - - 8,702 8,703
Total $ 133 $ 102 $ - $ 250 $ 485 $ 863,217 $ 863,702
Note 4-LOANS (Continued)
(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 $ 165 $ 27 $ - $ 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 $ 617 $ 48 $ 1,260 $ 4,562 $ 6,487 $ 837,670 $ 844,157
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 were dependent upon the direct involvement of financial institutions like the Bank. These programs were 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. The relief period provided in the CARES Act expired on January 1, 2022.
COVID-19 Related Troubled Debt Restructurings and Loan Modifications for Affected Borrowers. The CARES Act, as extended by certain provisions of the Consolidated Appropriations Act, 2021, permitted banks to suspend requirements under generally accepted accounting principles (“GAAP”) for loan modifications to borrowers affected by COVID-19 that may otherwise be characterized as troubled debt restructurings, or TDRs, 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 were related to COVID-19, and (iii) the modification occurred 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.
Beginning in March 2020, the Company proactively offered payment deferrals for up to 90 days to its loan customers regardless of the impact of the pandemic on their business or personal finances. As a result of payments being resumed at the conclusion of their payment deferral period, loans in which payments were being 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, to $8.7 million at March 31, 2021, $4.5 million at June 30, 2021, $4.1 million at September 30, 2021, and $0 at December 31, 2021.
Troubled Debt Restructurings. The Company identifies TDRs as impaired under the guidance in ASC 310-10-35. There were no loans determined to be TDRs that were restructured during the twelve month period ended December 31, 2021 December 31, 2020. Additionally, there were no loans determined to be TDRs in the previous twelve months that had 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.
Note 4-LOANS (Continued)
A summary of changes in the accretable yield for PCI loans for the years ended December 31, 2021, 2020, and 2019 follows:
Schedule for changes in the accretable yield for PCI loans
(Dollars in thousands) Year
Ended
December 31,
Year
Ended
December 31,
Year
Ended
December 31,
Accretable yield, beginning of period $ 93 $ 123 $ 153
Additions - - -
Accretion (29 ) (30 ) (30 )
Reclassification of non-accretable difference due to improvement in expected cash flows - - -
Other changes, net - - -
Accretable yield, end of period $ 64 $ 93 $ 123
At December 31, 2021 and December 31, 2020, the recorded investment in purchased impaired loans was $109 thousand and $110 thousand, respectively. The unpaid principal balance was $152 thousand and $171 thousand at December 31, 2021 and December 31, 2020, respectively. At December 31, 2021 and December 31, 2020, 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, 2021 and December 31, 2020.
Schedule of Related Party Loans
(Dollars in thousands) For the years ended
December 31,
Balance, beginning of year $ 3,297 $ 4,108
New Loans
Less loan repayments
Balance, end of year $ 2,809 $ 3,297
Note 5-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.
Note 5-FAIR VALUE MEASUREMENT (Continued)
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 are 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.
Note 5-FAIR VALUE MEASUREMENT (Continued)
The carrying amount and estimated fair value by classification Level of the Company’s financial instruments as of December 31, 2021 and December 31, 2020 are as follows:
Fair Value, by Balance Sheet Grouping
December 31, 2021
Carrying Fair Value
(Dollars in thousands) Amount Total Level 1 Level 2 Level 3
Financial Assets:
Cash and short term investments $ 69,022 $ 69,022 $ 69,022 $ - $ -
Available-for-sale securities 564,839 564,839 39,829 525,010 -
Other investments, at cost 1,785 1,785 - - 1,785
Loans held for sale 7,120 7,120 - 7,120 -
Net loans receivable 852,523 851,822 - - 851,822
Accrued interest 3,927 3,927 3,927 - -
Financial liabilities:
Non-interest bearing demand $ 444,688 $ 444,688 $ - $ 444,688 $ -
Interest bearing demand deposits and money market accounts 619,057 619,057 - 619,057 -
Savings 143,765 143,765 - 143,765 -
Time deposits 153,781 154,030 - 154,030 -
Total deposits 1,361,291 1,361,540 - 1,361,540 -
Federal Home Loan Bank Advances - - - - -
Short term borrowings 54,216 54,216 - 54,216 -
Junior subordinated debentures 14,964 15,015 - 15,015 -
Accrued interest payable - -
December 31, 2020
Carrying Fair Value
(Dollars in thousands) Amount Total Level 1 Level 2 Level 3
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 $ -
NOW and money market accounts 520,205 520,205 - 520,205 -
Savings 123,032 123,032 - 123,032 -
Time deposits 160,665 161,505 - 161,505 -
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 - -
Note 5-FAIR VALUE MEASUREMENT (Continued)
The following table summarizes quantitative disclosures about the fair value for each category of assets carried at fair value as of December 31, 2021 and December 31, 2020 that are measured on a recurring basis. There were no liabilities carried at fair value as of December 31, 2021 or December 31, 2020 that are measured on a recurring basis.
