UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

(Mark One) 
xAnnual Report under Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 20162018
Or
oTransition Report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from              to             

Commission file number: 000-28344

First Community Corporation

(Exact name of registrant as specified in its charter)

South Carolina
(State or other jurisdiction of incorporation or organization)
57-1010751
(I.R.S. Employer Identification No.)
5455 Sunset Blvd.,
Lexington, South Carolina
(Address of principal executive offices)
29072
(Zip Code)

803-951-2265

Registrant’s telephone number, including area code

Securities registered pursuant to Section 12(b) of the Act:

Title of each class Name of each exchange on which registered
Common stock, $1.00 par value per share The NASDAQ Capital Market

Securities registered pursuant to Section 12(g) of the Act:None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes o No x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer oAccelerated filer oxNon-accelerated filer o
(Do not check if a smaller reporting company)
Smaller reporting company xEmerging growth company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso No x

As of June 30, 2016,2018, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $87,341,966$178,249,487 based on the average of the bid and ask price of $14.09$25.08 on June 30, 2016,2018, as reported on The NASDAQ Capital Market. 6,713,3357,663,494 shares of the issuer’s common stock were issued and outstanding as of March 13, 2017.14, 2019.

Documents Incorporated by Reference

Proxy Statement for the Annual Meeting of Shareholders
to be held on May 17, 2017.
Part III (Portions of Items 10-14)

Portions of the registrant’s Definitive Proxy Statement for its 2019 Annual Meeting of Shareholders are incorporated by reference into Part III, Items 10-14 of this Form 10-K.

 
 

TABLE OF CONTENTS

 Page No.
PART I 
Item 1. Business4
Item 1A. Risk Factors1822
Item 1B. Unresolved Staff Comments3036
Item 2. Properties3036
Item 3. Legal Proceedings3036
Item 4. Mine Safety Disclosures3036
PART II 
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities3137
Item 6. Selected Financial Data3238
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations3439
Item 7A. Quantitative and Qualitative Disclosures about Market Risk60
Item 8. Financial Statements and Supplementary Data5560
Consolidated Balance Sheets5964
Consolidated Statements of Income6065
Consolidated Statements of Comprehensive Income6166
Consolidated Statements of Changes in Shareholders’ Equity6267
Consolidated Statements of Cash Flows6368
Notes to Consolidated Financial Statements6469
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure113118
Item 9A. Controls and Procedures113118
Item 9B. Other Information113118
PART III 
Item 10. Directors, Executive Officers and Corporate Governance113118
Item 11. Executive Compensation113118
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related StockholderShareholder Matters114119
Item 13. Certain Relationships and Related Transactions, and Director Independence114119
Item 14. Principal Accountant Fees and Services114119
PART IV 
Item 15. Exhibits, Financial Statement Schedules114119
SIGNATURES116122
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CAUTIONARY STATEMENT REGARDING

FORWARD-LOOKING STATEMENTS

This report, including information included or incorporated by reference in this document, contains statements which constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements may relate to, among other matters, the financial condition, results of operations, plans, objectives, future performance, and business of our Company.company. Forward-looking statements are based on many assumptions and estimates and are not guarantees of future performance. Our actual results may differ materially from those anticipated in any forward-looking statements, as they will depend on many factors about which we are unsure, including many factors which are beyond our control. The words “may,” “would,” “could,” “should,” “will,” “expect,” “anticipate,” “predict,” “project,” “potential,” “continue,” “assume,” “believe,” “intend,” “plan,” “forecast,” “goal,” and “estimate,” as well as similar expressions, are meant to identify such forward-looking statements. Potential risks and uncertainties that could cause our actual results to differ materially from those anticipated in our forward-looking statements include, without limitation, those described under the heading “Risk Factors” in this Annual Report on Form 10-K for the year ended December 31, 20162018 as filed with the Securities and Exchange Commission (the “SEC”) and the following:

·credit losses as a result of, among other potential factors, declining real estate values, increasing interest rates, increasing unemployment, or changes in customer payment behavior or other factors;
·the amount of our loan portfolio collateralized by real estate and weaknesses in the real estate market;
·restrictions or conditions imposed by our regulators on our operations;
·the adequacy of the level of our allowance for loan losses and the amount of loan loss provisions required in future periods;
·examinations by our regulatory authorities, including the possibility that the regulatory authorities may, among other things, require us to increase our allowance for loan losses, write-down assets, or take other actions;
·reduced earnings due to higher other-than-temporary impairment charges resulting from additional decline in the value of our securities portfolio, specifically as a result of increasing default rates, and loss severities on the underlying real estate collateral;
·increases in competitive pressure in the banking and financial services industries;
·changes in the interest rate environment which could reduce anticipated or actual margins;
·changes in political conditions or the legislative or regulatory environment, including governmental initiatives affecting the financial services industry;
·general economic conditions resulting in, among other things, a deterioration in credit quality;
·changes occurring in business conditions and inflation;
·changes in access to funding or increased regulatory requirements with regard to funding;
·increased cybersecurity risk, including potential business disruptions or financial losses;
·changes in deposit flows;
·changes in technology;
·our current and future products, services, applications and functionality and plans to promote them;
·changes in monetary and tax policies;
·changes in accounting standards, policies, estimates and practices;
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·our assumptions and estimates used in applying critical accounting policies, which may prove unreliable, inaccurate or not predictive of actual results;
·the rate of delinquencies and amounts of loans charged-off;
·the rate of loan growth in recent years and the lack of seasoning of a portion of our loan portfolio;
·our ability to maintain appropriate levels of capital, including levels of capital required under the capital rules implementing Basel III;
·our ability to successfully execute our business strategy;
·our ability to attract and retain key personnel;
·our ability to retain our existing clients, including our deposit relationships;
·adverse changes in asset quality and resulting credit risk-related losses and expenses;
·loss of consumer confidence and economic disruptions resulting from terrorist activities;
·disruptions due to flooding, severe weather or other natural disasters; and
·other risks and uncertainties described under “Risk Factors” below.

Because of these and other risks and uncertainties, our actual future results may be materially different from the results indicated by any forward-looking statements. For additional information with respect to factors that could cause actual results to differ from the expectations stated in the forward-looking statements, see “Risk Factors” under Part I, Item 1A of this Annual Report on Form 10-K. In addition, our past results of operations do not necessarily indicate our future results. Therefore, we caution you not to place undue reliance on our forward-looking information and statements.

All forward-looking statements in this report are based on information available to us as of the date of this report. Although we believe that the expectations reflected in our forward-looking statements are reasonable, we cannot guarantee you that these expectations will be achieved. We undertake no obligation to publicly update or otherwise revise any forward-looking statements, whether as a result of new information, future events, or otherwise.otherwise, except as required by applicable law.

PART I

Item 1. Business.Business.

General

First Community Corporation, (the “Company”), a bank holding company registered under the Bank Holding Company Act of 1956, was incorporated under the laws of South Carolina in 1994 primarily to own and control all of the capital stock of First Community Bank, (the “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 1520 full-service offices located inin: the Midlands of South Carolina, to include:which include Lexington County (6)(6 offices), Richland County (4)(4 offices), Newberry County (2)(2 offices) and Kershaw County (1)(1 office); the Upstate of South Carolina which include Greenville County (2 offices), Anderson County (1 office) and Pickens County (1 office); and the Central Savannah River area to include:which include Aiken County, (1)South Carolina (1 office) and Augusta (1) which is located in Richmond County, Georgia.(Richmond County), Georgia (2 offices). In addition, we conduct business from a loan production office located in Greenville County, South Carolina and a mortgage loan production office in Richland County, South Carolina. At December 31, 2018, we had approximately $1.1 billion in assets, $718.5 million in loans, $925.5 million in deposits, and $112.5 million in shareholders’ equity.

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On October 20, 2017, we acquired all of the outstanding common stock of Cornerstone Bancorp headquartered in Easley, South Carolina (“Cornerstone”) the bank holding company for Cornerstone National Bank (“CNB”), in a cash and stock transaction. The total purchase price was approximately $27.1 million, consisting of $7.8 million in cash and 877,364 shares of our common stock valued at $19.3 million based on a provision in the merger agreement that 30% of the outstanding shares of Cornerstone common stock be exchanged for cash and 70% of the outstanding shares of Cornerstone common stock be exchanged for shares of our common stock. The value of our common stock issued was determined based on the closing price of the common stock on October 19, 2017 as reported by NASDAQ, which was $22.05. Cornerstone common shareholders received 0.54 shares of our common stock in exchange for each share of Cornerstone common stock, or $11.00 per share, subject to the limitations discussed above.

We offer a wide-range of traditional banking products and services for professionals and small-to medium-sized businesses, including consumer and commercial, mortgage, brokerage and investment, and insurance services. We also offer online banking to our customers.

We have grown organically and through acquisitions. On September 26, 2014, the Bank completed its acquisition of approximately $40 million in deposits and $8.7 million in loans from First South Bank (“First South”). This represented all of the deposits and a portion of the loans at First South’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 were 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.

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On February 1, 2014, we completed our acquisition of Savannah River Financial Corporation (“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 1,274,330 shares of common stock in the merger. This acquisition added two additional branches to our branch network, one located in Aiken, South Carolina and the other in Augusta, Georgia.

 

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 atwww.firstcommunitysc.com/ under the About section, under the Investors link. These filings are made accessible as soon as reasonably practicable after they have been filed electronically with the Securities and Exchange Commission (the “SEC”). These filings are also accessible on the SEC’s website at www.sec.gov. In addition, we make available under our Investor Relations section on our website the following, among other things: (i) Code of Business Conduct and Ethics, which applies to our directors and all employees and (ii) the charters of the Audit and Compliance, Human Resources and Compensation, and Nominations and Corporate Governance Committees of our board of directors. These materials are available to the general public on our website free of charge. Printed copies of these materials are also available free of charge to shareholders who request them in writing. Please address your request to: Investor Relations, First Community Corporation, 5455 Sunset Boulevard, Lexington, South Carolina 29072. Statements of beneficial ownership of equity securities filed by directors, officers, and 10% or greater shareholders under Section 16 of the Exchange Act are also available through our website. The information on our website is not incorporated by reference into this report.

Location and Service Area

 

The Bank is engaged in a general commercial and retail banking business, emphasizing the needs of small-to-medium sized businesses, professional concerns and individuals, primarilyindividuals. We have a total of 13 full-service offices located in Richland, Lexington, Kershaw and Newberry Counties of South Carolina and the surrounding areas. We refer to these counties as the “Midlands” region of South Carolina. Lexington County is home to six of our Bank’s branch offices. Richland County, in which we have four branches as well as a mortgage loan production office, 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 National Bank 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. We refer to the three-county area of Aiken County (South Carolina), Richmond County (Georgia) and Columbia County (Georgia) as the Central Savannah River Area market (CSRA region). During 2016, we activated a loan production office in Greenville County, located in the upstate of South Carolina.“CSRA” region.

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The following table shows data as to deposits, market share and population for theour three market areas (deposits in thousands):

 Total  Estimated  Total Market
Deposits (2)
  Our Market
Deposits (2)
     Total Estimated Total Market
Deposits (2)
 Our Market
Deposits (2)
    
 Offices  Population (1)  June 30, 2016  June 30, 2016  Market Share  Offices  Population(1)  June 30, 2018   June 30, 2018  Market Share 
Midlands Region  13   790,499  $18,377,000  $630,000   3.43%  14(3)  805,758  $19,578,000  $712,437   3.64%
CSRA Region  2   505,376  $7,264,000  $102,000   1.40%  3   521,558  $7,707,000  $100,370   1.30%
Greenville Region  1(3)  491,863  $10,507,000   N/A   N/A 
                    
Upstate Region  4(4)  829,075  $16,432,000  $125,337   0.76%
(1)All population data is derived from July 20152017 estimates based on survey changes to the 2010 U. S. Census data.
(2)All deposit data as of June 30, 20162018 is derived from the most recent data published by the FDIC.
(3)GreenvilleMidlands Region consist of 13 full service offices and a Loan Production Office only andmortgage loan production office that does not receive deposits.

(4)As of June 30, 2017, the Upstate Region consisted of three full service branches and a loan production office that did not receive deposits. On February 14, 2019 the loan production office was relocated and converted into a full service branch

We believe that we serve attractive banking markets with long-term growth potential and a well educatedwell-educated employment base that helps to support our diverse and relatively stable local economy. According to 2010 U.S. Census Data, Aiken, Richmond, Lexington, Richland, Kershaw and Newberry counties had median household incomes for each of $44,509, $37,749, $54,069, $48,359, $43,765the counties in the regions noted above were as follows for 2017:

Richland County, SC $52,082 
Lexington County, SC $57,482 
Newberry County, SC $39,600 
Kershaw County SC $46,565 
Greenville County, SC $53,739 
Anderson County, SC $45,551 
Pickens County SC $45,332 
Aiken County SC $47,713 
Richmond County, GA         $39,430 
Columbia County, GA $74,162 

The county estimates noted above compare to 2017 statewide median household income estimates of $48,781 and $41,718, respectively, compared to $44,779$52,977 for South Carolina and $49,179 for Georgia, as a whole.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, areinclude Fort Jackson Army Base, the University of South Carolina, Palmetto Health Alliance, Blue Cross Blue Shield and Lexington Medical Center. The largest employers in our CSRA market area, each of which employs in excess of 3,000 people, areinclude Fort Gordon Army Base, Georgia Regents University, Georgia Regents Health System, University Hospital and Savannah River Nuclear Solutions. Greenville CountyThe Upstate region major employers include, among others, Greenville Health Systems, Bon Secours StSt. Francis Health System, Michelin North America Inc., BMW Manufacturing Corporation and GE Power and Water. Company believesWe 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.

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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 Accountsindividual 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).

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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, 2016,2018, the maximum amount we could lend to one borrower is $13.9$17.1 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 Jeannie,Nyce, Star, and Plus networks of automated teller machines and MasterCard debit cards that may be used by our customers throughout South Carolina and other regions. 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 Richland, Lexington, Kershaw and Newberry Counties and elsewhere.our market areas. As of June 30, 2016,2018, there were 2123 financial institutions operating approximately 189177 offices in Lexington, Richland, Kershaw and Newberry Counties. With the acquisition of Savannah River Financial Corporation we added a branch in Aiken, South Carolina and one in Augusta, Georgia. These two counties, along with Columbia County (Georgia) which is contiguous to Richmond County, make up the area we refer to as the CSRA market. There are 16Midlands market, 17 financial institutions operating 103 branches in the CSRA market, and 35 financial institutions operating 104 branches.225 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.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.

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Employees

As of December 31, 2016,2018, we had 202226 full-time employees. We believe that we have good relations with our employees.

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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 executive officer, and persons chosen to become executive officers, and their ages, positions over the past five years, and terms of office as of March 14, 2019, are as follows:

Name (age)Position and Five Year HistoryWith the
Company Since
Michael C. Crapps (60)Chief Executive Officer and President, Director1994
John T. Nissen (57)Chief Commercial and Retail Banking Officer1995
David K. Proctor (62)Chief Credit Officer1995
Joseph G. Sawyer (68)Chief Financial Officer1995
Robin D. Brown (51)Chief Human Resources and Marketing Officer1994
Tanya A. Butts (60)Chief Operations Officers/Chief Risk Officer2017

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.

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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 and regulations are generally intended to protect depositors, not shareholders. 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.

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 Board of Governors of the Federal Reserve (the “Federal Reserve”) under the Bank Holding Company Act and its regulations promulgated there under. 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.

The Dodd-Frank Wall Street2018 Regulatory Reform. In May 2018, the Economic Growth, Regulatory Reform and Consumer Protection Act.Act (“Regulatory Relief Act”), was enacted to modify or remove certain financial reform rules and regulations, including some of those implemented under The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). While the Regulatory Relief Act maintains most of the regulatory structure established by the Dodd-Frank Act, it amends certain aspects of the regulatory framework for small depository institutions with assets of less than $10 billion and for large banks with assets of more than $50 billion. Many of these changes could result in meaningful regulatory changes for the Company and the Bank.

The Regulatory Relief Act, among other things, expands the definition of qualified mortgages a financial institution may hold and simplifies the regulatory capital rules for financial institutions and their holding companies with total consolidated assets of less than $10 billion by instructing the federal banking regulators to establish a single “community bank leverage ratio” of between 8% and 10%. Any qualifying depository institution or its holding company that exceeds this community bank leverage ratio will be exempt from other generally applicable leverage and risk-based regulatory requirements. Further, any qualifying depository institution that exceeds the new ratio will be considered to be “well capitalized” for purposes of the prompt corrective action rules. The Regulatory Relief Act also expanded the category of holding companies that may rely on the “Small Bank Holding Company and Savings and Loan Holding Company Policy Statement” by raising the maximum amount of assets a qualifying holding company may have from $1 billion to $3 billion. This expansion also excludes such holding companies from the minimum capital requirements of the Dodd-Frank Act. In addition, the Regulatory Relief Act includes regulatory relief for community banks regarding regulatory examination cycles, call reports, the proprietary trading prohibitions in the Volcker Rule, mortgage disclosures, and risk weights for certain high-risk commercial real estate loans.

It is difficult at this time to predict when or how new standards under the Regulatory Relief Act will be implemented by regulations and ultimately be applied to the Company or the Bank or what specific impact the Regulatory Relief Act and the yet-to-be-written implementation rules and regulations will have on the Company or the Bank.

The Dodd-Frank Wall Street Reform and Consumer Protection Act.The Dodd-Frank Act was signed into law in July 2010. The Dodd-Frank Act impactsimpacted financial institutions in numerous ways, including:

·The creation of aCreated the Financial Stability Oversight Council responsible for monitoring and managing systemic risk,
·GrantingGranted additional authority to the Federal Reserve to regulate certain types of nonbank financial companies,
·GrantingGranted new authority to the FDIC as liquidator and receiver,
·ChangingChanged the manner in which deposit insurance assessments are made,
·RequiringRequired regulators to modify capital standards,
·EstablishingEstablished the Bureau of Consumer Financial Protection (the “CFPB”),
·CappingCapped interchange fees that banks with assets of $10 billion or more charge merchants for debit card transactions,
·ImposingImposed more stringent requirements on mortgage lenders, and
·LimitingLimited banks’ proprietary trading activities.

There are many provisions in the Dodd-Frank Act mandating regulators to adopt new regulations and conduct studies upon which future regulation may be based. While some have been issued, manysome remain to be issued. Governmental intervention and new regulations could materially and adversely affect our business, financial condition and results of operations.

 

Basel Capital Standards.RegulatoryIn July of 2013, the U.S. federal banking agencies approved the implementation of the Basel III regulatory capital reforms in pertinent part, and, at the same time, promulgated rules releasedeffecting certain changes required by the Dodd-Frank Act (the “Basel III Rule”). The Basel III Rule was released in the form of enforceable regulations by each of the applicable federal bank regulatory agencies in July 2013 to implement capital standards, referred to asagencies. The Basel III and developed by an international body known as the Basel Committee on Banking Supervision, impose higherRule is applicable to all banking organizations that are subject to minimum capital requirements, for bank holding companies and banks. The rules apply to all nationalincluding federal and state banks and savings and loan associations, regardless of size andas well as to bank holding companies 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 moreless than $1$3.0 billion in total consolidated assets. More stringent requirements are imposed on “advanced approaches” banking organizations, which areorganizations—generally those organizations with $250 billion or more in total consolidated assets, with $10 billion or more in total foreign exposures or that have opted inapplicable to advanced approaches banking organizations.

Based on the foregoing, as a small bank holding company, we are generally not subject to the Basel II capital regime. requirements at the holding company level unless otherwise advised by the Federal Reserve; however, our Bank remains subject to the capital requirements.

The new regulatoryFDIC’s final capital rules became effective for the Company and the Bank on January 1, 2015 (subject to a phase-in period for certain provisions), and all of the requirements in the rules will be fully phased in by January 1, 2019.

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The rules include certainincluded new and higher risk-based capital and leverage ratios and refined the definition of what constitutes “capital” for purposes of calculating those ratios. The minimum capital-level requirements than those previously in place. Specifically,applicable to the following minimum capital requirements apply to us:Bank under the final rule are:

 

·a new common equityCommon Equity Tier 1 risk-based capital ratio of 4.5%;
·a Tier 1 risk-based capital ratio of 6% (increased from the former 4% requirement);
·a total risk-based capital ratio of 8% (unchanged from the former requirement); and
·a leverage ratio of 4% (also unchanged from the former requirement).

The final rules also established a “capital conservation buffer” above the new regulatory minimum capital requirements, which must consist entirely of Common Equity Tier 1 capital, which was phased in over several years. The phase-in of the capital conservation buffer began on January 1, 2016, at a level of 0.625% of risk-weighted assets for 2016 and increased to 1.250% for 2017, and 1.875% for 2018. The fully phased-in capital conservation buffer of 2.500%, which became effective on January 1, 2019, resulted in the following effective minimum capital ratios beginning in 2019: (i) a Common Equity Tier 1 capital ratio of 7.0%, (ii) a Tier 1 capital ratio of 8.5%, and (iii) a total capital ratio of 10.5%. Under the final rules, institutions are subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if their capital levels fall below the buffer amount. These limitations establish a maximum percentage of eligible retained income that could be utilized for such actions.

 

Under the rules, Tier 1 capital is redefined to include two components: Common Equity Tier 1 capital and additional Tier 1 capital. The new and highest form of capital, Common Equity Tier 1 capital, consists solely of common stock (plus related surplus), retained earnings, accumulated other comprehensive income, and limited amounts of minority interests that are in the form of common stock. Additional Tier 1 capital includes other perpetual instruments historically included in Tier 1 capital, such as noncumulative perpetual preferred stock. The rules permit bank holding companies with less than $15.0 billion in total consolidated assets to continue to include trust preferred securities and cumulative perpetual preferred stock issued before May 19, 2010 in Tier 1 capital, but not in Common Equity Tier 1 capital, subject to certain restrictions. Tier 2 capital consists of instruments that currently qualify in Tier 2 capital plus instruments that the rules have disqualified from Tier 1 capital treatment. Cumulative perpetual preferred stock, formerly includable in Tier 1 capital, is now included only in Tier 2 capital. Accumulated other comprehensive income (“AOCI”) is presumptively included in Common Equity Tier 1 capital and often would operate to reduce this category of capital. The rules provided a one-time opportunity at the end of the first quarter of 2015 for covered banking organizations to opt-out of much of this treatment of AOCI. We made this opt-out election and, as a result, will retain the pre-existing treatment for AOCI.

In addition, 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 its minimum risk-based capital requirements. This buffer must consist solely of Tier 1 Common Equity, but the buffer applies to all three measurements (Common Equity Tier 1, Tier 1 capital and total capital). The capital conservation buffer will bewas incrementally phased in incrementally over time, becomingand became fully effective on January 1, 2019, and will consist of an additional amount of common equity equal to 2.5% of risk-weighted assets. As of January 1, 2017, we are required to hold a capital conservation buffer of 1.25%, increasing by 0.625% amount each successive year until 2019.

In general, the rules have had the effect of increasing capital requirements by increasing the risk weights on certain assets, including high volatility commercial real estate, certain loans past due 90 days or more or in nonaccrual status, mortgage servicing rights not includable in Common Equity Tier 1 capital, equity exposures, and claims on securities firms, that are used in the denominator of the three risk-based capital ratios.

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Volcker Rule. Section 619 of the Dodd-Frank Act, known as the “Volcker Rule,” prohibitsoriginally prohibited any bank, bank holding company, or affiliate (referred to collectively as “banking entities”) from engaging in two types of activities: “proprietary trading” and the ownership or sponsorship of private equity or hedge funds that are referred to as “covered funds.” Proprietary trading is, in general, trading in securities on a short-term basis for a banking entity’s own account. Funds subject to the ownership and sponsorship prohibition are those not required to register with the SEC because they have only accredited investors or no more than 100 investors. In December 2013, our primary federal regulators, the Federal Reserve Board and the FDIC, together with other federal banking agencies, the SEC and the Commodity Futures Trading Commission, finalized a regulation to implement the Volcker Rule; however, in 2018, the Regulatory Relief Act exempted banking entities with less than $10 billion in total consolidated assets, such as us, from the Volcker Rule. At

Tax Cuts and Jobs Act. On December 31, 2016,22, 2017, the Company has evaluated our securities portfolioTax Cuts and has determinedJobs Act (the “Tax Act”) was signed into law. The Tax Act includes a number of provisions that we do not hold any covered funds.impact us, including the following:

·Tax Rate. The Tax Act replaced the graduated corporate tax rates applicable under prior law, which imposed a maximum tax rate of 35%, with a reduced 21% flat tax rate. Although the reduced tax rate generally should be favorable to us by resulting in increased earnings and capital, it will decrease the value of our existing deferred tax assets. Generally accepted accounting principles (“GAAP”) requires that the impact of the provisions of the Tax Act be accounted for in the period of enactment. Accordingly, the incremental income tax expense recorded by the Company in the fourth quarter of 2017 related to the Tax Act was $1.2 million, resulting primarily from a remeasurement of deferred tax assets of $3.2 million.
·Employee Compensation. A “publicly held corporation” is not permitted to deduct compensation in excess of $1 million per year paid to certain employees. The Tax Act eliminates certain exceptions to the $1 million limit applicable under prior to law related to performance-based compensation, such as equity grants and cash bonuses that are paid only on the attainment of performance goals. As a result, our ability to deduct certain compensation that may be paid to our most highly compensated employees will now be limited.
·Business Asset Expensing. The Tax Act allows taxpayers immediately to expense the entire cost (instead of only 50%, as under prior law) of certain depreciable tangible property and real property improvements acquired and placed in service after September 27, 2017 and before January 1, 2023 (with an additional year for certain property). This 100% “bonus” depreciation is phased out proportionately for property placed in service on or after January 1, 2023 and before January 1, 2027 (with an additional year for certain property).
·Interest Expense. The Tax Act limits a taxpayer’s annual deduction of business interest expense to the sum of (i) business interest income and (ii) 30% of “adjusted taxable income,” defined as a business’s taxable income without taking into account business interest income or expense, net operating losses, and, for 2018 through 2021, depreciation, amortization and depletion. Because we generate significant amounts of net interest income, we do not expect to be impacted by this limitation.

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 the operating environment of the Company 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 the financial condition or results of operations of the Company. A change in statutes, regulations or regulatory policies applicable to the Company or the Bank could have a material effect on the business of the Company.

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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.

·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.
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·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 sum, 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.

Change in Control. Two statutes, the Bank Holding Company Act and the Change in Bank Control 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 Bank Holding Company Act, control is deemed to exist if a company acquires 25% or more of any class of voting securities of a bank holding company; controls the election of a majority of the members of the board of directors; or exercises a controlling influence over the management or policies of a bank or bank holding company. In guidance issued in 2008, the Federal Reserve has stated that an investor generally will not be viewed as having a controlling influence over a bank holding company when the investor holds, in aggregate, less than 33% of the total equity of a bank or bank holding company (voting and nonvoting equity), provided such investor’s ownership does not include 15% or more of any class of voting securities. Prior Federal Reserve approval is necessary before an entity acquires sufficient control to become a bank holding company. Natural persons, certain non-business trusts, and other entities are not treated as companies (or bank holding companies), and their acquisitions are not subject to review under the Bank Holding Company Act. State laws generally, including South Carolina law, require state approval before an acquirer may become the holding company of a state bank.

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Under the Change in Bank Control Act, a person or company is generally 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. Transactions subject to the Bank Holding Company Act are exempt from Change in Control Act requirements. For state banks, state laws, including thatthose of South Carolina, typically require approval by the state bank regulator as well.

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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 imposes certain capital requirements on thea 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. These requirements are essentially the same as those that apply to the Bank and are described below under “First Community Bank—Capital Regulations.” However, because the Company currently qualifies as a small bank holding company, these capital requirements do not currently apply to the Company. Subject to our capital requirements and certain other 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.

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Dividends. Since the Company is a bank holding company, its 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 ability of the Company to pay dividends or otherwise engage in capital distributions.

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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 and to regulation by the S.C. Board.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 charteredstate-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.

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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 FDIC and the other federal banking regulatory agencies also have issued standards for all insured depository institutions relating, among other things, to the following:

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·internal controls;
·information systems and audit systems;
·loan documentation;
·credit underwriting;
·interest rate risk exposure; and
·asset quality.

 

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���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.

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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.

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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, 2016,2018, 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.

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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.

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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 stockholders, 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.

Dividends.The Company’sOur 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.

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 sate 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.

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Community Reinvestment Act. The CRA requires that the FDIC evaluate the record of the Bank in meeting the credit needs of its local community, including low and moderate income neighborhoods. These factors are also considered in evaluating mergers, acquisitions, and applications to open a branch or facility. Failure to adequately meet these criteria could impose additional requirements and limitations on our Bank.

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The Gramm-Leach-Bliley Act (the “GLBA”) made various changes to the CRA. Among other changes, CRA agreements with private parties must be disclosed and annual CRA reports must be made available to a bank’s primary federal regulator. A bank holding company will not be permitted to become a financial holding company and no new activities authorized under the GLBA may be commenced by a holding company or by a bank financial subsidiary if any of its bank subsidiaries received less than a satisfactory CRA rating in its latest CRA examination.

Financial Subsidiaries. Under the GLBA, subject to certain conditions imposed by their respective banking regulators, national and state-chartered banks are permitted to form “financial subsidiaries” that may conduct financial or incidental activities, thereby permitting bank subsidiaries to engage in certain activities that previously were impermissible. The GLBA imposes several safeguards and restrictions on financial subsidiaries, including that the parent bank’s equity investment in the financial subsidiary be deducted from the bank’s assets and tangible equity for purposes of calculating the bank’s capital adequacy. In addition, the GLBA imposes new restrictions on transactions between a bank and its financial subsidiaries similar to restrictions applicable to transactions between banks and non-bank affiliates.

Consumer Protection Regulations. Activities of the Bank are subject to a variety of statutes and regulations designed to protect consumers. Interest and other charges collected or contracted for by the Bank are subject to state usury laws and federal laws concerning interest rates. The Bank’s loan operations are also subject to federal laws applicable to credit transactions, such as:

·the Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;
·the Home Mortgage Disclosure Act of 1975, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves;
·the Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit;
·the Fair Credit Reporting Act of 1978, governing the use and provision of information to credit reporting agencies;
·the Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies; and
·the rules and regulations of the various federal agencies charged with the responsibility of implementing such federal laws.

 

The deposit operations of the Bank also are subject to:

·the FDIA, which, among other things, limits the amount of deposit insurance available per account to $250,000 and imposes other limits on deposit-taking;
·the Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records;
·the Electronic Funds Transfer Act and Regulation E, which governs automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services; and
·the Truth in Savings Act and Regulation DD, which requires depository institutions to provide disclosures so that consumers can make meaningful comparisons about depository institutions and accounts.

 

The Consumer Financial Protection Bureau (the “CFPB”) is an independent regulatory authority housed within the Federal Reserve. The CFPB has broad authority to regulate the offering and provision of consumer financial products. The CFPB has the authority to supervise and examine depository institutions with more than $10 billion in assets for compliance with federal consumer laws. The authority to supervise and examine depository institutions with $10 billion or less in assets, such as the Bank, for compliance with federal consumer laws remains largely with those institutions’ primary regulators. However, the CFPB may participate in examinations of these smaller institutions on a “sampling basis” and may refer potential enforcement actions against such institutions to their primary regulators. As such, the CFPB may participate in examinations of the Bank.

The CFPB has issued a number of significant rules that impact nearly every aspect of the lifecycle of a residential mortgage loan. These rules implement Dodd-Frank Act amendments to the Equal Credit Opportunity Act, TILA and the Real Estate Settlement Procedures Act (“RESPA”). Among other things, the rules adopted by the CFPB require banks to: (i) develop and implement procedures to ensure compliance with a “reasonable ability-to-repay” test; (ii) implement new or revised disclosures, policies and procedures for originating and servicing mortgages, including, but not limited to, pre-loan counseling, early intervention with delinquent borrowers and specific loss mitigation procedures for loans secured by a borrower’s principal residence, and mortgage origination disclosures, which integrate existing requirements under TILA and RESPA; (iii) comply with additional restrictions on mortgage loan originator hiring and compensation; and (iv) comply with new disclosure requirements and standards for appraisals and certain financial products.

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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.

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Anti-Money Laundering. Financial institutions must maintain anti-money laundering programs that include established internal policies, procedures, and controls; a designated compliance officer; an ongoing employee training program; and testing of the program by an independent audit function. The Company and the Bank are also prohibited from entering into specified financial transactions and account relationships and must meet enhanced standards for due diligence and “knowing your customer” in their dealings with foreign financial institutions and foreign customers. Financial institutions must take reasonable steps to conduct enhanced scrutiny of account relationships to guard against money laundering and to report any suspicious transactions, and recent laws provide law enforcement authorities with increased access to financial information maintained by banks. Anti-money laundering obligations have been substantially strengthened as a result of the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (which we refer to as the “USA PATRIOT Act”), enacted in 2001 and renewed through 2019. Bank regulators routinely examine institutions for compliance with these obligations and are required to consider compliance in connection with the regulatory review of applications. The regulatory authorities have been active in imposing cease and desist orders and money penalty sanctions against institutions that have not complied with these requirements.

USA PATRIOT Act/Bank Secrecy Act. 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 USA PATRIOT Act, amended, in part, the Bank Secrecy Act and provides for the facilitation of information sharing among governmental entities and financial institutions for the purpose of combating terrorism and money laundering by enhancing anti-money laundering and financial transparency laws, as well as enhanced information collection tools and enforcement mechanics for the U.S. government, including: (i) requiring standards for verifying customer identification at account opening; (ii) rules to promote cooperation among financial institutions, regulators, and law enforcement entities in identifying parties that may be involved in terrorism or money laundering; (iii) reports by nonfinancial trades and businesses filed with the U.S. Treasury Department’s Financial Crimes Enforcement Network for transactions exceeding $10,000; and (iv) filing suspicious activities reports if a bank believes a customer may be violating U.S. laws and regulations and requires enhanced due diligence requirements for financial institutions that administer, maintain, or manage private bank accounts or correspondent accounts for non-U.S. persons. Bank regulators routinely examine institutions for compliance with these obligations and are required to consider compliance in connection with the regulatory review of applications.

On February 18, 2015, the Bank entered into a Stipulation to the Issuance of a Consent Order with the FDIC consenting to the issuance by the FDIC of a Consent Order (the “Consent Order”). The Consent Order required the Bank to take certain actions with respect to the Bank Secrecy Act and anti-money laundering laws and regulations (collectively referred to as the “BSA”), including, among other things, enhancing its annual BSA risk assessment processes; revising certain internal controls related to BSA; and further developing and implementing certain BSA-related training programs. The Bank took immediate actions to correct and resolve all of the BSA issues included in the Consent Order and, on January 28, 2016, the FDIC advised the Bank that the Consent Order had been terminated.

Under the USA PATRIOT Act, the Federal Bureau of Investigation (“FBI”) can send to the banking regulatory agencies lists of the names of persons suspected of involvement in terrorist activities. The Bank can be requested, to search its records for any relationships or transactions with persons on those lists. If the Bank finds any relationships or transactions, it must file a suspicious activity report and contact the FBI.

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The Office of Foreign Assets Control (“OFAC”), which is a division of the U.S. Department of the Treasury (the “Treasury”), is responsible for helping to insure that United States entities do not engage in transactions with “enemies” of the United States, as defined by various Executive Orders and Acts of Congress. OFAC has sent, and will send, our banking regulatory agencies lists of names of persons and organizations suspected of aiding, harboring or engaging in terrorist acts. If the Bank finds a name on any transaction, account or wire transfer that is on an OFAC list, it must freeze such account, file a suspicious activity report and notify the FBI. The Bank has appointed an OFAC compliance officer to oversee the inspection of its accounts and the filing of any notifications. The Bank actively checks high-risk OFAC areas such as new accounts, wire transfers and customer files. The Bank performs these checks utilizing software, which is updated each time a modification is made to the lists provided by OFAC and other agencies of Specially Designated Nationals and Blocked Persons.

Privacy, Data Security and Credit Reporting. Financial institutions are required to disclose their policies for collecting and protecting confidential information. Customers generally may prevent financial institutions from sharing nonpublic personal financial information with nonaffiliated third parties except under narrow circumstances, such as the processing of transactions requested by the consumer. Additionally, financial institutions generally may not disclose consumer account numbers to any nonaffiliated third party for use in telemarketing, direct mail marketing or other marketing to consumers. It is the Bank’s policy not to disclose any personal information unless required by law.

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Recent cyber attacks against banks and other institutions that resulted in unauthorized access to confidential customer information have prompted the Federal banking agencies to issue several warnings and extensive guidance on cyber security. The agencies are likely to devote more resources to this part of their safety and soundness examination than they have in the past.

In addition, pursuant to the Fair and Accurate Credit Transactions Act of 2003 (the “FACT Act”) and the implementing regulations of the federal banking agencies and Federal Trade Commission, the Bank is required to have in place an “identity theft red flags” program to detect, prevent and mitigate identity theft. The Bank has implemented an identity theft red flags program designed to meet the requirements of the FACT Act and the joint final rules. Additionally, the FACT Act amends the Fair Credit Reporting Act to generally prohibit a person from using information received from an affiliate to make a solicitation for marketing purposes to a consumer, unless the consumer is given notice and a reasonable opportunity and a reasonable and simple method to opt out of the making of such solicitations.

Effect of Governmental Monetary Policies. Our earnings are affected by domestic economic conditions and the monetary and fiscal policies of the United States government and its agencies. The Federal Reserve’s monetary policies have had, and are likely to continue to have, an important impact on the operating results of commercial banks through its power to implement national monetary policy in order, among other things, to curb inflation or combat a recession. The monetary policies of the Federal Reserve have major effects upon the levels of bank loans, investments and deposits through its open market operations in United States government securities and through its regulation of the discount rate on borrowings of member banks and the reserve requirements against member bank deposits. It is not possible to predict the nature or impact of future changes in monetary and fiscal policies. In December 2016, the Federal Open Market Committee raised the target range for the federal funds rate by 25 basis points and indicated the potential for further gradual increases in the federal funds rate depending on the economic outlook.

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, following the fourth consecutive quarter (and any applicable phase-in period) where an institution’s total consolidated assets equal or exceed $10 billion, the FDIC will use a performance score and a loss-severity score to calculate an initial assessment rate. In calculating these scores, the FDIC uses an institution’s capital level and regulatory supervisory ratings and certain financial measures to assess an institution’s ability to withstand asset-related stress and funding-related stress. The FDIC also has the ability to make discretionary adjustments to the total score based upon significant risk factors that are not adequately captured in the calculations. In addition to ordinary assessments described above, the FDIC has the ability to impose special assessments in certain instances.

