UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

(Mark One)
x

Annual Report under Section 13 or 15(d) of the Securities Exchange Act of 1934

For the fiscal year ended December 31, 20202021

Or
o

Transition 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 57-1010751
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
5455 Sunset Blvd.,  
Lexington, South Carolina 29072
(Address of principal executive offices) (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 Trading Symbol Name of each exchange on which registered
Common stock, $1.00 par value per share FCCO 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 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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer oAccelerated Filer oAcceleratedNon-accelerated Filer xNon-accelerated filer oSmaller 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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes oNo x

As of June 30, 2020,2021, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $108,906,995146,376,573 based on the closing price of $15.15$20.20 on June 30, 2020,2021, as reported on The NASDAQ Capital Market. 7,526,9677,560,596 shares of the registrant’s common stock were issued and outstanding as of March 12, 2021.16, 2022.

Documents Incorporated by Reference

Portions of the registrant’s Definitive Proxy Statement for its 20212022 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. Business5
Item 1A. Risk Factors2622
Item 1B. Unresolved Staff Comments4337
Item 2. Properties4337
Item 3. Legal Proceedings4437
Item 4. Mine Safety Disclosures4437
PART II 
Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters, and Issuer Purchases of Equity Securities4538
Item 6. Selected Financial Data[Reserved]4739
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations4939
Item 7A. Quantitative and Qualitative Disclosures about Market Risk7767
Item 8. Financial Statements and Supplementary Data67
Consolidated Balance Sheets7770
Consolidated Balance Sheets81
Consolidated Statements of Income8271
Consolidated Statements of Comprehensive Income8372
Consolidated Statements of Changes in Shareholders’ Equity8473
Consolidated Statements of Cash Flows8574
Notes to Consolidated Financial Statements8675
Item 9. Changes in and Disagreements Withwith Accountants on Accounting and Financial Disclosure129110
Item 9A. Controls and Procedures129110
Item 9B. Other Information129110
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections110
PART III 
Item 10. Directors, Executive Officers and Corporate Governance130111
Item 11. Executive Compensation130111
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters130111
Item 13. Certain Relationships and Related Transactions, and Director Independence130111
Item 14. Principal Accountant Fees and Services130111
  
PART IV 
Item 15. Exhibits, Financial Statement Schedules131112
SIGNATURES134114

 
 

CAUTIONARY STATEMENT REGARDING
FORWARD-LOOKING STATEMENTS

This report, including information included or incorporated by reference in this report, 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. 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,” “approximately,” “is likely,” “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, 20202021 as filed with the U.S. Securities and Exchange Commission (the “SEC”) and the following:

·Thethe continuing impact of the outbreak of the novel coronavirus, or COVID-19 and its variants, on our business, including the impact of the actions taken by governmental authorities to try and contain the virus or address the impact of the virus on the United States economy, (including, without limitation, the Coronavirus Aid, Relief and Economic Security Act, or the CARES Act), and the resulting effect of these items on our operations, liquidity and capital position, and on the financial condition of our borrowers and other customers;
·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;
·risks associated with actual or potential information gatherings, investigations or legal proceedings by customers, regulatory agencies or others;
·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, including as a result of the 2020 presidential administration and congressional elections;
·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;
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·cybersecurity risk related to our dependence on internal computer systems and the technology of outside service providers, as well as the potential impacts of third party security breaches, which subject us to potential business disruptions or financial losses resulting from deliberate attacks or unintentional events;
·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;policies, including potential changes in tax laws and regulations;
·changes in accounting standards, policies, estimates and practices;practices as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the SEC and the Public Company Accounting Oversight Board;
·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,customers, including our deposit relationships;
·adverse changes in asset quality and resulting credit risk-related losses and expenses;

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·the potential effects of events beyond our control that may have a destabilizing effect on financial markets and the economy, such as epidemics and pandemics (including COVID-19), war or terrorist activities, disruptions in our customers’ supply chains, disruptions in transportation, essential utility outages or trade disputes and related tariffs;
·risks associated with our participation in the Paycheck Protection Program, otherwise the PPP, established by the Coronavirus Aid, Relief and Economic Security Act, or the CARES Act, including but not limited to, the failure of the borrower to qualify for loan forgiveness, which would subject us to the risk of holding these loans at unfavorable interest rates as compared to the loans to customers that we would have otherwise extended credit;
·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, except as required by applicable law.

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2

Summary of Material Risks

 

An investment in our securities involves risks, including those summarized below. For a more complete discussion of the material risks facing our business, see Item 1A—Risk Factors.

 

Economic and Geographic-Related Risks

·We are unable to predict the extent to which the COVID-19 pandemic and related impacts will continue to adversely affect our business, financial condition and results of operations.

·Our business may be adversely affected by economic conditions.

 

Credit and Interest Rate Risks

·Our decisions regarding credit risk and reserves for loan losses may materially and adversely affect our business.

·We may have higher loan losses than we have allowed for in our allowance for loan losses.

·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.

·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.

·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.

·Our focus on lending to small to mid-sized community-based businesses may increase our credit risk.

·Our underwriting decisions may materially and adversely affect our business.

·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.

·If we fail to effectively manage credit risk, our business and financial condition will suffer.

·Changes in prevailing interest rates may reduce our profitability.

 

Capital and Liquidity Risks

·Changes in the financial markets could impair the value of our investment portfolio.

·We are·The Bank is subject to strict capital requirements, which could be amended to be more stringent, in the future.

Risks Related to Our Industry

·The transition away from LIBOR could negatively impact our net interest income and require significant operational work.

·Higher FDIC deposit insurance premiums and assessments could adversely affect our financial condition.

·We could experience a loss due to competition with other financial institutions or nonbank companies.

·We may be adversely affected by the soundness of other financial institutions.

·Failure to keep pace with technological changechanges could adversely affect our business.

·New lines of business or new products and services may subject us to additional risk.

·Consumers may decide not to use banks to complete their financial transactions.

Risks Related to Our Strategy

·We may be adversely affected by risks associated with future mergers and acquisitions, including execution risk, which could disrupt our business and dilute shareholder value.

·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.

·New or acquired banking office facilities and other facilities may not be profitable.

 

Risks Related to Our Human Capital

·We are dependent on key individuals, and the loss of one or more of these key individuals could curtail our growth and adversely affect our prospects.

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Operational Risks

·A failure in, or breach of, our systems or infrastructure, or those of our vendors, including cyber-attacks, could disrupt our businesses, result in disclosure of confidential information, damage our reputation or increase our costs and losses.

·We are at risk of increased losses from fraud.

·Our use of third party vendors and our other ongoing third party business relationships are subject to increasing regulatory requirements and attention.

·If we fail to maintain our reputation, our performance may be materially adversely affected.

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Legal, Accounting, Regulatory and Compliance Risks

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

·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.

·We are subject to federal and state fair lending laws, and failure to comply with these laws could lead to material penalties.

·Changes in accounting standards could materially affect our financial statements.

·New accounting standards will likely require us to increase our allowance for loan losses and may have a material adverse effect on our financial condition and results of operations.

·The Federal Reserve may require us to commit capital resources to support the Bank.

·We face risks related to the adoption of future legislation and potential changes in federal regulatory agency leadership, policies, and priorities.

·We are party to various claims and lawsuits incidental to our business. Litigation is subject to many uncertainties such that the expenses and ultimate exposure with respect to many of these matters cannot be ascertained.

·From time to time we are, or may become, involved in suits, legal proceedings, information-gatherings, investigations and proceedings by governmental and self-regulatory agencies that may lead to adverse consequences.

·We could be adversely affected by changes in tax laws and regulations or the interpretations of such laws and regulations

·Our ability to realize deferred tax assets may be reduced, which may adversely impact our results of operation.

 

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.

·Our stock price may be volatile, which could result in losses to our investors and litigation against us.

·Future sales of our stock by our shareholders or the perception that those sales could occur may cause our stock price to decline.

·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.

·Provisions of our articles of incorporation and bylaws, South Carolina law, and state and federal banking regulations, could delay or prevent a takeover by a third party.

·An investment in our common stock is not an insured deposit.

General Risks

·Our historical operating results may not be indicative of our future operating results.

·A downgrade of the U.S. credit rating could negatively impact our business, results of operations and financial condition.
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4

PART I

Item 1. Business.

General

First Community Corporation, a bank holding company registered under the Bank Holding Company Act of 1956, was incorporated under the laws of South Carolina in November 1994 primarily to own and control all of the capital stock of First Community Bank, which commenced operations in August 1995. The Bank’s primary federal regulator is the Federal Deposit Insurance Corporation (the “FDIC”). The Bank is also regulated and examined by the South Carolina Board of Financial Institutions (the “S.C. Board”).

Unless otherwise mentioned or unless the context requires otherwise, references herein to “First Community,” the “Company” “we,” “us,” “our” or similar references mean First Community Corporation and its consolidated subsidiaries. References to the “Bank” means First Community Bank.

We engage in a commercial banking business from our main office in Lexington, South Carolina and our 21 full-service offices located in: the Midlands of South Carolina, which includes Lexington County (6 offices), Richland County (4 offices), Newberry County (2 offices) and Kershaw County (1 office); the Upstate of South Carolina, which includes Greenville County (2 offices), Anderson County (1 office) and Pickens County (1 office); and the Central Savannah River area,Area, which includes Aiken County, South Carolina (1 office); and in Augusta, Georgia, which includes Richmond County (2 offices) and Columbia County (1 office). In addition, we conducted business from a mortgage loan production office in Richland County, South Carolina until January 24, 2020, after which we consolidated such operations with other existing Bank offices. At December 31, 2020,2021, we had approximately $1.4$1.6 billion in assets, $844.2$863.7 million in loans, $1.2$1.4 billion in deposits, and $136.3$141.0 million in shareholders’ equity.

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

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

Our stock trades on The NASDAQ Capital Market under the symbol “FCCO”.