Fair Value, Assets Measured on Recurring Basis
(Dollars in thousands)
Description December 31,
(Level 1) (Level 2) (Level 3)
Available- for-sale securities
US Treasury Securities $ 15,436 $ - $ 15,436 $ -
Government Sponsored Enterprises 2,501 - 2,501 -
Mortgage-backed securities 397,729 25,934 371,796 -
Small Business Administration pools 31,273 - 31,273 -
State and local government 109,848 12,896 96,952 -
Corporate and other securities 8,052 1,000 7,052 -
Total Available-for-sale securities 564,839 39,830 525,010 -
Loans held for sale 7,120 - 7,120 -
Total $ 571,959 $ 39,830 $ 532,130 $ -
(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 securities 35,498 - 35,498 -
State and local government 88,603 3,535 85,068 -
Corporate and other securities 3,328 - 3,328 -
Total Available-for-sale securities 359,866 20,564 339,302 -
Loans held-for-sale 45,020 - 45,020 -
Total $ 404,886 $ 20,564 $ 384,322 $ -
The following tables summarize quantitative disclosures about the fair value for each category of assets carried at fair value as of December 31, 2021 and December 31, 2020 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, 2021 and 2020.
Fair Value, Assets Measured on Non-Recurring Basis
(Dollars in thousands)
Description December 31,
(Level 1) (Level 2) (Level 3)
Impaired loans:
Commercial & Industrial $ - $ - $ - $ -
Real estate:
Mortgage-residential - -
Mortgage-commercial 1,560 - - 1,560
Consumer:
Home equity - - - -
Other - - - -
Total impaired 1,693 - - 1,694
Other real estate owned:
Construction - -
Mortgage-commercial - -
Total other real estate owned 1,165 - - 1,165
Total $ 2,859 $ - $ - $ 2,859
Note 5-FAIR VALUE MEASUREMENT (Continued)
(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
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 $1.2 million and $6.1 million for the year ended December 31, 2021, and year ended December 31, 2020, respectively.
For Level 3 assets and liabilities measured at fair value on a non-recurring basis as of December 31, 2021 and December 31, 2020, the significant unobservable inputs used in the fair value measurements were as follows:
Fair Value Measurement Inputs and Valuation Techniques
(Dollars in thousands) Fair Value as
of December 31,
Valuation Technique Significant
Observable
Inputs Significant
Unobservable
Inputs
OREO $ 1,165 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 $ 1,694 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 $ 1,194 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
Note 6-PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
December 31,
(Dollars in thousands)
Land $ 10,454 $ 11,166
Premises 29,415 29,342
Equipment 6,855 7,050
Fixed assets in progress (4 )
Property and equipment, gross 46,720 47,620
Accumulated depreciation 13,889 13,162
Property and Equipment Net $ 32,831 $ 34,458
Provision for depreciation included in operating expenses for the years ended December 31, 2021, 2020 and 2019 amounted to $1.7 million, $1.6 million, and $1.6 million, respectively.
Premises held-for-sale was $0 and $591 thousand at December 31, 2021, and December 31, 2020, respectively. Gain on premises held-for-sale was $103 thousand and $0 at December 31, 2021, and December 31, 2020, respectively. Gain on sale of fixed assets was $14 thousand and $0 at December 31, 2021, and December 31, 2020, respectively.