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The FDIC’s deposit insurance fund is currently underfunded, and the FDIC has raised assessment rates and imposed special assessments on certain institutions during recent years to raise funds. Under the Dodd-Frank Act, the minimum designated reserve ratio for the deposit insurance fund is 1.35% of the estimated total amount of insured deposits. In October 2010, the FDIC adopted a restoration plan to ensure that the fund reserve ratio reaches 1.35% by September 30, 2020, as required by the Dodd-Frank Act. At least semi-annually, the FDIC will updateupdates its loss and income projections for the fund and, if needed, will increase or decrease assessment rates, following notice-and-comment rulemaking if required. Because the reserve ratio has reached 1.35%, two deposit insurance assessment changes occurred under FDIC regulations: (1) surcharges on insured depository institutions with total consolidated assets of $10 billion or more (large institutions) will cease; and (2) banks with assets of less than $10 billion, such as us, will receive assessment credits for the portion of their assessments that contributed to the growth in the reserve ratio from between 1.15% and 1.35%, to be applied when the reserve ratio is at or above 1.38%, with credits starting March 31, 2019.

In addition, FDIC insured institutions are required to pay a Financing Corporation assessment to fund the interest on bonds issued to resolve thrift failures in the 1980s. The Financing Corporation quarterly assessment for the fourth quarter of 2014 equaled 1.725 basis points for each $100 of average consolidated total assets minus average tangible equity. These assessments, which may be revised based upon the level of deposits, will continue until the bonds mature in the years 2017 through 2019. The amount assessed on individual institutions is in addition to the amount, if any, paid for deposit insurance according to the FDIC’s risk-related assessment rate schedules. Assessment rates may be adjusted quarterly to reflect changes in the assessment base.

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The FDIC may terminate the deposit insurance of any insured depository institution, including the Bank, if it determines after a hearing that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. It also may suspend deposit insurance temporarily during the hearing process for the permanent termination of insurance, if the institution has no tangible capital. If insurance of accounts is terminated, the accounts at the institution at the time of the termination, less subsequent withdrawals, shall continue to be insured for a period of six months to two years, as determined by the FDIC. Management is not aware of any practice, condition or violation that might lead to termination of the Bank’s deposit insurance.

Incentive Compensation.The Dodd-Frank Act requires the federal bank regulators and the SEC to establish joint regulations or guidelines prohibiting incentive-based payment arrangements at specified regulated entities having at least $1 billionThere have been a number of developments in total assets that encourage inappropriate risks by providing an executive officer, employee, director or principal stockholder with excessive compensation, fees, or benefits or that could lead to material financial loss to the entity. In addition, these regulators must establish regulations or guidelines requiring enhanced disclosure to regulators of incentive-based compensation arrangements. The agencies proposed such regulations in April 2011. However, the 2011 proposal was replaced with a new proposal in May 2016, which makes explicit that the involvement of risk management and control personnel includes not only compliance, risk management and internal audit, but also legal, human resources, accounting, financial reporting and finance roles responsible for identifying, measuring, monitoring or controlling risk-taking. A final rule had not been adopted as of December 31, 2016.

In June 2010, the Federal Reserve, the FDIC and the OCC issued a comprehensive final guidancerecent years focused on incentive compensation policies intended to ensureplans sponsored by bank holding companies and banks, reflecting recognition by the bank regulatory agencies and Congress that theflawed incentive compensation policiespractices in the financial industry were one of banking organizations do not underminemany factors contributing to the safety and soundnessglobal financial crisis. Layered on top of such organizations by encouraging excessive risk-taking.that are the abuses in the headlines dealing with product cross-selling incentive plans. The result is interagency 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’son sound incentive compensation arrangements shouldpractices and proposed rulemaking by the agencies required under Section 956 of the Dodd-Frank Act.

The interagency guidance recognized three core principles; effective incentive plans are required to: (i) provide employees incentives that do not encourage risk-taking beyond the organization’s ability to effectively identifyappropriately balance risk and manage risks,reward; (ii) be compatible with effective internal controls and risk management,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 Much of the regular, risk-focused examination process,guidance addresses large banking organizations and, because of the size and complexity of their operations, the regulators expect those organizations to maintain systematic and formalized policies, procedures, and systems for ensuring that the incentive compensation arrangements offor all executive and non-executive employees covered by this guidance are identified and reviewed, and appropriately balance risks and rewards.  Smaller banking organizations such aslike 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 itsuse incentive compensation arrangements or related risk-management control or governance processes, pose a riskare expected to be less extensive, formalized, and detailed than those of the organization’s safety and soundness andlarger banks. 

Section 956 of the organization is not taking prompt and effective measures to correct the deficiencies.

The Dodd-Frank Act required the banking agencies, the National Credit Union Administration, the SEC and the Federal Housing Finance Agency to jointly prescribe regulations that prohibit types of incentive-based compensation that encourage inappropriate risk taking and to disclose certain information regarding such plans. On June 10, 2016, the agencies released an updated proposed rule for comment. Section 956 will only apply to banking organizations with assets of greater than $1 billion. The Company has consolidated assets greater than $1 billion and less than $50 billion and the Company is considered a Level 3 banking organization under the proposed rules. The proposed rules contain mostly general principles and reporting requirements for Level 3 institutions so there are no specific prescriptions or limits, deferral requirements or claw-back mandates. Risk management and controls are required, as is board or committee level approval and oversight. No final rule has been issued yet.

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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, 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 in the preceding three years or (ii) construction and land development loans exceed 100% of 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 SEC,risks arising from commercial real estate lending. In addition, FDIC-insured institutions must maintain capital commensurate with the level and certain other federal agencies to jointly issue a regulationnature of their commercial real estate concentration risk. Based on incentive compensation. The agencies proposed such a rule in 2011, which reflected the 2010 guidance. However, the 2011 proposal was replaced with a new proposal rule in May 2016, which makes explicit that the involvement of risk management and control personnel includes not only compliance, risk management and internal audit, but also legal, human resources, accounting, financial reporting and finance roles responsible for identifying, measuring, monitoring or controlling risk-taking. A final rule had not been adoptedBank’s loan portfolio as of December 31, 2016.2018, its non-owner occupied commercial loans and its construction and land development loans were approximately 260% 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.

Item 1A. Risk Factors.

OurThere 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, financial condition, and results of operations couldand/or financial condition. Additional risks and uncertainties not currently known to us or that we currently consider to not be harmed by any of the followingmaterial also may materially and adversely affect us. In assessing these risks, or other risks that have not been identified or which we believe are immaterial or unlikely. Shareholdersyou should carefully consider the risks described below in conjunction with thealso refer to other information disclosed in this Form 10-K andour SEC filings, including the information incorporated by reference in this Form 10-K, including our consolidated financial statements and related notes.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.

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General Business Risks

Our business may be adversely affected by economic conditions.

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, is highly dependent upon the business environment in the primary markets where we operate and in the U.S. as a whole. 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; or a combination of these or other factors. While economic conditions in our local markets in South Carolina and Georgia have improvedcontinued to improve since the end of the economic recession, economic growth has been slow and uneven, unemployment remains relatively high, and concerns still exist over the federal deficit, government spending, as well as the potential for rapid changes in local and global economic risks.conditions. A return of recessionary conditions and/or negative developments in the domestic and 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 value and sales volumes and high unemployment levels may result in higher than expected loan delinquencies 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.

Furthermore, the Federal Reserve, in an attempt to help the overall economy, has among other things, kept interest rates low through its targeted federal funds rate and the purchase of U.S. Treasury and mortgage-backed securities. The Federal Reserve increased the target range for the federal funds rate by 2575 basis points in December 20162017 and by a total of 100 basis points during 2018 and has indicated the potential for further graduala patient approach in evaluating increases in the target rate depending on the economic outlook. As the federal funds rate increases, market interest rates will likely rise, which may negatively impact the housing markets and the U.S. economic recovery.

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.
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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, 2016,2018, approximately 84.1%87.1% of our loan portfolio (excluding loans held for sale) is composed of construction (8.4%(8.1%), commercial mortgage (67.9%(71.5%) and commercial loans (7.8%(7.5%). 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.

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A significant portion of our loan portfolio is secured by real estate, and events that negatively impact the real estate market could hurt our business.

A significant portion of our loan portfolio is secured by real estate. As of December 31, 2016,2018, approximately 91.7%91.1% of our loans (excluding loans held for sale) had real estate as a primary or secondary component of collateral. The real estate collateral in each case provides an alternate source of repayment in the event of default by the borrower and may deteriorate in value during the time the credit is extended. While economic conditions and real estate in our local markets in South Carolina and Georgia have improved since the end of the economic recession, there can be no assurance that our local markets will not experience another economic decline. Deterioration in the real estate market could cause us to adjust our opinion of the level of credit quality in our loan portfolio. Such a determination may lead to an additional increase in our provisions for loan losses, which could also adversely affect our business, financial condition, and results of operations. Natural disasters, including hurricanes, tornados, earthquakes, fires and floods, which could be exacerbated by potential climate change, may cause uninsured damage and other loss of value to real estate that secures these loans and may also negatively impact our financial condition.

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, 2016,2018, we had approximately $406.0$561.4 million in loans outstanding to borrowers whereby the collateral securing the loan was commercial real estate, representing approximately 73.4%78.1% of our total loans outstanding as of that date. Approximately 40.5%40.0%, or $164.3$212.4 million, of this real estate areis 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.

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Our commercial real estate loans have grown 13.5%14.2% or $44.1$69.8 million, since December 31, 2015.2018. The banking regulators are giving commercial real estate lending greater scrutiny, and may require banks with higher levels of commercial real estate loans to implement more stringent underwriting, internal controls, risk management policies and portfolio stress testing, as well as possibly higher levels of allowances for losses and capital levels as a result of commercial real estate lending growth and exposures.

Imposition of limits by the bank regulators on commercial and multi-family real estate lending activities could curtail our growth and adversely affect our earnings.

In 2006, the FDIC, the Federal Reserve and the Office of the Comptroller of the Currency issued joint guidance entitled “Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices” (the “CRE Guidance”). Although the CRE Guidance did not establish specific lending limits, it provides that a bank’s commercial real estate lending exposure could receive increased supervisory scrutiny where (i) total non-owner-occupied commercial real estate loans, including loans secured by apartment buildings, investor commercial real estate, and construction and land loans, represent 300% or more of an institution’s total risk-based capital, and the outstanding balance of the commercial real estate loan portfolio has increased by 50% or more during the preceding 36 months, or (ii) construction and land development loans exceed 100% of capital. Our total non-owner-occupied commercial real estate loans represented 260% of the Bank’s total risk-based capital at December 31, 2018, and our construction and land development loans represented 69% of the Bank’s capital at December 31, 2018.

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, 2016,2018, commercial business loans comprised 7.8%7.5% 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.

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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 $283.6$271.6 million in 2016,2018, as compared to $275.5$265.7 million in 2015.2017. This represents 34.8%27.7% and 35.9%30.9% of the average earning assets for the years ended December 31, 20162018 and 2015,2017, respectively. At December 31, 2016,2018, the portfolio was 32.6%25.7% of earning assets. Turmoil in the financial markets could impair the market value of our investment portfolio, which could adversely affect our net income and possibly our capital.

As of December 31, 20162018 and 2015,2017, 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.

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Economic challenges, especially those affecting the local markets in which we operate, may reduce our customer base, our level of deposits, and demand for financial products such as loans.

Our success depends significantly on growth, or lack thereof, in population, income levels, deposits and housing starts in the geographic markets in which we operate. The local economic conditions in these areas have a significant impact on our commercial, real estate and construction loans, the ability of borrowers to repay these loans, and the value of the collateral securing these loans. Unlike larger financial institutions that are more geographically diversified, we are a community banking franchise. Adverse changes in the economic conditions of the Southeast United States in general or in our primary markets in South Carolina and Georgia could negatively affect our financial condition, results of operations and profitability. While economic conditions in the states of South Carolina and Georgia, along with the U.S. and worldwide, have improved since the economic recession, there can be no assurance that these markets will not experience another economic decline. A return of recessionary conditions could result in the following consequences, any of which could have a material adverse effect on our business:

·loan delinquencies may increase
·problem assets and foreclosures may increase;
·demand for our products and services may decline; and
·collateral for loans that we make, especially real estate, may decline in value, in turn reducing a customer’s borrowing power, and reducing the value of assets and collateral associated with the our loans.

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.

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. 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.

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Our deposit insurance premiums could be substantially higher in the future, which could have a material adverse effect on our future earnings.

The FDIC insures deposits at FDIC-insured depository institutions, such as the bank, up to applicable limits. The amount of a particular institution’s deposit insurance assessment is based on that institution’s risk classification under an FDIC risk-based assessment system. An institution’s risk classification is assigned based on its capital levels and the level of supervisory concern the institution poses to its regulators. Recent marketMarket developments and bank failures during and after the recession significantly depleted the FDIC’s Deposit Insurance Fund and reduced the ratio of reserves to insured deposits. As a result of recentsuch economic conditions and the enactment of the Dodd-Frank Act, banks are nowwere assessed deposit insurance premiums based on the bank’s average consolidated total assets, and the FDIC has modified certain risk-based adjustments, which increase or decrease a bank’s overall assessment rate. This has resulted in increases to the deposit insurance assessment rates and thus raised deposit premiums for many insured depository institutions. Because the reserve ratio has reached 1.35%, two deposit insurance assessment changes occurred under FDIC regulations: (1) surcharges on insured depository institutions with total consolidated assets of $10 billion or more (large institutions) will cease; and (2) banks with assets of less than $10 billion, such as us, will receive assessment credits for the portion of their assessments that contributed to the growth in the reserve ratio from between 1.15% and 1.35%, to be applied when the reserve ratio is at or above 1.38%, with credits starting March 31, 2019. If these increases are insufficient for the Deposit Insurance Fund fails to meet its funding requirements, further special assessments or increases in deposit insurance premiums may be required. We are generally unable to control the amount of premiums that we are required to pay for FDIC insurance. If there are additional bank or financial institution failures, we may be required to pay even higher FDIC premiums than the recently increased levels. Any future additional assessments, increases or required prepayments in FDIC insurance premiums could reduce our profitability, may limit our ability to pursue certain business opportunities or otherwise negatively impact our operations.

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Changes in prevailing interest rates may reduce our profitability.

Our results of operations depend in large part upon the level of our net interest income, which is the difference between interest income from interest- earning assets, such as loans and mortgage-backed securities (“MBSs”), and interest expense on interest-bearing liabilities, such as deposits and other borrowings. Depending on the terms and maturities of our assets and liabilities, we believe it is more likely than not 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.

We will face risks with respect to expansion through future acquisitions or mergers.

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, Community Reinvestment Act 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;
·the incurrence and possible impairment of goodwill associated with an acquisition and possible adverse effects on our results of operations; and
·the risk of loss of key employees and customers.

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 acquisition, 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 its acquisitions within desired time frames.

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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.

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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 seriously harm our business, results of operations, and financial condition.

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.

We could experience a loss due to competition with other financial institutions.

 

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 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. Also, technology has lowered barriers to entry and made it possible for nonbanks to offer products and services traditionally provided by banks, such as automatic transfer and automatic payment systems. 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:

 

·the ability to develop, maintain, and build upon long-term customer relationships based on top quality service, high ethical standards, and safe, sound assets;
·the ability to expand our market position;
·the scope, relevance, and pricing of products and services offered to meet customer 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.

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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 financial condition and results of operations.

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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 and we are in the process of converting to a new core processing and electronic banking system.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. We expect to convert from our internal core processing and electronic banking system that is used to manage customer accounts to a processing system offered by a third party software vendor with the conversion planned to occur in June 2017. Interruption or failure of these systems, in connection with our conversion or otherwise, could cause business loss as a result of adverse customer experiences and possible diminishing of our reputation, damage claims or civil fines. Failure to successfully keep pace with technological change affecting the financial services industry or to successfully convert to a new core processing and electronic banking system could have a material adverse impact on our business and, in turn, our 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 and, in turn, our 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.

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, 2016,2018, approximately $11.8$12.3 million of our loans, or 12.75%10.76% of our Bank’s regulatory capital, had loan-to-value ratios that exceeded regulatory supervisory guidelines, of which three loansonly one loan totaling approximately $0.4 million$26 thousand had loan-to-value ratios of 100% or more. In addition, supervisory limits on commercial loan to valueloan-to-value exceptions are set at 30% of our Bank’s capital. At December 31, 2016, $2.32018, $5.2 million of our commercial loans, or 2.53%4.54% of our 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.

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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 generally accepted accounting principles (“GAAP”)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.

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 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.

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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 our business, financial condition or results of operations.

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. Further, 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.

Negative public opinion surrounding our Company and the financial institutions industry generally could damage our reputation and adversely impact our earnings.

Reputation risk, or the risk to our business, earnings and capital from negative public opinion surrounding our company 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 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 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 and Regulatory Risks

We are subject to extensive regulation that could restrict our activities, have an adverse impact on our operations, and impose financial requirements or limitations on the conduct of our business.

We operate in a highly regulated industry and are subject to examination, supervision, and comprehensive regulation by various regulatory agencies. We are subject to Federal Reserve regulation. Our Bank is subject to extensive regulation, supervision, and examination by our primary federal regulator, the FDIC, the regulating authority that insures customer deposits. Also, as a member of the Federal Home Loan Bank (the “FHLB”), our Bank must comply with applicable regulations of the Federal Housing Finance Board and the FHLB. Regulation by these agencies is intended primarily for the protection of our depositors and the deposit insurance fund and not for the benefit of our shareholders. Our Bank’s activities are also regulated under consumer protection laws applicable to our lending, deposit, and other activities. A sufficient claim against us under these laws could have a material adverse effect on our results of operations.

Further, changes in laws, regulations and regulatory practices affecting the financial services industry could subject us to increased capital, liquidity and risk management requirements, create additional costs, limit the types of financial services and products we may offer and/or increase the ability of non-banks to offer competing financial services and products, among other things. 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.

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The final Basel III capital rules generally require insured depository institutions and their holding companies to hold more capital, which could adversely affect our financial condition and operations.

In July 2013, the federal bank regulatory agencies issued a final rule that revised their risk based capital requirements and the method for calculating risk weighted assets to make them consistent with agreements that were reached by Basel III and certain provisions of the Dodd Frank Act. This rule substantially amended the regulatory risk based capital rules applicable to us. The requirements in the rule began to phase in on January 1, 2015 for the Company and the Bank. The requirements in the rule will beBankand are now fully phased in byas of January 1, 2019.2019.

The rule includesincluded certain new and higher risk-based capital and leverage requirements than those currentlypreviously in place. Specifically, the following minimum capital requirements apply to us:requirements:

·a new common equity Tier 1 risk-based capital ratio of 4.5%;
·a Tier 1 risk-based capital ratio of 6% (increased from the former 4% requirement);
·a total risk-based capital ratio of 8% (unchanged from the former requirement); and
·a leverage ratio of 4% (also unchanged from the former requirement).

The Basel III Rule 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.

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.

Under the rule,Basel III Rule, Tier 1 capital is redefined to include two components: Common Equity Tier 1 capital and additional Tier 1 capital. The new and highest form of capital, Common Equity Tier 1 capital, consists solely of common stock (plus related surplus), retained earnings, accumulated other comprehensive income, and limited amounts of minority interests that are in the form of common stock. Additional Tier 1 capital includes other perpetual instruments historically included in Tier 1 capital, such as noncumulative perpetual preferred stock. Tier 2 capital consists of instruments that currently qualify in Tier 2 capital plus instruments that the rule has disqualified from Tier 1 capital treatment. Cumulative perpetual preferred stock, formerly includable in Tier 1 capital, is now included only in Tier 2 capital. Accumulated other comprehensive income (AOCI)(“AOCI”) is presumptively included in Common Equity Tier 1 capital and often would operate to reduce this category of capital. The rule provided a one-time opportunity at the end of the first quarter of 2015 for covered banking organizations to opt out of much of this treatment of AOCI. We made this opt-out election and, as a result, will retainretained the pre-existing treatment for AOCI.

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In addition, 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 its minimum risk-based capital requirements. This buffer must consist solely of Tier 1 Common Equity, but the buffer applies to all three measurements (Common Equity Tier 1, Tier 1 capital and total capital). The capital conservation buffer will bewas phased in incrementally over time becomingand became fully effective on January 1, 2019, and will consist of an additional amount of common equity equal to 2.5% of risk-weighted assets. As of January 1, 2017, we are required to hold a capital conservation buffer of 1.25%, increasing by 0.625% each successive year until 2019.

In general, the rules have had the effect of increasing capital requirements by increasing the risk weights on certain assets, including high volatility commercial real estate, certain loans past due 90 days or more or in nonaccrual status, mortgage servicing rights not includable in Common Equity Tier 1 capital, equity exposures, and claims on securities firms, that are used in the denominator of the three risk-based capital ratios.

In addition, in the current economic and regulatory environment, bank regulators may impose capital requirements that are more stringent than those required by applicable existing regulations. The application of more stringent capital requirements for us could, among other things, result in lower returns on equity, require the raising of additional capital, and result in regulatory actions if we are unable to comply with such requirements. Implementation of changes to asset risk weightings for risk based capital calculations, items included or deducted in calculating regulatory capital or additional capital conservation buffers, could result in management modifying our business strategy and could limit our ability to make distributions, including paying dividends or buying back our shares.

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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, the Financial Accounting Standards Board (the “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. For example, in 2012,2016, the FASB issued a proposed standard on accounting for credit losses. The standard wouldwill replace multiple existing impairment models, including replacing an “incurred loss” model for loans with an “expected loss” model. The FASB has indicated a tentativean effective date of January 1, 2019, and final guidance is expected to be issued in the second quarter of 2016.2020. These 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.

27

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.

32

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.

Failure to comply with government regulation and supervision could result in sanctions by regulatory agencies, civil money penalties, and damage to our reputation.

Our operations are subject to extensive regulation by federal, state, and local governmental authorities. Given the currentWith any disruption in the financial markets, we expect that the government will continue to pass new regulations and laws that will impact us. Compliance with such regulations may increase our costs and limit our ability to pursue business opportunities. Failure to comply with laws, regulations, and policies could result in sanctions by regulatory agencies, civil money penalties, and damage to our reputation. While we have policies and procedures in place that are designed to prevent violations of these laws, regulations, and policies, there can be no assurance that such violations will not occur.

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, customerswe, our directors and others makeour management are or may be the subject of various claims and take legal action pertaining to our performance of fiduciary responsibilities.actions by customers, employees, shareholders and others. Whether customersuch 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 financial liabilityjudgments or reputation damagesettlements 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.

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 turn,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, 2018, we had net deferred tax assets of $2.3 million, which included deferred tax assets for a federal net operating loss carryforward of $854 thousand that is expected to expire in 2037.Realization of deferred tax assets is dependent upon the generation of sufficient future taxable income during the periods in which existing deferred tax assets are expected to become deductible for federal income tax purposes. Based on projections of future taxable income in periods in which deferred tax assets are expected to become deductible, management determined that the realization of our net deferred tax asset was more likely than not. As a result, we did not recognize a valuation allowance on its net deferred tax asset as of December 31, 2018 or December 31, 2017. If it becomes more likely than not that some portion or the entire deferred tax asset will not be realized, a valuation allowance must be recognized.  In December 2017, the Tax Cuts and Jobs Act was enacted, which reduced the corporate federal income tax rate to 21% and resulted in an approximate $1.2 million write-down of our deferred tax asset in the fourth quarter of 2017, through income tax expense. These tax rate changes, in conjunction with our net income in 2017 and 2018, have resulted in a significant reduction of the deferred tax asset over the last two years.  Our deferred tax asset may be further reduced in the future if estimates of future income or our tax planning strategies do not support the amount of the deferred tax assets. Charges to establish a valuation allowance with respect to our deferred tax asset could have a material adverse effect on our financial condition and results of operations.

2833
 

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 FASB has issued a new credit impairment model, the Current Expected Credit Loss, or CECL model, which will become applicable to us in 2020. 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.

There is uncertainty surrounding the potential legal, regulatory and policy changes by the current presidential administration in the U.S. that may directly affect financial institutions and the global economy.

The current presidential administration has implemented certain financial reform regulations, including reform regulations affecting the Dodd-Frank Act, which has resulted in increased regulatory uncertainty, and we are assessing the potential impact on financial and economic markets and on our business. Changes in federal policy and at regulatory agencies are expected to occur over time through policy and personnel changes, which could lead to changes involving the level of oversight and focus on the financial services industry. The nature, timing and economic and political effects of potential changes to the current legal and regulatory framework affecting financial institutions remain highly uncertain. At this time, it is unclear what additional laws, regulations and policies may change and whether future changes or uncertainty surrounding future changes will adversely affect our operating environment and therefore our business, 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 theour ability of the Company 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 Companyus and by our need to maintain sufficient capital to support our operations. As a South Carolina charteredCarolina-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 the Company,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.

34

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 theThe 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.

29

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.

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.

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Item 1B. Unresolved Staff Comments.

Not applicable.

Item 2.   Properties.

TheOur principal place of business of bothas well as the Company and our BankBank’s is located at 5455 Sunset Boulevard, Lexington, South Carolina 29072. In addition, we currently operate 1520 full-service offices located in the South Carolina counties of Lexington County (6)(6 offices), Richland County (4)(4 offices), Newberry County (2)(2 offices), Kershaw County (1)(1 office), Aiken County (1 office), Greenville County (2 offices), Anderson County (1 office), Pickens County (1 office), and Aiken County (1), andin Richmond County, Georgia (1)(2 offices), as well as a loan production office located in Greenville County, South Carolina and a mortgage loan production office located in Richland County, South Carolina. All of these properties are owned by the Bank except for the loan production office inDowntown Augusta, Georgia (Richmond County) and Greenville, South Carolina full service branch offices, which isare 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.

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.

Item 4. Mine Safety Disclosures.

None.

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PART II

Item 5.    Market for Registrant’s Common Equity, Related StockholderShareholder Matters, and Issuer Purchases of Equity Securities.

As of February 28, 2017,2019, there were approximately 1,4281,576 shareholders of record of our common stock. Our common stock trades on The NASDAQ Capital Market under the trading symbol of “FCCO.” The following table sets forth the high and low sales price information as reported by NASDAQ in 2016 and 2015,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 
2016            
Quarter ended March 31, 2016 $14.98  $12.66  $0.08 
Quarter ended June 30, 2016 $14.94  $13.56  $0.08 
Quarter ended September 30, 2016 $15.75  $13.74  $0.08 
Quarter ended December 31, 2016 $18.95  $14.80  $0.08 
2015            
Quarter ended March 31, 2015 $11.91  $10.78  $0.07 
Quarter ended June 30, 2015 $12.88  $11.45  $0.07 
Quarter ended September 30, 2015 $12.74  $11.58  $0.07 
Quarter ended December 31, 2015 $14.92  $12.07  $0.07 
             
  High  Low  Dividends 
2018            
Quarter ended March 31, 2018 $23.50  $20.56  $0.10 
Quarter ended June 30, 2018 $26.25  $21.95  $0.10 
Quarter ended September 30, 2018 $26.25  $23.30  $0.10 
Quarter ended December 31, 2018 $24.38  $18.54  $0.10 
2017            
Quarter ended March 31, 2017 $23.55  $16.10  $0.09 
Quarter ended June 30, 2017 $22.45  $18.50  $0.09 
Quarter ended September 30, 2017 $22.20  $19.50  $0.09 
Quarter ended December 31, 2017 $24.87  $20.65  $0.09 

Notwithstanding the foregoing, theour future dividend policy of the Company is subject to the discretion of the board of directors and will depend upon a number of factors, including future earnings, financial condition, cash requirements, and general business conditions. Our ability to pay dividends is generally limited by the ability of the Bank to pay dividends to us. As a South Carolina charteredCarolina-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.

Pursuant to the Company’sour 2006 Non-Employee Director Deferred Compensation Plan, non-employee directors may elect to defer all or any part of annual retainer fees payable in respect of the following calendar year to the director for his or her service on the board of directors or any committee of the board of directors. During the year, a number of deferred stock units are credited to the director’s account at the time such compensation would otherwise have been payable absent the election to defer equal to (i) the otherwise payable amount divided by (ii) the fair market value of a share of the Company’sour common stock on the last trading day preceding the credit date. In general, a director’s vested account balance will be distributed in a lump sum of the Company’sour common stock on the 30th day following termination of service on the board and on the board of directors of all of the Company’sour subsidiaries, including termination of service as a result of death or disability. During the year ended December 31, 2016, the Company2018, we credited an aggregate of 9,8625,904 deferred stock units to accounts for directors who elected to defer monthly fees or annual retainer fees for 2016.2018. The deferred stock units were issued by the Company 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.

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Item 6. Selected Financial Data

 As of or For the Years Ended December 31,  As of or For the Years Ended December 31, 
(Dollars in thousands except per share amounts) 2016 2015 2014 2013 2012  2018 2017 2016 2015 2014 
Balance Sheet Data:                                        
                    
Total assets $914,793  $862,734  $812,363  $633,309  $602,925  $1,091,595  $1,050,731  $914,793  $862,734  $812,363 
Loans held for sale  5,707   2,962   4,124   3,790   9,658   3,223   5,093   5,707   2,962   4,124 
Loans  546,709   489,191   443,844   347,597   332,111   718,462   646,805   546,709   489,191   443,844 
Deposits  766,622   716,151   669,583   497,071   474,977   925,523   888,323   766,622   716,151   669,583 
Total common shareholders’ equity  81,861   79,038   74,528   52,671   54,183   112,497   105,663   81,861   79,038   74,528 
Total shareholders’ equity  81,861   79,038   74,528   52,671   54,183   112,497   105,663   81,861   79,038   74,528 
Average shares outstanding, basic  6,617   6,558   6,538   5,285   4,144   7,581   6,849   6,617   6,558   6,538 
Average shares outstanding, diluted  6,787   6,719   6,607   5,334   4,172   7,731   6,998   6,787   6,719   6,607 
Results of Operations:                                        
Interest income $29,506  $28,649  $27,298  $21,783  $23,002  $39,729  $32,156  $29,506  $28,649  $27,298 
Interest expense  3,047   3,396   3,567   3,734   5,428   3,981   2,762   3,047   3,396   3,567 
Net interest income  26,459   25,253   23,731   18,049   17,574   35,748   29,394   26,459   25,253   23,731 
Provision for loan losses  774   1,138   881   528   496   346   530   774   1,138   881 
Net interest income after provision for loan losses  25,685   24,115   22,850   17,521   17,078   35,402   28,864   25,685   24,115   22,850 
Non-interest income (1)  8,339   8,611   8,031   8,118   7,929   10,986   9,239   8,339   8,611   8,031 
Securities gains (1)  601   355   182   73   26 
Securities gains (losses) (1)  (342)  400   601   355   182 
Non-interest expenses  25,776   24,678   23,960   20,422   19,445   32,123   29,358   25,776   24,678   23,960 
Income before taxes  8,849   8,403   7,103   5,290   5,588   13,923   9,145   8,849   8,403   7,103 
Income tax expense  2,167   2,276   1,982   1,153   1,620   2,694   3,330   2,167   2,276   1,982 
Net income  6,682   6,127   5,121   4,137   3,968   11,229   5,815   6,682   6,127   5,121 
Amortization of warrants              72 
Preferred stock dividends, including discount accretion and redemption costs              604 
Net income available to common shareholders  6,682   6,127   5,121   4,137   3,292   11,229   5,815   6,682   6,127   5,121 
Per Share Data:                                        
Basic earnings per common share $1.01  $0.93  $0.78  $0.78  $0.79  $1.48  $0.85  $1.01  $0.93  $0.78 
Diluted earnings per common share  0.98   0.91   0.78   0.78   0.79   1.45   0.83   0.98   0.91   0.78 
Book value at period end  12.24   11.81   11.18   9.93   10.37   14.74   13.93   12.24   11.81   11.18 
Tangible book value at period end  11.31   10.84   10.25   9.83   10.23 
Tangible book value at period end (non-GAAP)  12.56   11.66   11.31   10.84   10.25 
Dividends per common share  0.32   0.28   0.24   0.22   0.16   0.40   0.36   0.32   0.28   0.24 
Asset Quality Ratios:                                        
Non-performing assets to total assets(3)  0.57%  0.85%  1.17  1.39  1.45
Non-performing assets to total assets (3)  0.37%  0.51%  0.57%  0.85%  1.17%
Non-performing loans to period end loans  0.75%  0.99%  1.48%  1.56%  1.44%  0.39%  0.52%  0.75%  0.99%  1.48%
Net charge-offs to average loans  0.03%  0.14%  0.22%  0.27%  0.17%
Net charge-offs (recoveries) to average loans  (0.02)%  (0.01)%  0.03%  0.14%  0.22%
Allowance for loan losses to period-end total loans  0.94%  0.94%  0.93%  1.21%  1.39%  0.87%  0.89%  0.94%  0.94%  0.93%
Allowance for loan losses to non-performing assets  99.35%  62.98%  43.37%  48.07%  52.77%  155.14%  79.52%  99.35%  62.98%  43.37%
Selected Ratios:                                        
Return on average assets:                    
GAAP earnings  0.75%  0.73%  0.73%  0.66%  0.55%
Return on average assets  1.04%  0.62%  0.75%  0.73%  0.73%
Return on average common equity:                      10.48%  6.56%  8.08%  7.94%  8.13%
GAAP earnings  8.08%  7.94%  8.13%  7.68%  7.40%
Return on average tangible common equity:                    
GAAP earnings  8.76%  8.68%  8.88%  7.78%  7.55%
Efficiency Ratio(1)  72.27%  71.25%  74.14%  76.69%  74.89%
Noninterest income to operating revenue(2)  25.26%  26.20%  25.71%  31.22%  31.16%
Return on average tangible common equity (non-GAAP):  12.44%  7.22%  8.76%  8.68%  8.88%
Efficiency Ratio (non-GAAP) (1)  68.06%  74.34%  72.27%  71.25%  74.14%
Noninterest income to operating revenue (2)  22.94%  24.69%  25.26%  26.20%  25.71%
Net interest margin (tax equivalent)  3.35%  3.38%  3.40%  3.18%  3.22%  3.69%  3.52%  3.35%  3.38%  3.40%
Equity to assets  8.95%  9.16%  9.17%  8.32%  8.99%  10.31%  10.06%  8.95%  9.16%  9.17%
Tangible common shareholders’ equity to tangible assets  8.33%  8.47%  8.48%  8.23%  8.88%
Tier 1 risk-based capital  14.46%  15.40%  16.12%  17.60%  17.33%
Total risk-based capital  15.28%  16.21%  16.94%  18.68%  18.58%
Leverage  10.23%  10.19%  10.02%  10.77%  10.63%
Average loans to average deposits (4)  69.62%  68.75%  69.14%  69.17%  70.33%
Tangible common shareholders’ equity to tangible assets (non-GAAP)  8.92%  8.56%  8.33%  8.47%  8.48%
Tier 1 risk-based capital (Bank) (4)  13.19%  13.40%  13.84%  14.72%  15.39%
Total risk-based capital (Bank) (4)  13.96%  14.18%  14.66%  15.54%  16.21%
Leverage (Bank) (4)  9.98%  9.66%  9.77%  9.73%  9.56%
Average loans to average deposits (5)  75.01%  73.08%  69.62%  68.75%  69.14%

32
(1)The efficiency ratio is a key performance indicator in our industry. The ratio is computed by dividing non-interest expense by the sum of net interest income on a tax equivalent basis and non-interest income, net of any securities gains or losses. Non-interest income for the calculation of efficiency ratio excludes OTTI on securities of $200 thousand in 2012. The efficiency ratio is a measure of the relationship between operating expenses and earnings.
38
(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 OREO.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, divided by the sum of net interest income on a tax equivalent basis and non-interest income, net of any securities gains or losses and OTTI on securities. Non-interest income for the calculation of efficiency ratio excludes OTTI on securities of $200 thousand in 2012. The efficiency ratio is a measure of the relationship between operating expenses and earnings. “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 the Company’sour results as reported under GAAP.

33

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 2016 2015 2014 2013 2012  2018 2017 2016 2015 2014 
Tangible common equity per common share (non-GAAP) $11.31  $10.84  $10.25  $9.83  $10.23  $12.56  $11.66  $11.31  $10.84  $10.25 
Effect to adjust for intangible assets  0.93   0.97   0.93   0.10   0.14   2.18   2.27   0.93   0.97   0.93 
Book value per common share (GAAP) $12.24  $11.81  $11.18  $9.93  $10.37  $14.74  $13.93  $12.24  $11.81  $11.18 
Return on average tangible common equity                                        
Return on average tangible common equity (non-GAAP)  8.76%  8.68%  8.88%  7.78%  7.55%  12.44%  7.22%  8.76%  8.68%  8.88%
Effect to adjust for intangible assets  (0.68)%   (0.74)%   (0.75)%   (0.10)%   (0.15)%   (1.96)%  (0.66)%  (0.68)%  (0.74)%  (0.75)%
Return on average common equity (GAAP)  8.08%  7.94%  8.13%  7.68%  7.40%  10.48%  6.56%  8.08%  7.94%  8.13%
Tangible common shareholders’ equity to tangible assets                                        
Tangible common equity to tangible assets (non-GAAP)  8.33%  8.47%  8.48%  8.23%  8.88%  8.92%  8.56%  8.33%  8.47%  8.48%
Effect to adjust for intangible assets  0.32%  0.69%  0.69%  0.09%  0.11%  1.39%  1.50%  0.62%  0.69%  0.69%
Common equity to assets (GAAP)  8.65%  9.16%  9.17%  8.32%  8.99%  10.31%  10.06%  8.95%  9.16%  9.17%
                    

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Overview

The Company isWe are headquartered in Lexington, South Carolina and serve as the bank holding company for the Bank. We operate from our main office in Lexington, South Carolina, and our 1520 full-service offices located in the South Carolina counties of Lexington County (6)(6 offices), Richland County (4)(4 offices), Newberry County (2)(2 offices), Kershaw County (1)(1 office), Aiken County (1 office), Greenville County (2 offices), Anderson County (1 office), and AikenPickens County (1)(1 office), and in Richmond County, Georgia (1)(2 offices). In addition, we operate a mortgage loan production office in Richland County, South Carolina and a loan production office in Greenville County, South Carolina. 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.

The following discussion describes our results of operations for 2016,2018, as compared to 20152017 and 2014,2016, and also analyzes our financial condition as of December 31, 2016,2018, as compared to December 31, 2015.2017. 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.

39

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 2016, 20152018, 2017 and 20142016 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.

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Recent Developments

On February 18, 2015, the Bank entered into a Consent Order with the FDIC (the “Consent Order”). The Consent Order required the Bank to take certain actions with respect to the BSA, including, among other things, enhancing its annual BSA risk assessment processes; revising certain internal controls related to BSA; and further developing and implementing certain BSA-related training programs. The Bank took immediate actions to correct and resolve all of the BSA issues included in the Consent Order and, on January 28, 2016, the FDIC advised the Bank that the Consent Order had been terminated.

On February 1, 2014, we completed our acquisition of 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 the merger.

On September 26, 2014, the Bank completed the acquisition of approximately $40 million in deposits and $8.7 million in loans from First South. This represented all of the deposits and a portion of the loans at First South’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 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.