Available Information

We provide our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”) on our website at www.firstcommunitysc.com/ under the About section, under the Investors link. These filings are made accessible as soon as reasonably practicable after they have been filed electronically with the Securities and Exchange Commission (the “SEC”).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.

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Location and Service Area

The Bank is engaged in a general commercial and retail banking business, emphasizing the needs of small-to-medium sized businesses, professional concerns and individuals. We have a total of 13 full-service offices located in Richland, Lexington, Kershaw and Newberry Counties of South Carolina and the surrounding areas. We refer to these counties as the “Midlands” region of South Carolina. Lexington County is home to six of our Bank’s branch offices. Richland County, in which we currently have four branches, is the second largest county in South Carolina. Columbia is located within Richland County and is South Carolina’s capital city and is geographically positioned in the center of the state between the industrialized Upstate region of South Carolina and the coastal city of Charleston, South Carolina. Intersected by three major interstate highways (I-20, I-77, and I-26), Columbia’s strategic location has contributed greatly to its commercial appeal and growth. With the acquisition of Savannah River Banking Company in 2014, we added a branch in Aiken, South Carolina and a branch in Augusta, Georgia (Richmond County). In 2016, we opened a loan production office in Greenville County, which we converted into a full servicefull-service office in February 2019. With the acquisition of CNBCornerstone Bancorp in 2017, we added a branch in each of Greenville, Pickens, and Anderson Counties of South Carolina. We refer to this three-county area as the “Upstate” region of South Carolina. In 2018, we opened a de novo branch in downtown Augusta, Georgia (Richmond County). In 2019, we opened a de novo branch in Evans, Georgia, a suburb of Augusta in Columbia County, Georgia. We refer to the three-county area of Aiken County (South Carolina), Richmond County (Georgia) and Columbia County (Georgia) as the “CSRA” region.

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

                      
 Total Estimated Total Market
Deposits(2)
 Our Market
Deposits(2)
    Total Estimated Total Market
Deposits(2)
 Our Market
Deposits(2)
    
 Offices Population(1) June 30, 2020 June 30, 2020 Market Share  Offices  Population(1)  June 30, 2021  June 30, 2021  Market Share 
Midlands Region  13(3)  819,500  $24,272,721  $843,895   3.48%  13   823,953  $26,809,851  $957,314   3.57%
CSRA Region 4 530,104 $9,051,092 $144,689 1.60% 4 539,254 $10,317,182 $179,071 1.74%
Upstate Region 4(4) 852,984 $20,163,710 $133,936 0.66%  4   864,301  $22,725,822  $157,413   0.69%

 

(1)All populationPopulation data is derived2022 total population from July 2019 estimates based on survey changes to the 2010 U. S. Census data.S&P Global Market Intelligence.

(2)All deposit data as ofis based on June 30, 2020 is derived2021 data sourced from the most recent data published by the FDIC.S&P Global Market Intelligence.

(3)As of June 30, 2020, the Midlands Region consisted of 13 full service branches.

(4)As of June 30, 2020, the Upstate Region consisted of four full service branches.

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We believe that we serve attractive banking markets with long-term growth potential and a well-educated employment base that helps to support our diverse and relatively stable local economy. According to U.S. Census Data,S&P Global Market Intelligence, 2022 median household incomes for each of the counties in the regions noted above were as follows for 2019:follows:

 

Richland County, SC $54,767  $58,822 
Lexington County, SC $61,173  $68,245 
Newberry County, SC $44,226  $49,798 
Kershaw County SC $51,479  $60,407 
Greenville County, SC $60,351  $70,306 
Anderson County, SC $50,865  $61,821 
Pickens County SC $49,573  $55,821 
Aiken County SC $51,399  $60,331 
Richmond County, GA $42,728  $48,465 
Columbia County, GA $82,339  $96,346 

The county estimates noted above compare to 20192022 statewide median household income estimates of $53,199$62,822 and $58,700$68,363 for South Carolina and Georgia, respectively. The principal components of the economy within our market areas are service industries, government and education, and wholesale and retail trade. The largest employers in the Midlands market area, each of which employs in excess of 3,000 people, include the State of South Carolina, Prisma Health, BlueCross BlueShield of SC, the University of South Carolina, the United States Department of the Army (Fort Jackson Army Base), Richland School District 1, Richland School District 2, and Lexington Medical Center.Center, Southern Freight Lines, Lexington County School District One, and Medical Services of America. The largest employers in our CSRA market area, each of which employs in excess of 3,000 people, include the U.S. Army Cyber Center of Excellence & Fort Gordon, Augusta University, NSA Augusta, Augusta University Hospitals, Richmond County School System, NSA Augusta, University Hospital, Augusta University Hospitals, and the Department of Energy, Savannah River Site. The Upstate region major employers include, among others, Prisma Health, Greenville County Schools, BMW Manufacturing Corp., Michelin North America, BI-LO, LLC, Bon Secours St. Francis Health System, AnMed Health Medical Center, Clemson University, Duke Energy Corp., and GE Power & Water.Water, and the Greenville County Government. We believe that this diversified economic base has reduced, and will likely continue to reduce, economic volatility in our market areas. Our markets have experienced steady economic and population growth over the past 10 years, and we expect that the area, as well as the service industry needed to support it, will continue to grow.

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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 accounts (“IRAs”). All deposit accounts are insured by the FDIC up to the maximum amount allowed by law (currently, $250,000, subject to aggregation rules).

We also offer a full range of commercial and personal loans. Commercial loans include both secured and unsecured loans for working capital (including inventory and receivables), business expansion (including acquisition of real estate and improvements), and the purchase of equipment and machinery. Consumer loans include secured and unsecured loans for financing automobiles, home improvements, education, and personal investments. We also make real estate construction and acquisition loans. We originate fixed and variable rate mortgage loans, substantially all of which are sold into the secondary market. Our lending activities are subject to a variety of lending limits imposed by federal law. While differing limits apply in certain circumstances based on the type of loan or the nature of the borrower (including the borrower’s relationship to the bank), in general, we are subject to a loans-to-one-borrower limit of an amount equal to 15% of the Bank’s unimpaired capital and surplus, or 25% of the unimpaired capital and surplus if the excess over 15% is approved by the board of directors of the Bank and is fully secured by readily marketable collateral. As a result, our lending limit will increase or decrease in response to increases or decreases in the Bank’s level of capital. Based upon the capitalization of the Bank at December 31, 2020,2021, the maximum amount we could lend to one borrower is $19.6$21.6 million. In addition, we may not make any loans to any director, officer, employee, or 10% shareholder of the Company or the Bank unless the loan is approved by our board of directors and is made on terms not more favorable to such person than would be available to a person not affiliated with the Bank.

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Other bank services include internet banking, cash management services, safe deposit boxes, travelers checks, direct deposit of payroll and social security checks, and automatic drafts for various accounts. We offer non-deposit investment products and other investment brokerage services through a registered representative with an affiliation through LPL Financial. We are associated with Nyce and Plus networks of automated teller machines and MasterCard debit cards that may be used by our customers throughout South Carolina and other regions. In November 2019, we deconverted from the Star network of automated teller machines. We also offer VISA and MasterCard credit card services through a correspondent bank as our agent.

We currently do not exercise trust powers, but we can begin to do so with the prior approval of our primary banking regulators, the FDIC and the S.C. Board.

Competition

The banking business is highly competitive. We compete as a financial intermediary with other commercial banks, savings and loan associations, credit unions and money market mutual funds operating in our market areas. As of June 30, 2020,2021, there were 24 financial institutions operating approximately 167159 offices in the Midlands market, 1920 financial institutions operating 9796 branches in the CSRA market, and 35 financial institutions operating 227224 branches in the Upstate market. The competition among the various financial institutions is based upon a variety of factors, including interest rates offered on deposit accounts, interest rates charged on loans, credit and service charges, the quality of services rendered, the convenience of banking facilities and, in the case of loans to large commercial borrowers, relative lending limits. Size gives larger banks certain advantages in competing for business from large corporations. These advantages include higher lending limits and the ability to offer services in other areas of South Carolina and Georgia. As a result, we do not generally attempt to compete for the banking relationships of large corporations, but concentrate our efforts on small-to-medium sized businesses and individuals. We believe we have competed effectively in this market by offering quality and personal service. In addition, many of our non-bank competitors are not subject to the same extensive federal regulations that govern bank holding companies and federally insured banks.

Employees

As of December 31, 2020,2021, the company had 244247 full-time employees and three part-time employees. We believe that we have good relations with our employees and our employees are not represented by any collective bargaining group or agreement. We believe our ability to attract and retain employees is a key to our success and one of our core values is mutual respect for our colleagues and their role in our success. Our employees embody and consistently demonstrate our five cultural beliefs of honesty and integrity, everyone matters, spirit of service, strong work ethic and excellence with humility. Accordingly, we strive to offer competitive salaries, insurance and retirement benefits, a generous paid time off plan including paid holidays, and a stable and friendly working environment to all employees. We believe the development of our staff is important to the success of our company and we encourage employees to continue on a lifelong trajectory of learning. As such, we provide a number of opportunities for employee development through both internal and external sources. To develop our current and future leaders, the Bank created the First Community Bank Leadership Institute (FCBLI), an eighteen-month leadership development program that provides academic and experiential learning to teach and nurture leadership skills across the organization to prepare to support the Bank now and in the future. The Bank also supports the development of employees through external educational opportunities such as various bankers’ schools that offer multi-year development programs as well as short term training classes and industry conferences. In addition to these, the Bank encourages employees to continue with career development specific to their role to insure employees stay current with the most up-to-date information and best practices.