Note 7-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 (2,977 ) (2,776 ) (2,413 )
Net $ 919 $ 1,120 $ 1,483
Based on the core deposit and other intangibles as of December 31, 2021, the following table presents the aggregate amortization expense for each of the succeeding years ending December 31:
(Dollars in thousands) Amount
$ 158
2026 and thereafter
Total $ 919
Amortization of the intangibles amounted to $201 thousand , $363 thousand and $523 thousand for the years ended December 31, 2021, 2020 and 2019, 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.
Note 7-GOODWILL, CORE DEPOSIT INTANGIBLE AND OTHER ASSETS (Continued)
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, 2021 and 2020 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, 2021 or 2020.
Bank-owned life insurance provides benefits to various bank officers. The carrying value of all existing policies at December 31, 2021 and 2020 was $29.2 million and $27.7 million, respectively. During 2021, an additional $850 thousand in Bank-owned life insurance was purchased.
Note 8-OTHER REAL ESTATE OWNED
The following summarizes the activity in the other real estate owned for the years ended December 31, 2021 and 2020.
December 31,
(In thousands)
Balance-beginning of year $ 1,194 $ 1,410
Additions-foreclosures
Write-downs (50 ) (128 )
Sales (124 ) (202 )
Balance, end of year $ 1,165 $ 1,194
Note 9-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 $ 444,688 $ 385,511
Interest bearing demand deposits and money market accounts 619,057 520,205
Savings 143,765 123,032
Time deposits 153,781 160,665
Total deposits $ 1,361,291 $ 1,189,413
At December 31, 2021, the scheduled maturities of time deposits are as follows:
(Dollars in thousands)
$ 117,612
19,950
8,409
3,673
4,037
Time Deposits $ 153,781
Note 9-DEPOSITS (Continued)
Interest paid on time deposits of $100 thousand or more totaled $538 thousand, $993 thousand, and $1.1 million in 2021, 2020, and 2019, respectively.
Time deposits that meet or exceed the FDIC insurance limit of $250 thousand at year end 2021 and 2020 were $27.9 million and $28.6 million, respectively.
Deposits from directors and executive officers and their related interests at December 31, 2021 and 2020 amounted to approximately $31.9 million and $36.3 million, respectively.
The amount of overdrafts classified as loans at December 31, 2021 and 2020 were $58 thousand and $61 thousand , respectively.
Note 10-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, 2021 and 2020 was 0.12% and 0.20%, respectively. The maximum month-end balance during 2021 and 2020 was $72.4 million and $73.0 million, respectively. The average outstanding balance during the years ended December 31, 2021 and 2020 amounted to $62.2 million and $49.5 million, respectively, with an average rate paid of 0.14% and 0.38%, 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, 2021 and 2020, the Company had unused short-term lines of credit totaling $70.0 million and $70.0 million respectively.
Note 11-ADVANCES FROM FEDERAL HOME LOAN BANK
As collateral for its advances, the Company has pledged in the form of blanket liens, eligible loans, in the amount of $22.8 million at December 31, 2021. Securities have been pledged as collateral for advances in the amount of $2.7 million as of December 31, 2021. 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. Advances are subject to prepayment penalties. The average advances during 2021 and 2020 were $5.0 million and $2.0 million, respectively. The average interest rate for 2021 and 2020 was 0.18% and 0.39%, respectively. The maximum outstanding amount at any month end was $0 and $15.0 million for 2021 and 2020, respectively.
During the years ended December 31, 2021 and December 31, 2020 there were no advances that were prepaid. Accordingly, no losses were realized on early extinguishment.