Critical Accounting Policies

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 involve significant judgments and assumptions by us that have a material impact on the carrying value of certain assets and liabilities. We consider these accounting policies to be critical accounting policies. The judgment and assumptions we use are based on historical experience and other factors, which we believe to be reasonable under the circumstances. Because of the nature of the judgment and assumptions we make, actual results could differ from these judgments and estimates that could have a material impact on the carrying values of our assets and liabilities and our results of operations.

Allowance for Loan Losses

We believe the allowance for loan losses is the critical accounting policy that requires the most significant judgment and estimates used in preparation of our consolidated financial statements. Some of the more critical judgments supporting the amount of our allowance for loan losses include judgments about the credit worthiness of borrowers, the estimated value of the underlying collateral, the assumptions about cash flow, determination of loss factors for estimating credit losses, the impact of current events, and conditions, and other factors impacting the level of probable inherent losses. Under different conditions or using different assumptions, the actual amount of credit losses incurred by us may be different from management’s estimates provided in our consolidated financial statements. Refer to the portion of this discussion that addresses our allowance for loan losses for a more complete discussion of our processes and methodology for determining our allowance for loan losses.

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Goodwill and Other Intangibles

Goodwill represents the excess of the purchase price over the sum of the estimated fair values of the tangible and identifiable intangible assets acquired less the estimated fair value of the liabilities assumed. Goodwill has an indefinite useful life and isits evaluated for impairment annually or more frequently if events and circumstances indicate that the asset might be impaired. An impairment loss is recognized to the extent that the carrying amount exceeds the asset’s fair value. Qualitative factors are assessed to first determine if it is more likely than not (more than 50%) that the carrying value of goodwill is less than fair value. These qualitative factors include but are not limited to overall deterioration in general economic conditions, industry and market conditions, and overall financial performance. If determined that it is more likely than not that there has been a deterioration in the fair value of the carrying value than the first of a two-step process would be performed. The first step, used to identify potential impairment, involves comparing each reporting unit’s estimated fair value to its carrying value, including goodwill. If the estimated fair value of a reporting unit exceeds its carrying value, goodwill is considered not to be impaired. If the carrying value exceeds estimated fair value, there is an indication of potential impairment and the second step is performed to measure the amount of impairment.

 

If required, the second step involves calculating an implied fair value of goodwill for each reporting unit for which the first step indicated impairment. The implied fair value of goodwill is determined in a manner similar to the amount of goodwill calculated in a business combination, by measuring the excess of the estimated fair value of the reporting unit, as determined in the first step, over the aggregate estimated fair values of the individual assets, liabilities and identifiable intangibles as if the reporting unit was being acquired in a business combination. If the implied fair value of goodwill exceeds the carrying value of goodwill assigned to the reporting unit, there is no impairment. If the carrying value of goodwill assigned to a reporting unit exceeds the implied fair value of the goodwill, an impairment charge is recorded for the excess. An impairment loss cannot exceed the carrying value of goodwill assigned to a reporting unit, and the loss establishes a new basis in the goodwill. Subsequent reversal of goodwill impairment losses is not permitted. Management has determined that the Company haswe have four reporting units (See Note 24 to the Consolidated Financial Statements).

 

Core deposit intangibles consist of costs that resulted from the acquisition of deposits from Savannah River and First South. Core deposit intangibles represent the estimated value of long-term deposit relationships acquired in this transaction.bank or branch acquisition transactions. These costs are amortized over the estimated useful lives of the deposit accounts acquired on a method that we believe reasonably approximates the anticipated benefit stream from the accounts. The estimated useful lives are periodically reviewed for reasonableness.

Income Taxes and Deferred Tax Assets and Liabilities

 

Income taxes are provided for the tax effects of the transactions reported in our consolidated financial statements and consist of taxes currently due plus deferred taxes related to differences between the tax basis and accounting basis of certain assets and liabilities, including available-for-sale securities, allowance for loan losses, write downs of OREO properties, 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. The 2017 Tax Cuts and Jobs Act reduced corporate income taxes which resulted in an adjustment of our deferred tax asset in 2017 (See Note 14 to the Consolidated financial statements for the impact of the change). We file a consolidated federal income tax return for our Bank. At December 31, 2016,2018, we are in a net deferred tax asset position.

Other-Than-Temporary Impairment

We evaluate securities for other-than-temporary impairment at least on a quarterly basis. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) the outlook for receiving the contractual cash flows of the investments, (4) the anticipated outlook for changes in the general level of interest rates, and (5) our intent and ability to retain our investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value or for a debt security whether it is more-likely-than-not that the Companywe will be required to sell the debt security prior to recovering its fair value (See Note 4 to the Consolidated Financial Statements).

3641
 

Business Combinations, Method of Accounting for Loans Acquired

We account for acquisitions under FASB ASC Topic 805,Business Combinations, which requires the use of the acquisition method of accounting. All identifiable assets acquired, including loans, are recorded at fair value. No allowance for loan losses related to the acquired loans is recorded on the acquisition date because the fair value of the loans acquired incorporates assumptions regarding credit risk.

 

Acquired credit-impaired loans are accounted for under the accounting guidance for loans and debt securities acquired with deteriorated credit quality, found in FASB ASC Topic 310-30,Receivables—Loans and Debt Securities Acquired with Deteriorated Credit Quality.Qualityand initially measured at fair value, which includes estimated future credit losses expected to be incurred over the life of the loans. Loans acquired in business combinations with evidence of credit deterioration are considered impaired. Loans acquired through business combinations that do not meet the specific criteria of FASB ASC Topic 310-30, but for which a discount is attributable, at least in part to credit quality, are also accounted for under this guidance. Certain acquired loans, including performing loans and revolving lines of credit (consumer and commercial), are accounted for in accordance with FASB ASC Topic 310-20, where the discount is accreted through earnings based on estimated cash flows over the estimated life of the loan.

Results of Operations

As noted above, on February 1, 2014,

On October 20, 2017, we completed the acquisition of Savannah River.Cornerstone. Therefore, the results for the year ended December 31, 20142018 include the impact of this acquisition from February 1, 2014 through December 31, 2014. Also, as noted above, on September 26, 2014, we completedfor the purchase of certain loans and assumption of deposits from First South’s Columbia, South Carolina office located at 1333 Main Street. These loans and deposits were consolidated into the Bank’s branch located at 1213 Lady Street. Therefore, the results forentire year. For the year ended December 31, 2014 include2017, the impact of thisthe acquisition includes the period from September 26, 2014 toOctober 20, 2017 through December 31, 2014.2017. See Note 3 to the consolidated financial statements for additional information related to the Savannah River and First South acquisitions.Cornerstone acquisition.

Net income was $6.7$11.2 million, or $0.98$1.45 diluted earnings per common share, for the year ended December 31, 2016,2018, as compared to net income $6.1$5.8 million, or $0.91$0.85 diluted earnings per common share, for the year ended December 31, 2015.2017. During the year ended 2017, we recognized a tax expense adjustment resulting from the change in corporate tax rates enacted in the Tax Cuts and Jobs Act passed on December 22, 2017. The primary reason forlowering of the increasecorporate tax rate to 21% required that we make an approximate $1.2 million tax expense charge to adjust the value of our deferred tax asset. As a result of the enacted lower tax rates, we recovered substantially all of this charge through the lower effective tax rate in the year ended December 31, 2018. We expect to continue to benefit in future periods as a result of the lower effective corporate tax rate. Another factor impacting net income is thatduring 2017 included expenses of approximately $300 thousand related to our net interestconversion to a new operating system and $903 thousand in expenses related to the acquisition of Cornerstone. During 2018, we had no merger or conversion related expenses. Interest income improved by $1.2 millionincreased from $25.3$32.2 million in 20162017 to $26.5$39.7 million for 2015.in 2018. This improvement was a primarily result of an increase of $46.3 million in average earning assets of $121.7 million in 20162018 as compared to 2015. See below under “Net Interest Income” and “Market Risk and Interest Rate Sensitivity” for a further discussion about the effect average earning assets on2017. In addition, our net interest income.margin on a fully taxable equivalent basis improved by 17 basis points in 2018 as compared to 2017. Net interest spread, the difference between the yield on earning assets and the rate paid on interest-bearing liabilities, was 3.16%3.49% in 20152018 as compared to 3.31% in 2017. The provision for loan losses was $346 thousand in 2018 as compared to $530 thousand in 2017. Increases in salary and benefit, occupancy and information technology expenses, were the largest contributors to the overall increase in non-interest expense (see discussion “Non-interest Income and Non-interest Expense”). A substantial percentage of these increases relates to the inclusion of Cornerstone expenses for the entire year of 2018 whereas in 2017 they were included for approximately 2 ½ months.

Net income was $5.8 million, or $0.85 diluted earnings per common share, for the year ended December 31, 2017, as compared to net income $6.7 million, or $0.98 diluted earnings per common share, for the year ended December 31, 2016. The primary reason for the decrease in net income is the tax expense adjustment of approximately $1.2 million in 2017 resulting from the change in corporate tax rate noted previously. Another factor contributing to lower net income during 2017 as compared to 2016 included expenses of approximately $300 thousand related to our conversion to a new operating system and $903 thousand in expenses related to the acquisition of Cornerstone. The impact of these increases in non-recurring expenses were partially offset by an increase in net interest income of $2.9 million, as a result of an improvement in net interest margin and a higher level of earning assets. Net interest spread, the difference between the yield on earning assets and the rate paid on interest-bearing liabilities, was 3.31% in 2017 as compared to 3.13% in 2016. The provision for loan losses was $774 thousand in 2016 as compared to $1.1 million$530 thousand in 2015. Non-interest income was $9.0 million for 2016 and 2015. The improvement in net income as a result of higher earning assets and2017. Excluding the reduced provision expense were partially offset by an increase in non-interest expense of $1.1 million in 2016 as compared to 2015. Increasesnon-recurring expenses noted previously, increases in salary and benefit expense as well as debit card/ATM processing cost were the largest contributors to the overall increase in non-interest expense in 2017 as compared to 2016 (see discussion “Non-interest Income and Non-interest Expense”).

Net income was $6.1 million, or $0.91 diluted earnings per common share, for the year ended December 31, 2015, as compared to net income of $5.1 million, or $0.78 diluted earnings per common share, for the year ended December 31, 2014. The primary reason for the increase in net income is that our net interest income improved by $1.6 million from $23.7 million in 2014 to $25.3 million for 2015. This improvement was a primarily result of an increase of $55.3 million in average earning assets in 2015 as compared to 2014. See below under “Net Interest Income” and “Market Risk and Interest Rate Sensitivity” for a further discussion about the effect average earning assets on net interest income. Net interest spread was 3.20% in 2014 as compared to 3.16% in 2015. The provision for loan losses was $881 thousand in 2014 as compared to $1.1million in 2015. Non-interest income was increased to $9.0 million for 2015 as compared to $8.2 million in 2014. This increase resulted from increased mortgage banking income of $246 thousand as well as an increase in the gain on sale of investments of $173 thousand and a reduction in the loss on early extinguishment of debt of $152 thousand. Non-interest expense increased $718 thousand in 2015 as compared to 2014. Increases in all categories of non-interest expense were primarily a result of the impact of the Savannah River acquisition that was completed on February 1, 2014, the opening of the Lady Street branch located in downtown Columbia, South Carolina in June of 2014 and the opening of a branch in Blythewood, South Carolina in April 2015, each being included for the full year in 2015. In 2014, there was $503 thousand in merger-related expenses included in non-interest expense. There were no merger-related expenses included in the results for 2015.

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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 its interest-earning assets and interest-bearing liabilities.

Net interest income totaled $35.7 million in 2018, $29.4 million in 2017 and $26.5 million in 2016, $25.3 million in 2015 and $23.7 million in 2014.2016. The yield on earning assets was 3.62%4.05%, 3.72%3.74%, and 3.82%3.62% in 2016, 20152018, 2017 and 2014,2016, respectively. The rate paid on interest-bearing liabilities was 0.49%0.55%, 0.56%0.43%, and 0.62%0.49% in 2016, 2015,2018, 2017, and 2014,2016, respectively. The fully taxable equivalent net interest margin was 3.69% in 2018, 3.52% in 2017 and 3.35% in 2016, 3.38% in 2015 and 3.40% in 2014.2016. Our loan to deposit ratio on average during 20162018 was 69.6%75.0%, as compared to 68.7%73.1% during 20152017 and 69.1%69.6% during 2014.2016. 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. At December 31, 2016,2018, the loan (including held for sale) to deposit ratio was 72.1%78.0%.

The net interest margin decreased fourincreased 22 basis points in 20162018 as compared to 2015.2017. The yield on earning assets decreasedincreased by 1031 basis points while our cost of funds decreasedinterest-bearing liabilities increased by seven12 basis points in 20162018 as compared to 2015.2017. The declineincrease in net interest margin in 20162018 as compared to 20152017 was partially a result of payoffs that occurredthe Federal Reserve increasing the federal funds target rate. In 2018, this rate was increased four times. These increases positively impact our yield on variable rate assets in the first quarter of 2015 relatedloan and investment portfolios as well as our short term investments. The yield on our earning assets increased from 3.74% to purchase impaired loans as discussed below. The lower cost of funds was primarily a result of the cost of time deposits and other borrowings decreasing by four and fifty one basis points, respectively4.05% in 20162018 as compared to 2015. We continued2017. The average loan balance as a percentage of earning assets was 70.0% in 2018 as compared to shift67.2% in 2017. This increase in earning asset mix along with the mix of funding toincreases in short term rates noted previously accounted for the improved yield on our earning assets. Our lower cost funding sources (non-interestinclude non-interest bearing transaction accounts, interest-bearing transaction accounts, money-market accounts and savings deposits).deposits. During 2015,2017, the average balance in these accounts represented 72.9%77.7% of total deposits whereas in 20162018 they represented 75.6%79.5%. Our average other borrowings, which are typically a higher cost funding source, decreased $4.5$5.0 million in 20162017 as compared to 2015. Since early 2008,2018. Throughout 2018, the treasury yield curve continued to flatten with short-term rates increasing as noted above while longer term rates, including five year to 10 year treasury rates, remaining relatively unchanged or increasing at a lower rate than the shorter term rates. Over time, this can negatively impact net interest margins as shorter term funding rates have been at historic lows. The shift inincrease while our funding mix as well as our efforts to shift earning assetsfixed rate loan and investment portfolio yields do not increase to the loan portfolio have helped in offsetting some of the net interest margin compression resulting from the continued historically lowsame extent. Managing this interest rate environment.risk continues to be a primary focus of management (see discussion of Market Rate and Interest Rate Sensitivity discussion below).

The net interest margin decreased fourincreased 18 basis points in 20152017 as compared to 2014.2016. The yield on earning assets decreasedincreased by ten12 basis points while our cost of funds decreased by six basis points in 20152017 as compared to 2014.2016. The increase in net interest margin in 2017 as compared to 2016 was positively impacted in 2015 as a result of two purchased impaired loan payoffs that occurred in the first quarter of 2015. These loans were acquired in the Savannah River acquisition and, as a result, the credit mark established at the acquisition date was recovered. These payoffs impacted the net interest margin by approximately 5 basis points in 2015. The lower cost of funds was primarilypartially a result of the costFederal Reserve increasing the federal funds target rate in late 2015. From December 2015 through December 2017, the rate was increased in 25 basis point increments from a range of time deposits decreasing by five basis points0.00% to 0.25% to a range of 1.25% to 1.50%. The yield on our earning assets increased from 3.62% to 3.74% in 20152017 as compared to 2014. We continued2016. The percentage of average loans to shiftaverage total earning assets was 67.2% in 2017 as compared to 63.1% in 2016. The change in our earning asset mix, along with the miximpact of funding to lower cost sources (non-interest bearing transaction accounts, interest-bearing transaction accounts, money-market accounts and savings deposits).rising short-term rates are the primary contributors in the 12 basis point improvement in our yield on earning assets. During 2015,2016, the average balance in these accountsour lower cost deposit account funding sources, as noted above, represented 72.9%75.6% of total deposits whereas in 20142017 they represented 71.8%77.7%. OurAlso our average borrowings, which are typically a higher cost funding source, decreased $6.0$8.4 million in 20152017 as compared to 2014 while2016. This change in funding mix was primarily responsible for the decrease in our cost of these funds on average decreased eight basis pointsinterest bearing liabilities from 0.49% in 2015 as compared2016 to 2014.0.43% in 2017.

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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,  Year ended December 31, 
 2016 2015 2014  2018 2017 2016 
(Dollars in thousands) Average
Balance
 Income/
Expense
 Yield/
Rate
 Average
Balance
 Income/
Expense
 Yield/
Rate
 Average
Balance
 Income/
Expense
 Yield/
Rate
  Average
Balance
 Income/
Expense
 Yield/
Rate
 Average
Balance
 Income/
Expense
 Yield/
Rate
 Average
Balance
 Income/
Expense
 Yield/
Rate
 
Assets                                                                        
Earning assets                                                                        
Loans(1) $514,766  $23,677   4.60% $473,367  $23,219   4.91% $439,174  $21,915   4.99% $686,438  $32,789   4.78% $577,730  $26,134   4.52% $514,766  $23,677   4.60%
Securities  283,585   5,724   2.02%  275,944   5,311   1.92%  256,392   5,277   2.06%  271,621   6,522   2.40%  265,751   5,859   2.20%  283,585   5,724   2.02%
Other short-term investments(2)  17,512   105   0.60%  20,293   119   0.59%  18,766   106   0.56%  23,156   419   1.81%  15,972   163   1.02%  17,512   105   0.60%
Total earning assets  815,863   29,506   3.62%  769,604   28,649   3.72%  714,332   27,298   3.82%  981,215   39,729   4.05%  859,453   32,156   3.74%  815,863   29,506   3.62%
Cash and due from banks  10,903           8,070           10,344           13,446           11,571           10,903         
Premises and equipment  30,084           30,833           28,098           34,905           31,850           30,084         
Intangible assets  6,334           6,575           5,554           16,881           8,128           6,334         
Other assets  29,922           24,895           26,623           36,299           32,160           29,922         
Allowance for loan losses  (4,866)          (4,373)          (4,154)          (6,075)          (5,479)          (4,866)        
Total assets $888,240          $835,604          $780,797          $1,076,671          $937,683          $888,240         
Liabilities                                                                        
Interest-bearing liabilities(2)                                                                        
Interest-bearing transaction accounts  152,936   173   0.11%  137,969   160   0.12%  131,767   167   0.13%  192,420   443   0.23%  163,870   190   0.12%  152,936   173   0.11%
Money market accounts  164,826   426   0.26%  158,726   423   0.27%  141,020   336   0.24%  184,413   869   0.47%  170,296   435   0.26%  164,826   426   0.26%
Savings deposits  69,178   82   0.12  57,958   68   0.12%   51,768   60   0.12  106,752   143   0.13%  80,807   94   0.12%  69,178   82   0.12%
Time deposits  180,447   1,137   0.63%  186,911   1,099   0.59%  179,384   1,147   0.64%  188,023   1,450   0.77%  176,358   1,106   0.63%  180,447   1,137   0.63%
Other borrowings  59,569   1,229   2.06%  64,072   1,646   2.57%  70,083   1,858   2.65%  46,155   1,076   2.34%  51,171   937   1.83%  59,569   1,229   2.06%
Total interest-bearing liabilities  626,956   3,047   0.49%  605,636   3,396   0.56%  574,022   3,568   0.62%  717,763   3,981   0.55%  642,502   2,762   0.43%  626,956   3,047   0.49%
Demand deposits  171,968           147,009           131,299           243,530           199,169           171,968         
Other liabilities  6,663           5,835           5,716           8,200           7,306           6,663         
Shareholders’ equity  82,653           77,124           69,760           107,178           88,706           82,653         
Total liabilities and shareholders’ equity $888,240          $835,604          $780,797          $1,076,671          $937,683          $888,240         
Net interest spread          3.13%          3.16%          3.20%          3.49%          3.31%          3.13%
Net interest income/margin     $26,459   3.24%     $25,253   3.28%     $23,730   3.32%     $35,748   3.64%     $29,394   3.42%     $26,459   3.24%
Net interest margin (tax equivalent)(3)          3.35%          3.38%          3.40          3.69%          3.52%          3.35%

 
(1)All loans and deposits are domestic. Average loan balances include non-accrual loans and loans held for sale.
(2)The computation includes federal funds sold, securities purchased under agreement to resell and interest bearing deposits.
(3)Based on a 21.0% marginal tax rate for 2018 and a 32.5% marginal tax rate.rate for 2017 and 2016.
3944
 

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.

 2016 versus 2015
Increase (decrease) due to
 2015 versus 2014
Increase (decrease) due to
  2018 versus 2017
Increase (decrease) due to
 2017 versus 2016
Increase (decrease) due to
 
(In thousands) Volume Rate Net Volume Rate Net  Volume Rate Net Volume Rate Net 
Assets                                     
Earning assets                                                
Loans $1,957  $(1,499) $458  $1,682  $(378) $1,304  $5,129  $1,526  $6,655  $2,854  $(397) $2,457 
Investment securities  138   275   413   388   (354)  34   132   531   663   (373)  508   135 
Other short-term investments  (17)  3   (14)  9   4   13   94   161   255   (10)  68   58 
Total earning assets  1,689   (832)  857   2,071   (720)  1,351   4,792   2,781   7,573   1,610   1,040   2,650 
Interest-bearing liabilities                                                
Interest-bearing transaction accounts  17   (4)  13   8   (15)  (7)  37   215   252   13   4   17 
Money market accounts  14   (11)  3   45   42   87   38   397   435   14   (5)  9 
Savings deposits  13   1   14   7   1   8   33   16   49   14   (2)  12 
Time deposits  (35)  73   38   52   (100)  (48)  77   267   344   (26)  (5)  (31)
Other short-term borrowings  (110)  (307)  (417)  (156)  (56)  (212)  (98)  237   139   (162)  (130)  (292)
Total interest-bearing liabilities  116   (465)  (349)  190   (362)  (172)  351   870   1,219   74   (359)  (285)
Net interest income         $1,206          $1,523          $6,354          $2,935 
                        

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 (“ALCO”(the “ALCO”) to monitor and manage interest rate risk. The ALCO monitors and manages the pricing and maturity of its assets and liabilities in order to diminish the potential adverse impact that changes in interest rates could have on our net interest income. The ALCO has established policy guidelines and strategies with respect to interest rate risk exposure and liquidity.

A monitoring technique employed by us is the measurement of our interest sensitivity “gap,” which is the positive or negative dollar difference between assets and liabilities that are subject to interest rate repricing within a given period of time. Simulation modeling is performed to assess the impact varying interest rates and balance sheet mix assumptions will have on net interest income. We model the impact on net interest income for several different changes, to include a flattening, steepening and parallel shift in the yield curve. For each of these scenarios, we model the impact on net interest income in an increasing and decreasing rate environment of 100 and 200 basis points. We also periodically stress certain assumptions such as loan prepayment rates, deposit decay rate 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 twelve month12-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.

4045
 

The following table illustrates our interest rate sensitivity at December 31, 2016.2018.

Interest Sensitivity Analysis

(Dollars in thousands) Within
One Year
 One to
Three Years
 Three to
Five Years
 Over
Five Years
 Total  Within
One Year
 One to
Three Years
 Three to
Five Years
 Over
Five Years
 Total 
Assets                                        
Earning assets                                        
Loans(1) $245,047  $186,835  $71,033  $39,745  $542,660  $289,692  $245,945  $122,099  $58,112  $715,848 
Loans Held for Sale  5,707            5,707   3,223            3,223 
Securities(2)  95,207   27,427   28,703   121,243   272,580   73,824   37,316   43,724   101,158   256,022 
Federal funds sold, securities purchased under agreements to resell and other earning assets  10,643   1,240         11,883   13,691   3,000   250      16,941 
Total earning assets  356,604   215,502   99,736   160,988   832,830   380,430   286,261   166,073   159,270   992,034 
Liabilities                                        
Interest bearing liabilities                                        
Interest bearing deposits                                        
NOW accounts  16,111   40,277   40,277   64,441   161,106 
Interest checking accounts  80,158         121,778   201,936 
Money market accounts  36,598   58,224   21,626   49,905   166,353   119,243         72,294   191,537 
Savings deposits  15,002   11,252   7,501   41,257   75,012   24,910         83,459   108,369 
Time deposits  96,970   59,839   24,425   2   181,236   108,168   55,771   15,238  ($182)  178,995 
Total interest-bearing deposits  164,681   169,592   93,829   155,605   583,707   332,479   55,771   15,238   $277,349   680,837 
Other borrowings  45,576   3,983   8,967      58,526   43,184   33         43,217 
Total interest-bearing liabilities  210,257   173,575   102,796   155,607   642,233   375,663   55,804   15,238   277,349   724,054 
Period gap $146,347  $41,928  $(3,060) $5,383   190,597  $5,767  $230,456  $150,835  ($119,078) $267,980 
Cumulative gap $146,347  $188,275  $185,216  $190,597   190,597  $5,767  $236,223  $387,058   $267,980  $267,980 
Ratio of cumulative gap to total earning assets  17.57  22.61   22.24  22.89  22.89  1.51%  35.38%  46.42%  27.01%  27.01%

 
(1)Loans classified as non-accrual as of December 31, 20162018 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, 20162018 and 20152017 over the subsequent 12 months. At December 31, 2016,2018, we are slightly liability sensitive over the first three month period and over the balance of a 12-month period are asset sensitive.sensitive on a cumulative basis. As a result, our modeling reflects modest improvementdecline in our net interest income in a rising rate environment.environment over the first 12 months. This negative impact of rising rates reverses and net interest income is favorably impacted over a 24-month period. In a declining rate environment, the model reflects a decline in net interest income. This primarily results from the current level of interest rates being paid on our interest bearing transaction accounts as well as money market accounts. The interest rates on these accounts are at a level where they cannot be repriced in proportion to the change in interest rates. The increase and decrease of 100 and 200 basis points, respectively, reflected in the table below assume a simultaneous and parallel change in interest rates along the entire yield curve.

Net Interest Income Sensitivity

Change in short-term interest rates Hypothetical
percentage change in
net interest income
December 31,
 
  2016  2015 
+200bp  0.08%  1.61%
+100bp  0.37%  0.89%
Flat      
-100bp  -2.81%  -3.55%
-200bp  -7.69%  -9.19%
         
Change in
short-term
interest
rates
  Hypothetical
percentage change in
net interest income
December 31,
 
   2018  2017 
 +200bp   -3.54%  -2.26%
 +100bp   -1.58%  -0.85%
 Flat       
 -100bp  -0.34%  -2.54%
 -200bp  -4.37%  -7.71%

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, 20162018 and 2015,2017, the PVE exposure in a plus 200 basis point increase in market interest rates was estimated to be 0.78%(1.56)% and (0.07)(0.09)%, respectively.

4146
 

Provision and Allowance for Loan Losses

At December 31, 2016,2018, the allowance for loan losses amounted to $5.2$6.3 million, or 0.95%0.87% of loans (excludes loans held for sale), as compared $4.6$5.8 million, or 0.95%0.90% of loans, at December 31, 2015.2017. Loans that were acquired in the acquisition of Cornerstone in 2017 and Savannah River and First SouthFinancial Corp. (“Savannah River”) in 2014 are accounted for under Financial Accounting Standards Board (“FASB”)FASB Accounting Standard Codification (“ASC”) 310-30. These acquired loans are 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.Subsequent to the acquisition date, increases in cash flows expected to be received in excess of the Company’sour 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. During 20162018 and 2015,2017, there were no adjustments to our initial estimates or impairments recorded on purchased loans. The recorded investment in loans acquired in the Cornerstone and Savannah River transactions at December 31, 2018 and 2017 amounted to approximately $64.5 million and $101.8 million, respectively. At December 31, 20162018 and 2015,2017, the credit component on loans attributable to these acquired loans in the Savannah River and First South transactions was $334$660 thousand and $1.0$1.5 million, respectively.

Our provision for loan loss was $774$346 thousand for the year ended December 31, 2016,2018, as compared to $1.1 million$530 thousand and $880$774 thousand for the years ended December 31, 20152017 and 2014,2016, respectively. The provision is made based on our assessment of general loan loss risk and asset quality. 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 a number of 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, economic conditions 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 subjective issues 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. Periodically, we adjust the amount of the allowance based on changing circumstances. 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 overall weakness in the commercial real estate market in our market areas.

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 5 – Loans). The annualized weighted average loss ratios over the last 36 months for loans classified substandard, special mention and pass have been approximately 5.35%0.23%, 3.04%0.33% and 0.03%0.01%, respectively. The allowance consists of an allocated and unallocated allowance. The allocated portion is determined by types and ratings of loans within the portfolio. The unallocated portion of the allowance is established for losses that exist in the remainder of the portfolio and compensates for uncertainty in estimating the loan losses. As a result of the recent economic downturn that began in 2008, real estate values have been adversely impacted. With our loan portfolio consisting of a large percentage of real estate secured loans we, like most financial institutions, have experienced higher delinquencies and problem loans from pre-2008 historical levels. However, ourOur percentage of non-performing assets to total assets has shown continued improvement in the last several years. Non-performing assets were $7.3$4.0 million (0.85%(0.37% of total assets) at December 31, 2016, $7.32018, $5.3 million (0.85%(0.51% of total assets) at December 31, 2015,2017, and $9.5$5.2 million (1.17%(0.57% of total assets) at December 31, 2014.2016. We believe these ratios are favorable in comparison to current industry results nationally and specifically in our local markets. 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. As noted below in the “Allocation of the Allowance for Loan Losses” table, the unallocated portion of the allowance as a percentage of the total allowance decreased as a percentage of the total allowance in 2016.2018 and 2017. The overall risk as measured in our three-year lookback, both quantitatively and qualitatively, does not encompass a full economic cycle. The U.S. economy has been in an extended period of recovery and slow economic growth.recovery. The period at which we will reach full recovery ormay revert back to a slowing economy is not determinable. 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 they have averaged 17 basis points annualized.experienced a modest net recovery. We believe the unallocated portion of our allowance represents potential risk associated throughout a full economic cycle. With an anemicAs a result of national economic recovery, subpar inflation, geopolitical risks, and global economic slowdown,uncertainty, management does not believe it would be judicious to reduce substantially the overall level of the allowance at this time. The percentage of the unallocated portion of the allowance decreased from 44.5% at December 31, 2015 to 27.9% at December 31, 2016. In the fourth quarter of 2016 we began including the balances of acquired loans from the Savannah Riverto 27.5% at December 31, 2017 and the First South acquisitions in our migration analysis. With the aging of these specific portfolios since acquisition and the substantial reductionat December 31, 2018 is at 10.3%. The decline in the credit marks assignedunallocated portion of the reserve reflects lower provisioning as a result of continued improvement in overall loan performance. Management also continually evaluates the underlying qualitative factors applied to the portfolios, management believed it appropriate to begin applying historical loss experience to these portfolios. In addition, due to the growth in our portfolio as well as the addition of the loan production office in Greenville South Carolina several qualitative factors were adjusted in 2016. In the third quarter of 2016 we increased the change in nature and volume, change in staff, and change in concentration qualitative factors by five, two and two basis points, respectively. Management does not feel that there have been significant changes in underwriting practices or the fundamental mix and nature of the portfolio. The increase in loan production, addition of the Greenville portfolio and lending staff could impose additional risk to the portfolio and therefore management increased these three qualitative factors in its overall evaluation of the adequacy of the allowance for loan losses. The addition of the acquired portfolios and adjustments to the qualitative factors were the primary contributors to the reduction in the percentage of the unallocated allowance. Management believes that as economic conditions reflect sustainable improvements, the unallocated portion of the allowance should continue to decrease as a percentage of the total reserve.

4247
 

Our Company hasWe have a significant portion of itsour loan portfolio with real estate as the underlying collateral. At both December 31, 20162018 and 2015,2017, approximately 90.6%91.1% and 90.4%, respectively, of the loan portfolio had real estate as underlying collateral (see Note 15 to financial statements for concentrations of credit). 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.

At December 31, 2016, 2015,2018, 2017, and 2014,2016, we had non-accrual loans in the amount of $4.0$2.5 million (0.75%(0.35%of total loans), $4.8$3.4 million (0.99%(0.52%of total loans) and $6.6$4.0 million (1.48%(0.75%of total loans), respectively. Nonaccrual loans at December 31, 20162018 consisted of 4128 loans. All of these loans are considered to be impaired, are substantially all real estate-related, and have been measured for impairment under the fair value of the collateral method. We consider a loan to be impaired when, based upon current information and events, it is believed that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. Such fair values are obtained using independent appraisals, which we consider to be level 3 inputs. The aggregate amount of impaired loans was $5.8$4.4 million and $6.5$5.2 million for the years endingended December 31, 20162018 and 2015,2017, respectively. The non-accrual loans range in size from $1 thousand to $933$776 thousand. The largest of these loans is in the amount of $933$776 thousand and is secured by commercial non-owner occupied real estate located in Aiken, South Carolina.

In addition to the non-accrual loans that are considered to be impaired, we have fivesix loans totaling $1.8 million that are classified as troubled debt restructurings but are accruing loans as of December 31, 2016.2018. The largest relationship consists of one loan totaling $1.2$1.1 million with a mortgage on a commercial property located in the Midlands of South Carolina. There were $1.8 million, $1.9$2.1 million, and $1.8 million in loans delinquent 30 to 89 days at December 31, 2016, 20152018, 2017 and 2014,2016, respectively. There was one loanwere loans in the amount of $31 thousand, $32 thousand and $53 thousand delinquent greater than 90 days and still accruing at December 31, 2016. There were no loans 90 days delinquent2018, 2017 and still accruing interest at December 31, 2015 and 2014.2016, respectively.

Our management continuously monitors non-performing, classified and past due loans to identify deterioration regarding the condition of these loans. We have not identified one relationship in the amount of $1.0 million which isany relationships that are current as to principal and interest at December 31, 20162018 and not included in non-performing assets that could be a potential problem loans. Loans are identified as potential problems based on our review that their traditional sources of cash flow may have been impacted and that they may ultimately not be able to service the debt. These loans are continually monitored and are considered in our overall evaluation of the adequacy of our allowance for loan losses.

4348
 

The following table summarizes the activity related to our allowance for loan losses.

Allowance for Loan Losses

(Dollars in thousands) 2016 2015 2014 2013 2012  2018  2017  2016 2015 2014 
Average loans and loans held for sale outstanding $514,766  $473,367  $439,174  $344,110  $331,564  $686,438  $577,730  $514,766  $473,367  $439,174 
Loans and loans held for sale outstanding at period end $552,416  $492,153  $447,968  $351,387  $341,769  $721,685  $651,898  $552,416  $492,153  $447,968 
Total nonaccrual loans $4,049  $4,839  $6,585  $5,406  $4,715  $2,545  $3,342  $4,049  $4,839  $6,585 
Loans past due 90 days and still accruing $53  $  $  $2  $55  $31  $32  $53     
Beginning balance of allowance $4,596  $4,132  $4,219  $4,621  $4,699  $5,797  $5,214  $4,596  $4,132  $4,219 
Loans charged-off:                                        
Construction and development loans               
1-4 family residential mortgage  25   50   52   47   112   1      25   50   52 
Non-farm non-residential mortgage  92   626   879   897   200      30   92   626   879 
Multifamily residential  31            93         31       
Home equity  19      17   67      23   7   19      17 
Commercial     69   54      258      5      69   54 
Installment & other  60   13   67   37   44   137   112   60   13   67 
Overdrafts  12   49   42   42   35   3   19   12   49   42 
Total loans charged-off  239   807   1,111   1,090   742   164   173   239   807   1,111 
Recoveries:                                        
1-4 family residential mortgage  41   7   10   72   86   83   46   41   7   10 
Multifamily residential  4   5          
Non-farm non-residential mortgage  21   33            127   126   21   33    
Home equity  3   3   6      3   6   24   3   3   6 
Commercial  5   6   110   47   42   3   5   5   6   110 
Installment & other  2   66   6   28   25   59   19   2   66   6 
Overdrafts  11   18   11   13   12   2   1   11   18   11 
Total recoveries  83   133   143   160   168   284   226   83   133   143 
Net loans charged off  156   774   968   930   574 
Net loans recovered (charged off)  120   53   (156)  (774)  (968)
Provision for loan losses  774   1,138   881   528   496   346   530   774   1,138   881 
Balance at period end $5,214  $4,596  $4,132  $4,219  $4,621  $6,263  $5,797  $5,214  $4,596  $4,132 
Net charge -offs to average loans and loans held for sale  0.03%  0.16%  0.22%  0.27%  0.17%  (0.02%)  (0.01%)  0.03%  0.16%  0.22%
Allowance as percent of total loans  0.95%  0.94%  0.93%  1.21%  1.39%  0.87%  0.89%  0.94%  0.94%  0.93%
Non-performing loans as % of total loans  0.75%  0.99%  1.48%  1.56%  1.44%  0.77%  0.52%  0.75%  0.99%  1.48%
Allowance as % of non-performing loans  127.11  95.00  62.75  78.01  96.88  112.32%  171.81%  127.11%  95.00%  62.75%
4449
 

The following table presents an allocation of the allowance for loan losses at the end of each of the past five years. The allocation is calculated on an approximate basis and is not necessarily indicative of future losses or allocations. The entire amount is available to absorb losses occurring in any category of loans.

Allocation of the Allowance for Loan Losses

 2016 2015 2014 2013 2012  2018 2017 2016 2015 2014 
(Dollars in thousands) Amount % of
loans
in
category
 Amount % of
loans
in
category
 Amount % of
loans
in
category
 Amount % of
loans
in
category
 Amount % of
loans
in
category
  Amount % of
loans
in
category
 Amount % of
loans
in
category
 Amount % of
loans
in
category
 Amount % of
loans
in
category
 Amount % of
loans
in
category
 
Commercial, Financial and Agricultural $145   7.8% $75   7.7% $67   7.5% $233   5.7% $338   6.3% $320   7.5% $221   7.9% $145   7.8% $75   7.7% $67   7.5%
Real Estate Construction  104   8.4%  51   7.3%  45   6.2%  26   5.5%     3.9%  130   8.1%  101   7.0%  104   8.4%  51   7.3%  45   6.2%
Real Estate Mortgage:                                                                                
Commercial  2,793   67.9%  2,036   66.9%  1,572   66.1%  1,117   68.4%  1,322   68.2%  2,658   71.6%  3,077   71.2%  2,793   67.9%  2,036   66.9%  1,572   66.1%
Residential  438   8.7%  223   10.0%  179   10.9%  291   10.8%  235   11.7%  318   7.3%  461   7.2%  438   8.7%  223   10.0%  179   10.9%
Consumer  280   7.2%  164   8.1%  178   9.3%  192   9.6%  417   9.9%  2,191   5.5%  343   6.7%  280   7.2%  164   8.1%  178   9.3%
Unallocated  1,454   N/A   2,047   N/A   2,091   N/A   2,360   N/A   2,309   N/A   646   

N/A

   1,594   

N/A

   1,454   

N/A

   2,047   

N/A

   2,091   

N/A

 
Total $5,214   100.0 $4,596   100.0 $4,132   100.0 $4,219   100.0 $4,621   100.0 $6,263   100.0% $5,797   100.0% $5,214   100.0% $4,596   100.0% $4,132   100.0%
                                        

Loans acquired in the Savannah River and First South transactions wereCornerstone transaction are excluded from our evaluation of the adequacy of the allowance for loan losses prior to 2016. At December 31, 2015 and 2014, these loans amounted to approximately $76.9 million and $92.6 million, respectively. These loansas they were evaluated at the date of acquisition and recordedmeasured at fair value.value at acquisition. The assumptions used in this evaluation included a credit component and an interest rate component. During the third quarter of 2016, due to the aging of these portfoliosAt December 31, 2018 and the reduction of the accretable credit marks, management began including the purchased passed loans in the overall evaluation of the allowance for loan losses. There has been no material changes in the original assumptions used in evaluating2017, these loans as ofamounted to approximately $40.4 million and $58.9 million at December 31, 2016 or 2015.2018 and 2017, respectively.