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The health, safety and well-being of our employees, customers, vendors and communities has been and continues to be oura top priority. The COVID-19 pandemic presented challenges as we worked to continue to serve our customers and the community. Throughout the pandemic, we followed guidance from the Centers for Disease Control and the South Carolina Department of Health and Environmental Control and made the necessary adjustments as guidance and recommendations changed. We implemented a number of safety protocols to help provide a safe workplace for our employees, customers and vendors. This included limiting access to facilities, including at times our banking offices (except by appointment), encouraging the use of drive thru facilities and online, electronic and other technology products and services, implementing remote working and rotating work schedules, enhanced and more frequent cleaning of facilities, written communication to employees as updates were available, and reminders on safety protocols including social distancing, monitoring symptoms and quarantining with exposure or potential exposure to the virus, and hand washing/sanitizing. We provided supplies including masks, gloves, and hand sanitizer to employees and customers. With recent positive news on pandemic conditions,During 2021, we are beginning a transitiontransitioned back to a more normal operating environment.environment with the flexibility to make adjustments as needed.

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Information about the Executive Officers of First Community Corporation

Executive officers of First Community Corporation are elected by the board of directors annually and serve at the pleasure of the board of directors. The current executive officers, and persons chosen to become executive officers, and their ages, positions with us over the past five years, and terms of office as of March 12, 2021,16, 2022, are as follows:

Name (age)  Position and Five Year History with Company With the
Company
Since
 
Michael C. Crapps (62)(63)  Chief Executive Officer and President, Director  1994 
John T. Nissen (59)(60)  Chief Banking Officer; formerly Chief Commercial and Retail Banking Officer  1995 
Robin D. Brown (53)(54)  Chief Human Resources and Marketing Officer  1994 
Tanya A. Butts (62)(63)  Chief Operations Officer/Chief Risk Officer  2016 
John F. (Jack) Walker (55)(56)  Chief Credit Officer, formerly Senior Vice President and Loan Approval and Special Assets Officer  2009 
D. Shawn Jordan (53)(54)  Chief Financial Officer, formerly Executive Vice President  2019 

 

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 generally are intended primarily for the protection of customers, depositors and other consumers, the FDIC’s Deposit Insurance Fund (the “DIF”), and the banking system as a whole; not for the protection of our other creditors and shareholders.

We experienced heightened regulatory requirements and scrutiny following the 2008 global financial crisis, and as a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) and the Economic Growth, Regulatory Reform and Consumer Protection Act (“Regulatory Relief Act”). In addition, newer regulatory developments implemented in response to the COVID-19 pandemic, including the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) and the Consolidated Appropriations Act, 2021, which enhanced and expanded certain provisions of the CARES Act, had an impact on our operations.

The following discussion is not intended to be a complete list of all the activities regulated by the banking laws or of the impact of those laws and regulations on our operations. The following summary is qualified by reference to the statutory and regulatory provisions discussed. Changes in applicable laws or regulations may have a material effect on our business and prospects. Our operations may be affected by legislative changes and the policies of various regulatory authorities. We cannot predict the effect that fiscal or monetary policies, economic control, or new federal or state legislation may have on our business and earnings in the future.

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Legislative and Regulatory Developments.Responses to the COVID-19 Pandemic

An older legislative and regulatory development implemented in response

The COVID-19 pandemic has continued to cause extensive disruptions to the 2008 financial crisis—global economy, to businesses, and to the Dodd-Frank Wall Street Reform and Consumer Protectionlives of individuals throughout the world. On March 27, 2020, the CARES Act (the “Dodd-Frank Act”)—andwas signed into law. The CARES Act was a $2.2 trillion economic stimulus bill that was intended to provide relief in the newerwake of the COVID-19 pandemic. There have also been a number of regulatory developments implemented in responseactions intended to help mitigate the adverse economic impact of the COVID-19 pandemic on borrowers, including several mandates from the CARES Actbank regulatory agencies, requiring financial institutions to work constructively with borrowers affected by the COVID-19 pandemic. Although these programs generally have expired, governmental authorities may take additional actions in the future to limit the adverse impact of COVID-19 on borrowers and the Consolidated Appropriations Act, 2021, which enhanced and expanded certain provisions of the CARES Act—have had and will continue to have an impact on our operations.

The Dodd-Frank Wall Street Reform and Consumer Protection Acttenants.

 

The Dodd-FrankPaycheck Protection Program (“PPP”), originally established under the CARES Act was signed into law in July 2010 and impactsextended under the Coronavirus Response and Relief Supplemental Appropriations Act of 2021, authorized financial institutions to make federally-guaranteed loans to qualifying small businesses and non-profit organizations. These loans carry an interest rate of 1% per annum and a maturity of two years for loans originated prior to June 5, 2020 and five years for loans originated on or after June 5, 2020. The PPP provides that such loans may be forgiven if the borrowers meet certain requirements with respect to maintaining employee headcount and payroll and the use of the loan proceeds after the loan is originated. The initial phase of the PPP, after being extended multiple times by Congress, expired on August 8, 2020. However, on January 11, 2021, the SBA reopened the PPP for First Draw PPP loans to small businesses and non-profit organizations that did not receive a loan through the initial PPP phase. Further, on January 13, 2021, the SBA reopened the PPP for Second Draw PPP loans to small businesses and non-profit organizations that did receive a loan through the initial PPP phase. Maximum loan amounts were also increased for accommodation and food service businesses. Although the PPP ended in numerous ways, including:accordance with its terms on May 31, 2021, outstanding PPP loans continue to go through the process of either obtaining forgiveness from the SBA or pursuing claims under the SBA guaranty.

 

The CARES Act, as extended by certain provisions of the Consolidated Appropriations Act of 2021, also initially permitted banks to suspend requirements under GAAP for loan modifications to borrowers affected by COVID-19 that would otherwise had been characterized as troubled debt restructurings and suspended any determination related thereto if (i) the borrower was not more than 30 days past due as of December 31, 2019, (ii) the modifications were related to COVID-19, and (iii) the modification occurred between March 1, 2020 and the earlier of 60 days after the date of termination of the national emergency or January 1, 2022. Federal bank regulatory authorities also issued guidance to encourage banks to make loan modifications for borrowers affected by COVID-19.

Capital and Related Requirements.

Regulatory capital rules known as the Basel III rules or Basel III, impose minimum capital requirements for bank holding companies and banks. Basel III was released in the form of enforceable regulations by each of the applicable federal bank regulatory agencies. Basel III is applicable to all banking organizations that are subject to minimum capital requirements, including federal and state banks and savings and loan associations, as well as to bank and savings and loan holding companies, other than “small bank holding companies.” A small bank holding company is generally a qualifying bank holding company or savings and loan holding company with less than $3.0 billion in consolidated assets. More stringent requirements are imposed on “advanced approaches” banking organizations—generally those organizations with $250 billion or more in total consolidated assets, $10 billion or more in total foreign exposures applicable to advanced approaches banking organizations.

Based on the foregoing, as a small bank holding company, we are generally not subject to the capital requirements at the holding company level unless otherwise advised by the Federal Reserve; however, our Bank remains subject to the capital requirements. Accordingly, the Bank is required to maintain the following capital levels:

·The creationa Common Equity Tier 1 risk-based capital ratio of a Financial Stability Oversight Council responsible for monitoring and managing systemic risk;4.5%;
·Granting additional authority to the Boarda Tier 1 risk-based capital ratio of Governors of the Federal Reserve (the “Federal Reserve”) to regulate certain types of nonbank financial companies;6%;
·Granting new authority to the FDIC as liquidatora total risk-based capital ratio of 8%; and receiver;
·Changing the manner in which deposit insurance assessments are made;
·Requiring regulators to modify capital standards;
·Establishing the Consumer Financial Protection Bureau (the “CFPB”);
·Capping interchange fees that certain banks charge merchants for debit card transactions;
·Imposing more stringent requirements on mortgage lenders; and
·Limiting banks’ proprietary trading activities.a leverage ratio of 4%.

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

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Under Basel III, Tier 1 capital includes two components: Common Equity Tier 1 capital and additional Tier 1 capital. The highest form of capital, Common Equity Tier 1 capital, consists solely of common stock (plus related surplus), retained earnings, accumulated other comprehensive income, otherwise referred to as AOCI, and limited amounts of minority interests that are in the form of common stock. Additional Tier 1 capital is primarily comprised of noncumulative perpetual preferred stock, Tier 1 minority interests and grandfathered trust preferred securities. Tier 2 capital generally includes the allowance for loan losses up to 1.25% of risk-weighted assets, qualifying preferred stock, subordinated debt and qualifying Tier 2 minority interests, less any deductions in Tier 2 instruments of an unconsolidated financial institution. AOCI is presumptively included in Common Equity Tier 1 capital and often would operate to reduce this category of capital. When implemented, Basel III provided a one-time opportunity at the end of the first quarter of 2015 for covered banking organizations to opt out of a large part of this treatment of AOCI. We made this opt-out election and, as a result, retained our pre-existing treatment for AOCI.

ThereOn December 21, 2018, the federal banking agencies issued a joint final rule to revise their regulatory capital rules to (i) address the upcoming implementation of a new credit impairment model, the Current Expected Credit Loss, or CECL model, an accounting standard under GAAP; (ii) provide an optional three-year phase-in period for the day-one adverse regulatory capital effects that banking organizations are many provisionsexpected to experience upon adopting CECL; and (iii) require the use of CECL in stress tests beginning with the Dodd-Frank Act mandating regulators2023 capital planning and stress testing cycle for certain banking organizations that are subject to adoptstress testing. We are currently evaluating the impact the CECL model will have on our accounting, and expect to recognize a one-time cumulative-effect adjustment to our allowance for loan losses as of the beginning of the first quarter of 2023, the first reporting period in which the new regulations and conduct studies upon which future regulation may be based. While some have been issued, many remain to be issued. Governmental intervention andstandard is effective. At this time, we cannot yet reasonably determine the magnitude of such one-time cumulative adjustment, if any, or of the overall impact of the new regulations could materially and adversely affectstandard on our business, financial condition andor results of operations.