Note 12-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 13-LEASES
The Company has operating leases on three of its facilities. The leases have maturities ranging from September 2024 to December 2028 some of which include extensions of multiple five-year terms. The right-of-use asset and lease liability were $2.8 and $3.0 million, respectively, at December 31, 2021. During the twelve-month period ended December 31, 2021, the Company made cash payments in the amount of $297.6 thousand for operating leases and the lease liability was reduced by $164.6 thousand. The lease expense recognized during the twelve-month period ended December 31, 2021, amounted to $323.0 thousand . The weighted average remaining lease term as of December 31, 2021, is 15.08 years and the weighted average discount rate used is 4.42%. The following table shows future undiscounted lease payments for operating leases with initial terms of one year or more as of December 31, 2021 are as follow:
(Dollars in thousands)
$ 303
Thereafter 2,751
Total undiscounted lease payments $ 4,093
Less effect of discounting (1,143 )
Present value of estimated lease payments (lease liability) 2,950
Note 14-INCOME TAXES
Income tax expense for the years ended December 31, 2021, 2020 and 2019 consists of the following:
Year ended December 31
(Dollars in thousands)
Current
Federal $ 3,653 $ 2,724 $ 2,299
State
4,402 3,247 2,840
Deferred
Federal (167 ) (751 )
State (53 ) (34 ) -
(220 ) (785 )
Income tax expense $ 4,182 $ 2,496 $ 2,858
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 $ 4,126 $ 2,645 $ 2,904
State income tax net of federal benefit
Tax exempt interest (396 ) (316 ) (293 )
Increase in cash surrender value life insurance (146 ) (153 ) (144 )
Valuation allowance
Life Insurance Proceeds - (65 ) -
Excess tax benefit of stock compensation (11 ) (1 ) (56 )
Other (32 ) (32 )
Income tax expense $ 4,182 $ 2,496 $ 2,858
Note 14-INCOME TAXES (Continued)
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 $ 2,415 $ 2,235
Excess tax basis of deductible intangible assets
Excess tax basis of assets acquired
Net operating loss carry forward
Compensation expense deferred for tax purposes 1,221 1,125
Deferred loss on other-than-temporary-impairment charges
FASB 91 - Origination Income & Costs
Tax credit carry-forwards
Other Real Estate Owned
Other
Total deferred tax asset 5,301 4,987
Valuation reserve
Total deferred tax asset net of valuation reserve 4,412 4,130
Liabilities:
Tax depreciation in excess of book depreciation
Excess financial reporting basis of assets acquired 1,005
Unrealized gain on available-for-sale securities 1,021 3,149
Total deferred tax liabilities 2,602 4,668
Net deferred tax asset / (liability) recognized $ 1,810 $ (538 )
At December 31, 2021 the Company has approximately $20.1 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 on securities available-for-sale. The tax benefit related to the change in unrealized gain on these securities of $2.1 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 $220 thousand. At December 31, 2021, the Company had no federal net operating loss carryforward.
Tax returns for 2018 and subsequent years are subject to examination by taxing authorities.
As of December 31, 2021, 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 15-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, 2021 and 2020, the Bank had commitments to extend credit including lines of credit of $137.4 million and $142.6 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.
Note 15-COMMITMENTS, CONCENTRATIONS OF CREDIT RISK AND CONTINGENCIES (Continued)
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 $36.0 million.
Based on this criteria, the Bank had five such concentrations at December 31, 2021, including $259.0 million (30.0% of total loans) to lessors of non-residential property, $120.8 million (14.0% of total loans) to lessors of residential properties, $57.7 million (6.7% of total loans) to private households, $38.2 million (4.4% of total loans) to other activities related to real estate and $47.2 million to religious organizations (5.5% of total loans). As reflected above, lessors of non-residential properties and lessors of residential buildings equate to approximately 179.8% and 83.8% of total regulatory capital, respectively. The risk in these portfolios is diversified over a large number of loans approximately 455 for lessors of non-residential properties and 420 loans for lessors of residential buildings. Commercial real estate loans and commercial construction loans represent $703.2 million, or 81.4%, of the portfolio. Approximately $243.7 million, or 34.7%, 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 16-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.