Accrual of interest is discontinued on loans when we believe, after considering economic and business conditions and collection efforts that a borrower’s financial condition is such that the collection of interest is doubtful. A delinquent loan is generally placed in nonaccrual status when it becomes 90 days or more past due. At the time a loan is placed in nonaccrual status, all interest, which has been accrued on the loan but remains unpaid, is reversed and deducted from earnings as a reduction of reported interest income. No additional interest is accrued on the loan balance until the collection of both principal and interest becomes reasonably certain.

Non-interest Income and Expense

Non-interest Income. A significant source of noninterest income is service charges on deposit accounts. We also originate and sell residential loans on a servicing released basis in the secondary market. These loans are fixed rate residential loans that are originated in our name. The loans have locked in price commitments to be purchased by investors at the time of closing. Therefore, these loans present very little market risk for the Company.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, bankcard fees, ATM/debit card fees, commissions on check sales, safe deposit box rent, wire transfer and official check fees. Non-interest income was $8.9& 10.6 million and $9.0$9.6 million in 20162018 and 2015,2017, respectively. The deposit service charges were down slightlyincreased by $283 thousand or 19.0% in comparing 20162018 to 2015. Changes2017. Average transaction accounts (deposits accounts excluding time deposits) increased 18.4% during the year ended December 31, 2018 as compared to Regulation E that were madethe same period for 2017. The addition of Cornerstone accounts in 2010 continue to impact the levelfourth quarter of 2017 as well as organic growth accounted for the increase in deposit service charges. In addition, potential regulatory changes related to insufficient funds charges and overdraft protection programs could mandate limitations on the number of items an institution can charge within established time frames, as well as the order in which items presented for payment must be processed on accounts. If such regulatory changes are implemented, this could continue to reduce deposit service charge fees in the future. Mortgage banking income decreased by $50increased $117 thousand in 2016,2018, as compared to 2015. This is primarily2017. Mortgage loan production was $119.7 million in 2018 (including construction perm loans to be sold upon completion of construction) as compared to $108.6 million in 2017. Revenue from increased production was slightly offset by a result of the resignation of one mortgage loan producer in the first quarter of 2016.decreased average yield recognized on 2018 production as compared to 2017. Investment advisory fees and non-deposit commissions decreasedincreased by $152$392 thousand in 20162018 compared to 2015. During 2015, we had one transaction that was non-recurring that accounted for substantially all of the difference between the two periods. In April 2016, the Department of Labor published a final version of a new fiduciary standard that will expand the definition of a fiduciary for certain financial advisors who provide advice related to retirement planning. We believe this conflict-of-interest, or fiduciary standard, rule may have far-reaching effects on the financial results and business models of investment product manufacturers and wealth2017. Total assets under management firms. We are evaluating the potential financial impact that this new conflict-of-interest, or fiduciary standard, rule may have on the Bank, as the rule could impact the timing and method of assessing fees for our services. Assets under management(“AUM”) at December 31, 2016 amounted to approximately $200.62018 were $288.5 million as compared to $175.6$269.2 million at December 31, 2015.2017. The quarterly average AUM in 2018 increased approximately $44.0 million as compared to 2017. The ending AUM at December 31, 2018 was impacted by an overall decline in the markets in late December 2018. The net gain on sale of securities for 20152017 amounted to $355$400 thousand as compared to $601a loss of $342 thousand in 2016. These2018. The sales resultin 2018 and 2017 resulted from modest restructurings of the investment portfolio. These sales are made after evaluating specific investments and comparing them to an alternative asset or liability strategy. We recognized a gain on sale of other real estate of $235 thousand in 2017 as compared to $24 thousand in 2018. During 2016 and 2015,2017, we prepaid $11.4$13.0 million and $5.8 million, respectively, in FHLB advances and incurred prepayment penalties of $459$447 thousand. We did not prepay any FHLB advances in 2018. ATM debit card income increased by $239 thousand and $329 thousand, respectively. The prepayment penaltiesor 14.9% in 2015 were partially offset by a $130 thousand gain on the early redemption of $500 thousand in junior subordinated debt (Trust Preferred). Non-interest income other increased $295 thousand in 20162018 as compared to 2015.2017. The increase primarily results from increasedin transaction accounts mentioned previously accounts for the overall increase in ATM and debit card income in the amount of $125 thousand in 2016 as compared to 2015. In addition, income recognizedfees. Income on bank owned life insurance (“BOLI”) increased by $195from $623 thousand in 2016 as compared2017 to 2015. At$722 thousand in 2018. This increase results from approximately $4.0 million in additional BOLI acquired in 2017, $2.5 million of which was acquired in the endCornerstone transaction. This BOLI was outstanding for the full year of 2015,2018 and only part of the year in 2017. Non-interest income other increased from $271 thousand in 2017 to $535 thousand in 2018. This increase results from the impact of Cornerstone being included for the entire year of 2018 and only a part of the year in 2017. In addition, the Bank purchased additional bank owned life insurancereceived proceeds of approximately $102 thousand related to a death benefit on BOLI which accounts for the increased income.was credited to “Non-interest income—Other”.

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Non-interest income was $9.0$9.6 million and $8.2$8.9 million in 20152017 and 2014,2016, respectively. The deposit service charges were downincreased slightly in comparing 20152017 to 2014.2016. This increase primarily relates to the organic increase in transaction accounts as well as the addition of Cornerstone accounts in the fourth quarter of 2017. Mortgage banking feesincome increased $246$396 thousand to $3.4 million in 2015 from $3.2 million in 2014. Mortgage banking fees had declined in 20142017, as compared to 2013 levels partly as a result of an increase in mortgage interest rates in late 2013 and, as a result, mortgage loan production began to slow down and continued throughout 2014. In 2015, we2016. We added two additional mortgage lenders which contributedoriginators in 2017. Mortgage loan production was $108.6 million in 2017 as compared to the increase over 2014.$102.5 million in 2016. Investment advisory fees and non-deposit commissions remained relatively flatincreased by $156 thousand in 2015 as2017 compared to 2014. Assets2016. Total assets under management at December 31, 2015 and 20142017 were approximately $175.6$269.2 million and $142.6as compared to $200.6 million respectively. During the year endedat December 31, 2014, we sold a book of business which included approximately $20.0 million in assets under management. This transaction resulted in a gain of approximately $113 thousand and is included in non-interest income “Other”.2016. The net gain on sale of securities for 20152017 amounted to $355$400 thousand as compared to $182$601 thousand in 2014.2016. These sales result from modest restructurings of the investment portfolio. TheseAs noted above these sales are made after evaluating specific investments and comparing them to an alternative asset or liability strategy. AsWe recognized $235 thousand in gains on sale of real estate owned in 2017 as compared to a loss of $33 thousand in 2016. Although our other real estate owned balance increased at December 31, 2015, there were no securities rated below investment grade2017 as compared to December 31, 2016, the increase was a result of approximately $1.2 million in our investment portfolio.repossessed real estate acquired in the Cornerstone transaction. Improving real estate values have resulted in the gains recognized in 2017. During 2015,2017 and 2016, we prepaid $5.8$13.0 million and $11.4 million, respectively, in FHLB advances and incurred prepayment penalties of $329 thousand. These losses were offset by a $130$447 thousand gain onand $459 thousand, respectively.

The following table sets forth for the early redemptionperiods indicated the primary components of $500 thousand in junior subordinated debt (Trust Preferred). This compares to prepayment penalties of $351 thousand in 2014 as a result of paying down $5.5 million in advances. Non-interest income other increased $295 thousand in 2016 as compared to 2015. The increase results from increased ATM and debit card income in the amount of $102 thousand in 2016 as compared to 2015. In addition, income recognized on bank owned life insurance increased by $195 thousand in 2016 as compared to 2015 due primarily to the purchase of additional bank owned life insurance at the end of 2015.noninterest income:

  Year ended December 31, 
(In thousands) 2018  2017  2016 
ATM debit card income $1,844  $1,605  $1,519 
Income on bank owned life insurance  722   623   604 
Rental income  280   216   273 
Loan late charges  96   64   114 
Safe deposit fees  58   50   45 
Wire transfer fees  80   67   54 
Other  535   271   300 
Total $3,615  $2,896  $2,909 

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 from $24.7$2.8 million in 20152018 as compared to $25.82017, from $29.4 million in 2016.2017 to $32.1 million in 2018. In 2017, we undertook two major projects. The first was to convert our core processing system from an in-house solution to an outsourced solution which included changing vendors. This cost of the conversion accounted for approximately $300 thousand in increased non-interest expense in 2017. The second was the acquisition of Cornerstone, which was completed in the fourth quarter of 2017 in which we incurred $903 thousand in merger related expenses. As noted earlier, the impact of the Cornerstone transaction impacts non-interest expense for the full year of 2018 whereas, only approximately 2 ½ months in 2017. Salary and benefit expense increased $895 thousand$2.6 million from $14.4$16.9 million in the 20152017 to $15.3$19.5 million in 2016.2018.  We had 202226 and 186224 full time equivalent employees at December 31, 20162018 and 2015, respectively. In the first quarter of 2016, we activated2017, respectively.The increase in salary and benefit expense is primarily a loan production office in Greenville, South Carolina which is staffed by four employees. In addition, we added approximately five additional support staff in various areasresult of the Bank and in the fourth quarter of 2016 added an executive level position of Chief Operation/Chief Risk Officer. These staff additions, normal salary adjustments, as well as the addition of the employees as a result of the Cornerstone acquisition for the entire year of 2018. Occupancy expense increased $214 thousand from $2.2 million in 2017 to $2.4 million in 2018. The increase in occupancy expense of $214 thousand in 2018 as compared to 2017 is primarily a result of the addition of the three offices acquired in the Cornerstone transaction as well as the opening of our new office in downtown Augusta, Georgia in March of 2018. As noted above in June of 2017, we moved our core data processing system from an in-house environment to an outsourcing environment. As a result certain costs associated with data processing prior to the conversion were captured in the furniture fixtures and equipment category, as well as other categories such as postage. This resulted in a decrease in furniture and equipment expense of $258 thousand in 2018 as compared to 2017. Data processing expense increased by $888 thousand in 2018 compared to 2017. This, along with adding the Cornerstone accounts, is the reason for the overall increase in ATM/debit card, bill payment and data processing expenses category. FDIC assessments increased by $63 thousand in 2018 as compared to 2017. This is a result of our overall asset growth which is the assessment base for calculating the FDIC premium. Amortization of intangibles increased $220 thousand in 2018 as compared to 2017. This increase is a result of the amortization of core deposit intangible acquired in the Cornerstone transaction. Total core deposit intangible in this transaction amounted to approximately $1.8 million. The amortization is being recognized on a 150% declining balance method over ten years.

51

Non-interest expense increased $3.6 million in 2017 as compared to 2016, from $25.8 million in 2016 to $29.4 million in 2017. Merger expenses in the amount of $903 thousand accounted for part of the overall increase in non-interest expense in 2017 as compared to 2016. Salary and benefit expense increased $1.6 million from $15.3 million in the 2016 to $16.9 million in 2017.  We had 224 and 202 full-time equivalent employees at December 31, 2017 and 2016, respectively.The acquisition of Cornerstone in the fourth quarter, along with the addition of former Cornerstone employees, accounts for approximately $122 thousand of the increase in salary and benefit expense. Additional overtime and part-time staff during the previously mentioned conversion accounted for another $125 thousand increase in this expense category. New staff additions in the last half of 2016 and early in 2017 included eight new positions, including a Chief Operations Officer, loan operations staff, additional lending staff as well as a new financial advisor position. The staff additions along with normal salary increases and increased medical benefit premiums along with the conversion and merger salary related cost account for the overall increase in Salarysalary and Employee Benefitsemployee benefits in 2017. Data processing expense increased by $614 thousand in 2017 compared to 2016. OccupancyThe conversion to the outsourced data processing system in June 2017 is the primary reason for this increase. Previously, certain of these costs were included in equipment maintenance expense when we operated on the in-house system. As part of the data processing system conversion, we consolidated our core, card, ATM and equipment expenses increased $170bill payment processing into one vendor and all of these costs are now captured in the data processing expense line. FDIC assessments decreased by $100 thousand and $194 thousand, respectively, in 20162017 as compared to 2015. This increase is a result2016. As of additional occupancyJuly 2016, the FDIC adjusted the assessment calculations and equipment expense related toat the Greenville loan production office oftime we estimated the new formula would reduce our overall annual assessment by approximately $50 thousand. Also, we incurred repair costs associated with the fourth quarter 2015 flooding and rain that were not previously identified and determined not to be covered by insurance in the approximate amount of $50 thousand. The additional increase in occupancy expense was a result of increases in repair and maintenance expense throughout the branch network.40%. Other real estate expense decreased $323$159 thousand in 20162017 as compared to 2015.2016. This reflects the overall decrease in the level of our repossessed real estate assets between the two periods.periods excluding the properties acquired in the Cornerstone acquisition in the fourth quarter of 2017. Legal and professional fees increased $253 thousand. Included in the increase of legal and professional fees are consulting fees associated with our core processing conversion of $72 thousand, $60 thousand in audit and accounting fees and $55 thousand related to a mortgage origination process improvement engagement. As of June 30, 2016, our market capitalization crossed the threshold which resulted in requiring an internal control audit by our independent auditors under the Sarbanes Oxley 404 legislation. Crossing this threshold has also added the need to outsource certain internal audit procedures as more of the internal resources are dedicated to documenting and testing to insure compliance with the requirements of Section 404 of The Sarbanes Oxley Act of 2002. Non-interest expense “Other” increased by $523$444 thousand in 20162017 as compared to 2015. This increase is primarily a result of increased ATM/debit card activity charges of $192 thousand during 2016 as compared to 2015. We incurred $64 thousand in costs associated with2016. In the mass reissue of our debit cards to implement the new EMV (chip) card in the first quarter of 2016. We also experienced significantly higher levels of attempted fraud activity on our card base in the first half of 2016 as compared to the same period in 2015. There is a direct cost assessed by our processor for each card that is compromised or had attempted fraud activity. The higher level of fraud cases in 2016 accounted for approximately $43 thousand in debit card losses. We believe the “chip” card technology will ultimately reduce the level of fraud activity and losses on debit cards. Also included in the increase of “Other” non-interest expense were costs of approximately $23 thousand related to converting our current bill pay system to another vendor. This conversion was completed in the second quarter of 2016. Also, an increase in legal and professional fees in the amount of $153 thousand during 2016 was primarily associated with the requirement that, in connection with our transition from a smaller reporting company to an accelerated filer which will be effective beginning in the firstfourth quarter of 2017, we are required to have an audit of our internal controls. The balance of the increase in Non-interest expense “Other” general increases in other miscellaneous expense categories due to our growth in 2016.

46

Non-interest expense increased from $24.0 million in 2014 to $24.7 million in 2015. Salary and benefit expense increased $685 thousand from $13.7 million in the 2014 to $14.4 million in 2015.  We had 186 and 185 full time equivalent employees at December 31, 2015 and 2014, respectively. The increase in salary expenses results from normal salary adjustments as well as additional staff due to the Savannah River acquisition and the opening of the Lady Street Branch in downtown Columbia for the entire year of 2015 as compared to onlyacquired a portion of the year in 2014. Occupancy expense and equipment expenses increased $194 thousand and $144 thousand, respectively, in 2015 as compared to 2014. These increases were again primarily a result of the addition of the two new branches acquired in the Savannah River transaction included for the entire year of 2015. As noted previously, the Bank also opened a new branch office in Columbia, South Carolina in June 2014 and therehabilitation tax credit of $205 thousand. The cost of operating this branch wascredit of $164 thousand is included in the 2015 results for the entire year. Marketing and public relationnon -interest expense increased $110 thousand from $738 thousand in 2014 to $848 thousand in 2015. This increase is result of planned increases in our overall marketing program. During the 2014, we incurred merger-related expenses of $503 thousand related to the acquisition of Savannah River and the First South loan and deposit acquisition. There were no merger related expenses in 2015. Amortization of intangibles increased from $280 thousand in 2014 to $387 thousand in 2015. The core deposit premium and other identifiable intangibles for both the Savannah River and First South transactions are being amortized over seven years on an accelerated basis and are included in our results for the entire year of 2015.“Other”.

The following table sets forth for the periods indicated the primary components of noninterest expense:

 Year ended December 31,  Year ended December 31, 
(In thousands) 2016 2015 2014  2018 2017 2016 
Salary and employee benefits $15,323  $14,428  $13,743  $19,515  $16,951  $15,323 
Occupancy  2,167   2,076   1,882   2,380   2,166   2,167 
Furniture and Equipment  1,728   1,649   1,505   1,513   1,771   1,728 
Marketing and public relations  865   848   739   919   901   865 
ATM/debit card and bill payment processing  798   605   569 
ATM/debit card and data processing*  2,300   1,412   798 
Supplies  130   137   153   142   165   130 
Telephone  349   357   373   422   378   349 
Courier  95   89   85   149   106   95 
Correspondent services  237   207   188   270   227   237 
Subscriptions  199   135   146 
FDIC/FICO premium  412   527   521   375   312   412 
Insurance  291   265   279   254   394   291 
Other real estate expenses  201   524   553 
Other real estate expenses including OREO write downs  98   42   201 
Legal and Professional fees  738   586   766   864   991   738 
Loss on limited partnership interest  172   188   187   60   161   172 
Postage  182   185   189   56   113   182 
Director fees  391   367   356   366   378   391 
Amortization of intangibles  318   387   280   563   343   318 
Shareholder expense  172   130   170   173   131   172 
Merger expense        503      945    
Other  1,207   1,123   919   1,504   1,336   1,061 
 $25,776  $24,678  $23,960  $32,122  $29,358  $25,776 

*Data processing includes core processing, bill payment, online banking, and remote deposit capture

4752
 

IIncomencome Tax Expense

Income tax expense for 20162018 was $2.2$2.7 million as compared to income tax expense for the year ended December 31, 20152017 of $2.3$3.3 million and $2.0$2.2 million for the year ended December 31, 20142016 (see Note 14 “Income Taxes” to the Consolidated Financial Statements for additional information). As noted previously, the lower tax rates as a result of the passing of the Tax Cut and Jobs Act on December 22, 2017 required that we adjust our deferred tax asset for the lower effective corporate tax rate. This adjustment was made as of the date of enactment of the new legislation and increased our tax expense by approximately $1.2 million in 2017. The lower corporate tax rate of 21% versus the previous rate of 34% resulted in our effective tax rates being 19.3% in 2018 whereas historically it has been in the 25% to 27% range. 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 then established to reduce the deferred tax asset to the level that it is more likely than not that the tax benefit will be realized. The effective tax rate for 2016, 2015In 2017 and 2014 was 24.5%, 27.1% and 27.9%, respectively. The decrease in the effective tax rate in 2016 as compared to 2015 resulted from2018, we purchased a $200$205 thousand South Carolina rehabilitation tax credit. The cost of this credit received onfor each year was $164 thousand and is included in “Other” non-interest expense. Effective for years beginning after December 15, 2016, the accounting for share-based compensation changed the recognition of the tax effects of deductions for tax purposes of compensation cost not recognized in the income statement. Previously, the income tax effects of these deductions were recorded directly to equity. Beginning in 2017, all of the tax effects of share-based compensation are recognized in the income statement. The tax benefit is recognized at the time of settlement of the share-based payments. During the first quarter of each of 2018 and 2017, the recognition of settled share-based payments reduced our tax expense by approximately$14 thousand and $115 thousand, respectively. As a qualifying community developmentresult, of our current level of tax exempt securities in our investment as well asportfolio and our BOLI holdings, assuming the additional income on increased bank-owned-life insurance holdings. It is anticipated thatcurrent corporate rate remains unchanged, our effective tax rate for 2017 willis expected to be between 27% and 30%approximately 20.5% to 21.0%.

Financial Position

Assets totaled $914.8 million$1.09 billion at December 31, 20162018 as compared to $862.7 million$1.05 billion at December 31, 2015,2017, an increase of $52.1$41.0 million. This is primarily a result of organic growth in deposit balances of $50.4 million during 2016. Over the last several years, we have attempted to control our pricing on time deposits as we have experienced continued growth in pure deposits (deposits excluding time deposits). Pure deposits grew $48.7 million in 2016 and time deposits increased by only $1.7 million in 2016. Loans at December 31, 2016 were $546.7 million (excluding loans held for sale) as compared to $489.2 million at December 31, 2015. We funded in excess of $164.5approximately $146.1 million in loan production during 2016.2018. Net of pay-downs, this resulted in organic loan growth of $57.5approximately $71.7 million (excluding loans held for sale), or 11.8%11.1%, from December 31, 20152017 to December 31, 2016.2018. At December 31, 2016,2018, loans (excluding loans held for sale) accounted for 64.3%72.2% of earning assets, as compared to 62.1%67.9% at December 31, 2015.2017.  The loan-to-deposit ratio (including loans held for sale) at December 31, 20162018 was 72.1%78.0% as compared to 68.7%73.4% at December 31, 2015.2017.  Loans originated and held for sale are generally held for less than thirty30 days and have locked in purchase commitments by investors prior to closing. At December 31, 2016,2018, loans held for sale amounted to $5.7$3.2 million as compared to $3.0$5.1 at December 31, 2015.2017. Investment securities were $270.6$256.0 million at December 31, 20162018 as compared to $283.8$284.4 million at December 31, 2015.2017.  At December 31, 20162018 and 2015,2017, we had $17.2$16.2 million and $17.4$17.0 million, respectively, in securities classified as held-to-maturity, all of which are municipal securities. We continue to evaluate the intent for classification purposes on a security-by-security basis. At December 31, 2016,2018, we had no securities rated below investment grade on our balance sheet (see Note 4, Investment Securities, for further information). Short-term federal funds sold, and interest-bearing bank balances were $10.1$17.9 million at December 31, 20162018 compared to $12.1$15.8 million at December 31, 2015.  Deposits increased by $50.42017.  Total deposits grew $37.2 million to $766.6from $888.3 million at December 31, 2016 as compared2017 to $716.2$925.5 million at December 31, 2015.2018. The growth in deposits as well as the decrease in investment securities funded substantially all of the loan growth in 2018. We continue attempting to control our pricing on time deposits as we have experienced continued growth in pure deposits (deposits excluding time deposits). Pure deposits grew $50.9 million in 2018 and time deposits decreased by $13.7 million in 2018. At December 31, 2016,2018 and 2017, we had no brokered deposits. At December 31, 2015, we had brokered deposits amounting to $1.8 million which had been acquired through the Savannah River acquisition in 2014. FHLB advances decreased slightly, from $24.8$14.3 million at December 31, 2015,2017 to $24.0$231 thousand at December 31, 2018.

Shareholders’ equity totaled $112.5 million at December 31, 2016. During 2016, we prepaid certain term advances of $11.4 million2018, as discussed above. At December 31, 2016, there were $13.0 million in fixed-rate term advances and $11.0 million in overnight advances (see Note 12compared to financial statements). Typically, the term advances funds are higher costing funds and as previously discussed we have paid down advances as they mature or as the pricing for prepaying certain advances is favorable. The loan growth experienced in the fourth quarter of 2016 was partially funded through these overnight borrowings. We currently anticipate that cash flow from the investment portfolio will allow us to reduce these overnight funds over the next few quarters.

Shareholders’ equity totaled $81.9$105.7 million at December 31, 2016, as compared to $79.0 million at December 31, 2015.2017. The increase in shareholder’s equity includes is primarily a result ofattributable to retention of earnings net ofless dividends paid of $4.6 million and a decrease in Accumulated Other Comprehensive Income (loss) (“AOCI”) of $2.1during the year totaling approximately $3.0 million.

53

Earning Assets

Loans and loans held for sale

Loans typically provide higher yields than the other types of earning assets. During 2016,2018, loans accounted for 63.1%70.0% of average earning assets. The loan portfolio (including held-for-sale) averaged $514.8$686.4 million in 20162018 as compared to $473.4$577.7 million in 2015.2017. Quality loan portfolio growth continued to be a strategic focus in 2016.2018. Associated with the higher loan yields are the 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 2016,2018, we funded new loans (excluding loans originated for sale) of approximately $164.5$146.1 million, as compared to $116.5$144.2 million in 2015.2017. We remain committed to meeting the credit needs of our local markets. However, adverse national and local economic conditions, as well as deterioration of our asset quality, within our Company, 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.

48

The following table shows the composition of the loan portfolio by category:

 December 31,  December 31, 
(In thousands) 2016 2015 2014 2013 2012  2018 2017 2016 2015 2014 
Commercial, financial & agricultural $42,704  $37,809  $33,403  $19,925  $20,924  $53,933  $51,040  $42,704  $37,809  $33,403 
Real estate:                                        
Construction  45,746   35,829   27,545   18,933   13,052   58,440   45,401   45,746   35,829   27,545 
Mortgage—residential  47,472   49,077   48,510   37,579   38,892   52,764   46,901   47,472   49,077   48,510 
Mortgage—commercial  371,112   326,978   293,186   237,701   226,575   513,833   460,276   371,112   326,978   293,186 
Consumer:                                        
Home equity  31,368   30,906   33,000   25,659   27,173   29,583   32,451   31,368   30,906   33,000 
Other  8,307   8,592   8,200   7,800   5,495   9,909   10,736   8,307   8,592   8,200 
Total gross loans  546,709   489,191   443,844   347,597   332,111   718,462   646,805   546,709   489,191   443,844 
Allowance for loan losses  (5,214)  (4,596)  (4,132)  (4,219)  (4,621)  (6,263)  (5,797)  (5,214)  (4,596)  (4,132)
Total net loans $541,495  $484,595  $439,712  $343,378  $327,490  $712,199  $641,008  $541,495  $484,595  $439,712 
                    

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 the Company’sour 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 20162018 and 20152017 were commercial mortgage loans in the amount of $371.1$513.8 million and $327.0$460.3 million, respectively, representing 67.9%71.5% and 66.8%71.2% 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 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, 2016.2018.

Loan Maturity Schedule and Sensitivity to Changes in Interest Rates

(In thousands) December 31, 2016 
  One Year or Less  Over one Year
Through Five
Years
  Over
five
years
  Total 
Commercial, financial and agricultural $10,715  $28,003  $3,986  $42,704 
Real Estate/Construction  11,428   20,731   13,587   45,746 
All other loan  66,531   241,418   150,310   458,259 
  $88,674  $290,152  $167,883  $546,709 
       

  Loans maturing after one year with:       
        Variable Rate  $65,135 
        Fixed Rate   392,900 
              $458,035 
                 
(In thousands) December 31, 2018 
  One Year
or Less
  Over one Year
Through Five
Years
  Over five
years
  Total 
Commercial, financial and agricultural $17,232  $20,572  $16,129  $53,933 
Real Estate/Construction  90,665   227,652   336,303   654,620 
All other loan  1,745   6,126   2,038   9,909 
  $109,642  $254,350  $354,470  $718,462 
  
Loans maturing after one year with: 
      Variable Rate      $116,054 
      Fixed Rate       492,766 
              $608,820 

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.

4954
 

Investment Securities

The investment securities portfolio is a significant component of our total earning assets. Total investment securities averaged $283.6$271.6 million in 2016,2018, as compared to $275.9$265.8 million in 2015.2017. This represents 34.8%27.7% and 35.9%30.9% of the average earning assets for both the years ended December 31, 20162018 and 2015,2017, respectively. At December 31, 20162018 and 2015,2017, our investment securities portfolio amounted to $272.4$256.0 million and $283.8$284.4 million, respectively.

At December 31, 2016, the estimated weighted average life of the investment portfolio was approximately 5.1 years, duration of approximately 3.8 years, and a weighted average tax equivalent yield of approximately 2.48%. At December 31, 2015,2018, the estimated weighted average life of the investment portfolio was approximately 4.9 years, duration of approximately 3.7, years, and a weighted average tax equivalent yield of approximately 2.37%2.81%. At December 31, 2017, the estimated weighted average life of the investment portfolio was approximately 4.8 years, duration of approximately 3.7, and a weighted average tax equivalent yield of approximately 2.68%.

We held no debt securities rated below investment grade at December 31, 2016.2018.

The following table shows the investment portfolio composition.

    
  December 31, 
(Dollars in thousands) 2016  2015  2014 
Securities available-for-sale at fair value:         
U.S. Treasury $1,520  $1,522  $ 
U.S. Government sponsored enterprises  997   992   3,434 
Small Business Administration pools  50,184   57,328   58,545 
Mortgage-backed securities  144,298   146,261   160,353 
State and local government  54,534   57,295   46,516 
Preferred stock  1,000   417   417 
Other  861   872   899 
  $253,394  $264,687  $270,164 
Securities held-to-maturity at amortized cost:            
State and local government $17,193  $17,371  $10,647 
     Total $270,587  $282,058  $280,811 
             

    
  December 31, 
(Dollars in thousands) 2018  2017  2016 
Securities available-for-sale at fair value:            
U.S. Treasury  15,457  $1,505  $1,520 
U.S. Government sponsored enterprises  1,100   1,109   997 
Small Business Administration pools  55,336   61,588   50,184 
Mortgage-backed securities  115,475   143,768   144,298 
State and local government  50,506   56,004   54,534 
Preferred stock        1,000 
Other  19   850   861 
  $237,893  $264,824  $253,394 
Securities held-to-maturity at amortized cost:            
State and local government $16,174  $17,012  $17,193 
     Total $254,067  $281,836  $270,587 
             

We hold other investments carried at cost which represents our investment in FHLB stock. This investment amounted to $1.8$2.0 million and $2.6 million at December 31, 20162018 and 2015.2017, respectively.

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Investment Securities Maturity Distribution and Yields

The following table shows, at amortized cost, the expected maturities and average yield of securities held at December 31, 2016:2018:

(In thousands)   
        After One But  After Five But       
  Within One Year    Within Five Years    Within Ten Years  After Ten Years 
Available-for-sale: Amount  Yield  Amount  Yield  Amount  Yield  Amount  Yield 
                         
US Treasury $     $     $1,520   1.50% $    
Government sponsored enterprises  8   4.90%  989   2.75%            
Small Business Administration pools  936   0.88%  23,012   1.87%  22,140   2.36%  4,096   2.73%
Mortgage-backed securities  4,221   1.62%  94,972   1.77%  41,925   2.22%  3,179   3.58%
   State and local
government
        1,937   2.92%  7,242   3.69%  45,356   4.35%
   Other  801   3.01%  60   2.01%        1,000    
Total investment
securities available-for-sale
 $5,966   1.70 $120,970   1.82 $72,827   2.78 $53,631   4.70
                                 
(In thousands)   
        After One But  After Five But       
  Within One Year    Within Five Years    Within Ten Years  After Ten Years 
Held-to-maturity: Amount  Yield  Amount  Yield  Amount  Yield  Amount  Yield 
                         
   State and local government $     $611   1.91% $8,229   3.20% $8,353   3.86%
Total investment
securities held-to-maturity:
 $     $611   1.91% $8,229   3.20 $8,353   3.86

(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 $8,365   2.33% $7,123   2.46% $     $    
Government sponsored enterprises        1,096  2.81%            
Small Business Administration pools  635   0.73%  32,254   2.25%  21,545   3.61%  1,350   3.77%
Mortgage-backed securities  5,738   2.51%  73,516   2.45%  33,406   2.60%  5,202   3.32%
State and local government  322   1.20%  7,136   2.78%  42,144   3.15%  997   2.69%
Other        10   3.70%        9   3.70%
Total investment securities available-for-sale $15,060   2.31% $121,135   2.42% $97,095   3.06% $7,558   3.31%
                         
(In thousands)                        
        After One But  After Five But       
  Within One Year    Within Five Years    Within Ten Years  After Ten Years 
Held-to-maturity: Amount  Yield  Amount  Yield  Amount  Yield  Amount  Yield 
                         
State and local government $     $491   2.81% $8,674   2.21% $7,009   2.35%
Total investment securities                                
Held-to-maturity: $     $491   2.81% $8,674   2.21% $7,009   2.35%

(1)Yield calculated on tax equivalent basis

Short-Term Investments

Short-term investments, which consist of federal funds sold, securities purchased under agreements to resell and interest bearing deposits, averaged $17.5$23.2 million in 2016,2018, as compared to $20.3$16.0 million in 2015.2017. 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, 2016,2018, short-term investments including funds on deposit at the Federal Reserve totaled $10.1$17.9 million. These funds are an immediate source of liquidity and are generally invested in an earning capacity on an overnight basis.

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Deposits and Other Interest-Bearing Liabilities

Deposits.Average deposits were $739.4$915.1 million during 2016,2018, compared to $688.6$790.5 million during 2015.2017. Average interest-bearing deposits were $567.4$671.6 million during 2016,2018, as compared to $541.6$591.3 million during 2015.2017.

The following table sets forth the deposits by category:

 December 31,  December 31, 
 2016 2015 2014  2018 2017 2016 
(In thousands) Amount % of
Deposits
 Amount % of
Deposits
 Amount % of
Deposits
  Amount % of
Deposits
 Amount % of
Deposits
 Amount % of
Deposits
 
Demand deposit accounts $182,915   23.9% $156,247   21.4% $133,004   22.6% $244,686   26.4% $226,546   25.5% $182,915   23.9%
NOW accounts  161,106   21.0%  154,262   20.0%  136,362   19.9%
Interest bearing checking accounts  201,936   21.8%  189,034   21.3%  161,106   21.0%
Money market accounts  166,353   21.7%  164,046   23.1%  151,620   20.4%  191,537   20.7%  175,325   19.7%  166,353   21.7%
Savings accounts  75,012   9.8%  60,699   8.4%  53,583   8.0%  108,369   11.7%  104,756   11.8%  75,012   9.8%
Time deposits less than $100,000  90,332   11.8%  100,170   15.0%  108,048   16.1%  93,480   10.1%  100,531   11.3%  90,332   11.8%
Time deposits more than $100,000  90,904   11.8%  80,727   12.1%  86,966   13.0%  85,515   9.3%  92,131   10.4%  90,904   11.8%
 $766,622   100.0 $716,151   100.0 $669,583   100.0 $925,523   100.0% $888,323   100.0% $766,622   100.0%
                        

Large certificate of deposit customers, whichwhom 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 $654.4$840.0 million and $635.4$796.2 million at December 31, 20162018 and 2015,2017, respectively. Time deposits greater than $250 thousand, the FDIC deposit insurance coverage limit, amounted to $37.7$27.8 million and $21.1$36.1 million at December 31, 20162018 and December 31, 2015,2017, respectively.

A stable base of deposits is expected to continue to be the primary source of funding to meet both our short-term and long-term liquidity needs in the future. The maturity distribution of time deposits is shown in the following table

Maturities of Certificates of Deposit and Other Time Deposit of $100,000 or more

 December 31, 2016  December 31, 2018 
(In thousands) Within
Three
Months
 After Three
Through
Six Months
 After Six
Through
Twelve
Months
 After
Twelve
Months
 Total  Within
Three
Months
 After Three
Through
Six Months
 After Six
Through
Twelve
Months
 After
Twelve
Months
 Total 
Time deposits of $100,000 or more $14,376  $12,629  $17,922  $45,977  $90,904  $11,126  $17,293  $21,648  $35,448  $85,515 
                    

There were no other time deposits of $100,000 or more at December 31, 2016.

Borrowed funds. Borrowed funds consist of securities sold under agreements to repurchase, FHLB advances and long-term debt as a result of issuing $15.0 million in trust preferred securities. Short-term borrowings in the form of securities sold under agreements to repurchase averaged $27.0 million, $19.2 million and $21.4 million $19.3 millionduring 2018, 2017 and $18.2 million during 2016, 2015 and 2014, respectively. The maximum month-end balances during 2018, 2017 and 2016 2015 and 2014 were $23.7$33.4 million, $22.5$21.3 million and $20.1$23.7 million, respectively. The average rates paid during these periods were 0.19%1.08%, 0.19%0.37% and 0.20%0.19%, respectively. The balances of securities sold under agreements to repurchase were $19.5$28.0 million and $21.0$19.3 million at December 31, 20162018 and 2015,2017, respectively. The repurchase agreements all mature within one to four days and are generally originated with customers that have other relationships with the companyus 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 20162018 and 2015,2017, the average outstanding advances amounted to $23.2$4.1 million and $29.3$17.0 million, respectively.

5257
 


The following is a schedule of the maturities for FHLB Advances as of December 31, 20162018 and 2015:2017:

 December 31,  December 31, 
(In thousands) 2016 2015  2018 2017 
Maturing Amount Rate Amount Rate  Amount Rate Amount Rate 
2017  11,000   0.65%  15,250   3.98%
2018        9,250   4.44% $     $14,000   1.41%
2019  3,813   2.94%                  
2020  4,519   3.26%  288   1.00%  231   1.00%  250   1.00%
2021  4,703   3.09%      
After five years                
 $24,035   1.98 $24,788   4.12 $231   1.00% $14,250   1.40%
                

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 that resulted in a gain of $130 thousand.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 Dividends

Total shareholders’ equity as of December 31, 20162018 was $81.9$112.5 million as compared to $79.0$105.7 million as of December 31, 2015.2017. In 2014, we issued 1.274 million shares of common stock in connection with the Savannah River merger valued at $13.7 million. In 2016,2018, the retention of earnings less dividend payments on our common stock offset by a decline in AOCI of $2.1 million, accounted for substantially allthe majority of the $2.9 million increasechange in shareholders’ equity. The change in AOCI is related to the change in the fair value of our securities portfolio as a result of changing interest rates. In 2014,2016, we paid a dividend of $0.06$0.08 per share each quarter. During each quarter of 2015,2017, we paid a dividend on our common stock of $0.07$0.09 per share. In 2016,2018, we paid a $0.08$0.10 per share dividend on our common stock each quarter.

In addition, a dividend reinvestment plan was implemented in the third quarter of 2003. The plan allows existing shareholders the option of reinvesting cash dividends as well as making optional purchases of up to $5,000 in the purchase of common stock per quarter.

The following table shows the return on average assets (net income divided by average total assets), return on average equity (net income divided by average equity), and equity to assets ratio for the three years ended December 31, 2016.2018.