 

2018 Regulatory Reform.

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

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The Regulatory Relief Act, among other things, expanded the definition of qualified mortgages a financial institution may hold and simplified the regulatory capital rules for financial institutions and their holding companies with total consolidated assets of less than $10 billion by instructing the federal banking regulators to establish a single “community bank leverage ratio” between 8% and 10%. As such, in November 2019, the federal banking regulators published final rules implementing a simplified measure of capital adequacy for certain banking organizations that have less than $10 billion in total consolidated assets. Under the final rules, which went into effect on January 1, 2020, depository institutions and depository institution holding companies that have less than $10 billion in total consolidated assets and meet other qualifying criteria, including a leverage ratio of greater than 9%, off-balance-sheet exposures of 25% or less of total consolidated assets, and trading assets plus trading liabilities of 5% or less of total consolidated assets, are deemed “qualifying community banking organizations” and are eligible to opt into the “community bank leverage ratio framework.” A qualifying community banking organization that elects to use the community bank leverage ratio framework and that maintains a leverage ratio of greater than 9% is considered to have satisfied the generally applicable risk-based and leverage capital requirements under the Basel III rules discussed below, and, if applicable, is considered to have met the “well capitalized” capital ratio requirements for purposes of its primary federal regulator’s prompt corrective action rules, discussed below. The final rules include a two-quarter grace period during which a qualifying community banking organization that temporarily fails to meet any of the qualifying criteria, including the greater-than-9% leverage capital ratio requirement, is generally still deemed “well capitalized” so long as the banking organization maintains a leverage capital ratio greater than 8%. A banking organization that fails to maintain a leverage capital ratio greater than 8% is not permitted to use the grace period and must comply with the generally applicable requirements under the Basel III rules and file the appropriate regulatory reports. We do not have any immediate plans to elect to use the community bank leverage ratio framework but may make such an election in the future.

  

The Regulatory ReliefChange in Control.

Two statutes, the Change in Bank Control Act also expandedand the category of holding companies that may rely on the “Small Bank Holding Company Act, together with regulations promulgated under them, require some form of regulatory review before any company may acquire “control” of a bank or a bank holding company. Under the Change in Bank Control Act, a person or company is required to file a notice with the Federal Reserve if it will, as a result of the transaction, own or control 10% or more of any class of voting securities or direct the management or policies of a bank or bank holding company and Savingseither 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 Loanthe subsidiary bank’s primary federal regulator must approve the change in control; at the bank level, only the bank’s primary federal regulator is involved.

In addition, the Bank Holding Company Policy Statement”Act prohibits any entity from acquiring 25% (5% if the acquirer is a bank holding company) or more of a bank holding company’s voting securities, or otherwise obtaining control or a controlling influence over the management or policies of a bank or bank holding company without regulatory approval. On January 30, 2020, the Federal Reserve issued a final rule (which became effective September 30, 2020) that clarified and codified the Federal Reserve’s standards for determining whether one company has control over another. The final rule established four categories of tiered presumptions of noncontrol that are based on the percentage of voting shares held by raising the investor (less than 5%, 5-9.9%, 10-14.9% and 15-24.9%) and the presence of other indicia of control. As the percentage of ownership increases, fewer indicia of control are permitted without falling outside of the presumption of noncontrol. These indicia of control include nonvoting equity ownership, director representation, management interlocks, business relationship and restrictive contractual covenants. Under the final rule, investors can hold up to 24.9% of the voting securities and up to 33% of the total equity of a company without necessarily having a controlling influence.

Transactions subject to the Bank Holding Company Act are exempt from Change in Control Act requirements. For state banks, state laws, including those of South Carolina, typically require approval by the state bank regulator as well.

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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.

Section 23A of the Federal Reserve Act places limits on the amount of loans or extensions of credit by a bank to any affiliate, including its holding company, and on a bank’s investments in, or certain other transactions with, affiliates and on the amount of advances to third parties collateralized by the securities or obligations of any affiliates of the bank. Section 23A also applies to derivative transactions, repurchase agreements and securities lending and borrowing transactions that cause a bank to have credit exposure to an affiliate. The aggregate of all covered transactions is limited in amount, as to any one affiliate, to 10% of the Bank’s capital and surplus and, as to all affiliates combined, to 20% of the Bank’s capital and surplus. Furthermore, within the foregoing limitations as to amount, each covered transaction must meet specified collateral requirements. The Bank is forbidden to purchase low quality assets from an affiliate.

Section 23B of the Federal Reserve Act, among other things, prohibits an institution from engaging in certain transactions with certain affiliates unless the transactions are on terms substantially the same, or at least as favorable to such institution or its subsidiaries, as those prevailing at the time for comparable transactions with nonaffiliated companies. If there are no comparable transactions, a bank’s (or one of its subsidiaries’) affiliate transaction must be on terms and under circumstances, including credit standards, that in good faith would be offered to, or would apply to, nonaffiliated companies. These requirements apply to all transactions subject to Section 23A as well as to certain other transactions.

The affiliates of a bank include any holding company of the bank, any other company under common control with the bank (including any company controlled by the same shareholders who control the bank), any subsidiary of the bank that is itself a bank, any company in which the majority of the directors or trustees also constitute a majority of the directors or trustees of the bank or holding company of the bank, any company sponsored and advised on a contractual basis by the bank or an affiliate, and any mutual fund advised by a bank or any of the bank’s affiliates. Regulation W generally excludes all non-bank and non-savings association subsidiaries of banks from treatment as affiliates, except to the extent that the Federal Reserve decides to treat these subsidiaries as affiliates.

The Bank is also subject to certain restrictions on extensions of credit to executive officers, directors, certain principal shareholders, and their related interests. Extensions of credit include derivative transactions, repurchase and reverse repurchase agreements, and securities borrowing and lending transactions to the extent that such transactions cause a bank to have credit exposure to an insider. Any extension of credit to an insider (i) must be made on substantially the same terms, including interest rates and collateral requirements, as those prevailing at the time for comparable transactions with unrelated third parties and (ii) must not involve more than the normal risk of repayment or present other unfavorable features.

On December 22, 2020, the federal banking agencies issued an interagency statement extending the temporary relief from enforcement action against banks or asset managers, which become principal stockholders of banks, with respect to certain extensions of credit by banks that otherwise would violate Regulation O, provided the asset managers and banks satisfy certain conditions designed to ensure that there is a lack of control by the asset manager over the bank. This relief has been extended and will expire on the sooner of January 1, 2023, or the effective date of a final Federal Reserve rule having a revision to Regulation O that addresses the treatment of extensions of credit by a bank to fund complex-controlled portfolio companies that are insiders of a bank.

First Community Corporation

We own 100% of the outstanding capital stock of the Bank, and, therefore, we are considered to be a bank holding company under the federal Bank Holding Company Act of 1956 (the “Bank Holding Company Act”). As a result, we are primarily subject to the supervision, examination and reporting requirements of the Federal Reserve under the Bank Holding Company Act and its regulations promulgated thereunder. Moreover, as a bank holding company of a bank located in South Carolina, we also are subject to the South Carolina Banking and Branching Efficiency Act.

Permitted Activities. Under the Bank Holding Company Act, a bank holding company is generally permitted to engage in, or acquire direct or indirect control of more than 5% of the voting shares of any company engaged in, the following activities:

·banking or managing or controlling banks;

·furnishing services to or performing services for our subsidiaries; and

·any activity that the Federal Reserve determines to be so closely related to banking as to be a proper incident to the business of banking;

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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 summary, a financial holding company can engage in activities that are financial in nature or incidental or complimentary to financial activities, including insurance underwriting, sales and brokerage activities, providing financial and investment advisory services, underwriting services and limited merchant banking activities. We have not sought financial holding company status, but may elect such status in the future as our business matures. If we were to elect in writing for financial holding company status, each insured depository institution we control would have to be well capitalized, well managed and have at least a satisfactory rating under the Community Reinvestment Act (“CRA”) (discussed below).

The Federal Reserve has the authority to order a bank holding company or its subsidiaries to terminate any of these activities or to terminate its ownership or control of any subsidiary when it has reasonable cause to believe that the bank holding company’s continued ownership, activity or control constitutes a serious risk to the financial safety, soundness or stability of it or any of its bank subsidiaries.

Source of Strength. There are a number of obligations and restrictions imposed by law and regulatory policy on bank holding companies with regard to their depository institution subsidiaries that are designed to minimize potential loss to depositors and to the FDIC insurance funds in the event that the depository institution becomes in danger of defaulting under its obligations to repay deposits. Under a policy of the Federal Reserve, a bank holding company is required to serve as a source of financial strength to its subsidiary depository institutions and to commit resources to support such institutions in circumstances where it might not do so absent such policy. Under the Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”), to avoid receivership of its insured depository institution subsidiary, a bank holding company is required to guarantee the compliance of any insured depository institution subsidiary that may become “undercapitalized” within the terms of any capital restoration plan filed by such subsidiary with its appropriate federal banking agency up to the lesser of (i) an amount equal to 5% of the institution’s total assets at the time the institution became undercapitalized, or (ii) the amount which is necessary (or would have been necessary) to bring the institution into compliance with all applicable capital standards as of the time the institution fails to comply with such capital restoration plan.

The Federal Reserve also has the authority under the Bank Holding Company Act to require a bank holding company to terminate any activity or relinquish control of a nonbank subsidiary (other than a nonbank subsidiary of a bank) upon the Federal Reserve’s determination that such activity or control constitutes a serious risk to the financial soundness or stability of any subsidiary depository institution of the bank holding company. Further, federal law grants federal bank regulatory authorities’ additional discretion to require a bank holding company to divest itself of any bank or nonbank subsidiary if the agency determines that divestiture may aid the depository institution’s financial condition.