Note 16-REVENUE RECOGNITION (Continued)
(Dollars in thousands) December 31, December 31,
Non-Interest Income
Deposit service charges $ 977 $ 1,121
Mortgage banking income (1) 4,319 5,557
Investment advisory fees and non-deposit commissions (1) 3,995 2,720
Gain (loss) on sale of securities (1) -
Gain on sale of other real estate owned
Gain (loss) on sale of other assets -
Non-recurring BOLI income
Other (2) 4,248 3,814
Total non-interest income 13,904 13,769
(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 17-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 $ 3,823 $ 3,123 $ 2,834
Supplies
Telephone
Courier
Correspondent services
Insurance
Postage
Loss on limited partnership interest - -
Director fees
Legal and Professional fees 1,058
Shareholder expense
Other 1,777 1,554 1,718
Total $ 8,367 $ 7,551 $ 7,392
Note 18-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, 2021 and 2020, the Company had 71,768 and 94,910 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, 2021, December 31, 2020 and December 31, 2019.
Note 18-STOCK OPTIONS, RESTRICTED STOCK, AND DEFERRED COMPENSATION (Continued)
First Community Corporation 2011 Stock Incentive Plan
In 2011, the Company and its shareholders adopted a stock incentive plan whereby 350,000 shares were reserved for issuance by the Company upon the grant of stock options or restricted stock awards under the plan (the “2011 Plan”). The 2011 Plan provided 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 the date of grant. There were no stock options outstanding and exercisable at December 31, 2021, December 31, 2020 and December 31, 2019. At December 31, 2020, the Company had 94,910 shares reserved for future grants under the 2011 Plan. The 2011 Plan expired on March 15, 2021 and no new awards may be granted under the 2011 Plan. However, any awards outstanding under the 2011 Plan will continue to be outstanding and governed by the provisions of the 2011 Plan.
Under the 2011 Plan, the employee restricted shares and units cliff vest over a three-year period and the non-employee director shares vest approximately one year after issuance. The unrecognized compensation cost at December 31, 2021 and December 31, 2020 for non-vested shares amounts to $293.9 thousand and $283.1 thousand , respectively. Each unit is convertible into one share of common stock at the time the unit vests. The related compensation cost for time-based units is accrued over the vesting period and was $79.0 thousand and $107.4 thousand at December 31, 2021 and December 31, 2020, respectively.
Historically, the Company granted time-based equity awards that vested based on continued service. Beginning in 2021 and in addition to time-based equity awards, the Company began granting performance-based equity awards in the form of performance-based restricted stock units, with the target number of performance-based restricted stock units for the Company’s Chief Executive Officer and other executive officers representing 50% of total target equity awards. These performance-based restricted stock units cliff vest over three years and include conditions based on the following performance measures: total shareholder return, return on average equity, and non-performing assets. The Company granted 13,302 performance-based restricted stock units with a fair value of $234.0 thousand during 2021. The Company granted no performance-based restricted stock units in 2020. The related compensation cost for the performance-based restricted stock units is accrued over the vesting period and was $65.0 thousand during the year ended December 31, 2021. The total related compensation cost for restricted stock units was $144.0 thousand and $107.4 thousand at December 31, 2021, and December 31, 2020, respectively, including both time-based and performance-based restricted stock units.
First Community Corporation 2021 Omnibus Equity Incentive Plan
In 2021, the Company and its shareholders adopted an omnibus equity incentive plan whereby 225,000 shares were reserved for issuance by the Company to help the company attract, retain and motivate directors, officers, employees, consultants and advisors of the Company and its subsidiaries (the “2021 Plan”). The 2021 Plan replaced the 2011 Plan. No awards have been granted under the 2021 Plan as of December 31, 2021.
Non-Employee Director Deferred Compensation Plan
Under the Company’s Non-Employee Director Deferred Compensation Plan, as amended and restated effective as of January 1, 2021, 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 as of the last day of such calendar quarter during which the compensation is earned and are included in dilutive securities in the table below. The non-employee director’s account balance is distributed by issuance of common stock within 30 days following such director’s separation from service from the board of directors. At December 31, 2021 and 2020, there were 85,765 and 88,412 units in the plan, respectively. The accrued liability related to the plan at December 31, 2021 and 2020 amounted to $1.1 million and $1.1 million, respectively, and is included in “Other liabilities” on the balance sheet.
The table below summarizes the common shares of restricted stock granted to each non-employee director in connection with their overall compensation plan in 2021, 2020 and 2019.