  2018  2017  2016 
Return on average assets  1.04%  0.62%  0.75%
Return on average common equity  10.48%  6.56%  8.08%
Equity to assets ratio  10.31%  10.06%  8.95%
Dividend Payout Ratio  27.02%  42.35%  31.68%

 

  2016  2015  2014 
Return on average assets  0.75%  0.73%  0.73%
Return on average common equity  8.08%  7.94%  8.13%
Equity to assets ratio  8.95%  9.16%  9.17%
Dividend Payout Ratio  31.68  29.92  28.98
             

In July 2013, the federal bank regulatory agencies issued a final rule that revised the risk-based capital requirements and the method for calculating risk-weighted assets to make them consistent with certain standards in Basel III and certain provisions of the Dodd-Frank Act. See “Supervision and Regulation—Basel Capital Standards” for additional information on Basel III and the Dodd-Frank Act. The rules became effective as of January 1, 2015. Portions of the capital rules have a phase in period. The revised rules will be2015 and were fully phased inphased-in as of January 1, 2019. While the Company is currently a small bank holding company and so generally is not subject to these capital requirements, our Bank remains subject to these capital requirements. As of December 31, 2016,2018, the Company and the Bank meet all capital adequacy requirements under the new capitalBasel III rules on a fully phased-in basis as if such requirements had been effective at that time. The Company and the Bank exceeded the regulatory capital ratios at December 31, 20152018 and 2014,2017, as set forth in the following table:

5358
 
(In thousands) Required
Amount
 % Actual
Amount
 % Excess
Amount
 %  Required
Amount
 % Actual
Amount
 % Excess
Amount
 % 
The Bank:                        
December 31, 2016                        
The Bank (1):                        
December 31, 2018                        
Risk Based Capital                                                
Tier 1 $38,010   6.0% $87,657   13..8% $48,872   7.8% $49,043   6.0% $107,806   13.2% $58,764   7.2%
Total Capital  50,681   8.0%  92,871   14.7%  42,253   6.7%  65,390   8.0%  114,069   14.0%  48,679   6.0%
CET1  28,509   4.5%  87,657   13.8%  57,282   9.3%  36,782   4.5%  107,806   13.2%  71,024   8.7%
Tier 1 Leverage  35,875   4.0%  87,657   9.8%  48,589   5.8%  43,198   4.0%  107,806   10.0%  64,608   6.0%
December 31, 2015                        
December 31, 2017                        
Risk Based Capital                                                
Tier 1 $33,640   6.0% $82,512   14.7% $48,872   8.7% $44,396   6.0% $99,118   13.4% $54,722   7.4%
Total Capital  44,855   8.0%  87,108   15.5%  42,253   7.5%  59,195   8.0%  104,915   14.2%  45,720   6.2%
CET1  25,230   4.5%  82,512   14.7%  57,282   10.2%  33,297   4.5%  99,118   13.4%  65,821   8.9%
Tier 1 Leverage  33,923   4.0%  82,512   9.7%  48,589   5.7%  41,030   4.0%  99,118   9.7%  58,088   5.7%
The Company:                        
December 31, 2016                        
Risk Based Capital                        
Tier 1 $38,126   6.0% $91,966   14.5% $53,840   8.5%
Total Capital  50,835   8.0%  97,180   15.3%  46,345   7.3%
CET1  28,595   4.5%  77,466   12.2%  48,871   7.7%
Tier 1 Leverage  35,957   4.0% $91,966   10.2%  56,009   6.2%
December 31, 2015                        
Risk Based Capital                        
Tier 1 $33,782   6.0% $86,682   15.4% $52,900   9.4%
Total Capital  45,043   8.0%  91,278   16.2%  46,235   8.2%
CET1  25,336   4.5%  72,444   12.9%  47,108   8.4%
Tier 1 Leverage  34,021   4.0  86,682   10.2  52,661   6.2
                        

(1)As a small bank holding company, we are generally not subject to the capital requirements unless otherwise advised by the Federal Reserve.

Since the Company iswe are a bank holding company, itsour 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 theour ability of the Company to pay dividends or otherwise engage in capital distributions.

In addition, since the Company iswe are a legal entity separate and distinct from the Bank and doesdo not conduct stand-alone operations, itsour ability to pay dividends depends on the ability of the Bank to pay dividends to it,us, which is also subject to regulatory restrictions. As a South Carolina charteredCarolina-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.

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 securities pledged by the Bank or assignment of loans within the Bank’s portfolio.

5459
 

We anticipate that the Bank will remain a well capitalizedwell-capitalized institution for at least the next 12 months. Total shareholders’ equity was 8.95%10.31% of total assets at December 31, 20162018 and 9.16%10.06% at December 31, 2015.2017. Funds sold and short-term interest bearing deposits are our primary source of immediate liquidity and averaged $17.5$23.2 million and $20.3$16.0 million during the year ended December 31, 20162018 and 2015,2018, respectively. The Bank maintains federal funds purchased lines with two financial institutions each in the amount of $10.0 million. The FHLB has approved a line of credit of up to 25% of the Bank’s assets, which would be collateralized by a pledge against specific investment securities and or eligible loans. We regularly review theour liquidity position of the Company and have implemented internal policies establishing guidelines for sources of asset based liquidity and limit the total amount of purchased funds used to support the balance sheet and funding from non-core sources. We believe that our existing stable base of core deposits, along with continued growth in this deposit base, will enable us to meet our long term liquidity needs successfully.

We believe our liquidity remains adequate to meet operating and loan funding requirements and that our existing stable base of core deposits, along with continued growth in this deposit base, will enable us to meet our long-term and short-term liquidity needs successfully.

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 the Company’sour 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.

Item 7A. Quantitative and Qualitative Disclosure About Market Risk

Not Applicable

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 21.

5560
 

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

TheOur management of First Community Corporation 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.

·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, 2016.2018. 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, 2016,2018, our internal control over financial reporting is effective based on those criteria.

The effectiveness of the internal control structure over financial reporting as of December 31, 20162018 has been audited by Elliott Davis, Decosimo, LLC, an independent registered public accounting firm, as stated in their report included in this Annual Report on Form 10-K, which expresses an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2016.2018.

/s/ Michael C. Crapps

/s/ Joseph G. Sawyer
Chief Executive Officer and President/s/ Joseph G. Sawyer

Executive Vice President and Chief Financial Officer
5661
 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMReport of Independent Registered Public Accounting Firm

To the Shareholders and the Board of Directors
of First Community Corporation and Subsidiary
Lexington, South CarolinaCorporation:

Opinion on the Internal Control Over Financial Reporting

We have audited theFirst Community Corporation and its subsidiary’s (the “Company”) internal control over financial reporting of First Community Corporation and Subsidiary (the “Company”) as of December 31, 2016,2018, based on criteria established inInternal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in 2013 (the “COSO criteria”2013. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018 and the related notes to the consolidated financial statement based on criteria established in COSO.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”). , the consolidated balance sheets as of December 31, 2018 and 2017, the related consolidated statements of income, comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2018, of the Company and our report dated March 14, 2019 expressed an unqualified opinion.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company’sCompany’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the 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 audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that(a)(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;(b)(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and(c)(3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s 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. Also, 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.

/s/ Elliott Davis, LLC 

Columbia, South Carolina

March 14, 2019

62

Report of Independent Registered Public Accounting Firm

To the Shareholders and the Board of Directors of First Community Corporation:

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of First Community Corporation and its subsidiary (the “Company”) as of December 31, 2018 and 2017 and the related consolidated statements of income, comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2018, and the related notes to the consolidated financial statements and schedules (collectively, the “consolidated financial statements”). In our opinion, the Company maintained,consolidated financial statements present fairly, in all material respects, effective internal control overthe financial reportingposition of the Company as of December 31, 2016, based on2018 and 2017, and the COSO criteria.results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (the “PCAOB”), the consolidated balance sheets of the CompanyCompany’s internal control over financial reporting as of December 31, 2016 and 2015 and2018, based on criteria established in Internal Control — Integrated Framework issued by the related consolidated statementsCommittee of income, comprehensive income (loss), changes in shareholders’ equity, and cash flows for eachSponsoring Organizations of the yearsTreadway Commission in the three year period ended December 31, 20162013, and our report dated March 13, 201714, 2019 expressed an unqualified opinion thereon.

/s/ Elliott Davis Decosimo, LLC

Columbia, South Carolina
March 13, 2017

57

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors

First Community Corporation and Subsidiary

Lexington, South Carolina

We have auditedon the accompanying consolidated balance sheets of First Community Corporation and Subsidiary (the “Company”) as of December 31, 2016 and 2015, and the related consolidated statements of income, comprehensive income (loss), changes in shareholders’ equity and cash flows for eacheffectiveness of the years in the three year period ended December 31, 2016. Company’s internal control over financial reporting.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on thesethe Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the 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 Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the auditaudits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includesmisstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated 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 supportingregarding the amounts and disclosures in the consolidated financial statements, assessingstatements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statement presentation.statements. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of First Community Corporation and Subsidiary, as of December 31, 2016 and 2015, and the results of their operations and their cash flows for each of the years in the three year period ended December 31, 2016, in conformity with U.S. generally accepted accounting principles. 

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2016, based on criteria established inInternal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013, and our report dated March 13, 2017 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting. 

/s/ Elliott Davis, Decosimo, LLC

We have served as the Company’s auditor since 2006.

Columbia, South Carolina

March 13, 201714, 2019

5863
 
FIRST COMMUNITY CORPORATION
Consolidated Balance Sheets
 
  December 31, 
(Dollars in thousands, except par values) 2016  2015 
ASSETS        
Cash and due from banks $11,925  $10,973 
Interest-bearing bank balances  9,475   11,375 
Federal funds sold and securities purchased under agreements to resell  599   593 
Investments held-to-maturity  17,193   17,371 
Investment securities available-for-sale  253,394   264,687 
Other investments, at cost  1,809   1,783 
Loans held for sale  5,707   2,962 
Loans  546,709   489,191 
Less,  allowance for loan losses  5,214   4,596 
Net loans  541,495   484,595 
Property, furniture and equipment - net  29,833   29,929 
Land held for sale  1,055   1,080 
Bank owned life insurance  20,905   20,301 
Other real estate owned  1,146   2,458 
Intangible assets  1,102   1,419 
Goodwill  5,078   5,078 
Other assets  14,077   8,130 
Total assets $914,793  $862,734 
LIABILITIES        
Deposits:        
Non-interest bearing demand $182,915  $156,247 
Interest bearing  583,707   559,904 
Total deposits  766,622   716,151 
Securities sold under agreements to repurchase  19,527   21,033 
Federal Home Loan Bank Advances  24,035   24,788 
Junior subordinated debt  14,964   14,964 
Other liabilities  7,784   6,760 
Total liabilities  832,932   783,696 
Commitments and Contingencies (Note 15)        
SHAREHOLDERS’ EQUITY        
Preferred stock, par value $1.00 per share; 10,000,000 shares authorized; none issued and outstanding      
Common stock, par value $1.00 per share; 10,000,000 shares authorized; issued and outstanding 6,708,393 at December 31, 2016 and 6,690,551 at December 31, 2015  6,708   6,690 
Common stock warrants issued  46   46 
Nonvested restricted stock  (220)  (297)
Additional paid in capital  75,991   75,761 
Retained earnings (deficit)  573   (3,992)
Accumulated other comprehensive income (loss)  (1,237)  830 
Total shareholders’ equity  81,861   79,038 
Total liabilities and shareholders’ equity $914,793  $862,734 

FIRST COMMUNITY CORPORATION

Consolidated Balance Sheets

  December 31, 
(Dollars in thousands, except par values) 2018  2017 
ASSETS        
Cash and due from banks $14,328  $14,803 
Interest-bearing bank balances  17,883   15,186 
Federal funds sold and securities purchased under agreements to resell  57   602 
Investments held-to-maturity  16,174   17,012 
Investment securities available-for-sale  237,893   264,824 
Other investments, at cost  1,955   2,559 
Loans held for sale  3,223   5,093 
Loans  718,462   646,805 
Less,  allowance for loan losses  6,263   5,797 
Net loans  712,199   641,008 
Property, furniture and equipment - net  34,987   36,103 
Bank owned life insurance  25,754   25,413 
Other real estate owned  1,460   1,934 
Intangible assets  2,006   2,569 
Goodwill  14,637   14,589 
Other assets  9,039   9,036 
Total assets $1,091,595  $1,050,731 
LIABILITIES        
Deposits:        
  Non-interest bearing demand $244,686  $226,546 
 Interest bearing  680,837   661,777 
Total deposits  925,523   888,323 
Securities sold under agreements to repurchase  28,022   19,270 
Federal Home Loan Bank Advances  231   14,250 
Junior subordinated debt  14,964   14,964 
Other liabilities  10,358   8,261 
Total liabilities  979,098   945,068 
         
 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; 10,000,000 shares authorized; issued and outstanding 7,638,681 at December 31, 2018 and 7,587,938 at December 31, 2017  7,639   7,588 
Common stock warrants issued  31   46 
Nonvested restricted stock  (149)  (109)
Additional paid in capital  95,048   94,516 
Retained earnings  12,262   4,066 
Accumulated other comprehensive loss  (2,334)  (444)
Total shareholders’ equity  112,497   105,663 
Total liabilities and shareholders’ equity $1,091,595  $1,050,731 

See Notes to Consolidated Financial Statements

64

FIRST COMMUNITY CORPORATION

Consolidated Statements of Income

  Year Ended December 31, 
(Dollars in thousands except per share amounts) 2018  2017  2016 
          
Interest income:            
Loans, including fees $32,789  $26,134  $23,677 
Investment securities - taxable  4,755   4,001   3,819 
Investment securities - non taxable  1,767   1,858   1,905 
Other short term investments  418   163   105 
Total interest income  39,729   32,156   29,506 
Interest expense:            
Deposits  2,905   1,825   1,818 
Securities sold under agreement to repurchase  293   73   42 
Other borrowed money  783   864   1,187 
Total interest expense  3,981   2,762   3,047 
Net interest income  35,748   29,394   26,459 
Provision for loan losses  346   530   774 
Net interest income after provision for loan losses  35,402   28,864   25,685 
Non-interest income:            
Deposit service charges  1,769   1,486   1,405 
Mortgage banking income  3,895   3,778   3,382 
Investment advisory fees and non-deposit commissions  1,683   1,291   1,135 
Gain (loss) on sale of securities  (342)  400   601 
Gain (loss) on sale of other assets  24   235   (33)
Loss on early extinguishment of debt     (447)  (459)
Other  3,615   2,896   2,909 
Total non-interest income  10,644   9,639   8,940 
Non-interest expense:            
Salaries and employee benefits  19,515   16,951   15,323 
Occupancy  2,380   2,166   2,167 
Equipment  1,513   1,771   1,728 
Marketing and public relations  919   901   865 
FDIC Insurance assessments  375   312   412 
Other real estate expense  98   3   201 
Amortization of intangibles  563   343   318 
Merger expenses     903    
Other  6,760   6,008   4,762 
Total non-interest expense  32,123   29,358   25,776 
Net income before tax  13,923   9,145   8,849 
Income tax expense  2,694   3,330   2,167 
Net income $11,229  $5,815  $6,682 
             
             
Basic earnings per common share $1.48  $0.85  $1.01 
Diluted earnings per common share $1.45  $0.83  $0.98 

 

See Notes to Consolidated Financial Statements

5965
 
FIRST COMMUNITY CORPORATION
Consolidated Statements of Income
 
  Year Ended December 31, 
(Dollars in thousands except per share amounts) 2016  2015  2014 
          
Interest income:            
  Loans, including fees $23,677  $23,219  $21,915 
  Investment securities - taxable  3,819   3,630   3,986 
  Investment securities - non taxable  1,905   1,681   1,291 
  Other short term investments  105   119   106 
       Total interest income  29,506   28,649   27,298 
Interest expense:            
  Deposits  1,818   1,750   1,710 
  Securities sold under agreement to repurchase  42   37   37 
  Other borrowed money  1,187   1,609   1,821 
      Total interest expense  3,047   3,396   3,568 
      Net interest income  26,459   25,253   23,730 
      Provision for loan losses  774   1,138   880 
      Net interest income after provision for loan losses  25,685   24,115   22,850 
Non-interest income:            
  Deposit service charges  1,405   1,469   1,517 
  Mortgage banking income  3,382   3,432   3,186 
  Investment advisory fees and non-deposit commissions  1,135   1,287   1,268 
  Gain on sale of securities  601   355   182 
  Gain ( loss) on sale of other assets  (33)  8   (11)
  Loss on early extinguishment of debt  (459)  (199)  (351)
  Other  2,909   2,614   2,422 
      Total non-interest income  8,940   8,966   8,213 
Non-interest expense:            
  Salaries and employee benefits  15,323   14,428   13,743 
  Occupancy  2,167   2,076   1,882 
  Equipment  1,728   1,649   1,505 
  Marketing and public relations  865   848   738 
  FDIC Insurance assessments  412   527   521 
  Other real estate expense  201   524   553 
  Amortization of intangibles  318   387   280 
  Merger expenses        503 
  Other  4,762   4,239   4,235 
      Total non-interest expense  25,776   24,678   23,960 
Net income before tax  8,849   8,403   7,103 
Income tax expense  2,167   2,276   1,982 
     Net income $6,682  $6,127  $5,121 
             
Basic earnings per common share $1.01  $0.93  $0.78 
Diluted earnings per common share $0.98  $0.91  $0.78 
             

FIRST COMMUNITY CORPORATION

Consolidated Statements of Comprehensive Income

(Dollars in thousands) Year ended December 31, 
  2018  2017  2016 
          
Net income $11,229  $5,815  $6,682 
             
Adjustment to AOCI related to tax legislation     (149)   
             
Other comprehensive income (loss):            
Unrealized gain (loss) during the period on available for sale securities, net of tax of $930, ($623) and $860, respectively  (2,160)  1,206   (1,670)
             
Less: Reclassification adjustment for loss (gain) included in net income, net of tax of  ($72), $121, and $204, respectively  270   (264)  (397)
Other comprehensive income (loss)  (1,890)  793   (2,067)
Comprehensive income $9,339  $6,608  $4,615 

See Notes to Consolidated Financial Statements

60
FIRST COMMUNITY CORPORATION
Consolidated Statements of Comprehensive Income
 
(Dollars in thousands) Year ended December 31, 
  2016  2015  2014 
          
Net income $6,682  $6,127  $5,121 
             
Other comprehensive income (loss):           
Unrealized gain (loss) during the period on available for sale securities, net of tax of $860, $106 and ($2,017), respectively  (1,670)  (207)  3,918 
           
Less: Reclassification adjustment for gain included in net income, net of tax of  $204, $121, and $62, respectively  (397)  (234)  (120)
Other comprehensive income (loss)  (2,067)  (441)  3,798 
Comprehensive income $4,615  $5,686  $8,919 
             

See Notes to Consolidated Financial Statements

6166
 

FIRST COMMUNITY CORPORATION

Consolidated Statements of Changes in Shareholders’ Equity

 Common Stock         Accumulated    Common Stock         Accumulated   
 Number   Common Additional Nonvested Retained Other    Number   Common Additional Nonvested   Other   
 Shares Common Stock Paid-in Restricted Earnings Comprehensive    Shares Common Stock Paid-in Restricted Retained Comprehensive   
(Dollars and shares in thousands) Issued Stock Warrants Capital Stock (deficit) Income (loss) Total  Issued Stock Warrants Capital Stock Earnings (deficit) Income (loss) Total 
Balance, December 31, 2013  5,303  $5,303  $48  $62,214  $(444) $(11,923) $(2,527) $52,671 
Net income                      5,121       5,121 
Other comprehensive incomenet of tax of $2,079                          3,798   3,798 
Issuance of restricted stock  71   71       697   (768)            
Amortization of compensation onrestricted stock                  539           539 
Issuance of common stock  1,274   1,274       12,436               13,710 
Dividends: Common ($0.24 per share)                      (1,484)      (1,484)
Dividend reinvestment plan  16   16       157               173 
Balance, December 31, 2014  6,664  $6,664  $48  $75,504  $(673) $(8,286) $1,271  $74,528 
Net income                      6,127       6,127 
Other comprehensive loss net of tax of $227                          (441)  (441)
Issuance of restricted stock  13   13       137   (150)           
Restricted stock shares surrendered  (8)  (8)      (90)              (98)
Amortization of compensation onrestricted stock                  526           526 
Exercise of stock warrants  2   2   (2)                   
Dividends: Common ($0.28 per share)                      (1,833)      (1,833)
Dividend reinvestment plan  19   19       210               229 
Balance, December 31, 2015  6,690  $6,690  $46  $75,761  $(297) $(3,992) $830  $79,038   6,690  $6,690  $46  $75,761  $(297) $(3,992) $830  $79,038 
Net income                      6,682       6,682                       6,682       6,682 
Other comprehensive lossnet of tax of $1,064                          (2,067)  (2,067)                          (2,067)  (2,067)
Issuance of restricted stock  22   22       275   (297)             22   22       275   (297)           
Restricted stock shares surrendered  (26)  (26)      (327)              (353)  (26)  (26)      (327)              (353)
Amortization of compensation onrestricted stock                  374           374                   374           374 
Issuance of common stock  1   1       13               14   1   1       13               14 
Dividends: Common ($0.32 per share)                      (2,117)      (2,117)                      (2,117)      (2,117)
Dividend reinvestment plan  21   21       269               290   21   21       269               290 
Balance, December 31, 2016  6,708  $6,708  $46  $75,991  $(220) $573  $(1,237) $81,861   6,708  $6,708  $46  $75,991  $(220) $573  $(1,237) $81,861 
                                
Net income                      5,815       5,815 
Other comprehensive income net of tax of $487                          942   942 
Adjustment to AOCI related to tax
legislation
                      149   (149)   
Issuance of restricted stock  5   5       100   (105)           
Shares forfeited  (2)  (2)      (27)  9           (20)
Shares retired  (19)  (19)      (369)              (388)
Amortization of compensation on restricted stock                  207           207 
Issuance of common stock  877   877       18,468               19,345 
Dividends: Common ($0.36 per share)                      (2,471)      (2,471)
Dividend reinvestment plan  19   19       353               372 
Balance, December 31, 2017  7,588  $7,588  $46  $94,516  $(109) $4,066  $(444) $105,663 
Net income                      11,229       11,229 
Other comprehensive loss net of tax of $858                          (1,890)  (1,890)
Issuance of restricted stock  11   11       233   (244)           
Exercise of stock warrants  25   25   (15)  (10)               
Shares retired  (2)  (2)      (55)              (57)
Exercise of deferred compensation  1 �� 1       18               19 
Amortization of compensation on restricted stock                  204           204 
Dividends: Common ($0.40 per share)                      (3,033)      (3,033)
Dividend reinvestment plan  16   16       346               362 
Balance, December 31, 2018  7,639  $7,639  $31  $95,048  $(149) $12,262  $(2,334) $112,497 

See Notes to Consolidated Financial Statements

6267
 

FIRST COMMUNITY CORPORATION

Consolidated Statements of Cash Flows

(Amounts in thousands)(Amounts in thousands) Year Ended December 31,  Year Ended December 31, 
 2016 2015 2014  2018 2017 2016 
Cash flows from operating activities:Cash flows from operating activities:                        
Net income Net income $6,682  $6,127  $5,121  $11,229  $5,815  $6,682 
Adjustments to reconcile net income to net cash provided in operating activities Adjustments to reconcile net income to net cash provided in operating activities                        
Depreciation Depreciation  1,333   1,253   1,118   1,519   1,448   1,333 
Premium amortization  4,040   4,214   3,617 
Net premium amortization  2,447   3,270   4,040 
Provision for loan losses Provision for loan losses  774   1,138   881   346   530   774 
Writedowns of other real estate owned Writedowns of other real estate owned  76   219   161      39   76 
(Gain) loss on sale of other real estate owned  33   (8)  11 
Loss (gain) loss on sale of other real estate owned  4   (235)  33 
Originations of HFS loans Originations of HFS loans  (96,489)  (101,944)  (87,864)  (114,959)  (104,200)  (96,489)
Sales of HFS loans Sales of HFS loans  93,744   103,106   87,530   116,829   104,814   93,744 
Amortization of intangibles Amortization of intangibles  318   387   280   563   343   318 
Gain on sale of securities Gain on sale of securities  (601)  (355)  (182)  342   (400)  (601)
Accretion on acquired loans Accretion on acquired loans  (880)  (934)     (620)  (262)  (880)
Writedown of land held for sale Writedown of land held for sale  25   120      42   90   25 
Loss on early extinguishment of debt Loss on early extinguishment of debt  459   199   351      447   459 
(Gain) loss on sale of fixed assets  (123)      
(Increase) decrease in other assets (Increase) decrease in other assets  (5,404)  936   804   441   6,495   (5,404)
Increase in accounts payable Increase in accounts payable  1,025   50   179   2,097   157   1,025 
Net cash provided in operating activities Net cash provided in operating activities  5,135   14,508   12,007   20,157   18,351   5,135 
Cash flows from investing activities:Cash flows from investing activities:                        
Proceeds from sale of securities available-for-sale Proceeds from sale of securities available-for-sale  33,215   26,099   49,007   44,299   25,368   33,215 
Proceeds from sale of securities held-to-maturity  655       
Purchase of investment securities available-for-sale Purchase of investment securities available-for-sale  (66,359)  (63,217)  (106,064)  (64,146)  (30,626)  (66,359)
Purchase of investment securities held-to-maturity Purchase of investment securities held-to-maturity     (6,879)  (10,666)         
Maturity/call of investment securities available-for-sale Maturity/call of investment securities available-for-sale  38,034   37,634   37,128   41,564   35,452   38,034 
Proceeds from sale of other investments Proceeds from sale of other investments  486   1,250   671   604   250   486 
(Increase) decrease in loans  (57,456)  (45,460)  16,169 
Net cash disbursed in business combination        (11,353)
Purchase of loans        (8,705)
Increase in loans  (71,266)  (39,944)  (57,456)
Net cash received in business combination     22,385    
Proceeds from sale of other real estate owned Proceeds from sale of other real estate owned  1,781   514   1,822   816   684   1,781 
Proceeds from sale of fixed assets  1,145       
Purchase of property and equipment Purchase of property and equipment  (1,237)  (2,672)  (3,215)  (1,465)  (3,072)  (1,237)
Purchase of BOLI Purchase of BOLI     (5,250)        (1,500)   
Net cash used in investing activities  (51,536)  (57,981)  (35,206)
Net cash provided (used) in investing activities  (47,794)  8,997   (51,536)
Cash flows from financing activities:Cash flows from financing activities:                        
Increase in deposit accounts  50,403   46,652   18,219 
Increase (decrease) in deposit accounts  37,290   (4,868)  50,403 
Advances from the Federal Home Loan Bank Advances from the Federal Home Loan Bank  73,593   32,500   38,100   79,000   26,000   73,593 
Repayment of advances from the Federal Home Loan Bank Repayment of advances from the Federal Home Loan Bank  (74,865)  (36,848)  (61,674)  (93,019)  (36,273)  (74,865)
Increase (decrease) in securities sold under agreements to repurchase Increase (decrease) in securities sold under agreements to repurchase  (1,506)  3,650   (1,251)  8,752   (1,106)  (1,506)
Purchase of deposits        39,482 
Repayment of long term debt     (370)   
Deferred compensation shares  19       
Restricted shares surrendered Restricted shares surrendered  (353)  (98)     (57)  (408)  (353)
Issuance of common stock Issuance of common stock  14               14 
Dividend reinvestment plan Dividend reinvestment plan  290   229   173   362   372   290 
Dividends paid on Common Stock Dividends paid on Common Stock  (2,117)  (1,833)  (1,484)  (3,033)  (2,471)  (2,117)
Net cash provided in financing activities  45,459   43,882   31,565 
Net cash (used) provided in financing activities  29,314   (18,756)  45,459 
Net increase (decrease) in cash and cash equivalentsNet increase (decrease) in cash and cash equivalents  (942)  409   8,366   1,677   8,592   (942)
Cash and cash equivalents at beginning of yearCash and cash equivalents at beginning of year  22,941   22,532   14,166   30,591   21,999   22,941 
Cash and cash equivalents at end of yearCash and cash equivalents at end of year $21,999  $22,941  $22,532  $32,268  $30,591  $21,999 
Supplemental disclosure:Supplemental disclosure:                        
Cash paid during the period for: Interest $3,097  $3,468  $3,537 
Income Taxes $1,345  $2,220  $1,100 
Cash paid during the period for: Interest $3,592  $2,796  $3,097 
Income Taxes $2,215  $1,895  $1,345 
Non-cash investing and financing activities:Non-cash investing and financing activities:                        
Unrealized (loss) gain on securities available-for-sale $(2,067) $(441) $3,798 
Unrealized (loss) gain on securities available-for-sale, net of tax $(1,890) $942  $(2,067)
Transfer of loans to other real estate owned Transfer of loans to other real estate owned $579  $240  $1,567  $346  $1,275  $579 
            

See Notes to Consolidated Financial Statements

6368
 

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 maturity.

Mortgage Loans Held for Sale

 

The Company originates fixed rate residential loans on a servicing released basis in the secondary market. Loans closed but not yet settled with an investor, are carried in the Company’s loans held for sale portfolio. These loans are primarily fixed rate residential loans that have been originated in the Company’s name and have closed. Virtually all of these loans have commitments to be purchased by investors at a locked in price with the investors on the same day that the loan was locked in with the Company’s customers. Therefore, these loans present very little market risk for the Company.

6469
 

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 September 30 of each year.

Other Real Estate Owned

Other real estate owned includes real estate acquired through foreclosure. Other real estate owned is carried at the lower of cost (principal balance at date of foreclosure) or fair value minus estimated cost to sell. Any write-downs at the date of foreclosure are charged to the allowance for loan losses. Expenses to maintain such assets, subsequent changes in the valuation allowance, and gains or losses on disposal are included in other expenses.

Comprehensive Income (loss)

The Company reports comprehensive income (loss) in accordance with Accounting Standards Codification (“ASC”) 220, “Comprehensive Income.” ASC 220 requires that all items that are required to be reported under accounting standards as comprehensive income (loss) be reported in a financial statement that is displayed with the same prominence as other financial statements. The disclosures requirements have been included in the Company’s consolidated statements of comprehensive income (loss).income.

6570
 

Note 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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 $820$919 thousand, $806$901 thousand and $609$820 thousand for the years ended December 31, 2016, 2015,2018, 2017, and 20142016, respectively.

Income Taxes

A deferred income tax liability or asset is recognized for the estimated future effects attributable to differences in the tax bases of assets or liabilities and their reported amounts in the financial statements as well as operating loss and tax credit carry forwards. The deferred tax asset or liability is measured using the enacted tax rate expected to apply to taxable income in the period in which the deferred tax asset or liability is expected to be realized.

In 2006, the FASB issued guidance related to Accounting for Uncertainty in Income Taxes. This guidance clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB ASC Topic 740-10, “Income Taxes.” It also prescribes a recognition threshold and measurement of a tax position taken or expected to be taken in an enterprise’s tax return.

Stock Based Compensation Cost

The Company accounts for stock based compensation under the fair value provisions of the accounting literature. Compensation expense is recognized in salaries and employee benefits.

The fair value of each grant is estimated on the date of grant using the Black-Sholes option pricing model. No options were granted in 2016, 20152018, 2017 or 2014.2016.

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.”

6671
 

Note 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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 inbusiness 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 (nonaccretable 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 nonaccretable difference to accretable difference and are accreted into interest income on a level-yield basis over the remaining life of the loan. Decreases in cash flows expected to be collected are recognized as impairment through the provision for loan losses.

Segment Information

ASC Topic 280-10, “Segment Reporting,” requires selected segment information of operating segments based on a management approach. The Company’s four reportable segments represent the distinct product lines the Company offers and are viewed separately for strategic planning by management (see Note 24, Reportable Segments, for further information).

Recently Issued Accounting Standards

In May 2014, the FASB issued guidance (ASU 2014-09) to change the recognition of revenue from contracts with customers. The core principle of the new guidance is that an entity should recognize revenue to reflect the transfer of goods and services to customers in an amount equal to the consideration the entity receives or expects to receive. The guidance will beis effective for the Company for reporting periods beginning after December 15, 2017.as of January 1, 2018. The Company will applyevaluated the overall impact on affected revenue streams and any related contracts, including asset management fees, gains and losses on the sale of real estate, deposit related fees and interchange fees. Based on this evaluation, the Company determined that ASU 2014-09 did not materially change the method in which revenue from impacted revenue streams was previously being recognized. The Company applied the guidance using a modified retrospective approach. The Company does not expect these amendments to have a material effect on its financial statements.

In January 2015,This approach requires the FASB issued guidance to eliminate from U.S. GAAP the conceptapplication of an extraordinary item, which is an event or transaction that is both (1) unusual in nature and (2) infrequently occurring. Under the new guidance an entity will no longer (1) segregate an extraordinary item fromto uncompleted contracts at the results of ordinary operations; (2) separately present an extraordinary item on its income statement, net of tax, after income from continuing operations; or (3) disclose income taxes and earnings-per-share data applicable to an extraordinary item. The amendments will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015, with early adoption permitted provided that the guidance is applied from the beginning of the fiscal yeardate of adoption. The Company does not expect these amendmentsPeriods prior to have a material effect on its financial statements.

In February 2015, the FASB issued guidance which amends the consolidation requirements and significantly changes the consolidation analysis required under U.S. GAAP. Although the amendments are expected to result in the deconsolidation of many entities, the Company will need to reevaluate all its previous consolidation conclusions. The amendments became effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. These amendments did not have a material effect on the Company’s financial statements.

67

Note 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

In April 2015, the FASB issued guidance which provides guidance to customers about whether a cloud computing arrangement includes a software license. The amendments became effective for fiscal years, and interim periods within thosefiscal years, beginning after December 15, 2015. These amendments did not have a material effect on the Company’s financial statements.

In May 2015, the FASB issued guidance which removes the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. The amendments became effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. These amendments did not have a material effect on the Company’s financial statements.

In August 2015, the FASB deferred the effective date of ASU 2014-09, Revenue from Contracts with Customers. As a resultadoption were not retrospectively revised as the impact on uncompleted contracts at the date of the deferral, the guidance in ASU 2014-09 will be effective for the Company for reporting periods beginning after December 15, 2017. The Company will apply the guidance using a modified retrospective approach. The Company doesadoption was not expect these amendments to have a material effect on its financial statements.material.

In August 2015, the FASB issued amendments to the Interest topic of the Accounting Standards Codification to clarify the SEC staff’s position on presenting and measuring debt issuance costs incurred in connection with line-of-credit arrangements. The amendments were effective upon issuance. The Company does not expect these amendments to have a material effect on its financial statements.

In September 2015, the FASB amended the Business Combinations topic of the Accounting Standards Codification to simplify the accounting for adjustments made to provisional amounts recognized in a business combination by eliminating the requirement to retrospectively account for those adjustments. The amendments became effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. All entities are required to apply the amendments prospectively to adjustments to provisional amounts that occur after the effective date. These amendments did not have a material effect on the Company’s financial statements.

In January 2016, the FASB amended the Financial Instruments topic of the Accounting Standards Codification (ASU 2016-01) to address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The amendments will bewere effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years.the Company on January 1, 2018. The Company will applyguidance affects the guidance by meansaccounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption.financial instruments. The amendments related to equity securities without readily determinable fair values will bewere applied prospectively to equity investments that exist as of the date of adoption of the amendments. ASU 2016-01 requires the use of exit price rather than entrance price in determining the fair value of loans not measured at fair value on a non-recurring basis in the consolidated balance sheets. See Note 6 - Fair Value of Financial Instruments for information regarding the change in the valuation of these loans. The Company doesadoption of ASU 2016-01 did not expect these amendments to have a material effect on its financial statements.

In February 2016, the FASB amended the Leases topic of the Accounting Standards Codification to revise certain aspects of recognition, measurement, presentation, and disclosure of leasing transactions. The amendments will be effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. 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 March 2016, the FASB amended the Liabilities topic of the Accounting Standards Codification to address the current and potential future diversity in practice related to the derecognition of a prepaid stored-value product liability. The amendments will be effective for financial statements issued for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company will apply the guidance using a modified retrospective transition method by means of a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year in which the guidance is effective to each period presented. The Company does not expect these amendments to have a material effect on its financial statements.

68

Note 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

In March 2016, the FASB amended the Derivatives and Hedging topic of the Accounting Standards Codification to clarify that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument does not, in and of itself, require dedesignation of that hedging relationship provided that all other hedge accounting criteria continue to be met. The amendments will be effective for financial statements issued for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The Company will apply the guidance prospectively to each period presented. The Company does not expect these amendments to have a material effect on its financial statements.

In March 2016, the FASB amended the Investments—Equity Method and Joint Ventures topic of the Accounting Standards Codification to eliminate the requirement to retroactively adopt the equity method of accounting. The amendments are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. The Company will apply the guidance prospectively upon their effective date to increases in the level of ownership interest or degree of influence that result in the adoption of the equity method. The Company does not expect these amendments to have a material effect on its financial statements.

In March 2016, the FASB amended the Revenue from Contracts with Customers topic of the Accounting Standards Codification to clarify the implementation guidance on principal versus agent considerations and address how an entity should assess whether it is the principal or the agent in contracts that include three or more parties. The amendments will be effective for the Company for reporting periods beginning after December 15, 2017. The Company does not expect these amendments to have a material effect on its financial statements.

In March 2016, the FASB issued guidance to simplify several aspects of the accounting for share-based payment award transactions including the income tax consequences, the classification of awards as either equity or liabilities, and the classificationimpact on the statement of cash flows. Additionally, the guidance simplifies two areas specific to entities other than public business entities allowing them to apply a practical expedient to estimate the expected term for all awards with performance or service conditions that have certain characteristics and also allowing them to make a one-time election to switch from measuring all liability-classified awards at fair value to measuring them at intrinsic value. The amendments will be effective for the Company for annual periods beginning after December 15, 2016 and interim periods within those annual periods. The Company does not expect these amendments to have a material effect on itsCompany’s financial statements.

In April 2016, the FASB amended the Revenue from Contracts with Customers topic of the Accounting Standards Codification to clarify guidance related to identifying performance obligations and accounting for licenses of intellectual property. The amendments will be effective for the Company for reporting periods beginning after December 15, 2017. The Company does not expect these amendments to have a material effect on its financial statements.

In May 2016, the FASB amended the Revenue from Contracts with Customers topic of the Accounting Standards Codification to clarify guidance related to collectability, noncash consideration, presentation of sales tax, and transition. The amendments will be effective for the Company for reporting periods beginning after December 15, 2017. The Company does not expect these amendments to have a material effect on its financial statements.

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, 2019. 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 August 2016, the FASB amended the Statement of Cash Flows topic of the Accounting Standards CodificationASC to clarify how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments will beare effective for the Company for fiscal years beginning after December 15, 2017 including interim periods within those fiscal years. These amendments had no material effect on the Company’s financial statements.