In addition, the “cross guarantee” provisions of the Federal Deposit Insurance Act (“FDIA”) require insured depository institutions under common control to reimburse the FDIC for any loss suffered or reasonably anticipated by the FDIC as a result of the default of a commonly controlled insured depository institution or for any assistance provided by the FDIC to a commonly controlled insured depository institution in danger of default. The FDIC’s claim for damages is superior to claims of shareholders of the insured depository institution or its holding company, but is subordinate to claims of depositors, secured creditors and holders of subordinated debt (other than affiliates) of the commonly controlled insured depository institutions.

The FDIA also provides that amounts received from the liquidation or other resolution of any insured depository institution by any receiver must be distributed (after payment of secured claims) to pay the deposit liabilities of the institution prior to payment of any other general or unsecured senior liability, subordinated liability, general creditor or shareholder. This provision would give depositors a preference over general and subordinated creditors and shareholders in the event a receiver is appointed to distribute the assets of our Bank.

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Any capital loans by a bank holding company to any of its subsidiary banks are subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary bank. In the event of a bank holding company’s bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee and entitled to a priority of payment.

Capital Requirements. The Federal Reserve generally imposes certain capital requirements on a bank holding company under the Bank Holding Company Act, including a minimum leverage ratio and a minimum ratio of “qualifying” capital to risk-weighted assets. If applicable, these requirements are essentially the same as those that apply to the Bank and are described above under “Capital and Related Requirements.” However, because the Company currently qualifies as a small bank holding company, these capital requirements do not currently apply to the Company. Subject to certain restrictions, we are able to borrow money to make a capital contribution to the Bank, and these loans may be repaid from dividends paid from the Bank to the Company. Our ability to pay dividends depends on, among other things, the Bank’s ability to pay dividends to us, which is subject to regulatory restrictions as described below in “First Community Bank—Dividends.” We are also able to raise capital for contribution to the Bank by issuing securities without having to receive regulatory approval, subject to compliance with federal and state securities laws.

Dividends. As a bank holding company, the Company’s ability to declare and pay dividends is dependent on certain federal and state regulatory considerations, including the guidelines of the Federal Reserve. The Federal Reserve has issued a policy statement regarding the payment of dividends by bank holding companies. In general, the Federal Reserve’s policies provide that dividends should be paid only out of current earnings and only if the prospective rate of earnings retention by the bank holding company appears consistent with the organization’s capital needs, asset quality and overall financial condition. The Federal Reserve’s policies also require that a bank holding company serve as a source of financial strength to its subsidiary banks by standing ready to use available resources to provide adequate capital funds to those banks during periods of financial stress or adversity and by maintaining the financial flexibility and capital-raising capacity to obtain additional resources for assisting its subsidiary banks where necessary. In addition, under the prompt corrective action regulations, the ability of a bank holding company to pay dividends may be restricted if a subsidiary bank becomes undercapitalized. These regulatory policies could affect the Company’s ability to pay dividends or otherwise engage in capital distributions.

In addition, since the Company is legal entity separate and distinct from the Bank and does not conduct stand-alone operations, its ability to pay dividends depends on the ability of the Bank to pay dividends to it, which is also subject to regulatory restrictions as described below in “First Community Bank—Dividends.”

South Carolina State Regulation. As a South Carolina bank holding company under the South Carolina Banking and Branching Efficiency Act, we are subject to limitations on any sale to, or merger with, other financial institutions. We are not required to obtain the approval of the S.C. Board prior to acquiring the capital stock of a national bank, but we must notify them at least 15 days prior to doing so. We must receive the S.C. Board’s approval prior to engaging in the acquisition of a South Carolina state-chartered bank or another South Carolina bank holding company.

First Community Bank

As a South Carolina state bank, the Bank’s primary federal regulator is the FDIC and the Bank is also regulated and examined by the S.C. Board. Deposits in the Bank are insured by the FDIC up to a maximum amount of assets$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.

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These agencies, and the federal and state laws applicable to the Bank’s operations, extensively regulate various aspects of our banking business, including, among other things, permissible types and amounts of loans, investments and other activities, capital adequacy, branching, interest rates on loans and on deposits, the maintenance of reserves on demand deposit liabilities, and the safety and soundness of our banking practices.

Prompt Corrective Action. The FDICIA established a qualifying“prompt corrective action” program in which every bank is placed in one of five regulatory categories, depending primarily on its regulatory capital levels. The FDIC and the other federal banking regulators are permitted to take increasingly severe action as a bank’s capital position or financial condition declines below the “Adequately Capitalized” level described below. Regulators are also empowered to place in receivership or require the sale of a bank to another depository institution when a bank’s leverage ratio reaches two percent. Better capitalized institutions are generally subject to less onerous regulation and supervision than banks with lesser amounts of capital. The FDIC’s regulations set forth five capital categories, each with specific regulatory consequences. The categories are:

·Well Capitalized—The institution exceeds the required minimum level for each relevant capital measure. A well capitalized institution (i) has a total risk-based capital ratio of 10% or greater, (ii) has a Tier 1 risk-based capital ratio of 8% or greater, (iii) has a common equity Tier 1 risk-based capital ratio of 6.5% or greater, (iv) has a leverage capital ratio of 5% or greater, and (v) is not subject to any order or written directive to meet and maintain a specific capital level for any capital measure.

·Adequately Capitalized—The institution meets the required minimum level for each relevant capital measure. No capital distribution may be made that would result in the institution becoming undercapitalized. An adequately capitalized institution (i) has a total risk-based capital ratio of 8% or greater, (ii) has a Tier 1 risk-based capital ratio of 6% or greater, (iii) has a common equity Tier 1 risk-based capital ratio of 4.5% or greater, and (iv) has a leverage capital ratio of 4% or greater.

·Undercapitalized—The institution fails to meet the required minimum level for any relevant capital measure. An undercapitalized institution (i) has a total risk-based capital ratio of less than 8%, (ii) has a Tier 1 risk-based capital ratio of less than 6%, (iii) has a common equity Tier 1 risk-based capital ratio of less than 4.5% or greater, or (iv) has a leverage capital ratio of less than 4%.

·Significantly Undercapitalized—The institution is significantly below the required minimum level for any relevant capital measure. A significantly undercapitalized institution (i) has a total risk-based capital ratio of less than 6%, (ii) has a Tier 1 risk-based capital ratio of less than 4%, (iii) has a common equity Tier 1 risk-based capital ratio of less than 3% or greater, or (iv) has a leverage capital ratio of less than 3%.

·Critically Undercapitalized—The institution fails to meet a critical capital level set by the appropriate federal banking agency. A critically undercapitalized institution has a ratio of tangible equity to total assets that is equal to or less than 2%.

If the FDIC determines, after notice and an opportunity for hearing, that the bank is in an unsafe or unsound condition, the regulator is authorized to reclassify the bank to the next lower capital category (other than critically undercapitalized) and require the submission of a plan to correct the unsafe or unsound condition.

If a bank is not well capitalized, it cannot accept brokered deposits without prior regulatory approval. In addition, a bank that is not well capitalized cannot offer an effective yield in excess of 75 basis points over interest paid on deposits of comparable size and maturity in such institution’s normal market area for deposits accepted from within its normal market area, or national rate paid on deposits of comparable size and maturity for deposits accepted outside the bank’s normal market area. Moreover, the FDIC generally prohibits a depository institution from making any capital distributions (including payment of a dividend) or paying any management fee to its parent holding company if the depository institution would thereafter be categorized as undercapitalized. Undercapitalized institutions are subject to growth limitations (an undercapitalized institution may not acquire another institution, establish additional branch offices or engage in any new line of business unless determined by the appropriate federal banking agency to be consistent with an accepted capital restoration plan, or unless the FDIC determines that the proposed action will further the purpose of prompt corrective action) and are required to submit a capital restoration plan. The agencies may not accept a capital restoration plan without determining, among other things, that the plan is based on realistic assumptions and is likely to succeed in restoring the depository institution’s capital. In addition, for a capital restoration plan to be acceptable, the depository institution’s parent holding company must guarantee that the institution will comply with the capital restoration plan. The aggregate liability of the parent holding company is limited to the lesser of an amount equal to 5.0% of the depository institution’s total assets at the time it became categorized as undercapitalized or the amount that is necessary (or would have been necessary) to bring the institution into compliance with all capital standards applicable with respect to such institution as of the time it fails to comply with the plan. If a depository institution fails to submit an acceptable plan, it is categorized as significantly undercapitalized.

Significantly undercapitalized categorized depository institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become categorized as adequately capitalized, requirements to reduce total assets, and cessation of receipt of deposits from $1.0 billioncorrespondent banks. The appropriate federal banking agency may take any action authorized for a significantly undercapitalized institution if an undercapitalized institution fails to $3.0 billion. This expansionsubmit 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.

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An insured depository institution may not pay a management fee to a bank holding company controlling that institution or any other person having control of the institution if, after making the payment, the institution, would be undercapitalized. In addition, an institution cannot make a capital distribution, such as a dividend or other distribution that is in substance a distribution of capital to the owners of the institution if following such a distribution the institution would be undercapitalized. Thus, if payment of such a management fee or the making of such would cause a bank to become undercapitalized, it could not pay a management fee or dividend to the bank holding company.

As of December 31, 2021, the Bank was deemed to be “well capitalized.”

Standards for Safety and Soundness. The FDIA also excludedrequires the federal banking regulatory agencies to prescribe, by regulation or guideline, operational and managerial standards for all insured depository institutions relating to: (i) internal controls, information systems and internal audit systems; (ii) loan documentation; (iii) credit underwriting; (iv) interest rate risk exposure; and (v) asset growth. The agencies also must prescribe standards for asset quality, earnings, and stock valuation, as well as standards for compensation, fees and benefits. The federal banking agencies have adopted regulations and Interagency Guidelines Prescribing Standards for Safety and Soundness to implement these required standards. These guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. Under the regulations, if the FDIC determines that the Bank fails to meet any standards prescribed by the guidelines, the agency may require the Bank to submit to the agency an acceptable plan to achieve compliance with the standard, as required by the FDIC. The final regulations establish deadlines for the submission and review of such safety and soundness compliance plans.