Restricted shares granted
Year Total per Director Value
per share Date shares
vest
7,959 $ 17.59 1/1/22
2,662 $ 20.64 1/1/21
2,976 $ 20.18 1/1/20
Note 18-STOCK OPTIONS, RESTRICTED STOCK, AND DEFERRED COMPENSATION (Continued)
In 2021, 2020 and 2019, 13,302, 17,175 and 8,418 restricted shares, respectively, were issued to executive officers in connection with the Bank’s incentive compensation plan. The related compensation expense was $329.3 thousand , $312.2 thousand , and $143.9 thousand for the years ended December 31, 2021, 2020, and 2019 respectively. The shares were valued at $17.59, $20.64 and $20.18 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 2021, 2020 and 2019 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.
Note 19-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, 2021, 2020 and 2019, the plan expense amounted to $581 thousand , $552 thousand, and $528 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 Bancshares 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 two 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, 2019, and 2021, the Company established salary continuation plans for three 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, 2019, and 2021, in the amount of $3.5 million, $5.2 million, $1.5 million, $1.6 million, and $850 thousand , respectively. These policies are designed to offset the funding of these benefits.
The cash surrender value at December 31, 2021 and 2020 of all bank owned life insurance was $29.2 million and $27.7 million, respectively. Expenses accrued for the anticipated benefits under the salary continuation plans for the year ended December 31, 2021, 2020 and 2019 amounted to $516 thousand, $514 thousand, and $437 thousand, respectively.
Note 20-EARNINGS PER COMMON SHARE
The following reconciles the numerator and denominator of the basic and diluted earnings per common share computation:
Schedule of Earning Per Common Share
Year ended December 31,
(Amounts in thousands)
Numerator (Included in basic and diluted earnings per share) $ 15,465 $ 10,099 $ 10,971
Denominator
Weighted average common shares outstanding for:
Basic earnings per common share 7,491 7,446 7,510
Dilutive securities:
Deferred compensation
Warrants-Treasury stock method - -
Diluted common shares outstanding 7,549 7,482 7,588
Basic earnings per common share $ 2.06 $ 1.36 $ 1.46
Diluted earnings per common share $ 2.05 $ 1.35 $ 1.45
The average market price used in calculating assumed number of shares $ 19.68 $ 15.89 $ 19.32
On December 16, 2011 there were 107,500 warrants issued in connection with the issuance of $2.5 million in subordinated debt (See Note 18). As shown above, the warrants were dilutive for the period ended December 31, 2019. As of December 31, 2021 and December 31, 2020 there were no warrants outstanding.
Note 21-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.
Note 21-SHAREHOLDERS’ EQUITY, CAPITAL REQUIREMENTS AND DIVIDEND RESTRICTIONS (Continued)
The Bank exceeded the minimum regulatory capital ratios at December 31, 2021 and 2020, 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, 2021
Risk Based Capital
Tier 1 $ 57,075 6.0 % $ 132,918 14.0 % $ 75,843 8.0 %
Total Capital $ 76,101 8.0 % $ 144,097 15.2 % $ 67,996 7.1 %
CET1 $ 42,807 4.5 % $ 132,918 14.0 % $ 90,111 9.5 %
Tier 1 Leverage $ 62,897 4.0 % $ 132,918 8.5 % $ 70,021 4.5 %
December 31, 2020
Risk Based Capital
Tier 1 $ 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 %
(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 22-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 $ 3,335 $ 3,357
Interest bearing deposits - -
Securities purchased under agreement to resell - -
Investment in bank subsidiary 151,519 147,140
Other 1,353 1,046
Total assets $ 156,207 $ 151,543
Liabilities:
Junior subordinated debentures $ 14,964 $ 14,964
Other
Total liabilities 15,209 15,206
Shareholders’ equity 140,998 136,337
Total liabilities and shareholders’ equity $ 156,207 $ 151,543
Note 22-PARENT COMPANY FINANCIAL INFORMATION (Continued)
Condensed Statements of Operations
Year ended December 31,
(Dollars in thousands)
Income:
Interest and dividend income $ 13 $ 17 $ 24
Equity in undistributed earnings of subsidiary 12,386 6,759 4,776