72

Note 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

In January 2017, the FASB issued guidance to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The amendment to the Business Combinations Topic is intended to address concerns that the existing definition of a business has been applied too broadly and has resulted in many transactions being recorded as business acquisitions that in substance are more akin to asset acquisitions. The guidance was effective for the Company for reporting periods beginning after December 15, 2017. These amendments had no material effect on the Company’s financial statements.

In January 2017, the FASB amended the Goodwill and Other Topic of the ASC to simplify the accounting for goodwill impairment for public business entities and other entities that have goodwill reported in their financial statements and have not elected the private company alternative for the subsequent measurement of goodwill. The amendment removes Step 2 of the goodwill impairment test. Goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The effective date and transition requirements for the technical corrections will be effective for the Company for reporting periods beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company does not expect these amendments to have a material effect on its financial statements.

In October 2016,March 2017, the FASB amended the requirements in the Receivables—Nonrefundable Fees and Other Costs Topic of the ASC related to the amortization period for certain purchased callable debt securities held at a premium. The amendments shorten the amortization period for the premium to the earliest call date. The amendments became effective for the Company for interim and annual periods beginning after December 15, 2018. The Company does not expect these amendments to have a material effect on its financial statements.

In September 2017, the FASB updated the Revenue from Contracts with Customers and the Leases Topics of the ASC. The amendments incorporate into the ASC recent SEC guidance about certain public business entities (PBEs) electing to use the non-PBE effective dates solely to adopt the FASB’s new standards on revenue and leases. The amendments were effective upon issuance and did not have a material effect on the Company’s financial statements.

In November 2017, the FASB updated the Income Taxes topicStatement and Revenue from Contracts with Customers Topics of the ASC. The amendments incorporate into the ASC recent SEC guidance related to revenue recognition. The amendments were effective upon issuance and did not have a material effect on the Company’s financial statements.

In March 2018, the FASB updated the Debt Securities and the Regulated Operations Topics of the ASC. The amendments incorporate into the Accounting Standards Codification recent SEC guidance which was issued in order to make the relevant interpretive guidance consistent with current authoritative accounting and auditing guidance and SEC rules and regulations. The amendments were effective upon issuance and did not have a material effect on the financial statements.

In March 2018, the FASB updated the Income Taxes Topic of the ASC. The amendments incorporate into the ASC recent SEC guidance related to the income tax accounting implications of the Tax Cuts and Jobs Act. The amendments were effective upon issuance and did not have a material effect on the Company’s financial statements.

In May 2018, the FASB amended the Financial Services—Depository and Lending Topic of the ASC to remove outdated guidance related to Circular 202. The amendments were effective upon issuance and did not have a material effect on the Company’s financial statements.

In July 2018, the FASB amended the Leases Topic of the ASC to make narrow amendments to clarify how to apply certain aspects of the new leases standard. Additionally, amendments were made to give entities another option for transition and to provide lessors with a practical expedient. The amendments are effective for reporting periods beginning after December 15, 2018. The Company does not expect these amendments to have a material effect on its financial statements.

73

Note 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

In August 2018, the FASB amended the Fair Value Measurement Topic of the ASC. The amendments remove, modify, and add certain fair value disclosure requirements based on the accountingconcepts in the FASB Concepts Statement, Conceptual Framework for intra-entity transfersFinancial Reporting—Chapter 8: Notes to Financial Statements. The amendments are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted. An entity is permitted to early adopt any removed or modified disclosures upon issuance of assets other than inventory.this ASU and delay adoption of the additional disclosures until their effective date. The Company does not expect these amendments to have a material effect on its financial statements.

In August 2018, the FASB amended the Intangibles—Goodwill and Other Topic of the ASC to align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The amendments will be effective for the Company for fiscal years beginning after December 15, 2017 including2019. Early adoption is permitted. The Company does not expect these amendments to have a material effect on its financial statements.

In October 2018, the FASB amended the Derivatives and Hedging Topic of the ASC to expand the list of U.S. benchmark interest rates permitted in the application of hedge accounting. The amendments will be effective for the Company for fiscal years beginning after December 15, 2018. Early adoption is permitted. The Company does not expect these amendments to have a material effect on its financial statements.

In October 2018, the FASB amended the Consolidation topic of the ASC for determining whether a decision-making fee is a variable interest. The amendments require organizations to consider indirect interests held through related parties under common control on a proportional basis rather than as the equivalent of a direct interest in its entirety. The amendments will be effective for the Company for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted. The Company will apply a full retrospective approach in which financial statements for each individual prior period presented and the opening balances of the earliest period presented are adjusted to reflect the period-specific effects of applying the amendments. The Company does not expect these amendments to have a material effect on its financial statements.

In November 2018, the FASB amended the Collaborative Arrangements Topic of the ASC to clarify the interaction between the guidance for certain collaborative arrangements and the new revenue recognition financial accounting and reporting standard. The amendments will be effective for the Company for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted. The Company does not expect these amendments to have a material effect on its financial statements.

69

Note 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

In October 2016,December 2018, the FASB amended the Consolidation topic of the Accounting Standards Codification to revise the consolidationissued guidance on how a reporting entity that is the single decision maker of a variable interest entity (VIE) should treat indirect interestsproviding narrow-scope improvements for lessors, that provides relief in the entity held through related partiesaccounting for sales, use and similar taxes, the accounting for other costs paid by a lessee that are under common control with the reporting entitymay benefit a lessor, and variable payments when determining whether it is the primary beneficiary of that VIE.contracts have lease and non-lease components. The amendments will bebecame effective for the Company for fiscal yearsreporting periods beginning after December 15, 2016 including interim periods within those fiscal years.2018. The Company does not expect these amendments to have a material effect on its financial statements.

In November 2016, the FASB amended the Statement of Cash Flows topic of the Accounting Standards Codification to clarify how restricted cash is presented and classified in the statement of cash flows. The amendments will be effective for the Company for fiscal years beginning after December 15, 2017 including interim periods within those fiscal years. Early adoption is permitted. The Company does not expect these amendments to have a material effect on its financial statements.

In December 2016, the FASB issued amendments to clarify the Accounting Standards Codification (ASC), correct unintended application of guidance, and make minor improvements to the ASC that are not expected to have a significant effect on current accounting practice or create a significant administrative cost to most entities. The amendments were effective upon issuance (December 14, 2016) for amendments that do not have transition guidance. Amendments that are subject to transition guidance will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is permitted. The Company does not expect these amendments to have a material effect on its financial statements.

In December 2016, the FASB issued technical corrections and improvements to the Revenue from Contracts with Customers Topic. These corrections make a limited number of revisions to several pieces of the revenue recognition standard issued in 2014. The effective date and transition requirements for the technical corrections will be effective for the Company for reporting periods beginning after December 15, 2017. The Company will apply the guidance using a modified retrospective approach. 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.

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.

74

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 20142016 and 20152017 consolidated financial statements were reclassified to conform to the 20162018 presentation.

70

Note 3—MERGERS AND ACQUISTIONSACQUISITIONS

On February 1, 2014,October 20, 2017, the Company acquired all of the outstanding common stock of Savannah River Financial Corporation of Augusta, GeorgiaCornerstone Bancorp headquartered in Easley, South Carolina (“Savannah River”Cornerstone”), the bank holding company for Savannah River Banking CompanyCornerstone National Bank (“SRBC”CNB”), in a cash and stock transaction. The total purchase price was approximately $33.5$27.1 million, consisting of $19.8$7.8 million in cash and 1,274,200877,364 shares of ourthe Company’s common stock valued at $13.7$19.3 million based on a provision in the merger agreement that 60%30% of the outstanding shares of Savannah RiverCornerstone common stock be exchanged for cash and 40%70% of the outstanding shares of Savannah RiverCornerstone common stock be exchanged for shares of the Company’s common stock. The value of the Company’s common stock issued was determined based on the closing price of the common stock on January 31, 2014October 19, 2017 as reported by NASDAQ, which was $10.76. Savannah River$22.05. Cornerstone common shareholders received 1.06180.54 shares of the Company’s common stock in exchange for each share of Savannah RiverCornerstone common stock, or $11.00 per share, subject to the limitations discussed above. The Company issued 1,274,200877,364 shares of its common stock in connection with the merger.

The Savannah RiverCornerstone transaction was accounted for using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed and consideration exchanged were recorded at estimated fair value on the acquisition date based on a third party valuation of significant accounts. Fair values are subject to refinement for up to a year.

On September 26, 2014,

The following table presents the Bank completed itsassets acquired and liabilities assumed as of October 20, 2017 as recorded by the Company on the acquisition date and initial fair value adjustments.

  As Recorded by  Fair Value  As Recorded 
(Dollars in thousands, except per share data) Cornerstone  Adjustments  by the Company 
Assets            
Cash and cash equivalents $30,060  $  $30,060 
Investment securities  44,018   (358)(a)  43,660 
Loans  60,835   (734)(b)  60,101 
Premises and equipment  4,164   573(c)  4,737 
Intangible assets     1,810(d)  1,810 
Bank owned life insurance  2,384      2,384 
Other assets  3,082   (452)(e)  2,630 
Total assets $144,543  $839  $145,382 
             
Liabilities            
Deposits:            
Noninterest-bearing $27,296  $  $27,296 
Interest-bearing  99,152   150(f)  99,302 
Total deposits  126,448   150   126,598 
Securities sold under agreements to repurchase  849      849 
Other liabilities  320   96(g)  416 
Total liabilities  127,617   246   127,863 
Net identifiable assets acquired over liabilities assumed  16,926   593   17,519 
Goodwill     9,558   9,558 
Net assets acquired over liabilities assumed $16,926  $10,151  $27,077 
             
Consideration:            
First Community Corporation common shares issued  877,364         
Purchase price per share of the Company’s common stock $22.05         
  $19,346         
Cash exchanged for stock and fractional shares  7,731         
Fair value of total consideration transferred $27,077         

Explanation of approximately $40 million in deposits and $8.7 million in loans from First South Bank (“First South”). This represented allfair value adjustments

(a)—Adjustment reflects marking the securities portfolio to fair value as of the deposits and a portion ofacquisition date.

(b)—Adjustment reflects the loans at First South’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 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 based on the Company’s evaluation of the acquired loan portfolio and excludes the allowance for loan losses recorded by Cornerstone.

(c)—Adjustment reflects the fair value adjustments based on loansthe Company’s evaluation of the acquired premises and deposits acquired resulted in aequipment.

(d)—Adjustment reflects the recording of the core deposit intangible on the acquired deposit accounts.

(e)—Adjustment reflects the deferred tax adjustment related to fair value adjustments at 34%.

(f)—Adjustment reflects the fair value adjustment on interest-bearing deposits.

75

Note 3—MERGERS AND ACQUISITIONS (Continued)

The operating results of $365.9the Company for the period ended December 31, 2017 include the operating results of the acquired assets and assumed liabilities for the 72 days subsequent to the acquisition date of October 20, 2017. Merger-related charges related to the Cornerstone acquisition of $945 thousand are recorded in the consolidated statement of income and include incremental costs related to closing the acquisition, including legal, accounting and auditing, investment banker, travel, printing, supplies and other identifiable intangible assetscosts.

The following table discloses the impact of the merger with Cornerstone (excluding the impact of merger-related expenses) since the acquisition on October 20, 2017 through December 31, 2017. The table also presents certain pro forma information as if Cornerstone had been acquired on January 1, 2017 and January 1, 2016. These results combine the historical results of Cornerstone in the amountCompany’s consolidated statement of $538.6 thousand being recorded related to this transactionincome and, is reflected onwhile certain adjustments were made for the consolidated balance sheet at December 31, 2014. The transaction is being accounted for as an asset acquisition and liability assumption. The core deposit intangibleestimated impact of certain fair value adjustments and other identifiable intangibleacquisition-related activity, they are being amortized over seven yearsnot indicative of what would have occurred had the acquisition taken place on an accelerated basis.January 1, 2017 or January 1, 2016.

       
  Pro Forma  Pro Forma 
  Twelve Months  Twelve Months 
(Dollars in thousands) Ended
December 31,
2017
  Ended
December 31,
2016
 
Total revenues(net interest income plus noninterest income) $43,602  $41,300 
Net income $6,791  $7,750 
7176
 

Note 4—INVESTMENT SECURITIES

The amortized cost and estimated fair values of investment securities are summarized below:

AVAILABLE-FOR-SALE:

   Gross Gross   
 Amortized Unrealized Unrealized   
(Dollars in thousands) Amortized
Cost
 Gross
Unrealized
Gains
 Gross
Unrealized
Losses
 Fair Value  Cost Gains Losses Fair Value 
December 31, 2016:                
December 31, 2018                
US Treasury securities $1,538  $  $18  $1,520  $15,488  $9  $40  $15,457 
Government sponsored enterprises  959   38      997 
Mortgage-backed securities  145,696   480   1,878   144,298 
Small Business Administration pools  50,560   208   584   50,184 
State and local government  54,702   907   1,075   54,534 
Corporate and other securities  1,932      71   1,861 
 $255,387  $1,633  $3,626  $253,394 
December 31, 2015:                
US Treasury securities $1,547  $  $25  $1,522 
Government sponsored enterprises  950   42      992 
Government Sponsored Enterprises  1,096   6   2   1,100 
Mortgage-backed securities  146,935   498   1,172   146,261   117,862   73   2,460   115,475 
Small Business Administration pools  57,474   355   501   57,328   55,784   247   695   55,336 
State and local government  55,294   2,037   36   57,295   50,599   619   712   50,506 
Corporate and other securities  1,349      60   1,289   19         19 
 $263,549  $2,932  $1,794  $264,687  $240,848  $954  $3,909  $237,893 
                                
     Gross  Gross     
 Amortized  Unrealized  Unrealized     
(Dollars in thousands) Cost  Gains  Losses  Fair Value 
December 31, 2017                
US Treasury securities $1,529  $  $24  $1,505 
Government Sponsored Enterprises  1,085   24      1,109 
Mortgage-backed securities  145,185   285   1,702   143,768 
Small Business Administration pools  61,544   374   330   61,588 
State and local government  55,111   1,309   416   56,004 
Corporate and other securities  932      82   850 
 $265,386  $1,992  $2,554  $264,824 
77

Note 4—INVESTMENT SECURITIES (Continued)

HELD-TO-MATURITY

   Gross Gross   
 Amortized Unrealized Unrealized   
(Dollars in thousands) Amortized
Cost
 Gross
Unrealized
Gains
 Gross
Unrealized
Losses
 Fair Value  Cost Gains Losses Fair Value 
December 31, 2016:                
State and local government $17,193  $54  $133  $17,114 
 $17,193  $54  $133  $17,114 
December 31, 2015:                
December 31, 2018         
State and local government $17,371  $211  $27  $17,555  $16,174  $50  $40  $16,184 
 $17,371  $211  $27  $17,555  $16,174  $50  $40  $16,184 
                                
     Gross  Gross     
 Amortized  Unrealized  Unrealized     
(Dollars in thousands) Cost  Gains  Losses  Fair Value 
December 31, 2017                
State and local government $17,012  $223  $15  $17,220 
 $17,012  $223  $15  $17,220 

At December 31, 2016,2018, corporate and other securities available-for-sale included the following at fair value: mutual funds at $801.1$7.1 thousand and foreign debt of $60.1 thousand, and corporate preferred stock in the amount of $1.0 million.$10.0 thousand. At December 31, 2015,2017, corporate and other securities available-for-sale included the following at fair value: mutual funds at $812.0$790.0 thousand and foreign debt of $60.1 thousand, and corporate preferred stock in the amount of $416.8$60.0 thousand. Other investments, at cost, include Federal Home Loan Bank (“FHLB”) stock in the amount of $1.8 million$955.0 thousand and $1.8corporate stock in the amount of $1.0 million at December 31, 20162018. The Company held $1.6 million of FHLB stock and $1.0 million in corporate stock at December 31, 2015, respectively.2017.

For the year ended December 31, 2018, proceeds from the sale of securities available-for-sale amounted to $44.3 million, gross realized gains amounted to $274 thousand and gross realized losses amounted to $616 thousand. For the year ended December 31, 2018, the Company received proceeds of $655 thousand and gross unrealized loss of $4.0 thousand for the sale of an investment security held-to-maturity. For the year ended December 31, 2017, proceeds from the sale of securities available-for-sale amounted to $25.3 million, gross realized gains amounted to $422 thousand and gross realized losses amounted to $22 thousand. For the year ended December 31, 2016, proceeds from the sale of securities available-for-sale amounted to $32.2 million, gross realized gains amounted to $601 thousand and there were no gross realized losses. For the year ended December 31, 2015, proceeds from the sale of securities available-for-sale amounted to $26.1 million, gross realized gains amounted to $380 thousand and gross realized losses amounted to $25 thousand. For the year ended December 31, 2014, proceeds from the sale of securities available-for-sale amounted to $49.0 million, gross realized gains amounted to $308 thousand and gross realized losses amounted to $126 thousand. The tax (benefit) provision applicable to the net realized gain was approximately $204($72) thousand, $121 thousand, and $62$204 thousand for 2016, 20152018, 2017 and 2014,2016, respectively.

7278
 

Note 4—INVESTMENT SECURITIES (Continued)

The amortized cost and fair value of investment securities at December 31, 2016,2018, 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.

(Dollars in thousands) Available-for-sale Held-to-maturity  Available-for-sale Held-to-maturity 
 Amortized
Cost
 Fair
Value
 Amortized
Cost
 Fair
Value
  Amortized Fair Amortized Fair 
          Cost Value Cost Value 
Due in one year or less $6,013  $5,966  $  $  $15,060  $15,035  $  $ 
Due after one year through five years  122,954   122,490   611   606   121,134   119,721   491   491 
Due after five years through ten years  72,521   71,307   8,229   8,171   97,095   95,656   8,674   8,676 
Due after ten years  53,899   53,631   8,353   8,337   7,559   7,481   7,009   7,017 
 $255,387  $253,394  $17,193  $17,114  $240,848  $237,893  $16,174  $16,184 
                

Securities with an amortized cost of $102.8$118.4 million and fair value of $107.6$116.2 million at December 31, 20162018 were pledged to secure FHLB advances, public deposits, and securities sold under agreements to repurchase.Securities with an amortized cost of $98.3$101.2 million and fair value of $98.1$100.2 million at December 31, 20152017 were pledged to secure FHLB advances, public deposits, and securities sold under agreements to repurchase.

The following tables show gross unrealized losses and fair values, aggregated by investment category and length of time that individual securities have been in a continuous loss position at December 31, 20162018 and December 31, 2015.2017.

 Less than 12 months 12 months or more Total  Less than 12 months 12 months or more Total 
December 31, 2016
(Dollars in thousands)
 Fair Value Unrealized
Loss
 Fair Value Unrealized
Loss
 Fair Value Unrealized
Loss
 
December 31, 2018
(Dollars in thousands)
 Fair Value Unrealized
Loss
 Fair Value Unrealized
Loss
 Fair Value Unrealized
Loss
 
Available-for-sale securities:                                                
US Treasury $1,520  $18  $  $  $1,520  $18  $8,355  $10  $1,488  $30  $9,843  $40 
Government Sponsored Enterprise mortgage-backed securities  77,389   1,597   16,655   281   94,044   1,878 
Government Sponsored Enterprise        122   2   122   2 
Mortgage-Backed Securities  13,917   120   89,870   2,339   103,787   2,459 
Small Business Administration pools  15,213   206   23,382   378   38,595   584   16,400   211   20,330   484   36,730   695 
State and local government  17,502   1,075         17,502   1,075   9,517   52   15,598   660   25,115   712 
Corporate bonds and other        801   71   801   71   7   1         7   1 
Total $111,624  $2,896  $40,838  $730  $152,462  $3,626  $48,196  $394  $127,408  $3,515  $175,604  $3,909 
                        
 Less than 12 months 12 months or more Total 
December 31, 2016
(Dollars in thousands)
 Fair Value Unrealized
Loss
 Fair Value Unrealized
Loss
 Fair Value Unrealized
Loss
 
Held-to-maturity securities:                        
State and local government $10,245  $133  $  $  $10,245  $133 
Total $10,245  $133  $ ��$  $10,245  $133 

  Less than 12 months  12 months or more  Total 
December 31, 2018
(Dollars in thousands)
 Fair Value  Unrealized
Loss
  Fair Value  Unrealized
Loss
  Fair Value  Unrealized
Loss
 
Held-to-maturity securities:                        
State and local government $2,843  $14  $4,899  $26  $7,742  $40 
Total $2,843  $14  $4,899  $26  $7,742  $40 
7379
 

Note 4—INVESTMENT SECURITIES (Continued)

  Less than 12 months  12 months or more  Total 
December 31, 2015
(Dollars in thousands)
 Fair Value  Unrealized
Loss
  Fair Value  Unrealized
Loss
  Fair Value  Unrealized
Loss
 
Available-for-sale securities:                        
US Treasury $1,522  $25  $  $  $1,522  $25 
Government Sponsored Enterprise mortgage-backed securities  69,112   731   17,593   439   86,705   1,170 
Small Business Administration pools  13,386   153   25,709   348   39,095   501 
Non-agency mortgage-backed securities        186   2   186   2 
State and local government  1,461   8   1,362   28   2,823   36 
Corporate bonds and other        812   60   812   60 
Total $85,481  $917  $45,662  $877  $131,143  $1,794 
                         
  Less than 12 months  12 months or more  Total 
December 31, 2015
(Dollars in thousands)
 Fair Value  Unrealized
Loss
  Fair Value  Unrealized
Loss
  Fair Value  Unrealized
Loss
 
Held-to-maturity securities:                        
State and local government $3,473  $24  $444  $3  $3,917  $27 
Total $3,473  $24  $444  $3  $3,917  $27 
74
  Less than 12 months  12 months or more  Total 
December 31, 2017
(Dollars in thousands)
 Fair Value  Unrealized
Loss
  Fair Value  Unrealized
Loss
  Fair Value  Unrealized
Loss
 
Available-for-sale securities:                        
US Treasury $  $  $1,505  $24  $1,505  $24 
Government Sponsored Enterprise mortgage-backed securities  50,377   420   46,071   1,282   96,448   1,702 
Small Business Administration pools  17,607   164   16,311   166   33,918   330 
State and local government  3,639   15   12,990   401   16,629   416 
Corporate bonds and other        790   82   790   82 
Total $71,623  $599  $77,667  $1,955  $149,290  $2,554 

Note 4—INVESTMENT SECURITIES (Continued)

  Less than 12 months  12 months or more  Total 
December 31, 2017
(Dollars in thousands)
 Fair Value  Unrealized
Loss
  Fair Value  Unrealized
Loss
  Fair Value  Unrealized
Loss
 
Held-to-maturity securities:                        
State and local government $2,899  $15  $  $  $2,899  $15 
Total $2,899  $15  $  $  $2,899  $15 

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 $145.3$117.9 million and $146.9$145.0 million and approximate fair value of $143.9$115.5 million and $146.3$143.6 million at December 31, 20162018 and December 31, 2015,2017, respectively. As of December 31, 20162018 and December 31, 2015,2017, 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, 2016.2018.

Non-agency Mortgage Backed Securities: The Company holds private label mortgage-backed securities (“PLMBSs”), including CMOs, at December 31, 20162017 with an amortized cost of $427.2$199.9 thousand and approximate fair value of $436.5$204.1 thousand. The Company held PLMBSs,private label mortgage-backed securities (“PLMBSs”), including CMOs, at December 31, 20152017 with an amortized cost of $554.8$143.7 thousand and approximate fair value of $556.3$144.4 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.

During the years ended December 31, 2016,2018, December 31, 20152017 and December 31, 2014,2016, no OTTI charges were recorded in earnings for the PLMBS portfolio. At December 31, 20162018 the Company does not own any securities rated below investment grade.

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, 20162018 and December 31, 2015.2017.

7580
 

Note 5—LOANS

Loans summarized by category are as follows:

 December 31,  December 31, 
(Dollars in thousands) 2016 2015  2018 2017 
Commercial, financial and agricultural $42,704  $37,809  $53,933  $51,040 
Real estate:                
Construction  45,746   35,829   58,440   45,401 
Mortgage-residential  47,472   49,077   52,764   46,901 
Mortgage-commercial  371,112   326,978   513,833   460,276 
Consumer:                
Home equity  31,368   30,906   29,583   32,451 
Other  8,307   8,592   9,909   10,736 
Total $546,709  $489,191  $718,462  $646,805 
        

Activity in the allowance for loan losses was as follows:

 Years ended December 31,  Years ended December 31, 
(Dollars in thousands) 2016 2015 2014  2018 2017 2016 
Balance at the beginning of year $4,596  $4,132  $4,219  $5,797  $5,214  $4,596 
Provision for loan losses  774   1,138   881   346   530   774 
Charged off loans  (239)  (807)  (1,111)  (164)  (173)  (239)
Recoveries  83   133   143   284   226   83 
Balance at end of year $5,214  $4,596  $4,132  $6,263  $5,797  $5,214 
7681
 

Note 5—LOANS (Continued)

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, 2016,2018, December 31, 20152017 and December 31, 20142016 follows:

(Dollars in thousands)                                  
     Real estate Real estate              Real estate Real estate         
   Real estate Mortgage Mortgage Consumer Consumer        Real estate Mortgage Mortgage Consumer Consumer     
 Commercial Construction Residential Commercial Home equity Other Unallocated Total  Commercial Construction Residential Commercial Home equity Other Unallocated Total 
2016                 
2018                                
Allowance for loan losses:                                                                
Beginning balance $75  $51  $223  $2,036  $127  $37  $2,047  $4,596  $221  $101  $461  $3,077  $308  $35  $1,594  $5,797 
Charge-offs        (11)  (136)  (20)  (72)     (239)        (1)     (23)  (140)     (164)
Recoveries  5      40   21   3   14      83   3      4   210   6   61      284 
Provisions  65   53   186   872   43   148   (593)  774   206   (12)  (33)  1,031   (30)  132   (948)  346 
Ending balance $145  $104  $438  $2,793  $153  $127  $1,454  $5,214  $430  $89  $431  $4,318  $261  $88  $646  $6,263 
                                                                
Ending balances:
Individually evaluated for impairment
 $  $  $2  $4  $  $  $  $6 
Ending balances:                                
Individually evaluated for impairment $  $  $  $14  $  $  $  $14 
                                                                
Collectively evaluated for impairment  145   104   436   2,789   153   127   1,454   5,208   430   89   431   4,304   261   88   646   6,249 
                                                                
Loans receivable:                                                                
Ending balance-total $42,704  $45,746  $47,472  $371,112  $31,368  $8,307  $  $546,709  $53,933  $58,440  $52,764  $513,833  $29,583  $9,909  $  $718,462 
                                                                
Ending balances:
Individually evaluated for impairment
        639   5,124   56         5,819 
Ending balances:                                
Individually evaluated for impairment        322   4,030   29         4,381 
                                
Collectively evaluated for impairment  42,704   45,746   46,833   365,988   31,312   8,307      540,890   53,933   58,440   52,442   509,803   29,554   9,909      714,081 
7782
 

Note 5—LOANS (Continued)

(Dollars in thousands)                                  
     Real estate Real estate              Real estate Real estate         
   Real estate Mortgage Mortgage Consumer Consumer        Real estate Mortgage Mortgage Consumer Consumer     
 Commercial Construction Residential Commercial Home equity Other Unallocated Total  Commercial Construction Residential Commercial Home equity Other Unallocated Total 
2015                 
2017                                
Allowance for loan losses:                                                                
Beginning balance $67  $45  $179  $1,572  $134  $44  $2,091  $4,132  $145  $104  $438  $2,793  $153  $127  $1,454  $5,214 
Charge-offs  (69)     (50)  (626)     (62)     (807)  (5)        (30)  (7)  (131)     (173)
Recoveries  6      7   33   3   84      133   5      5   172   24   20      226 
Provisions  71   6   87   1,057   (10)  (29)  (44)  1,138   76   (3)  18   142   138   19   140   530 
Ending balance $75  $51  $223  $2,036  $127  $37  $2,047  $4,596  $221  $101  $461  $3,077  $308  $35  $1,594  $5,797 
                                                                
Ending balances:
Individually evaluated for impairment
 $  $  $3  $  $  $  $  $3 
Ending balances:                                
Individually evaluated for impairment $  $  $2  $25  $  $  $  $27 
                                                                
Collectively evaluated for impairment  75   51   220   2,036   127   37   2,047   4,593   221   101   459   3,052   308   35   1,594   5,770 
                                                                
Loans receivable:                                                                
Ending balance-total $37,809  $35,829  $49,077  $326,978  $30,906  $8,592  $  $489,191  $51,040  $45,401  $46,901  $460,276  $32,451  $10,736  $  $646,805 
                                                                
Ending balances:
Individually evaluated for impairment
  9      848   5,620            6,477 
Ending balances:                                
Individually evaluated for impairment        413   4,742            5,155 
                                                                
Collectively evaluated for impairment  37,800   35,829   48,229   321,358   30,906   8,592      482,714   51,040   45,401   46,488   455,534   32,451   10,736      641,650 
7883
 

Note 5—LOANS (Continued)

(Dollars in thousands)                                  
     Real estate Real estate              Real estate Real estate         
   Real estate Mortgage Mortgage Consumer Consumer        Real estate Mortgage Mortgage Consumer Consumer     
 Commercial Construction Residential Commercial Home equity Other Unallocated Total  Commercial Construction Residential Commercial Home equity Other Unallocated Total 
2014                 
2016                                
Allowance for loan losses:                                                                
Beginning balance $233  $26  $291  $1,117  $112  $80  $2,360  $4,219  $75  $51  $223  $2,036  $127  $37  $2,047  $4,596 
Charge-offs  (54)     (52)  (879)  (17)  (109)     (1,111        (11)  (136)  (20)  (72)     (239)
Recoveries  110      10      6   17      143   5      40   21   3   14      83 
Provisions  (222)  19   (70)  1,334   33   56   (269)  881   65   53   186   872   43   148   (593)  774 
Ending balance $67  $45  $179  $1,572  $134  $44  $2,091  $4,132  $145  $104  $438  $2,793  $153  $127  $1,454  $5,214 
                                                                
Ending balances:
Individually evaluated for impairment
 $  $  $4  $57  $  $  $  $61 
Ending balances:                                
Individually evaluated for impairment $  $  $2  $4  $  $  $  $6 
                                                                
Collectively evaluated for impairment  67   45   175   1,515   134   44   2,091   4,071   145   104   436   2,789   153   127   1,454   5,208 
                                                                
Loans receivable:                                                                
Ending balance-total $33,403  $27,545  $48,510  $293,186  $33,000  $8,200  $  $443,844  $42,704  $45,746  $47,472  $371,112  $31,368  $8,307  $  $546,709 
                                                                
Ending balances:
Individually evaluated for impairment
  55      1,078   7,334   92         8,559 
Ending balances:                                
Individually evaluated for impairment        639   5,124   56         5,819 
                                                                
Collectively evaluated for impairment  33,348   27,545   47,432   285,852   32,908   8,200      435,285   42,704   45,746   46,833   365,988   31,312   8,307      540,890 

At December 31, 2018, $57.3 million of loans acquired in the Cornerstone acquisition were excluded in the evaluation of the adequacy of the allowance for loan losses. These loans were recorded at fair value at acquisition which included a credit component of approximately $1.5 million. Loans acquired prior to 2017 have been included in the evaluation of the allowance for loan losses.

7984
 

Note 5—LOANS (Continued)

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, 20162018 and December 31, 2015.2017.

(Dollars in thousands) For the years ended December 31,  For the years ended December 31, 
 2016 2015  2018 2017 
Balance, beginning of year $7,037  $3,969  $5,938  $6,492 
        
New Loans  481   4,332   778   545 
        
Less loan repayments  1,415   1,264   779   1,099 
Balance, end of year $6,103  $7,037  $5,937  $5,938 
        

 

The following table presents at December 31, 2016, 20152018, 2017 and 2014,2016, loans individually evaluated and considered impaired under FASB ASC 310 “Accounting by Creditors for Impairment of a Loan.” Impairment includes performing troubled debt restructurings.

 December 31,  December 31, 
(Dollars in thousands) 2016 2015 2014  2018 2017 2016 
Total loans considered impaired at year end $5,819  $6,477  $8,559  $4,381  $5,155  $5,819 
Loans considered impaired for which there is a related allowance for loan loss:                        
Outstanding loan balance $224  $49  $1,959  $453  $1,696  $224 
Related allowance $6  $3  $61  $14  $27  $6 
Loans considered impaired and previously written down to fair value $5,595  $6,428  $6,600  $3,928  $3,485  $5,595 
Average impaired loans $8,727  $9,518  $10,900  $4,128  $5,513  $8,727 
Amount of interest earned during period of impairment $112  $64  $163  $160  $132  $112 
8085
 

Note 5—LOANS (Continued)

The following tables are by loan category and present at December 31, 2016,2018, December 31, 20152017 and December 31, 20142016 loans individually evaluated and considered impaired under FASB ASC 310, “Accounting by Creditors for Impairment of a Loan.” Impairment includes performing troubled debt restructurings.

(Dollars in thousands)                      
December 31, 2016   Unpaid   Average Interest 
December 31, 2018   Unpaid   Average Interest 
 Recorded Principal Related Recorded Income  Recorded Principal Related Recorded Income 
 Investment Balance Allowance Investment Recognized  Investment Balance Allowance Investment Recognized 
With no allowance recorded:                                        
Commercial $  $  $  $  $  $  $  $  $  $ 
Real estate:                                        
Construction                              
Mortgage-residential  593   603      660      322   371      483   9 
Mortgage-commercial  4,946   6,821      7,777   98   3,577   6,173      3,232   128 
Consumer:                                       
Home Equity  56   56      56      29   30      33   2 
Other                              
                                        
With an allowance recorded:                                        
Commercial                              
Real estate:                                        
Construction                              
Mortgage-residential  46   46   2   48   2                
Mortgage-commercial  178   178   4   186   12   453   453   14   380   21 
Consumer:                                       
Home Equity                              
Other                              
                                        
Total:                                        
Commercial                              
Real estate:                                        
Construction                              
Mortgage-residential  639   649   2   708   2   322   371      483   9 
Mortgage-commercial  5,124   6,999   4   7,963   110   4,030   6,626   14   3,612   149 
Consumer:                                       
Home Equity  56   56      56      29   30      33   2 
Other                              
 $5,819  $7,704  $6  $8,727  $112  $4,381  $7,027  $14  $4,128  $160 
8186
 

Note 5—LOANS (Continued)

(Dollars in thousands)               
December 31, 2015    Unpaid     Average  Interest 
  Recorded  Principal  Related  Recorded  Income 
  Investment  Balance  Allowance  Investment  Recognized 
With no allowance recorded:                    
  Commercial $9  $9  $  $13  $ 
  Real estate:                    
    Construction               
    Mortgage-residential  799   874      1,082   1 
    Mortgage-commercial  5,620   7,548      8,372   60 
  Consumer:                   
    Home Equity               
    Other               
                     
With an allowance recorded:                    
  Commercial               
  Real estate:                    
    Construction               
    Mortgage-residential  49   49   3   51   3 
    Mortgage-commercial               
  Consumer:                   
    Home Equity               
    Other               
                     
Total:                    
  Commercial  9   9      13    
  Real estate:                    
    Construction               
    Mortgage-residential  848   923   3   1,133   4 
    Mortgage-commercial  5,620   7,548      8,372   60 
  Consumer:                   
    Home Equity               
    Other               
  $6,477  $8,480  $3  $9,518  $64 

(Dollars in thousands)               
December 31, 2017    Unpaid     Average  Interest 
  Recorded  Principal  Related  Recorded  Income 
  Investment  Balance  Allowance  Investment  Recognized 
With no allowance recorded:                    
Commercial $  $  $  $  $ 
Real estate:                    
Construction               
Mortgage-residential  371   437      399    
Mortgage-commercial  3,087   5,966      3,420   13 
Consumer:                    
Home Equity               
Other               
                     
With an allowance recorded:                    
Commercial               
Real estate:                    
Construction               
Mortgage-residential  42   42   2   43   2 
Mortgage-commercial  1,654   2,261   25   1,652   117 
Consumer:                    
Home Equity               
Other               
                     
Total:                    
Commercial               
Real estate:                    
Construction               
Mortgage-residential  413   479   2   442   2 
Mortgage-commercial  4,742   8,227   25   5,072   130 
Consumer:                    
Home Equity               
Other               
  $5,155  $8,706  $27  $5,513  $132 
8287
 

Note 5—LOANS (Continued)

(Dollars in thousands)               
December 31, 2014    Unpaid     Average  Interest 
  Recorded  Principal  Related  Recorded  Income 
  Investment  Balance  Allowance  Investment  Recognized 
With no allowance recorded:                    
  Commercial $55  $112  $  $132  $3 
  Real estate:                    
    Construction               
    Mortgage-residential  1,025   1,167      1,071   8 
    Mortgage-commercial  5,428   6,469      7,634   64 
  Consumer:                   
    Home Equity  92   97      83    
    Other               
                     
With an allowance recorded:                    
  Commercial               
  Real estate:                    
    Construction               
    Mortgage-residential  53   53   4   54   3 
    Mortgage-commercial  1,906   2,134   57   1,926   85 
  Consumer:                   
    Home Equity               
    Other               
                     
Total:                    
  Commercial  55   112      132   3 
  Real estate:                    
    Construction               
    Mortgage-residential  1,078   1,220   4   1,125   11 
    Mortgage-commercial  7,334   8,603   57   9,560   149 
  Consumer:                   
    Home Equity  92   97      83    
    Other               
  $8,559  $10,032  $61  $10,900  $163 

(Dollars in thousands)               
December 31, 2016    Unpaid     Average  Interest 
  Recorded  Principal  Related  Recorded  Income 
  Investment  Balance  Allowance  Investment  Recognized 
With no allowance recorded:                    
Commercial $  $  $  $  $ 
Real estate:                    
Construction               
Mortgage-residential  593   603      660    
Mortgage-commercial  4,946   6,821      7,777   98 
Consumer:                    
Home Equity  56   56      56    
Other               
                     
With an allowance recorded:                    
Commercial               
Real estate:                    
Construction               
Mortgage-residential  46   46   2   48   2 
Mortgage-commercial  178   178   4   186   12 
Consumer:                    
Home Equity               
Other               
                     
Total:                    
Commercial               
Real estate:                    
Construction               
Mortgage-residential  639   649   2   708   2 
Mortgage-commercial  5,124   6,999   4   7,963   110 
Consumer:                    
Home Equity  56   56      56    
Other               
  $5,819  $7,704  $6  $8,727  $112 
8388
 

Note 5—LOANS (Continued)

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis is performed on a monthly basis. The Company uses the following definitions for risk ratings:

Special Mention.Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date. Special mention assets are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification.

Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be “Pass” rated loans. As of December 31, 20162018 and December 31, 2015,2017, 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, 20162018 and December 31, 2015,2017, no loans were classified as doubtful.