Regulatory Examination. The FDIC also requires the Bank to prepare annual reports on the Bank’s financial condition and to conduct an annual audit of its financial affairs in compliance with its minimum standards and procedures.

All insured institutions must undergo regular on-site examinations by their appropriate banking agency. The cost of examinations of insured depository institutions and any affiliates may be assessed by the appropriate federal banking agency against each institution or affiliate as it deems necessary or appropriate. Insured institutions are required to submit annual reports to the FDIC, their federal regulatory agency, and state supervisor when applicable. The FDIC has developed a method for insured depository institutions to provide supplemental disclosure of the estimated fair market value of assets and liabilities, to the extent feasible and practicable, in any balance sheet, financial statement, report of condition or any other report of any insured depository institution. The federal banking regulatory agencies prescribe, by regulation, standards for all insured depository institutions and depository institution holding companies relating, among other things, to the following:

·internal controls;

·information systems and audit systems;

·loan documentation;

·credit underwriting;

·interest rate risk exposure; and

·asset quality.

Dividends. The Company’s principal source of cash flow, including cash flow to pay dividends to its shareholders, is dividends it receives from the Bank. Statutory and regulatory limitations apply to the Bank’s payment of dividends to the Company. As a South Carolina chartered bank, the Bank is subject to limitations on the amount of dividends that it is permitted to pay. Unless otherwise instructed by the S.C. Board, the Bank is generally permitted under South Carolina state banking regulations to pay cash dividends of up to 100% of net income in any calendar year without obtaining the prior approval of the S.C. Board. The FDIC also has the authority under federal law to enjoin a bank from engaging in what in its opinion constitutes an unsafe or unsound practice in conducting its business, including the payment of a dividend under certain circumstances. The Bank must also maintain the Common Equity Tier 1 capital conservation buffer of 2.5%, in excess of its minimum regulatory risk-based capital ratios, to avoid becoming subject to restrictions on capital distributions, including dividends, as described above.

Branching. Federal legislation permits out-of-state acquisitions by bank holding companies, interstate branching by banks, and interstate merging by banks. The Dodd-Frank Act removed previous state law restrictions on de novo interstate branching in states such as South Carolina and Georgia. This change effectively permits out of state banks to open de novo branches in states where the laws of such state would permit a bank chartered by that state to open a de novo branch.

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Anti-Tying Restrictions. Under amendments to the Bank Holding Company Act and Federal Reserve regulations, a bank is prohibited from engaging in certain tying or reciprocity arrangements with its customers. In general, a bank may not extend credit, lease, sell property, or furnish any services or fix or vary the consideration for these on the condition that (i) the customer obtain or provide some additional credit, property, or services from or to the bank, the bank holding company or subsidiaries thereof or (ii) the customer may not obtain some other credit, property, or services from a competitor, except to the extent reasonable conditions are imposed to assure the soundness of the credit extended. Certain arrangements are permissible: a bank may offer combined-balance products and may otherwise offer more favorable terms if a customer obtains two or more traditional bank products; and certain foreign transactions are exempt from the general rule. A bank holding company or any bank affiliate also is subject to anti-tying requirements in connection with electronic benefit transfer services.

Community Reinvestment Act. The Bank is subject to certain requirements and reporting obligations under the CRA, which requires federal banking regulators to evaluate the record of each financial institution in meeting the credit needs of its local community, including low- and moderate- income neighborhoods. The CRA further requires these criteria to be considered in evaluating mergers, acquisitions and applications to open a branch or facility. Failure to adequately meet these criteria could result in the imposition of additional requirements and limitations on the Bank. Additionally, financial institutions must publicly disclose the terms of various CRA-related agreements. In its most recent CRA examination, the Bank received a “satisfactory” rating.

In December 2019, the FDIC and the Office of the Comptroller of the Currency (“OCC”) issued a notice of proposed rulemaking intended to (i) clarify which activities qualify for CRA credit; (ii) update where activities count for CRA credit; (iii) create a more transparent and objective method for measuring CRA performance; and (iv) provide for more transparent, consistent, and timely CRA-related data collection, recordkeeping, and reporting. However, the Federal Reserve has not joined the proposed rulemaking. In May 2020, the OCC issued its final CRA rule, which was later rescinded in December 2021. The FDIC has not finalized any revisions to its CRA rule. In September 2020, the Federal Reserve issued an advance notice of proposed rulemaking that seeks public comment on ways to modernize the Federal Reserve’s CRA regulations. The effects on the Company and the Bank of any potential change to the CRA rules will depend on the final form of any federal rulemaking and cannot be predicted at this time. Management will continue to evaluate any changes to the CRA’s regulations and their impact to the Company and the Bank.

Fair Lending Requirements. We are subject to certain fair lending requirements and reporting obligations involving lending operations. A number of laws and regulations provide these fair lending requirements and reporting obligations, including, at the federal level, the Equal Credit Opportunity Act (“ECOA”), as amended by the Dodd-Frank Act, and Regulation B, as well as the Fair Housing Act (“FHA”) and regulations implementing FHA found at 24 C.F.R. Part 100. ECOA and Regulation B prohibit discrimination in any aspect of a credit transaction based on a number of prohibited factors, including race or color, religion, national origin, sex, marital status, age, the applicant’s receipt of income derived from public assistance programs, and the applicant’s exercise, in good faith, of any right under the Consumer Credit Protection Act. ECOA and Regulation B include lending acts and practices that are specifically prohibited, permitted, or required, and these laws and regulations proscribe data collection requirements, legal action statute of limitations, and disclosure of the consumer’s ability to receive a copy of any appraisal(s) and valuation(s) prepared in connection with certain loans secured by dwellings. FHA prohibits discrimination in all aspects of residential real-estate related transactions based on prohibited factors, including race or color, national origin, religion, sex, familial status, and handicap.

In addition to prohibiting discrimination in credit transactions on the basis of prohibited factors, these laws and regulations can cause a lender to be liable for policies that result in a disparate treatment of or have a disparate impact on a protected class of persons. If a pattern or practice of lending discrimination is alleged by a regulator, then the matter may be referred by the agency to the U.S. Department of Justice (“DOJ”) for investigation. In December 2012, the DOJ and CFPB entered into a Memorandum of Understanding under which the agencies have agreed to share information, coordinate investigations, and have generally committed to strengthen their coordination efforts.

In addition to substantive penalties and corrective measures that may be required for a violation of certain fair lending laws, the federal banking agencies may take compliance with fair lending requirements into account when regulating and supervising other activities of the bank, including in acting on expansionary proposals.

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

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Consumer Protection Regulations. Activities of the Bank are subject to a variety of statutes and regulations—both at the federal and state levels—designed to protect consumers. This includes Title X of the Dodd-Frank Act, which prohibits engaging in any unfair, deceptive, or abusive acts or practices (“UDAAP”). UDAAP claims involve detecting and assessing risks to consumers and to markets for consumer financial products and services. Interest and other charges collected or contracted for by the Bank are subject to state usury laws and federal laws concerning interest rates. The Bank’s loan operations are also subject to federal laws applicable to credit transactions, such as:

·the Dodd-Frank Act that created the Consumer Financial Protection Bureau (“CFPB”), an independent regulatory authority housed within the Federal Reserve, which has broad rule-making authority over a wide range of consumer laws that apply to insured depository institutions;

·the Truth-In-Lending Act (“TILA”) and Regulation Z, governing disclosures of credit terms to consumer borrowers and including substantial requirements for mortgage lending and servicing, as mandated by the Dodd-Frank Act;

·the Home Mortgage Disclosure Act (“HMDA”) and Regulation C, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves, and requiring collection and disclosure of data about applicant and borrower characteristics to assist in identifying possible discriminatory lending patterns and enforcing antidiscrimination statutes;

·the Equal Credit Opportunity Act (“ECOA”) and Regulation B, prohibiting discrimination on the basis of race, color, religion, or other prohibited factors in any aspect of a credit transaction;

·the Fair Credit Reporting Act, as amended by the Fair and Accurate Credit Transactions Act, and Regulation V, governing the use of consumer reports, provision of information to credit reporting agencies, certain identity theft protections, and certain credit and other disclosures, and requiring Bank to have in place an “identity theft red flags” program to detect, prevent and mitigate identity theft.

·the Fair Debt Collection Practices Act and Regulation F, governing the manner in which consumer debts may be collected by collection agencies and intending to eliminate abusive, deceptive, and unfair debt collection practices;

·the Real Estate Settlement Procedures Act (“RESPA”) and Regulation X, which governs various aspects of residential mortgage loans, including the settlement and servicing process, dictates certain disclosures to be provided to consumers, and imposes other requirements related to compensation of service providers, insurance escrow accounts, and loss mitigation procedures;

·The Secure and Fair Enforcement for Mortgage Licensing Act (“SAFE Act”) which mandates a nationwide licensing and registration system for residential mortgage loan originators. The SAFE Act also prohibits individuals from engaging in the business of a residential mortgage loan originator without first obtaining and maintaining annually registration as either a federal or state licensed mortgage loan originator;

·The Homeowners Protection Act (“HPA”), or the PMI Cancellation Act, provides requirements relating to private mortgage insurance (PMI) on residential mortgages, including the cancelation and termination of PMI, disclosure and notification requirements, and the requirement to return unearned premiums;

·The Fair Housing Act (“FHA”) prohibits discrimination in all aspects of residential real-estate related transactions based on race or color, national origin, religion, sex, and other prohibited factors;

·The Servicemembers Civil Relief Act (“SCRA”) and Military Lending Act (“MLA”), providing certain protections for servicemembers, members of the military, and their respective spouses, dependents and others;

·Section 106(c)(5) of the Housing and Urban Development Act requires making home ownership available to eligible homeowners; and

·the rules and regulations of the various federal agencies charged with the responsibility of implementing such federal laws.