Dividend income from bank subsidiary 4,019 4,158 7,057
Total income 16,418 10,934 11,857
Expenses:
Interest expense
Other
Total expense 1,188 1,055 1,141
Income before taxes 15,230 9,879 10,716
Income tax benefit (235 ) (219 ) (255 )
Net income $ 15,465 $ 10,099 $ 10,971
Condensed Statements of Cash Flows
Year ended December 31,
(Dollars in thousands)
Cash flows from operating activities:
Net income $ 15,465 $ 10,099 $ 10,971
Adjustments to reconcile net income to net cash provided by operating activities
Equity in undistributed earnings of subsidiary (12,386 ) (6,759 ) (4,776 )
Other-net
Net cash provided by operating activities 3,224 3,382 6,517
Cash flows from investing activities:
Purchase of investments at cost (87 ) - -
Net cash provided by investing activities (87 ) - -
Cash flows from financing activities:
Dividends paid: common stock (3,593 ) (3,573 ) (3,306 )
Repurchase of common stock - - (5,636 )
Proceeds from issuance of common stock -
Dividend Reinvestment Plan
Issuance of restricted stock - - (75 )
Restricted shares surrendered (70 ) (15 ) (159 )
Deferred compensation shares
Net cash used in financing activities (3,159 ) (3,012 ) (8,341 )
Increase (decrease) in cash and cash equivalents (22 ) (1,824 )
Cash and cash equivalents at beginning of year 3,357 2,987 4,811
Cash and cash equivalents at end of year $ 3,335 $ 3,357 $ 2,987
Note 23-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 24-QUARTERLY FINANCIAL DATA (UNAUDITED)
The following provides quarterly financial data for 2021, 2020 and 2019 (dollars in thousands, except per share amounts).
Schedule of Unaudited Quarterly Financial Data
Fourth
Quarter Third
Quarter Second
Quarter First
Quarter
Interest income $ 11,656 $ 12,982 $ 11,664 $ 11,218
Net interest income 11,164 12,456 11,092 10,567
Provision for loan losses (59 )
Gain on sale of securities - - - -
Income before income taxes 4,971 6,066 4,464 4,146
Net income 3,919 4,748 3,543 3,255
Net income available to common shareholders 3,919 4,748 3,543 3,255
Net income per share, basic $ 0.52 $ 0.63 $ 0.47 $ 0.44
Net income per share, diluted $ 0.52 $ 0.63 $ 0.47 $ 0.43
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
Note 25-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”).
Note 25-REPORTABLE SEGMENTS (Continued)
The following tables present selected financial information for the Company’s reportable business segments for the years ended December 31, 2021, December 31, 2020 and December 31, 2019.
Schedule of Company’s Reportable Segment
Year ended December 31, 2021
(Dollars in thousands) Commercial
and Retail
Banking Mortgage
Banking Investment
advisory and
non-deposit Corporate Eliminations Consolidated
Dividend and Interest Income $ 46,499 $ 1,008 $ - $ 4,032 $ (4,019 ) $ 47,520
Interest expense 1,825 - - - 2,241
Net interest income $ 44,674 $ 1,008 $ - $ 3,616 $ (4,019 ) $ 45,279
Provision for loan losses - - - -
Noninterest income 5,590 4,319 3,995 - - 13,904
Noninterest expense 31,275 4,694 2,460 - 39,201
Net income before taxes $ 18,654 $ 633 $ 1,535 $ 2,844 $ (4,019 ) $ 19,647
Income tax expense (benefit) 4,417 - - (235 ) - 4,182
Net income $ 14,237 $ 633 $ 1,535 $ 3,079 $ (4,019 ) $ 15,465
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 30,111 4,993 1,912 - 37,534
Net income before taxes $ 10,523 $ 2,301 $ 808 $ 3,121 $ (4,158 ) $ 12,595
Income tax expense (benefit) 2,715 - - (219 ) - 2,496
Net income $ 7,808 $ 2,301 $ 808 $ 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 $ 288 $ 5,940 $ (7,057 ) $ 13,829
Income tax expense (benefit) 3,114 - - (256 ) - 2,858
Net income $ 9,699 $ 1,845 $ 288 $ 6,196 $ (7,057 ) $ 10,971
(Dollars in thousands) Commercial
and Retail
Banking Mortgage
Banking Investment
advisory and
non-deposit Corporate Eliminations Consolidated
Total Assets as of
December 31, 2021 $ 1,566,949 $ 16,798 $ 2 $ 152,928 $ (152,169 ) $ 1,584,508
Total Assets as of
December 31, 2020 $ 1,335,320 $ 59,372 $ 2 $ 140,256 $ (139,568 ) $ 1,395,382

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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, 2021, 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, 2021, 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, 2021.