(Dollars in thousands)                      
December 31, 2016   Special       
December 31, 2018   Special       
 Pass Mention Substandard Doubtful Total  Pass Mention Substandard Doubtful Total 
Commercial, financial & agricultural $42,486  $218  $  $  $42,704  $53,709  $224  $  $  $53,933 
Real estate:                                        
Construction  45,746            45,746   58,440            58,440 
Mortgage – residential  45,751   622   1,099      47,472   51,286   633   845      52,764 
Mortgage – commercial  358,767   5,773   6,572      371,112   505,493   5,176   3,164      513,833 
Consumer:                                        
Home Equity  30,929   180   259      31,368   28,071   1,197   315      29,583 
Other  8,301   6         8,307   9,907      2      9,909 
Total $531,980  $6,799  $7,930  $  $546,709  $706,906  $7,230  $4,326  $  $718,462 

 

(Dollars in thousands)                      
December 31, 2015   Special       
December 31, 2017   Special       
 Pass Mention Substandard Doubtful Total  Pass Mention Substandard Doubtful Total 
Commercial, financial & agricultural $37,501  $299  $9  $  $37,809  $50,680  $179  $181  $  $51,040 
Real estate:                                        
Construction  35,374   455         35,829   45,401            45,401 
Mortgage – residential  46,580   1,378   1,119      49,077   45,343   720   838      46,901 
Mortgage – commercial  310,367   7,555   9,056      326,978   446,531   7,698   6,047      460,276 
Consumer:                                        
Home Equity  30,587   180   139      30,906   30,618   1,524   309      32,451 
Other  8,587   1   4      8,592   10,731      5      10,736 
Total $468,996  $9,868  $10,327  $  $489,191  $629,304  $10,121  $7,380  $  $646,805 
                    
8489
 

Note 5—LOANS (Continued)

At December 31, 20162018 and 2015,2017, non-accrual loans totaled $4.1$2.5 million and $4.8$3.3 million, respectively. The gross interest income which would have been recorded under the original terms of the non-accrual loans amounted to $340$218 thousand and $278$230 thousand in 20162018 and 2015,2017, respectively. Interest recorded on non-accrual loans in 20162018 and 20152017 amounted to $6$38 thousand and $1$8 thousand, respectively.

Troubled debt restructurings (“TDRs”) that are still accruing are included in impaired loans at December 31, 20162018 and 20152017 amounted to $1.8$2.0 million and $1.6$1.8 million, respectively. Interest earned during 20162018 and 20152017 on these loans amounted to $112$132 thousand and $63$132 thousand, respectively.

There were loans of $53.0$31.2 thousand as of December 31, 2016and $32.0 thousand that were greater than 90 days delinquent and still accruing interest. There were no loans greater than 90 days delinquent and still accruing interest as of December 31, 2015.2018 and December 31, 2017, respectively.

The following tables are by loan category and present loans past due and on non-accrual status as of December 31, 20152018 and December 31, 2014:2017:

 

(Dollars in thousands)

December 31, 2016
 30-59
Days
Past Due
 60-89 Days
Past Due
 Greater than
90 Days and
Accruing
 Nonaccrual Total Past
Due
 Current Total Loans 
(Dollars in thousands)
December 31, 2018
 30-59
Days
Past Due
 60-89 Days
Past Due
 Greater than
90 Days and
Accruing
 Nonaccrual Total Past
Due
 Current Total Loans 
Commercial $11  $  $  $  $11  $42,693  $42,704  $18  $8  $  $  $26  $53,907  $53,933 
Real estate:                                                        
Construction                 45,746   45,746                  58,440   58,440 
Mortgage-residential  194   145   32   593   964   46,508   47,472   110   163      284   557   52,207   52,764 
Mortgage-commercial  995   337      3,400   4,732   366,380   371,112   1,302         2,232   3,534   510.299   513,833 
Consumer:                                                        
Home equity  59   64   16   56   195   31,173   31,368   146   11   31   29   217   29,366   29,583 
Other  16   1   5      22   8,285   8,307   14   55         69   9,840   9,909 
Total $1,275  $547  $53  $4,049  $5,924  $540,785  $546,709  $1,590  $237  $31  $2,545  $4,403  $714,059  $718,462 
                            
(Dollars in thousands)

December 31, 2015
 30-59 Days
Past Due
 60-89 Days
Past Due
 Greater than
90 Days and
Accruing
 Nonaccrual Total Past
Due
 Current Total Loans 
Commercial $5  $  $  $9  $14  $37,795  $37,809 
Real estate:                            
Construction                 35,829   35,829 
Mortgage-residential  126   195      799   1,120   47,957   49,077 
Mortgage-commercial  1,180   290      4,031   5,501   321,477   326,978 
Consumer:                            
Home equity  135            135   30,771   30,906 
Other  4   4         8   8,584   8,592 
Total $1,450  $489  $  $4,839  $6,778  $482,413  $489,191 

(Dollars in thousands)
December 31, 2017
 30-59 Days
Past Due
  60-89 Days
Past Due
  Greater than
90 Days and
Accruing
  Nonaccrual  Total Past
Due
  Current  Total Loans 
Commercial $26  $  $32  $  $58  $50,982  $51,040 
Real estate:                            
Construction                 45,401   45,401 
Mortgage-residential  109   38      371   518   46,383   46,901 
Mortgage-commercial  290   828      2,971   4,089   456,187   460,276 
Consumer:                            
Home equity  805   36         841   31,610   32,451 
Other  1   5         6   10,730   10,736 
Total $1,231  $907  $32  $3,342  $5,512  $641,293  $646,805 
8590
 

Note 5—LOANS (Continued)

There were no loans determined to be TDR’s during the twelve month period ended December 31, 2018. The following tables,table, by loan category, presentpresents loans determined to be TDRs during the twelve month period ended December 31, 2014.2017. There were no loans determined to be TDRs during the twelve month periods ended December 31, 2016 and December 31, 2015.2016.

Troubled Debt         
Restructurings For the twelve months ended December 31, 2014 
(Dollars in thousands)         
     Pre-Modification  Post-Modification 
  Number  Outstanding  Outstanding 
  of  Recorded  Recorded 
  Contracts  Investment  Investment 
TDRs            
Mortgage-Commercial  1  $1,664  $1,664 
Mortgage-Consumer  1   180   180 
Total TDRs  2  $1,844  $1,844 
             

Troubled Debt Restructurings For the twelve months ended December 31, 2017 
(Dollars in thousands) Number
of Contracts
  Pre-Modification
Outstanding
Recorded
Investment
  Post-Modification
Outstanding
Recorded
Investment
 
          
TDRs         
Mortgage-Commercial  1  $189  $189 
Total TDRs  1  $189  $189 

During the twelve month period ended December 31, 2014,2017, the Company determined two loansone loan to be TDRs. For both of these loansa TDR and lowered the rate and payment amountdue to borrower financial hardship.

There were lowered.

The following table, by loan category, presentsno loans determined to be TDRs in the twelve months ended December 31, 20142018, December 31, 2017 and December 31, 2016 that had subsequent payment defaults during twelve month period ended December 31, 2014.defaults. Defaulted loans are those loans that are greater than 90 days past duedue.

   
Troubled Debt For the twelve months ended 
Restructurings 

December 31, 2014

 
that subsequently defaulted Number    
this period of  Recorded 
(Dollars in thousands) Contracts  Investment 
       
Mortgage-Consumer  1  $180 
Total TDRs  1  $180 
         

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 and 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.

8691
 

Note 5—LOANS (Continued)

Acquired credit-impaired loans are accounted for under the accounting guidance for loans and debt securities acquired with deteriorated credit quality, found in FASB ASC Topic 310-30, (Receivables—Loans and Debt Securities Acquired with Deteriorated Credit Quality),and initially measured at fair value, which includes estimated future credit losses expected to be incurred over the life of the loans. Loans acquired in business combinations with evidence of credit deterioration are considered impaired. Loans acquired through business combinations that do not meet the specific criteria of FASB ASC Topic 310-30, but for which a discount is attributable, at least in part to credit quality, are also accounted for under this guidance. Certain acquired loans, including performing loans and revolving lines of credit (consumer and commercial), are accounted for in accordance with FASB ASC Topic 310-20, where the discount is accreted through earnings based on estimated cash flows over the estimated life of the loan.

A summary of changes in the accretable yield for PCI loans for the years ended December 31, 2018, 2017 and 2016 2015 and 2014 follows (dollars in thousands):  follows:

(Dollars in thousands) Year
Ended
December 31,
2016
  Year
Ended
December 31,
2015
  Year
Ended
December 31,
2014
 
          
Accretable yield, beginning of period $92  $75  $ 
Additions        272 
Accretion  (170)  (544)  (197)
Reclassification of nonaccretable difference due to improvement in
    expected cash flows
  112   561    
Other changes, net         
Accretable yield, end of period $34  $92  $75 
             

(Dollars in thousands) Year
Ended
December 31,
2018
  Year
Ended
December 31,
2017
  Year
Ended
December 31,
2016
 
Accretable yield, beginning of period $21  $34  $92 
Additions     10    
Accretion  (256)  (67)  (170)
Reclassification of nonaccretable difference due to improvement in expected cash flows  284   44   112 
Other changes, net  104       
Accretable yield, end of period $153  $21  $34 

At December 31, 20162018 and 20152017 the recorded investment in purchased impaired loans was $593$112 thousand and $2.1 million$733 thousand respectively. The unpaid principal balance was $811$205 thousand and $2.9$1.0 million at December 31, 20162018 and 2015,2017, respectively. At December 31, 20162018 and 2017 these loans were all secured by commercial real estate.

Note 6– 6—FAIR VALUE MEASUREMENT

The Company adopted FASB ASC Fair Value Measurement Topic 820, which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. ASC 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

 

Level l

Quoted prices in active markets for identical assets or liabilities. 

Level 2

Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. 

Level 3Unobservable 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.

8792
 

Note 6– 6—FAIR VALUE MEASUREMENT(Continued)

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.

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 fair value of loans are estimated by discountingat December 31, 2018 were measured using an exit price methodology. Prior to adoption of ASU 2016-01, the Company measured fair value using an entry price notion. The entry price notion used a discounted cash flow method to calculate the present future value of expected future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturitiesmaturities. The exit price uses this methodology but also incorporates other assumptions such as market factors, illiquidity risk and enhanced credit risk. These added assumptions are classified as Level 2. As discount rates are based on current loan rates as well as management estimates,intended to approximate the fair values presented may not be indicative ofvalue that a market participant would realize in a hypothetical orderly transaction. In estimating the fair value, negotiatedthe Company’s portfolio is segmented using the six categories in an actual sale.Note 5 – Loans. 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 valuesPrior to adoption of ASU 2016-01 loans other than impaired loans were classified as a Level 2 measurement, as of December 31, 2018 all loans are obtained using independent appraisals, which the Company considers to beclassified as a Level 3 inputs.measurement.

Other Real Estate Owned (“OREO”) — OREO is carried at the lower of carrying value or fair value on a non-recurring basis. Fair value is based upon independent appraisals or management’s estimation of the collateral and is considered a Level 3 measurement.

Accrued Interest Receivable—The fair value approximates the carrying value and is classified as Level 1.

Deposits—The fair value of demand deposits, savings accounts, and money market accounts is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposits is estimated by discounting the future cash flows using rates currently offered for deposits of similar remaining maturities. Deposits are classified as Level 2.

Federal Home Loan Bank Advances—Fair value is estimated based on discounted cash flows using current market rates for borrowings with similar terms and are classified as Level 2.

Short Term Borrowings—The carrying value of short term borrowings (securities sold under agreements to repurchase and demand notes to the Treasury) approximates fair value. These are classified as Level 2.

Junior Subordinated Debentures—The fair values of junior subordinated debentures is estimated by using discounted cash flow analyses based on incremental borrowing rates for similar types of instruments. These are classified as Level 2.

Accrued Interest Payable—The fair value approximates the carrying value and is classified as Level 1.

Commitments to Extend Credit—The fair value of these commitments is immaterial because their underlying interest rates approximate market.

8893
 

Note 6– 6—FAIR VALUE MEASUREMENT(Continued)

The carrying amount and estimated fair value by classification Level of the Company’s financial instruments as of December 31, 20162018 and December 31, 20152017 are as follows:

  December 31, 2016 
     Fair Value 
(Dollars in thousands) Carrying
Amount
  Total  Level 1  Level 2  Level 3 
Financial Assets:                    
Cash and short term investments $21,999  $21,999  $21,999  $  $ 
Held-to-maturity securities  17,193   17,114      17,114    
Available-for-sale securities  253,394   253,394   801   251,593   1,000 
Other investments, at cost  1,809   1,809         1,809 
Loans held for sale  5,707   5,707      5,707    
Net loans receivable  541,495   540,487      534,674   5,813 
Accrued interest  2,925   2,925   2,925       
Financial liabilities:                    
Non-interest bearing demand $182,915  $182,915  $  $182,915  $ 
NOW and money market accounts  327,459   327,459      327,459    
Savings  75,012   75,012      75,012    
Time deposits  181,236   181,638      181,638    
Total deposits  766,622   767,024      767,024    
Federal Home Loan Bank Advances  24,035   24,518      24,518    
Short term borrowings  19,527   19,527      19,527    
Junior subordinated debentures  14,964   15,258      15,258    
Accrued interest payable  602   602   602       

  December 31, 2018 
     Fair Value 
(Dollars in thousands) Carrying
Amount
  Total  Level 1  Level 2  Level 3 
Financial Assets:                    
Cash and short term investments $32,268  $32,268  $32,268  $  $ 
Held-to-maturity securities  16,174   16,184      16,184    
Available-for-sale securities  237,893   237,893   1,642   235,560   691 
Other investments, at cost  1,955   1,955         1,955 
Loans held for sale  3,223   3,223      3,223    
Net loans receivable  712,199   697,432      693,065   4,367 
Accrued interest  3,579   3,579   3,579       
Financial liabilities:                    
Non-interest bearing demand $244,686  $244,686  $  $244,686  $ 
Interest bearing demand deposits  and money market accounts  393,473   393,473      393,4738    
Savings  108,368   108,368      108,368    
Time deposits  178,996   177,797      177,797    
Total deposits  925,523   925,849      925,849    
Federal Home Loan Bank Advances  231   231      231    
Short term borrowings  28,022   28,022      28,022    
Junior subordinated debentures  14,964   14,178      12,791    
Accrued interest payable  861   861   861       
8994
 

Note 6– 6—FAIR VALUE MEASUREMENT (Continued)

 December 31, 2015  December 31, 2017 
    Fair Value     Fair Value 
(Dollars in thousands) Carrying
Amount
 Total Level 1 Level 2 Level 3  Carrying
Amount
 Total Level 1 Level 2 Level 3 
Financial Assets:                                        
Cash and short term investments $22,941  $22,941  $22,941  $  $  $30,591  $30,591  $30,591  $  $ 
Held-to-maturity securities  17,371   17,555      17,555      17,012   17,220      17,220    
Available-for-sale securities  264,687   264,687   812   263,458   417   264,824   264,824   790   264,034    
Other investments, at cost  1,783   1,783         1,783   2,559   2,559         2,559 
Loans held for sale  2,962   2,962      2,962      5,093   5,093      5,093    
Net loans receivable  484,595   484,669      478,195   6,474   641,008   639,489      634,361   5,128 
Accrued interest  2,877   2,877   2,877         3,489   3,489   3,489       
Financial liabilities:                                        
Non-interest bearing demand $156,247  $156,247  $  $156,247  $  $226,546  $226,546  $  $226,546  $ 
NOW and money market accounts  318,308   318,308      318,308      364,358   364,358      364,358    
Savings  60,699   60,699      60,699      104,756   104,756      104,756    
Time deposits  180,897   181,325      181,325      192,663   192,186      192,186    
Total deposits  716,151   716,579      716,579      888,323   887,846      887,846    
Federal Home Loan Bank Advances  24,788   25,841      25,841      14,250   14,248      14,248    
Short term borrowings  21,033   21,033      21,033      19,270   19,270      19,270    
Junior subordinated debentures  14,964   14,954      14,954      14,964   15,025      15,025    
Accrued interest payable  652   652   652         562   562   562       
9095
 

Note 6– 6—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, 20162018 and December 31, 20152017 that are measured on a recurring basis. There were no liabilities carried at fair value as of December 31, 20162018 or December 31, 20152017 that are measured on a recurring basis.

(Dollars in thousands)

Description December 31,
2016
  

Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)

 

Significant
Other
Observable
Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

  December 31,
2018
  

 

Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)

 

Significant Other
Observable Inputs

(Level 2)

 

Significant
Unobservable

Inputs
(Level 3)

 
Available for sale securities                                
US Treasury Securities $1,520  $  $1,520  $  $15,457  $  $15,457  $ 
Government sponsored enterprises  997      997      1,100      1,100    
Mortgage-backed securities  144,298      144,298      115,475      114,784   691 
Small Business Administration securities  50,184      50,184      55,336   1,633   53,703    
State and local government  54,534      54,534      50,506      50,506    
Corporate and other securities  1,861   801   60   1,000   19   9   10    
  237,893   1,642   235,560   691 
Loans held for sale  3,223      3,223    
Total $253,394  $801  $251,593  $1,000  $241,116  $1,642  $238,783  $691 
                

(Dollars in thousands)

Description December 31,
2015
  

Quoted
Prices in
Active
Markets for
Identical
Assets (Level 1)

  

Significant
Other
Observable
Inputs
(Level 2)

  

Significant
Unobservable
Inputs
(Level 3)

 
Available for sale securities                
US Treasury Securities $1,522  $  $1,522  $ 
Government sponsored enterprises  992      992    
Mortgage-backed securities  146,261      146,261    
Small Business Administration securities  57,328      57,328    
State and local government  57,295      57,295    
Corporate and other securities  1,289   812   60   417 
               Total $264,687  $812  $263,458  $417 

Description December 31,
2017
  

Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)

  

Significant Other
Observable Inputs

(Level 2)

  

Significant
Unobservable

Inputs
(Level 3)

 
Available for sale securities                
US Treasury Securities $1,505  $  $1,505  $ 
Government sponsored enterprises  1,109      1,109    
Mortgage-backed securities  143,768      143,768    
Small Business Administration securities  61,588      61,588    
State and local government  56,004      56,004    
Corporate and other securities  850   790   60    
   264,824   790   264,034    
Loans held for sale  5,093      5,093    
Total $269,917  $790  $269,127  $ 
9196
 

Note 6– 6—FAIR VALUEMEASUREMENT (Continued)

The following tables reconciletable reconciles the changes in Level 3 financial instruments for the yeartwelve months ended December 31, 2016 and 20152017 measured on a recurring basis:basis. There were no Level 3 financial instruments for the twelve months ended December 31, 2018 measured on a recurring basis.

  2016 
    
(Dollars in thousands) Corporate
Preferred
Stock
 
Beginning Balance December 31, 2015 $417 
Total gains or losses (realized/unrealized)    
Included in earnings   
     
Included in other comprehensive income   
     
Purchases, sales, issuances, and settlements (net)  583 
     
Transfers in and/or out of Level 3   
Ending Balance December 31, 2016 $1,000 
     
  2015 
    
(Dollars in thousands) Corporate
Preferred
Stock
 
Beginning Balance December 31, 2014 $417 
Total gains or losses (realized/unrealized)    
Included in earnings   
     
Included in other comprehensive income   
     
Purchases, issuances, and settlements   
     
Transfers in and/or out of Level 3   
Ending Balance December 31, 2015 $417 
  2017 
(Dollars in thousands) Corporate
Preferred
Stock
 
Beginning Balance December 31, 2016 $1,000 
Total gains or losses (realized/unrealized)
Included in earnings
   
Included in other comprehensive income   
Purchases, sales, issuances, and settlements (net)   
Transfers in and/or out of Level 3  (1,000)
Ending Balance December 31, 2017 $ 
9297
 

Note 6– 6—FAIR VALUEMEASUREMENT (Continued)

 

The following tables summarize quantitative disclosures about the fair value for each category of assets carried at fair value as of December 31, 20162018 and December 31, 20152017 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, 20162018 and 2015.2017.

 

(Dollars in thousands)                  
Description December 31,
2016
 Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
 Significant
Other
Observable
Inputs
(Level 2)
 Significant
Unobservable
Inputs
(Level 3)
  December 31,
2018
 Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
 Significant
Other
Observable
Inputs
(Level 2)
 Significant
Unobservable
Inputs
(Level 3)
 
Impaired loans:                                
Commercial & Industrial $  $  $  $  $  $  $  $ 
Real estate:                                
Mortgage-residential  637         637   322         322 
Mortgage-commercial  5,120         5,120   4,016         4,016 
Consumer:                                
Home equity  56         56   29         29 
Other                        
Total impaired  5,813         5,813   4,367         4,367 
Other real estate owned:                                
Construction  141         141   828         828 
Mortgage-residential  269         269 
Mortgage-commercial  736         736   632         632 
Total other real estate owned  1,146         1,146   1,460         1,460 
Total $6,959  $

  $

  $6,959  $6,057  $

  $

  $6,057 
                
(Dollars in thousands)         
Description December 31,
2015
 Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
 Significant
Other
Observable
Inputs
(Level 2)
 Significant
Unobservable
Inputs
(Level 3)
 
Impaired loans:                
Commercial & Industrial $9  $  $  $9 
Real estate:                
Mortgage-residential  845         845 
Mortgage-commercial  5,620         5,620 
Consumer:                
Home equity            
Other            
Total impaired  6,474         6,474 
Other real estate owned:                
Construction  276         276 
Mortgage-residential  191         191 
Mortgage-commercial  1,991         1,991 
Total other real estate owned  2,458         2,458 
Total $8,932  $

  $

  $8,932 

(Dollars in thousands)            
Description December 31,
2017
  Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
  Significant
Other
Observable
Inputs
(Level 2)
  Significant
Unobservable
Inputs
(Level 3)
 
Impaired loans:                
Commercial & Industrial $  $  $  $ 
Real estate:                
Mortgage-residential  411         411 
Mortgage-commercial  4,717         4,717 
Consumer:                
Home equity            
Other            
Total impaired  5,128         5,128 
Other real estate owned:                
Construction  828         828 
Mortgage-residential  47         47 
Mortgage-commercial  1,059         1,059 
Total other real estate owned  1,934         1,934 
Total $7,062  $

  $

  $7,062 
9398
 

Note 6– 6—FAIR VALUEMEASUREMENT (Continued)

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 $5.8$4.6 million and $6.5$5.2 million for the year ended December 31, 20162018 and year ended December 31, 2015,2017, respectively.

For Level 3 assets and liabilities measured at fair value on a recurringnon-recurring or non-recurring basis as of December 31, 20162018 and December 31, 2015,2017, the significant unobservable inputs used in the fair value measurements were as follows:

(Dollars in thousands) Fair Value as
of December 31,
2016
 Valuation Technique Significant
Observable
Inputs
 Significant
Unobservable
Inputs
 Fair Value
as of
December 31,
2018
 Valuation Technique Significant Observable Inputs Significant Unobservable Inputs 
Corporate and Other Securities $1,000  Estimation based on comparable non-listed securities Comparable transactions n/a
OREO $1,146 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 $1,460   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 $5,813 Appraisal Value Appraisals and or sales of comparable properties Appraisals discounted 6% to 16% for sales commissions and other holding cost $4,367   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,
2017
  Valuation Technique  Significant
Observable
Inputs
  Significant
Unobservable
Inputs
 
OREO $1,934   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 $5,128   Appraisal Value   Appraisals and or sales of comparable properties   Appraisals discounted 6% to 16% for sales commissions and other holding cost 
9499
 

Note 6– FAIR VALUEMEASUREMENT (Continued)

(Dollars in thousands) Fair Value as
of December 31,
2015
  Valuation Technique Significant
Observable
Inputs
 Significant
Unobservable
Inputs
Corporate and Other Securities $417  Estimation based on comparable non-listed securities Comparable transactions n/a
OREO $2,458  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 $6,474  Appraisal Value Appraisals and or sales of comparable properties Appraisals discounted 6% to 16% for sales commissions and other holding cost
           

Note 7—PROPERTY AND EQUIPMENT

Property and equipment consisted of the following:

 December 31,  December 31, 
(Dollars in thousands) 2016 2015  2018 2017 
Land $8,629  $8,629  $10,640  $10,683 
Premises  24,722   24,270   27,678   28,684 
Equipment  3,819   4,371   5,323   4,673 
Fixed assets in progress  14   115   1,656   863 
  37,184   37,385   45,297   44,903 
Accumulated depreciation  7,351   7,456   10,310   8,800 
 $29,833  $29,929  $34,987  $36,103 
        

Provision for depreciation included in operating expenses for the years ended December 31, 2016, 20152018, 2017 and 20142016 amounted to $1.3$1.5 million, $1.3$1.5 million, and $1.1$1.3 million, respectively.

95100
 

Note 8—GOODWILL, CORE DEPOSIT INTANGIBLE AND OTHER ASSETS

Intangible assets (excluding goodwill) consisted of the following:

 December 31,  December 31, 
(Dollars in thousands) 2016 2015  2018 2017 
Core deposit premiums, gross carrying amount $1,548  $1,548  $3,358  $3,358 
Other intangibles  538   538   538   538 
  2,086   2,086   3,896   3,896 
Accumulated amortization  (984)  (667)  (1,890)  (1,327)
Net $1,102  $1,419  $2,006  $2,569 
        

Amortization of the intangibles amounted to $318$563 thousand, $387$343 thousand and $280$318 thousand for the years ended December 31, 2018, 2017 and 2016, 2015respectively.

On October 20, 2017, we completed our acquisition of Cornerstone and 2014, respectively.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 877,384sharesofcommon stockinthemerger. 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, SRBC.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 commonstock.The Companyissued 1,274,200sharesofcommon stock in connection with the merger.withthemerger. Total intangibles, including goodwill of $4.5 million and a core deposit premium of $1.2 million, were recorded in conjunction with the acquisition.

On September 26, 2014, the Bank completed its acquisition and assumption of approximately $40 million in deposits and $8.7 million in loans from First South.South Bank. This represented all of the deposits and a portion of the loans at First South’sSouth 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 mortgageMortgage Corp. on July 31, 2011, we have recorded goodwill in the amount of $571 thousand.

Total goodwill from acquisitions at December 31, 20162018 and 20152017 totaled $5.1$14.6 million. The goodwill is tested for impairment annually having identified none as of December 31,201631, 2018 or 2015.2017.

Bank-owned life insurance provides benefits to various bank officers. The carrying value of all existing policies at December 31, 20162018 and 20152017 was $20.9$25.8 million and $20.3$25.4 million, respectively.

101

Note 9—OTHER REAL ESTATE OWNED

The following summarizes the activity in the other real estate owned for the years ended December 31, 20162018 and 2015.2017.

  December 31, 
(In thousands) 2016  2015 
Balance—beginning of year $2,458  $2,943 
Additions—foreclosures  579   240 
Writedowns  76   219 
Sales  1,815   506 
Balance, end of year $1,146  $2,458 
96
  December 31, 
(In thousands) 2018  2017 
Balance—beginning of year $1,934  $1,146 
Additions—foreclosures  346   1,275 
Writedowns     39 
Sales  820   448 
Balance, end of year $1,460  $1,934 

Note 10—DEPOSITS

The Company’s total deposits are comprised of the following at the dates indicated:

  December 31,  December 31, 
(Dollars in thousands) 2016  2015 
Non-interest bearing demand deposits $182,915  $156,247 
NOW and money market accounts  327,459   318,308 
Savings  75,012   60,699 
Time deposits  181,236   180,897 
  Total deposits $766,622  $716,151 
         

  December 31,  December 31, 
(Dollars in thousands) 2018  2017 
Non-interest bearing demand deposits $244,686  $226,546 
Interest bearing demand deposits and money market accounts  393,473   364,358 
Savings  108,369   104,756 
Time deposits  178,995   192,663 
Total deposits $925,523  $888,323 

At December 31, 2016,2018, the scheduled maturities of time deposits are as follows:

(Dollars in thousands)(Dollars in thousands)      
2017 $96,576 
2018  39,620 
20192019  21,931  $107,985 
20202020  10,195   36,649 
20212021  12,912   19,883 
Thereafter  2 
2022  6,858 
2023  7,620 
  181,236  $178,995 
     

Interest paid on time deposits of $100 thousand or more totaled $717 thousand, $573 thousand, and $606 thousand $603 thousand,in 2018, 2017, and $599 thousand in 2016, 2015, and 2014, respectively.

Time deposits that meet or exceed the FDIC insurance limit of $250 thousand at year end 20162018 and 20152017 were $37.7$27.8 million and $21.2$38.4 million, respectively.

Deposits from directors and executive officers and their related interests at December 31, 20162018 and 20152017 amounted to approximately $10.3$5.8 million and $8.1$7.0 million, respectivelyrespectively.

The amount of overdrafts classified as loans at December 31, 20162018 and 20152017 were $165$206 thousand and $267$167 thousand, respectively.

102

Note 11—SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND OTHER BORROWED MONEY

Securities sold under agreements to repurchase generally mature within one to four days from the transaction date. The weighted average interest rate at December 31, 20162018 and 20152017 was 0.19%1.18% and 0.19%0.74%, respectively. The maximum month-end balance during 20162018 and 20152017 was $23.7$33.4 million and $22.9$21.3 million, respectively. The average outstanding balance during the years ended December 31, 20162018 and 20152017 amounted to $21.4$27.0 million and $19.3$19.2 million, respectively, with an average rate paid of 0.20%1.08% and 0.19%0.20%, respectively. Securities sold under agreements to repurchase are collateralized by securities with a fair market value of 100%values exceeding the total balance of the agreement.

At December 31, 20162018 and 2015,2017, the Company had unused short-term lines of credit totaling $20.0$30.0 million.

97

Note 12—ADVANCES FROM FEDERAL HOME LOAN BANK

Advances from the FHLB at December 31, 20162018 and 2015,2017, consisted of the following:

 December 31,  December 31, 
(In thousands) 2016 2015  2018 2017 
Maturing Amount Rate Amount Rate  Amount Rate Amount Rate 
2017  11,000   0.65%  15,250   3.98%
2018          9,250   4.44% $     $14,000   1.41%
2019  3,813   2.94%                    
2020  4,519   3.26%  288   1.00%  231   1.00%  250   1.00%
2021  4,703   3.09%        
 $24,035   1.98% $24,788   4.12% $231   1.00% $14,250   1.40%
                

 

As collateral for its advances, the Company has pledged in the form of blanket liens, eligible loans, in the amount of $40.2$26.6 million at December 31, 2016. No securities2018.Securities have been pledged as collateral for advances in the amount of $6.0 million as of December 31, 2016.2018.  As collateral for its advances, the Company has pledged in the form of blanket liens, eligible loans, in the amount of $48.2$35.3 million at December 31, 2015.2017. No securities have been pledged as collateral for advances as of December 31, 2015.2017. Advances are subject to prepayment penalties. The average advances during 20162018 and 20152017 were $23.4$4.1 million and $29.4$17.1 million, respectively. The average interest rate for 20162018 and 20152017 was 2.96%1.58% and 3.96%1.72%, respectively. The maximum outstanding amount at any month end was $32.8$25.3 million and $35.5$39.3 million for 20162018 and 2015,2017, respectively.

During the years ended, December 31, 2016, December 31, 20152017 and December 31, 2014,2016, the Company prepaid advances in the amount of $35.9 million, $4.0$13.3 million and $14.6$35.9 million, respectively, and realized losses on the early extinguishment of $447 thousand and $459 thousand, $199 thousand and $351 thousand, respectively. OfDuring the $14.6 million of 2014 prepaid advances, $8.7 millionyear ended December 31, 2018 there were related tono advances that were acquired during the merger with Savannah River and were repaid during the month of February 2014. These were recorded at fair value at the date of merger and therefore no loss was recorded at the time of prepayment.prepaid.

Note 13—JUNIOR SUBORDINATED DEBT

On September 16, 2004, FCC Capital Trust I (“Trust I”), a wholly owned unconsolidated subsidiary of the Company, issued and sold floating rate securities having an aggregate liquidation amount of $15.0 million. The Trust I securities accrue and pay distributions quarterly at a rate per annum equal to LIBOR plus 257 basis points. The distributions are cumulative and payable in arrears. The Company has the right, subject to events of default, to defer payments of interest on the Trust I securities for a period not to exceed 20 consecutive quarters, provided no extension can extend beyond the maturity date of September 16, 2034. The Trust I securities are mandatorily redeemable upon maturity at September 16, 2034. If the Trust I securities are redeemed on or after September 16, 2009, the redemption price will be 100% of the principal amount plus accrued and unpaid interest. The Trust I security were eligible to be redeemed in whole but not in part, at any time prior to September 16, 2009 following an occurrence of a tax event, a capital treatment event or an investment company event. Currently, these securities qualify under risk-based capital guidelines as Tier 1 capital, subject to certain limitations. The Company has no current intention to exercise its right to defer payments of interest on the Trust I securities. In the fourth quarter of 2015, the Company redeemed $500 thousand of this Trust I security. This resulted in a gain of $130 thousand received in 2015.

98103
 

Note 14—INCOME TAXES

Income tax expense for the years ended December 31, 2016, 20152018, 2017 and 20142016 consists of the following:

 Year ended December 31  Year ended December 31 
(Dollars in thousands) 2016 2015 2014  2018 2017 2016 
Current                        
Federal $2,491  $2,116  $1,232  $2,244  $1,665  $2,491 
State  136   387   248   351   92   136 
  2,627   2,503   1,480   2,595   1,757   2,627 
Deferred                        
Federal  (460)  (227)  502   99   1,573   (460)
State                  
  (460)  (227)  502   99   1,573   (460)
Income tax expense $2,167  $2,276  $1,982  $2,694  $3,330  $2,167 
            

Reconciliation from expected federal tax expense to effective income tax expense (benefit) for the periods indicated are as follows:

 Year ended December 31  Year ended December 31 
(Dollars in thousands) 2016 2015 2014  2018 2017 2016 
Expected federal income tax expense $3,009  $2,857  $2,415  $2,924  $3,109  $3,009 
State income tax net of federal benefit  90   255   164   277   61   90 
Tax exempt interest  (608)  (531)  (392)  (353)  (593)  (608)
Increase in cash surrender value life insurance  (206)  (139)  (140)  (152)  (212)  (206)
Valuation allowance released  2   35   55   68   216   2 
Merger expenses        70      92    
Low income housing tax credits  (186)  (186)  (186)     (186)  (186)
Excess tax benefit of stock compensation  (12)  (197)   
Deferred tax adjustment resulting from tax rate change     1,247    
Other  66   (15)  (4)  (58)  (207)  66 
 $2,167  $2,276  $1,982  $2,694  $3,330  $2,167 
99104
 

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,  December 31, 
(Dollars in thousands) 2016 2015  2018 2017 
Assets:                
Allowance for loan losses $1,798  $1,584  $1,353  $1,250 
Excess tax basis of deductible intangible assets  293   315   391   554 
Excess tax basis of assets acquired  215   537   8   184 
Net operating loss carry forward  424   388   852   891 
Unrealized loss on available-for-sale securities  642    
Unrealized loss on available for sale securities  471   118 
Compensation expense deferred for tax purposes  1,286   1,133   1,015   909 
Deferred loss on other-than-temporary-impairment charges  8   8   5   5 
Tax credit carry-forwards  17   699   4   73 
Other  675   754   438   351 
Total deferred tax asset  5,358   5,418   4,537   4,355 
Valuation reserve  489   487   773   705 
Total deferred tax asset net of valuation reserve  4,869   4,931   3,764   3,630 
Liabilities:                
Tax depreciation in excess of book depreciation  357   411   310   358 
Excess financial reporting basis of assets acquired  1,310   1,368   1,139   1,211 
Unrealized gain on available-for-sale securities     410 
Total deferred tax liabilities  1,667   2,189   1,449   1,569 
Net deferred tax asset recognized $3,202  $2,742  $2,315  $2,061 
        

At December 31 20162018 the Company has approximately $12.8$17.0 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 as well as a capital loss of $85 thousand for which realizability is uncertain.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.

On December 22, 2017, the Tax Cuts and Jobs Act was signed into law. The Tax Cuts and Jobs Act reduced the corporate tax rate to 21% from 35%, effective for 2018, among other things. As a result of the change in tax rates, we revalued our deferred tax assets and liabilities to reflect realization at the lower rate effective December 22, 2017, the date the law was enacted. The impact of this adjustment was to increase our deferred tax expense by approximately $1.2 million for the year ended December 31, 2017. The lower tax rate decreased the overall tax rate in 2018.

A portion of the change in the net deferred tax asset relates to unrealized gains and losses on securities available-for-sale. The change in the tax expense related to the change in unrealized losses on these securities of $860$353 thousand has been recorded directly to shareholders’shareholders? equity. The balance in the change in net deferred tax asset results from the current period deferred tax benefitexpense of $460$99 thousand. At December 31, 2018, the Company had a federal net operating loss carryforward in the amount of $854 thousand acquired in the Cornerstone transaction. There are statutory limitations on the amount that can be utilized in each year. It is anticipated that all of the net operating loss will be utilized prior to expiration..

Tax returns for 20132015 and subsequent years are subject to examination by taxing authorities.

As of December 31, 2016,2018, the Company had no material unrecognized tax benefits or accrued interest and penalties. It is the Company’sCompany?s policy to account for interest and penalties accrued relative to unrecognized tax benefits as a component of income tax expense.

100105
 

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, 20162018 and 2015,2017, the Bank had commitments to extend credit including lines of credit of $87.3$126.2 million and $68.7$107.6 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.

The primary market areaareas served by the Bank ourinclude the Midlands market consistingRegion of South Carolina to include Lexington, Richland, Newberry and Kershaw Counties withinCounties; the Midlands of South Carolina.  As result of theCentral Savannah River acquisition in 2014, we also serve theRegion include Aiken County, South Carolina and Richmond County, Georgia markets (CSRA Market).and Columbia Counties in Georgia. With the additionacquisition of a loan production office in Greenville, South CarolinaCornerstone, we also serve Greenville, County (Greenville Market).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 $23.3$28.5 million. Based on this criteria, the Bank had threefour such concentrations at December 31, 2016,2018, including $98.0$65.0 million (17.9%(9.1% of total loans excluding held for sale)loans) to private households, $93.4$228.4 million (17.1%(31.8% of total loans) to lessors of non-residential properties, $75.2 million (10.5% of total loans) to lessors of residential properties and $38.7$42.67 million (7.1%(5.9% of total loans) to religious organizations.  As reflected above, private households make up 98.0%lessors of total loansnon-residential properties and lessors of residential buildings equate to approximately 105.2%200.2% and 65.9% of total regulatory capital.capital, respectively. The risk in this portfoliothese portfolios is diversified over a large number of loans (approximately 1,947).approximately 426 for lessors of non-residential properties and 455 loans for lessors of residential buildings. Commercial real estate loans and commercial construction loans represent $406.0$561.5 million, or 74.2%78.1%, of the portfolio. Approximately $156.0$212.4 million, or 38.4%37.8%, of the total commercial real estate loans are owner occupied, which can tend to reduce the risk associated with these credits. Although the Bank’s loan portfolio, as well as existing commitments, reflects the diversity of its primary market area,areas, a substantial portion of its debtor’s ability to honor their contracts is dependent upon the economic stability of the area.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.