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The deposit operations of the Bank also are subject to laws, such as the following federal laws:

·the FDIA, which, among other things, imposes a minimum amount of deposit insurance available per account to $250,000 and imposes other limits on deposit-taking;

·the Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records;

·the Electronic Funds Transfer Act and Regulation E, which governs the rights, liabilities, and responsibilities of consumers and financial institutions using electronic fund transfer services, and which generally mandates disclosure requirements, establishes limitations on liability applicable to consumers for unauthorized electronic fund transfers, dictates certain error resolution processes, and applies other requirements relating to automatic deposits to and withdrawals from deposit accounts;

·the Check Clearing for the 21st Century Act (also known as “Check 21”), which gives “substitute checks,” such as digital check images and copies made from that image, the same legal standing as the original paper check;

·The Expedited Funds Availability Act (“EFA Act”) and Regulation CC, setting forth requirements to make funds deposited into transaction accounts available according to specified time schedules, disclose funds availability policies to customers, and relating to the collection and return of checks and electronic checks, including the rules regarding the creation or receipt of substitute checks; and

·the Truth in Savings Act (“TISA”) and Regulation DD, which requires depository institutions to provide disclosures so that consumers can make meaningful comparisons about depository institutions and accounts.

The CFPB has broad authority to regulate the offering and provision of consumer financial products and services. The CFPB has the authority to supervise and examine depository institutions with more than $10 billion in assets for compliance with federal consumer laws. The authority to supervise and examine depository institutions with $10 billion or less in assets, such as the Bank, for compliance with federal consumer laws remains largely with those institutions’ primary regulators. However, the CFPB may participate in examinations of these smaller institutions on a “sampling basis” and may refer potential enforcement actions against such institutions to their primary regulators. As such, the CFPB may participate in examinations of the Bank. In addition, states are permitted to adopt consumer protection laws and regulations that are stricter than the regulations promulgated by the CFPB.

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

Bank regulators take into account compliance with consumer protection laws when considering approval of a proposed expansionary proposals.

Enforcement Powers. The Bank and its “institution-affiliated parties,” including its management, employee’s agent’s independent contractors and consultants, such as attorneys and accountants, and others who participate in the conduct of the financial institution’s affairs, are subject to potential civil and criminal penalties for violations of law, regulations or written orders of a government agency. These practices can include the failure of an institution to timely file required reports or the filing of false or misleading information or the submission of inaccurate reports. Civil penalties may be as high as $1,000,000 a day for such violations. Criminal penalties for some financial institution crimes have been increased to twenty years. In addition, regulators are provided with greater flexibility to commence enforcement actions against institutions and institution-affiliated parties. Possible enforcement actions include the termination of deposit insurance. Furthermore, banking agencies’ powers to issue cease-and-desist orders have been expanded. Such orders may, among other things, require affirmative action to correct any harm resulting from a violation or practice, including restitution, reimbursement, indemnifications or guarantees against loss. A financial institution may also be ordered to restrict its growth, dispose of certain assets, rescind agreements or contracts, or take other actions as determined by the ordering agency to be appropriate.

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Anti-Money Laundering; the USA Patriot Act; the Office of Foreign Asset Control. Financial institutions must maintain anti-money laundering programs that include established internal policies, procedures, and controls; a designated compliance officer; an ongoing employee training program; and testing of the program by an independent audit function. The program must comply with the anti-money laundering provisions of the Bank Secrecy Act (“BSA”). The Company and the Bank are also prohibited from entering into specified financial transactions and account relationships and must meet enhanced standards for due diligence and “knowing your customer” in their dealings with foreign financial institutions, foreign customers, and other high risk customers. Financial institutions must take reasonable steps to conduct enhanced scrutiny of account relationships to guard against money laundering and to report any suspicious transactions, and certain laws provide law enforcement authorities with increased access to financial information maintained by banks. Financial institutions must comply with requirements regarding risk-based procedures for conducing ongoing customer due diligence, which requires the institutions to take appropriate steps to understand the nature and purpose of customer relationships and identify and verify the identity of the beneficial owners of legal entity customers.

Anti-money laundering obligations have been substantially strengthened as a result of the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act (which we refer to as the “USA PATRIOT Act”). Bank regulators routinely examine institutions for compliance with these obligations and are required to consider compliance in connection with the regulatory review of applications. The regulatory authorities have been active in imposing cease and desist orders and money penalty sanctions against institutions that have not complied with these requirements.

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

Under the USA PATRIOT Act, the regulators can provide lists of the names of persons suspected of involvement in terrorist activities. The Bank can be requested, to search its records for any relationships or transactions with persons on those lists. If the Bank finds any relationships or transactions, it must file a suspicious activity report and contact the applicable governmental authorities.

On January 1, 2021, Congress overrode former President Trump’s veto and thereby enacted the National Defense Authorization Act for Fiscal Year 2021 (“NDAA”). The NDAA provides for one of the most significant overhauls of the BSA and related anti-money laundering laws since the USA Patriot Act. Notably, changes include:

·expansion of coordination and information sharing efforts among the agencies tasked with administering anti-money laundering and countering the financing of terrorism requirements, including the Financial Crimes Enforcement Network (“FinCEN”), the primary federal banking regulators, federal law enforcement agencies, national security agencies, the intelligence community, and financial institutions;

·providing additional penalties with respect to violations of BSA and enhancing the powers of FinCEN;

·significant updates to the beneficial ownership collection rules and the creation of a registry of beneficial ownership which will track the beneficial owners of reporting companies which may be shared with law enforcement and financial institutions conducting due diligence under certain circumstances;

·improvements to existing information sharing provisions that permit financial institutions to share information relating to suspicious activity reports with foreign branches, subsidiaries, and affiliates (except those located in China, Russia, or certain other jurisdictions) for the purpose of combating illicit finance risks; and

·enhanced whistleblower protection provisions, allowing whistleblower(s) who provide original information which leads to successful enforcement of anti-money laundering laws in certain judicial or administrative actions resulting in certain monetary sanctions to receive up to 30 percent of the amount that is collected in monetary sanctions as well as increased protections.

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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 ensure that United States entities do not engage in transactions with “enemies” of the United States, as defined by various Executive Orders and Acts of Congress. OFAC publishes lists of names of persons and organizations with which the Bank is prohibited from engaging in business. If the Bank finds a name on any transaction, account or wire transfer that is on an OFAC list, it must freeze such account, file a suspicious activity report and notify the FBI. The Bank has appointed an OFAC compliance officer to oversee the inspection of its accounts and the filing of any notifications. The Bank actively checks high-risk OFAC areas such as new accounts, wire transfers and customer files. The Bank performs these checks utilizing software, which is updated each time a modification is made to the lists provided by OFAC and other agencies of Specially Designated Nationals and Blocked Persons.

Privacy and Data Security. There are a number of state and federal laws and regulations that govern financial privacy and cybersecurity. At the federal level, this includes the privacy protection provisions of the Gramm-Leach-Bliley Act (“GLBA”) and related regulations, including Regulation P, which govern the treatment of nonpublic personal information. Under these privacy protection provisions, we are limited in our ability to disclose non-public information about consumers to nonaffiliated third parties. These limitations require disclosure of privacy policies and notices to consumers and, in some circumstances, allow consumers to prevent disclosure of certain personal information to a nonaffiliated third party.

Recent cyber attacks against banks and other institutions that resulted in unauthorized access to confidential customer information have prompted the Federal banking agencies to issue several warnings and extensive guidance on cyber security. Guidance includes the establishment of information security standards and cybersecurity programs for implementing safeguards. This guidance, along with related regulatory materials, increasingly focus on risk management and processes related to information technology and the use of third parties in the provision of financial services. The agencies are likely to devote more resources to this part of their safety and soundness examination than they have in the past.

Effect of Governmental Monetary Policies. Our earnings are affected by domestic economic conditions and the monetary and fiscal policies of the United States government and its agencies. The Federal Reserve’s monetary policies have had, and are likely to continue to have, an important impact on the operating results of commercial banks through its power to implement national monetary policy in order, among other things, to curb inflation or combat a recession. The monetary policies of the Federal Reserve have major effects upon the levels of bank loans, investments and deposits through its open market operations in United States government securities and through its regulation of the discount rate on borrowings of member banks and the reserve requirements against member bank deposits. It is not possible to predict the nature or impact of future changes in monetary and fiscal policies. On July 31, 2019, September 18, 2019 and October 30, 2019, the Federal Open Market Committee (the “FMOC”) decreased the federal funds target rate by 25 basis points, which resulted in a total reduction of 75 basis points during 2019. On March 3, 2020, the FMOC decreased the federal funds target rate by 50 basis points to a target range of 1.00% to 1.25%; and on March 15, 2020, the FMOC decreased the federal funds target rate by 100 basis points to the current target range of 0.00% to 0.25%.

Insurance of Accounts and Regulation by the FDIC. The Bank’s deposits are insured up to applicable limits by the Deposit Insurance Fund of the FDIC. As insurer, the FDIC imposes deposit insurance premiums and is authorized to conduct examinations of and to require reporting by FDIC insured institutions. It also may prohibit any FDIC insured institution from engaging in any activity the FDIC determines by regulation or order to pose a serious risk to the insurance fund. The FDIC also has the authority to initiate enforcement actions against savings institutions, after giving the bank’s regulatory authority an opportunity to take such action, and may terminate the deposit insurance if it determines that the institution has engaged in unsafe or unsound practices or is in an unsafe or unsound condition.

As an FDIC-insured bank, the Bank must pay deposit insurance assessments to the FDIC based on its average total assets minus its average tangible equity. The Bank’s assessment rates are currently based on its risk classification (i.e., the level of risk it poses to the FDIC’s deposit insurance fund). Institutions classified as higher risk pay assessments at higher rates than institutions that pose a lower risk.