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.

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

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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, 2021 in connection with our 2022 annual meeting of shareholders. The information required by Item 10 is hereby incorporated by reference from our proxy statement for our 2022 annual meeting of shareholders to be held on May 18, 2022.
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, 2021 in connection with our 2022 annual meeting of shareholders. The information required by Item 11 is hereby incorporated by reference from our proxy statement for our 2022 annual meeting of shareholders to be held on May 18, 2022.

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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, 2021.
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, 2021 in connection with our 2022 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 2022 annual meeting of shareholders to be held on May 18, 2022.

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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, 2021 in connection with our 2022 annual meeting of shareholders. The information required by Item 13 is hereby incorporated by reference from our proxy statement for our 2022 annual meeting of shareholders to be held on May 18, 2022.

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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, 2021, in connection with our 2022 annual meeting of shareholders. The information required by Item 14 is hereby incorporated by reference from our proxy statement for our 2022 annual meeting of shareholders to be held on May 18, 2022.
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, 2021 and 2020
· Consolidated Statements of Income for the years ended December 31, 2021, 2020 and 2019
· Consolidated Statements of Comprehensive Income for the years ended December 31, 2021, 2020 and 2019
· Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2021, 2020 and 2019
· Consolidated Statements of Cash Flows for the years ended December 31 for 2021, 2020 and 2019
· 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 with the SEC 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 with the SEC on June 27, 2011).
3.2
Articles of Amendment (incorporated by reference to Exhibit 3.1 to the Company’s Form 8-K filed with the SEC 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 with the SEC 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 with the SEC 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 with the SEC on October 4, 2006).
10.7
First Community Corporation Non-Employee Director Deferred Compensation Plan, as amended and restated effective as of January 1, 2021 (incorporated by reference to Exhibit 10.1 to the Company’s Form 10-Q for the period ended June 30, 2021).
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 with 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 with the SEC 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 with the SEC 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 with the SEC on December 16, 2019).**
10.18
First Community Corporation 2021 Omnibus Equity Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company’s Form S-8 (File No. 333-257550) filed with the SEC on June 30, 2021)**
10.19
Form of Time-based Restricted Stock Unit Agreement under the First Community Corporation 2021 Omnibus Equity Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed with the SEC on February 16, 2022)**
10.20
Form of Performance-based Restricted Stock Unit Agreement under the First Community Corporation 2021 Omnibus Equity Incentive Plan (incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K filed with the SEC on February 16, 2022)**
10.21
Form of Restricted Stock Agreement for Directors under the First Community Corporation 2021 Omnibus Equity Incentive Plan (incorporated by reference to Exhibit 10.3 to the Company’s Form 8-K filed with the SEC on February 16, 2022)**
10.22
Form of Restricted Stock Agreement for Employees under the First Community Corporation 2021 Omnibus Equity Incentive Plan (incorporated by reference to Exhibit 10.4 to the Company’s Form 8-K filed with the SEC on February 16, 2022)**
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, 2021, formatted in eXtensible Business Reporting Language (XBRL): (i) the Consolidated Balance Sheets as December 31, 2021 and December 31, 2020; (ii) Consolidated Statements of Income for the years ended December 31, 2021, 2020 and 2019; (iii) Consolidated Statements of Comprehensive Income for the years ended December 31, 2021, 2020 and 2019; (iv) Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2021, 20120 and 2019; (v) Consolidated Statements of Cash Flows for the years ended December 31, 2021, 2020 and 2019; 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.