101106
 

Note 16—OTHER EXPENSES

A summary of the components of other non-interest expense is as follows:

 Year ended December 31,  Year ended December 31, 
(Dollars in thousands) 2016 2015 2014  2018 2017 2016 
ATM/debit card and bill payment processing $798  $605  $569 
ATM/debit card, bill payment and data processing* $2,300  $1,412  $798 
Supplies  130   137   153   142   165   130 
Telephone  349   357   373   422   378   349 
Courier  95   89   85   149   106   95 
Correspondent services  237   207   188   270   227   237 
Insurance  291   265   279   254   394   291 
Postage  182   185   189   56   113   182 
Loss on limited partnership interest  172   188   187   60   161   172 
Director fees  391   367   356   366   378   391 
Legal and Professional fees  738   586   766   864   991   738 
Shareholder expense  172   130   170   173   131   172 
Other  1,207   1,123   920   1,704   1,552   1,207 
 $4,762  $4,239  $4,235  $6,760  $6,008  $4,762 

*In June of 2017, the company moved its data processing from an in-house environment to an out-sourcing environment with FIS.

102107
 

Note 17—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, 20162018 and 2015,2017, the Company had 141,045328,624 and 163,531341,114 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 Stockstock options outstanding and exercisable as of December 31, 20162018, December 31, 2017 and December 31, 2015. At December 31, 2014 there were 69,903 stock options outstanding and exercisable with a weighted average exercise price of $19.44 and a weighted average remaining contractual term of 0.15 years. All of these options expired without being exercised in 2015.2016.

In 2016, 2015 and 2014, each non-employee director received 379, 427 and 455The table below summarizes the common shares of restricted stock respectivelygranted to each non-employee director in connection with their overall compensation plan. In 2016, there were 5,303 restricted shares granted at a value of $13.20 per share. The 2016 shares vested on January 1, 2017. In 2015, there were 6,410 restricted shares granted at a value of $11.70 per share. The 2015 shares vested on January 1,plan in 2018, 2017 and 2016. In 2014, there were 5,460 restricted shares granted at a value of $10.98 per share. The 2014 shares vested on January 1, 2015.

  Restricted shares granted  Value  Date shares 
Year Total  per Director  per share  vest 
2018 $2,990   230  $21.72   1/1/19 
2017  3,430   245  $20.38   1/1/18 
2016  5,303   379  $13.20   1/1/17 

In 2018, 2017 and 2016, 201511,447, 2,103 and 2014, 17,179 6,463 and 36,372 restricted shares, respectively, were issued to executive officers in connection with the Bank’s incentive compensation plan. The shares were valued at $21.72, $20.38 and $13.20 $11.70 and $10.98 per share,share/unit, respectively. Restricted sharesshares/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 2018, 2017 and 2016 2015 and 2014 isare 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 SRBCSavannah River Banking Company 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 vestvested in three equal annual installments beginning on January 31, 2015.

Warrants to purchase 97,18037,130 shares at $5.90 per share were issued in connection with the issuing of subordinated debt on November 15, 2011 and remain outstanding at December 31, 2016.2018. The remaining outstanding warrants expire on December 16, 2019. The related subordinated debt was paid off in November 2012.

In 2006, the Company established a Non-Employee Director Deferred Compensation Plan, whereby a director may elect to defer all or any part of annual retainer and monthly meeting fees payable with respect to service on the board of directors or a committee of the board. Units of common stock are credited to the director’s account at the time compensation is earned. The non-employee director’s account balance is distributed by issuance of common stock at the time of retirement or resignation from the Board.board of directors. At December 31, 20162018 and 20152017, there were 101,888114,982 and 92,925110,320 units in the plan, respectively. The accrued liability related to the plan at December 31, 20162018 and 20152017 amounted to $967 thousand$1.3 million and $841 thousand,$1.1 million, respectively, and is included in “Other liabilities” on the balance sheet.

103108
 

Note 18—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, 2016, 20152018, 2017 and 2014,2016, the plan expense amounted to $372$484 thousand, $364$405 thousand and $347$372 thousand, respectively. The Company matches 100% of the employee’s contribution up to 3% and 50% of the employee’s contribution on the next 2% of the employee’s contribution.

The Company acquired various single premium life insurance policies from DutchFork Bankshares that are used to indirectly fund fringe benefits to certain employees and officers. A salary continuation plan was established payable to two key individuals upon attainment of age 63. The plan provides for monthly benefits of $2,500 each for seventeen years. 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. 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 and 20152017 in the amount of $3.5 million, $5.2 million and $5.2$1.5 million, respectively. These policies are designed to offset the funding of these benefits. The cash surrender value at December 31, 20162018 and 20152017 of all bank owned life insurance was $20.9$25.8 million and $20.3$25.4 million, respectively. Expenses accrued for the anticipated benefits under the salary continuation plans for the year ended December 31, 2016, 20152018, 2017 and 20142016 amounted to $604$460 thousand, $409$401 thousand, and $391$382 thousand, respectively.

104109
 

Note 19—EARNINGS PER COMMON SHARE

The following reconciles the numerator and denominator of the basic and diluted earnings per common share computation:

 Year ended December 31,  Year ended December 31, 
(Amounts in thousands) 2016 2015 2014  2018 2017 2016 
Numerator (Included in basic and diluted earnings per share) $6,682  $6,127  $5,121  $11,229  $5,815  $6,682 
Denominator                        
Weighted average common shares outstanding for:                        
Basic earnings common per share  6,617   6,558   6,538 
Basic earnings per common share  7,581   6,849   6,617 
Dilutive securities:                        
Deferred compensation  112   110   23   84   84   112 
Warrants—Treasury stock method  58   51   46   65   70   58 
Diluted common shares outstanding  6,787   6,719   6,607   7,730   7,003   6,787 
The average market price used in calculating assumed number of shares $14.86  $12.31  $10.83  $23.26  $21.16  $14.86 
            

For the year ended December 31, 2014 options were not dilutive in calculating diluted earnings per share. As of December 31, 2014 there were 69,903 potentially dilutive options outstanding; the exercise price on all outstanding options exceeded the average market price for the year. There were no outstanding options as of December 31, 2016 and December 31, 2015. On December 16, 2011 there were 107,500 warrants issued in connection with the issuance of $2.5 million in subordinated debt.debt (See Note 13)17). As shown above, the warrants were dilutive for the periods ended December 31, 2016,2018, December 31, 20152017 and December 31, 2014.2016.

105110
 

Note 20—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 capital 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 Company and Bank areis 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.

In July of 2013, the U.S. federal bankbanking agencies approved the implementation of the Basel III regulatory agencies issued a final rule that revisedcapital reforms in pertinent part, and, at the risk-basedsame time, promulgated rules effecting certain changes required by the Dodd-Frank Act (the “Basel III Rule”). In contrast to capital requirements andhistorically, which were in the method for calculating risk-weighted assets to make them consistent with certain standards inform of guidelines, Basel III and certain provisionswas released in the form of enforceable regulations by each of the Dodd-Frank Act.regulatory agencies. The rules became effectiveBasel III Rule is applicable to all banking organizations that are subject to minimum capital requirements, including federal and state banks and savings and loan associations, as of January 1, 2015. Portions ofwell 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—those organizations with $250 billion or more in total consolidated assets, $10 billion or more in total foreign exposures, or that have opted in to the new rules haveBasel II capital regime.

Based on the foregoing, as a phase in period. The revised rules will be fully phased in as of January 1, 2019. As of December 31, 2016,small bank holding company, we are generally not subject to the Company andcapital requirements unless otherwise advised by the Federal Reserve; however, our Bank meet allremains subject to the capital adequacy requirements under the new capital rules on a fully phased-in basis if such requirements had been effective at that time.requirements.

On February 1, 2014,October 20, 2017, we completed our acquisition of Savannah RiverCornerstone and its wholly-owned subsidiary, Savannah River Banking Company.Cornerstone National Bank. Under the terms of the merger agreement, Savannah RiverCornerstone shareholders received either $11.00 in cash or 1.06180.54 shares of the Company’s common stock, or a combination thereof, for each Savannah RiverCornerstone share they owned immediately prior to the merger, subject to the limitation that 60%70% of the outstanding shares of Savannah River common stock were exchanged for cash and 40% of the outstanding shares of Savannah RiverCornerstone common stock were exchanged for shares of the Company’s common stock.Thestock and 30% of the outstanding shares of Cornerstone were exchanged for cash.The Companyissued 1,274,200shares ofcommon877,384sharesofcommon stockinthemerger.

The Company and the Bank exceeded the regulatory capital ratios at December 31, 2016 and 2015, as set forth in the following table:

(In thousands) Required
Amount
  %  Actual
Amount
  %  Excess
Amount
  % 
The Bank:                        
December 31, 2016                        
Risk Based Capital                        
Tier 1 $38,011   6.0% $87,657   13.8% $49,646   7.8%
Total Capital  50,681   8.0%  92,871   14.7%  42,190   6.7%
CET1  28,508   4.5%  87,657   13.8%  59,149   9.3%
Tier 1 Leverage  35,875   4.0%  87,657   9.8%  51,782   5.8%
December 31, 2015                        
Risk Based Capital                        
Tier 1 $33,640   6.0% $82,512   14.7% $48,872   8.7%
Total Capital  44,855   8.0%  87,108   15.5%  42,253   7.5%
CET1  25,230   4.5%  82,512   14.7%  57,282   10.2%
Tier 1 Leverage  33,923   4.0%  82,512   9.7%  48,589   5.7%
                         
The Company:                        
December 31, 2016                        
Risk Based Capital                        
Tier 1 $38,126   6.0% $91,966   14.5% $53,840   8.5%
Total Capital  50,835   8.0%  97,180   15.3%  46,345   7.3%
CET1  28,595   4.5%  77,466   12.2%  48,871   7.7%
Tier 1 Leverage  35,957   4.0% $91,966   10.2%  56,009   6.2%
December 31, 2015                        
Risk Based Capital                        
Tier 1 $33,782   6.0% $86,682   15.4% $52,900   9.4%
Total Capital  45,043   8.0%  91,278   16.2%  46,235   8.2%
CET1  25,336   4.5%  72,444   12.9%  47,108   8.4%
Tier 1 Leverage  34,021   4.0%  86,682   10.2%  52,661   6.2%
106111
 

Note 20—SHAREHOLDERS’ EQUITY, CAPITAL REQUIREMENTS AND DIVIDEND RESTRICTIONS (Continued)

The Company and the Bank exceeded the minimum regulatory capital ratios at December 31, 2018 and 2017, as set forth in the following table:

(In thousands) Minimum
Required
Amount
  %  Actual
Amount
  %  Excess
Amount
   %  
The Bank (1):                        
December 31, 2018                        
Risk Based Capital                        
Tier 1 $49,043   6.0% $107,806   13.2% $58,764   7.2%
Total Capital  65,390   8.0%  114,069   14.0%  48,679   6.0%
CET1  36,782   4.5%  107,806   13.2%  71,024   8.7%
Tier 1 Leverage  43,198   4.0%  107,806   10.0%  64,608   6.0%
December 31, 2017                        
Risk Based Capital                        
Tier 1 $44,396   6.0% $99,118   13.4% $54,722   7.4%
Total Capital  59,195   8.0%  104,915   14.2%  45,720   6.2%
CET1  33,297   4.5%  99,118   13.4%  65,821   8.9%
Tier 1 Leverage  41,030   4.0%  99,118   9.7%  58,088   5.7%

(1)As a small bank holding company, we are generally not subject to the capital requirements unless otherwise advised by 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 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 stateState 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 ourthe 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 ourthe Company’s common stock are entitled to receive dividends only when, and if declared by ourthe board of directors. Although we havethe Company has historically paid cash dividends on ourits common stock, we arethe Company is not required to do so and ourthe board of directors could reduce or eliminate our common stock dividend in the future.

107112
 

Note 21—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,  At December 31, 
(Dollars in thousands) 2016 2015  2018 2017 
Assets:                
Cash on deposit $2,732  $2,088  $4,811  $4,367 
Interest bearing deposits     131 
Securities purchased under agreement to resell  128   128      129 
Investment securities available-for-sale     417 
Land held for sale  1,055   1,080 
Investment in bank subsidiary  92,053   89,368   121,984   115,526 
Other  1,005   1,045   863   729 
Total assets $96,973  $94,126  $127,658  $120,882 
Liabilities:                
Junior subordinated debentures $14,964  $14,964  $14,964  $14,964 
Other  148   124   197   255 
Total liabilities  15,112   15,088   15,161   15,219 
Shareholders’ equity  81,861   79,038   112,497   105,663 
Total liabilities and shareholders’ equity $96,973  $94,126  $127,658  $120,882 
        

Condensed Statements of Operations

 Year ended December 31,  Year ended December 31, 
(Dollars in thousands) 2016 2015 2014  2018 2017 2016 
Income:                        
Interest and dividend income $126  $58  $40  $23  $18  $126 
Gain on early extinguishment of debtnote     130    
Gain on sale of land     90    
Equity in undistributed earnings of subsidiary  4,752   4,690   4,510   8,348   3,341   4,752 
Dividend income from bank subsidiary  2,606   2,181   1,369   3,721   3,001   2,606 
Total income  7,484   7,059   5,919   12,092   6,450   7,484 
Expenses:                        
Interest expense  493   446   427   718   570   493 
Other  570   792   708   386   350   570 
Total expense  1,063   1,238   1,135   1,104   920   1,063 
Income before taxes  6,421   5,821   4,784   10,988   5,530   6,421 
Income tax benefit  (261)  (306)  (337)  (241)  (285)  (261)
Net income $6,682  $6,127  $5,121  $11,229  $5,815  $6,682 
108113
 

Note 21—PARENT COMPANY FINANCIAL INFORMATION (Continued)

Condensed Statements of Cash Flows

 Year ended December 31,  Year ended December 31, 
(Dollars in thousands) 2016 2015 2014  2018 2017 2016 
Cash flows from operating activities:                        
Net income $6,682  $6,127  $5,121  $11,229  $5,815  $6,682 
Adjustments to reconcile net income to net cash provided by operating activities                        
Equity in undistributed earnings of subsidiary  (4,752)  (4,690)  (4,510)  (8,348)  (3,341)  (4,752)
Gain on early extinguishment of debt     130             
Gain on sales of assets     (90)    
Other-net  463   63   647   12   615   463 
Net cash provided by operating activities  2,393   1,630   1,258   2,893   2,999   2,393 
Cash flows from investing activities:                        
Proceeds from sale of federal funds  129       
Proceeds from business acquisition     131    
Proceeds from sale of land     1,145    
Proceeds from sale of securities available-for-sale  417               417 
Net cash provided by investing activities  417         129   1,276   417 
Cash flows from financing activities:                        
Dividends paid: Common stock  (2,117)  (1,833)  (1,484)  (3,033)  (2,472)  (2,117)
Proceeds from issuance of common stock  304   229   173   362   371   304 
Restricted shares surrendered  (353)  (98)     (57)  (408)  (353)
Repayment of long term debt     (370)   
Deferred compensation shares  19       
Net cash used in financing activities  (2,166)  (2,072)  (1,311)  (2,709)  (2,509)  (2,166)
Increase (decrease) in cash and cash equivalents  644   (442)  (53)  313   1,766   644 
Cash and cash equivalents, beginning of year  2,088   2,530   2,583   4,498   2,732   2,088 
Cash and cash equivalents, end of year $2,732  $2,088  $2,530  $4,811  $4,498  $2,732 
            

Note 22—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 other than the following:disclosure.

109114
 

Note 23—QUARTERLY FINANCIAL DATA (UNAUDITED)

The following provides quarterly financial data for 20162018, 2017 and 20152016 (dollars in thousands, except per share amounts).

2016 Fourth
Quarter
 Third
Quarter
 Second
Quarter
 First
Quarter
 
2018 Fourth
Quarter
 Third
Quarter
 Second
Quarter
 First
Quarter
 
Interest income $7,510  $7,400  $7,459  $7,137  $10,595  $9,984  $9,819  $9,331 
Net interest income  6,794   6,651   6,677   6,337   9,392   8,882   8,940   8,534 
Provision for loan losses  238   179   217   140   94   20   30   202 
Gain on sale of securities     478   64   59   (332)     94   (104)
Income before income taxes  2,238   2,276   2,391   1,944   3,389   3,569   3,596   3,369 
Net income  1,792   1,677   1,745   1,468   2,686   2,833   3,001   2,709 
Net income available to common shareholders  1,792   1,677   1,745   1,468   2,686   2,833   3,001   2,709 
Net income per share, basic $0.27  $0.26  $0.27  $0.22  $0.35  $0.37  $0.40  $0.36 
Net income per share, diluted $0.26  $0.25  $0.26  $0.22  $0.35  $0.37  $0.39  $0.35 
                
2015 Fourth
Quarter
 Third
Quarter
 Second
Quarter
 First
Quarter
 
Interest income $7,203  $7,114  $7,049  $7,283 
Net interest income  6,348   6,253   6,204   6,448 
Provision for loan losses  148   193   391   406 
Gain on sale of securities  84      167   104 
Income before income taxes  2,169   2,322   1,989   1,923 
Net income  1,601   1,679   1,443   1,404 
Net income available to common shareholders  1,601   1,679   1,443   1,404 
Net income per share, basic $0.24  $0.26  $0.22  $0.22 
Net income per share, diluted $0.24  $0.25  $0.22  $0.21 
                
2014 Fourth
Quarter
 Third
Quarter
 Second
Quarter
 First
Quarter
 
Interest income $7,078  $6,968  $6,849  $6,403 
Net interest income  6,192   6,096   5,947   5,496 
Provision for loan losses  179   152   400   150 
Gain on sale of securities  80   16   78   8 
Income before income taxes  2,063   2,184   1,661   1,195 
Net income  1,506   1,552   1,201   862 
Net income available to common shareholders  1,506   1,552   1,201   862 
Net income per share, basic $0.23  $0.23  $0.18  $0.14 
Net income per share, diluted $0.22  $0.23  $0.18  $0.14 

2017 Fourth
Quarter
  Third
Quarter
  Second
Quarter
  First
Quarter
 
Interest income $8,738  $7,921  $7,724  $7,773 
Net interest income  8,057   7,227   7,049   7,061 
Provision for loan losses  170   166   78   116 
Gain on sale of securities  49   124   172   54 
Income before income taxes  2,108   2,589   2,245   2,203 
Net income  502   1,893   1,664   1,756 
Net income available to common shareholders  502   1,893   1,664   1,756 
Net income per share, basic $0.07  $0.28  $0.25  $0.27 
Net income per share, diluted $0.07  $0.28  $0.24  $0.26 

2016 Fourth
Quarter
  Third
Quarter
  Second
Quarter
  First
Quarter
 
Interest income $7,510  $7,400  $7,459  $7,137 
Net interest income  6,794   6,651   6,677   6,337 
Provision for loan losses  238   179   217   140 
Gain on sale of securities     478   64   59 
Income before income taxes  2,238   2,276   2,391   1,944 
Net income  1,792   1,677   1,745   1,468 
Net income available to common shareholders  1,792   1,677   1,745   1,468 
Net income per share, basic $0.27  $0.26  $0.27  $0.22 
Net income per share, diluted $0.26  $0.25  $0.26  $0.22 
110115
 

Note 24 – 24—REPORTABLE SEGMENTS

The Company’s reportable segments represent the distinct product lines the Company offers and are viewed separately for strategic planning by management. The Company has four reportable segments:

·Commercial and retail banking: The Company’s primary business is to provide deposit and lending products and services to its commercial and retail customers.
·Mortgage banking: This segment provides mortgage origination services for loans that will be sold to investors in the secondary market.
·Investment advisory and non-deposit: This segment provides investment advisory services and non-deposit products.
·Corporate: This segment includes the parent company financial information, including interest on parent company debt and dividend income received from First Community Bank (the “Bank”).

 

The following tables present selected financial information for the Company’s reportable business segments for the years ended December 31, 2016,2018, December 31, 20152017 and December 31, 2014.2016.

Year ended December 31, 2016 Commercial     Investment          
(Dollars in thousands) and Retail  Mortgage  advisory and          
  Banking  Banking  non-deposit  Corporate  Eliminations  Consolidated 
                   
Dividend and Interest Income $29,186  $194  $  $2,732  $(2,606) $29,506 
Interest expense  2,553         494      3,047 
Net interest income $26,633  $194  $  $2,238  $(2,606) $26,459 
Provision for loan losses  774               774 
Noninterest income  4,423   3,382   1,135         8,940 
Noninterest expense  21,743   2,459   1,005   569      25,776 
Net income before taxes $8,539  $1,117  $130  $1,669  $(2,606) $8,849 
Income tax provision (benefit)  2,428         (261)     2,167 
Net income $6,111  $1,117  $130  $1,930  $(2,606) $6,682 
                         
Year ended December 31, 2015 Commercial     Investment          
(Dollars in thousands) and Retail  Mortgage  advisory and          
  Banking  Banking  non-deposit  Corporate  Eliminations  Consolidated 
                   
Dividend and Interest Income $28,389  $202  $  $2,239  $(2,181) $28,649 
Interest expense  2,950         446      3,396 
Net interest income $25,439  $202  $  $1,793  $(2,181) $25,253 
Provision for loan losses  1,138               1,138 
Noninterest income  4,117   3,432   1,287   130      8,966 
Noninterest expense  20,393   2,543   950   792      24,678 
Net income before taxes $8,025  $1,091  $337  $1,131  $(2,181) $8,403 
Income tax provision (benefit)  2,582         (306)     2,276 
Net income $5,443  $1,091  $337  $1,437  $(2,181) $6,127 

Year ended December 31, 2018 Commercial     Investment          
(Dollars in thousands) and Retail  Mortgage  advisory and          
  Banking  Banking  non-deposit  Corporate  Eliminations  Consolidated 
                   
Dividend and Interest Income $38,875  $830  $  $3,745  $(3,721) $39,729 
Interest expense  3,263         718      3,981 
Net interest income $35,612  $830  $  $3,027  $(3,721) $35,748 
Provision for loan losses  346               346 
Noninterest income  5,066   3,895   1,683         10,644 
Noninterest expense  27,095   3,242   1,400   386      32,123 
Net income before taxes $13,237  $1,483  $283  $2,641  $(3,721) $13,923 
Income tax provision (benefit)  2,935         (241)     2,694 
Net income $10,302  $1,483  $283  $2,882  $(3,721) $11,229 

Year ended December 31, 2017 Commercial     Investment          
(Dollars in thousands) and Retail  Mortgage  advisory and          
  Banking  Banking  non-deposit  Corporate  Eliminations  Consolidated 
                   
Dividend and Interest Income $31,634  $504  $  $3,019  $(3,001) $32,156 
Interest expense  2,192         570      2,762 
Net interest income $29,442  $504  $  $2,449  $(3,001) $29,394 
Provision for loan losses  530               530 
Noninterest income  4,480   3,778   1,291   90      9,639 
Noninterest expense  25,042   2,841   1,125   350      29,358 
Net income before taxes $8,350  $1,441  $166  $2,189  $(3,001) $9,145 
Income tax provision (benefit)  3,615         (285)     3,330 
Net income $4,735  $1,441  $166  $2,474  $(3,001) $5,815 
111116
 

Note 24 – 24—REPORTABLE SEGMENTS (Continued)

Year ended December 31, 2014 Commercial     Investment          
(Dollars in thousands) and Retail  Mortgage  advisory and          
  Banking  Banking  non-deposit  Corporate  Eliminations  Consolidated 
                         
Dividend and Interest Income $27,110  $148  $  $1,409  $(1,369) $27,298 
Interest expense  3,141         427      3,568 
Net interest income $23,969  $148  $  $982  $(1,369) $23,730 
Provision for loan losses  880               880 
Noninterest income  3,759   3,186   1,268         8,213 
Noninterest expense  19,915   2,401   936   708      23,960 
Net income before taxes $6,933  $933  $332  $274  $(1,369) $7,103 
Income tax provision (benefit)  2,319         (337)     1,982 
Net income $4,614  $933  $332  $611  $(1,369) $5,121 
                         
  Commercial     Investment          
(Dollars in thousands) and Retail  Mortgage  advisory and          
  Banking  Banking  non-deposit  Corporate  Eliminations  Consolidated 
                   
Total Assets as of December 31, 2016 $904,568  $8,158  $32  $98,210  $(96,175) $914,793 
                         
Total Assets as of December 31, 2015 $855,888  $4,355  $34  $93,296  $(90,839) $862,734 
                         

Year ended December 31, 2016 Commercial     Investment          
(Dollars in thousands) and Retail  Mortgage  advisory and          
  Banking  Banking  non-deposit  Corporate  Eliminations  Consolidated 
                   
Dividend and Interest Income $29,186  $194  $  $2,732  $(2,606) $29,506 
Interest expense  2,553         494      3,047 
Net interest income $26,633  $194  $  $2,238  $(2,606) $26,459 
Provision for loan losses  774               774 
Noninterest income  4,423   3,382   1,135         8,940 
Noninterest expense  21,743   2,459   1,005   569      25,776 
Net income before taxes $8,539  $1,117  $130  $1,669  $(2,606) $8,849 
Income tax provision(benefit)  2,428         (261)     2,167 
Net income $6,111  $1,117  $130  $1,930  $(2,606) $6,682 

(Dollars in thousands) Commercial     Investment          
  and Retail  Mortgage  advisory and          
  Banking  Banking  non-deposit  Corporate  Eliminations  Consolidated 
                   
Total Assets as of December 31, 2018 $1,074,838  $16,078  $9  $129,992  $(129,322) $1,091,595 
                         
Total Assets as of December 31, 2017 $1,033,483  $16,298  $19  $121,326  $(120,395) $1,050,731 
112117
 

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

None.

Item 9A. Controls and Procedures.

As of the end of the period covered by this report, we carried out an evaluation, under the supervision andThe Company’s management, with the participation of our management, including ourits Chief Executive Officer and Chief Financial Officer, ofhas evaluated the effectiveness of ourthe design and operation of the Company’s disclosure controls and procedures as definedof December 31, 2018, in accordance with Rule 13a-15 of the Exchange Act Rule 13a-15(e).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 have concluded that our currentthe Company’s disclosure controls and procedures are effective as of December 31, 2016. There have been no significant changes in2018, were effective to provide reasonable assurance regarding our internal controls over financial reporting during the fourth fiscal quarter ended December 31, 2016, that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

The design of any system of controls and procedures is based in part upon certain assumptions about the likelihood of future events. There can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.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, 2016,2018, and the attestation report thereon issued by our independent registered public accounting firm is included in Item 8 of this report.

Changes in Internal Controls

There were no changes in our internal controls over financial reporting that occurred during our most recent fiscal quarter that materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

Item 9B. Other Information.

None.

PART III

Item 10. Directors, Executive Officers and Corporate Governance.

The information required to be disclosed by this item will be disclosed in the Company’s definitive proxy statement to be filed no later than 120 days after December 31, 2018, in connection with the our 2019 annual meeting of shareholders. The information required by Item 10 is hereby incorporated by reference from our proxy statement for our 20172019 annual meeting of shareholders to be held on May 17, 2017.22, 2019.

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 atwww.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.

Item 11. Executive Compensation.

The information required to be disclosed by this item will be disclosed in the Company’s definitive proxy statement to be filed no later than 120 days after December 31, 2018, in connection with the our 2019 annual meeting of shareholders. The information required by Item 11 is hereby incorporated by reference from our proxy statement for our 20172019 annual meeting of shareholders to be held on May 17, 2017.22, 2019.

113118
 

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

There are no outstanding options as of December 31, 2016.2018.

The additional information required to be disclosed by this item will be disclosed in the Company’s definitive proxy statement to be filed no later than 120 days after December 31, 2018, in connection with the our 2019 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 20172019 annual meeting of shareholders to be held on May 17, 2017.22, 2019.

Item 13. Certain Relationships and Related Transactions, and Director Independence.

The information required to be disclosed by this item will be disclosed in the Company’s definitive proxy statement to be filed no later than 120 days after December 31, 2018, in connection with the our 2019 annual meeting of shareholders. The information required by Item 13 is hereby incorporated by reference from our proxy statement for our 20172019 annual meeting of shareholders to be held on May 17, 2017.22, 2019.

Item 14. Principal Accountant Fees and Services.

The information required to be disclosed by this item will be disclosed in the Company’s definitive proxy statement to be filed no later than 120 days after December 31, 2018, in connection with the our 2019 annual meeting of shareholders. The information required by Item 14 is hereby incorporated by reference from our proxy statement for our 20172019 annual meeting of shareholders to be held on May 17, 2017.22, 2019.

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, 20162018 and 20152017
·Consolidated Statements of Income for the years ended December 31, 2016, 20152018, 2017 and 20142016
·Consolidated Statements of Comprehensive Income (loss) for the years ended December 31, 2016, 20152018, 2017 and 20142016
·Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2016, 20152018, 2017 and 20142016
·Consolidated Statements of Cash Flows for the years ended December 31, 2016, 20152018, 2017 and 20142016
·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.

2.1Agreement and Plan of Merger, dated as of April 11, 2017, by and between First Community Corporation and Cornerstone Bancorp (incorporated by reference to Exhibit 2.1 to the Company’s Form 8-K filed on April 12, 2017).
3.1Amended and Restated Articles of Incorporation (incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement No. 33-86258Form 8-K filed on Form S-1)June 27, 2011).
3.2Amended and Restated Bylaws dated April 11, 2017 (incorporated by reference to Exhibit 3.1 to the Company’s Form 8-K filed on October 21, 2013)April 12, 2017).
3.3Articles of Amendment to the Company’s Amended and Restated Articles of Incorporation establishing the terms of the Series T Preferred Stock (incorporated by reference to Exhibit 3.1 to the Company’s Form 8-K filed on November 25, 2008).
4.1Provisions in the Company’s Articles of Incorporation and Bylaws defining the rights of holders of the Company’s Common Stock (included in Exhibits 3.1 3.2 and 3.3)3.2).
119
10.11996 Stock Option Plan and Form of Option Agreement (incorporated by reference to Exhibit 10.6 to the Company’s Form 10-KSB for the period ended December 31, 1995).*
10.2First Community Corporation 1999 Stock Incentive Plan and Form of Option Agreement (incorporated by reference to Exhibit 10.8 to the Company’s Form 10-KSB for the period ended December 31, 1998).*
10.3First Amendment to the First Community Corporation 1999 Stock Incentive Plan (incorporated by reference to Exhibit 10.7 to the Company’s Form 10-K for the period ended December 31, 2005).*
10.4Dividend 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)333-107009, April 20, 2011, File No. 333-173612, and January 31, 2019, File No. 333-229442).*
10.5Form of Salary Continuation Agreement dated August 2, 2006 (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on August 3, 2006).*
10.6Non-Employee Director Deferred Compensation Plan approved September 30, 2006 and Form of Deferred Compensation Agreement (incorporated by reference to Exhibits 10.1 and 10.2 to the Company’s Form 8-K filed on October 4, 2006).
10.7Employment Agreement by and between Michael C. Crapps and First Community Corporation dated December 8, 2015.2015 (incorporated by reference to Exhibit 10.7 of the Company’s Form 10-K for the period ended December 31, 2015).*
10.8Employment Agreement by and between Joseph G. Sawyer and First Community Corporation dated December 8, 2015.2015 (incorporated by reference to Exhibit 10.8 of the Company’s Form 10-K for the period ended December 31, 2015).*
10.9Employment Agreement by and between David K. Proctor and First Community Corporation dated December 8, 2015.2015 (incorporated by reference to Exhibit 10.9 of the Company’s Form 10-K for the period ended December 31, 2015).*
10.10Employment Agreement by and between Robin D. Brown and First Community Corporation dated December 8, 2015.2015 (incorporated by reference to Exhibit 10.10 of the Company’s Form 10-K for the period ended December 31, 2015).*
10.11Employment Agreement by and between J. Ted Nissen and First Community Corporation dated December 8, 2015.2015 (incorporated by reference to Exhibit 10.11 of the Company’s Form 10-K for the period ended December 31, 2015).*
10.12Subordinated Note and Warrant Purchase Agreement, dated December 16, 2011 (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on December 19, 2011).
10.13Form of First Community Corporation Warrant (incorporated by reference to Exhibit 10.3 to the Company’s Form 8-K filed on December 19, 2011).
10.14First Community Corporation 2011 Stock Incentive Plan and Form of Stock Option Agreement and Form of Restricted Stock Agreement (incorporated by reference to Appendix A to the Company’s Proxy Statement filed on April 7, 2011).*
10.15Amendment No. 1 to the First Community Corporation 2011 Stock Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on April 22, 2016).*
10.16Form of Restricted Stock Unit Agreement (incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K filed on April 22, 2016).
21.1Subsidiaries of the Company.
23.1Consent of Independent Registered Public Accounting Firm—Elliott Davis, Decosimo, LLC.
24.1Power of Attorney (contained on the signature page hereto).
31.1Rule 13a-14(a) Certification of the Chief Executive Officer.
31.2Rule 13a-14(a) Certification of the Chief Financial Officer.
32Section 1350 Certifications.
101The following materials from the Company’s Annual Report on Form 10-K for the year ended December 31, 2016,2018, formatted in eXtensible Business Reporting Language (XBRL): (i) the Consolidated Balance Sheets as December 31, 20162018 and December 31, 2015;2017; (ii) Consolidated Statements of Income for the years ended December 31, 2016, 20152018, 2017 and 2014;2016; (iii) Consolidated Statements of Comprehensive Income (loss) for the years ended December 31, 2016, 20152018, 2017 and 2014;2016; (iv) Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2016, 20152018, 2017 and 2014;2016; (v) Consolidated Statements of Cash Flows for the years ended December 31, 2016, 20152018, 2017 and 2014;2016; and (vi) Notes to the Consolidated Financial Statements.

 

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.

*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 and Exhibit List following this Annual Report on Form 10-K for a listing of exhibits filed herewith.
(c)Not applicable.
115120

Exhibit List

The following exhibits are required to be filed with this Report on Form 10-K by Item 601 of Regulation S-K.

21.1Subsidiaries of the Company.
23.1Consent of Independent Registered Public Accounting Firm—Elliott Davis, LLC.
24.1Power of Attorney (contained on the signature page hereto).
31.1Rule 13a-14(a) Certification of the Chief Executive Officer.
31.2Rule 13a-14(a) Certification of the Chief Financial Officer.
32Section 1350 Certifications.
101The following materials from the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, formatted in eXtensible Business Reporting Language (XBRL): (i) the Consolidated Balance Sheets as December 31, 2018 and December 31, 2017; (ii) Consolidated Statements of Income for the years ended December 31, 2018, 2017 and 2016; (iii) Consolidated Statements of Comprehensive Income for the years ended December 31, 2018, 2017 and 2016; (iv) Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2018, 2017 and 2016; (v) Consolidated Statements of Cash Flows for the years ended December 31, 2018, 2017 and 2016; and (vi) Notes to the Consolidated Financial Statements.
121
 

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: March 13, 201714, 2019FIRST COMMUNITY CORPORATION
  
 By:/s/Michael C. Crapps

Michael C. Crapps

President and Chief Executive Officer
(Principal Executive Officer)

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Michael C. Crapps, his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this report, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite or necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that attorney-in-fact and agent, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature

 

Title

 

Date

/s/Richard K. Bogan
Richard K. Bogan
 Director 

March 13, 2017 

14, 2019
Richard K. Bogan
     
/s/Thomas C. Brown
Thomas C. Brown
 Director March 13, 201714, 2019
Thomas C. Brown
     
/s/Chimin J. Chao
Chimin J. Chao
 Director March 13, 201714, 2019
Chimin J. Chao
     
/s/Michael C. Crapps
Michael C. Crapps
 Director, President, & Chief Executive Officer (PrincipalMarch 14, 2019
Michael C. Crapps(Principal Executive Officer) March 13, 2017
     
/s/Anita B. Easter
Anita B. Easter
 Director March 13, 201714, 2019
Anita B. Easter
     
/s/O. A. Ethridge
O. A. Ethridge
DirectorMarch 13, 2017
/s/George H. Fann, Jr.
George H. Fann, Jr.
DirectorMarch 13, 2017
/s/J. Thomas Johnson
J. Thomas Johnson
 Director and Vice Chairman of the Board March 13, 201714, 2019
J. Thomas Johnson
     
/s/W. James Kitchens, Jr.
W. James Kitchens, Jr.
 Director March 13, 201714, 2019
W. James Kitchens, Jr.    
/s/J. Randolph potter
J. Randolph Potter
DirectorMarch 13, 2017

/s/E. LELAND REYNOLDS 

E. Leland Reynolds

DirectorMarch 13, 2017

/s/paul s. simon 

Paul S. Simon

DirectorMarch 13, 2017
     
/s/Alexander Snipe, Jr.J. Randolph potter
Alexander Snipe, Jr.
 Director March 13, 201714, 2019
J. Randolph Potter
     
/s/Roderick M. Todd, Jr.E. Leland Reynolds
Roderick M. Todd, Jr.
 Director March 13, 201714, 2019
E. Leland Reynolds
     
/s/Alexander Snipe, Jr.DirectorMarch 14, 2019
Alexander Snipe, Jr.
/s/Edward J. TarverDirectorMarch 14, 2019
Edward J. Tarver
/s/Roderick M. Todd, Jr.DirectorMarch 14, 2019
Roderick M. Todd, Jr.
/s/Mitchell M. Willoughby
Mitchell M. Willoughby
 Director and Chairman of the Board March 13, 201714, 2019
Mitchell M. Willoughby
     
/s/Joseph G. Sawyer
Joseph G. Sawyer
 Chief Financial Officer and Officer(Principal Accounting OfficerOfficer) March 13, 2017

116

Exhibit List

The following exhibits are required to be filed with this Report on Form 10-K by Item 601 of Regulation S-K.

21.1Subsidiaries of the Company.14, 2019
23.1Joseph G. SawyerConsent of Independent Registered Public Accounting Firm—Elliott Davis Decosimo, LLC.
24.1Power of Attorney (contained on the signature page hereto).
31.1Rule 13a-14(a) Certification of the Chief Executive Officer.
31.2Rule 13a-14(a) Certification of the Chief Financial Officer.
32Section 1350 Certifications.
101The following materials from the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, formatted in eXtensible Business Reporting Language (XBRL): (i) the Consolidated Balance Sheets as December 31, 2016 and December 31, 2015; (ii) Consolidated Statements of Income for the years ended December 31, 2016, 2015 and 2014; (iii) Consolidated Statements of Comprehensive Income (loss) for the years ended December 31, 2016, 2015 and 2014; (iv) Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2016, 2015 and 2014; (v) Consolidated Statements of Cash Flows for the years ended December 31, 2016, 2015 and 2014; and (vi) Notes to the Consolidated Financial Statements.
122