In addition to the ordinary assessments described above, the FDIC has the ability to impose special assessments in certain instances. For example, the Dodd-Frank Act increased the minimum target Deposit Insurance Fund ratio from 1.15% of estimated insured deposits to 1.35% of estimated insured deposits. The FDIC was required to seek to achieve the 1.35% ratio by September 30, 2020. The FDIC indicated that the 1.35% ratio was exceeded in November 2018. Insured institutions of less than $10 billion of assets received credits for the portion of their assessments that contributed to the reserve ratio between 1.15% and 1.35%. All remaining small bank credits were refunded on the September 30, 2020 assessment invoice effectively ending the application of small bank credits. Assessment rates are expected to decrease if the reserve ratio increases such that it exceeds 2%.

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

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Incentive Compensation.The Dodd-Frank Act required the federal bank regulators and the SEC to establish joint regulations or guidelines prohibiting incentive-based payment arrangements at specified regulated entities having at least $1 billion in total assets that encourage inappropriate risks by providing an executive officer, employee, director or principal shareholder with excessive compensation, fees, or benefits or that could lead to material financial loss to the entity. In addition, these regulators must establish regulations or guidelines requiring enhanced disclosure to regulators of incentive-based compensation arrangements. The agencies proposed such regulations in April 2011. However, the 2011 proposal was replaced with a new proposal in May 2016, which makes explicit that the involvement of risk management and control personnel includes not only compliance, risk management and internal audit, but also legal, human resources, accounting, financial reporting and finance roles responsible for identifying, measuring, monitoring or controlling risk-taking. No final rule has been issued yet.

In June 2010, the Federal Reserve, the FDIC and the OCC issued a comprehensive final guidance on incentive compensation policies intended to ensure that the incentive compensation policies of banking organizations do not undermine the safety and soundness of such organizations by encouraging excessive risk-taking. The guidance, which covers all employees that have the ability to materially affect the risk profile of an organization, either individually or as part of a group, is based upon the key principles that a banking organization’s incentive compensation arrangements should (i) provide incentives that do not encourage risk-taking beyond the organization’s ability to effectively identify and manage risks, (ii) be compatible with effective internal controls and risk management, and (iii) be supported by strong corporate governance, including active and effective oversight by the organization’s board of directors.

The Federal Reserve will review, as part of the regular, risk-focused examination process, the incentive compensation arrangements of banking organizations, such as the Company, that are not “large, complex banking organizations.” These reviews will be tailored to each organization based on the scope and complexity of the organization’s activities and the prevalence of incentive compensation arrangements. The findings of the supervisory initiatives will be included in reports of examination. Deficiencies will be incorporated into the organization’s supervisory ratings, which can affect the organization’s ability to make acquisitions and take other actions. Enforcement actions may be taken against a banking organization if its incentive compensation arrangements, or related risk-management control or governance processes, pose a risk to the organization’s safety and soundness and the organization is not taking prompt and effective measures to correct the deficiencies.

In addition, the Regulatory ReliefTax Cuts and Jobs Act included regulatory relief(the “Tax Act”), which was signed into law in December 2017, contains certain provisions affecting performance-based compensation. Specifically, the pre-existing exception to the $1.0 million deduction limitation applicable to performance-based compensation was repealed. The deduction limitation is now applied to all compensation exceeding $1.0 million, for community banks regarding regulatory examination cycles, call reports, the proprietary trading prohibitions in the Volcker Rule, mortgage disclosures,our covered employees, regardless of how it is classified, which could have an adverse effect on our income tax expense and risk weights for certain high-risk commercial real estate loans.

We believe these reforms are favorable to our operations, but the ultimate impacts remain difficult to predict until rulemaking is complete and the reforms are fully implemented.

The CARES Act and Initiatives Related to COVID-19net income.

 

On March 27, 2020,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 Coronavirus Aid, Relief,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 Economic Security Act,construction and land loans, exceeding 300% or more of an institution’s total risk-based capital and the CARES Act, was signed into law. The CARES Act provided for approximately $2.2 trillion in direct economic relief in response to the public health and economic impacts of COVID-19. Manyoutstanding balance of the CARES Act’s programscommercial real estate loan portfolio has increased by 50% or more in the preceding three years or (ii) construction and land development loans exceeding 100% of total risk-based capital. The CRE Guidance does not limit banks’ levels of commercial real estate lending activities, but rather guides institutions in developing risk management practices and levels of capital that are commensurate with the level and remain, dependent uponnature of their commercial real estate concentrations. On December 18, 2015, the direct involvementfederal 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 financial institutions like the Bank. These programs have been implemented through rules and guidance adopted by federal departments and agencies, including the U.S. Department of Treasury, the Federal Reserve and othercommercial real estate underwriting standards. The federal bank regulatory authorities, including those with direct supervisory jurisdiction overagencies reminded FDIC-insured institutions to maintain underwriting discipline and exercise prudent risk-management practices to identify, measure, monitor and manage the Company and the Bank. Furthermore, as the COVID-19 pandemic evolves, federal regulatory authorities continue to issue additional guidance with respect to the implementation, life cycle, and eligibility requirements for the various CARES Act programs, as well as industry-specific recovery procedures for COVID-19.risks arising from commercial real estate lending. In addition, it is possible that Congress will enact supplementary COVID-19 response legislation, including amendments toFDIC-insured institutions must maintain capital commensurate with the CARES Act or new bills comparable in scope tolevel and nature of their commercial real estate concentration risk. Based on the CARES Act. We continue to assess the impact of the CARES Act and other statutes, regulations and supervisory guidance related to the COVID-19 pandemic.

Paycheck Protection Program. A principal provision of the CARES Act amended the SBA’sBank’s loan program to create a guaranteed, unsecured loan program, the Paycheck Protection Program, or PPP, to fund operational costs of eligible businesses, organizations and self-employed persons impacted by COVID-19. These loans are eligible to be forgiven if certain conditions are satisfied and are fully guaranteed by the SBA. Additionally, loan payments will also be deferred for the first six months of the loan term. The PPP commenced on April 3, 2020 and was available to qualified borrowers through August 8, 2020. No collateral or personal guarantees were required. On December 27, 2020, the President signed into law omnibus federal spending and economic stimulus legislation titled the “Consolidated Appropriations Act, 2021” that included the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (the “HHSB Act”). Among other things, the HHSB Act renewed the PPP, allocating $284.45 billion for both new first time PPP loans under the existing PPP and the expansion of existing PPP loans for certain qualified, existing PPP borrowers. In addition to extending and amending the PPP, the HHSB Act also creates a new grant program for “shuttered venue operators.” As a participating lender in the PPP, we continue to monitor legislative, regulatory, and supervisory developments related thereto, including the most recent changes implemented by the HHSB Act.

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Troubled Debt Restructurings and Loan Modifications for Affected Borrowers. The CARES Act, as extended by certain provisions of the Consolidated Appropriations Act, 2021, permits banks to suspend requirements under GAAP for loan modifications to borrowers affected by COVID-19 that may otherwise be characterized as troubled debt restructurings and suspend any determination related thereto if (i) the borrower was not more than 30 days past dueportfolio as of December 31, 2019, (ii)2021, its non-owner occupied commercial loans and its construction and land development loans were approximately 258% and 69% of total risk-based capital, respectively. Management will continue to monitor the modifications are related to COVID-19, and (iii) the modification occurs between March 1, 2020 and the earlier of 60 days after the date of terminationlevel of the national emergency or January 1, 2022. Federal bank regulatory authorities also issued guidance to encourage banks to makeconcentration in commercial real estate loans within the bank’s loan modifications for borrowers affected by COVID-19.portfolio.

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Main Street Lending Program. The CARES Act encouraged the Federal Reserve, in coordination with the Secretary of the Treasury, to establish or implement various programs to help mid-size businesses, nonprofit organizations, and municipalities. On April 9, 2020, the Federal Reserve proposed the creation of the Main Street Lending Program (the “MSLP”) to implement certain of these recommendations. The MSLP supported lending to small- and medium-sized businesses that were in sound financial condition before the onset of the COVID-19 pandemic. The MSLP, which expired on January 8, 2021, operated through three facilities: the Main Street New Loan Facility, the Main Street Priority Loan Facility, and the Main Street Expanded Loan Facility. The Bank registered as a lender under the MSLP, but as of December 31, 2020, originated no loans under the MSLP.

Proposed Legislation and Regulatory Action.From time to time, various legislative and regulatory initiatives are introduced in Congress and state legislatures, as well as by regulatory agencies. Such initiatives may include proposals to expand or contract the powers of bank holding companies and depository institutions or proposals to substantially change the financial institution regulatory system. Such legislation could change banking statutes and our operating environment in substantial and unpredictable ways. If enacted, such legislation could increase or decrease the cost of doing business, limit or expand permissible activities or affect the competitive balance among banks, savings associations, credit unions, and other financial institutions. We cannot predict whether any such legislation will be enacted, and, if enacted, the effect that it, or any implementing regulations, would have on our financial condition or results of operations. A change in statutes, regulations or regulatory policies applicable to the Company or the Bank could have a material effect on our business.

TemporaryFirst Community Bank Leverage Ratio Relief. Pursuant to the CARES Act, the federal banking agencies authorities adopted an interim rule, effective until the earlier of the termination of the COVID-19 emergency declaration and December 31, 2020, to (i) reduce the minimum community bank leverage ratio from 9% to 8% percent and (ii) give community banks two-quarter grace period to satisfy such ratio if such ratio falls out of compliance by no more than 1%.

Capital and Related Requirements.Corporation

In July of 2013 (and fully-phased in as of January 1, 2019), the U.S. federal banking agencies approved the implementationWe own 100% of the Basel III regulatoryoutstanding capital reforms in pertinent part, and, at the same time, promulgated rules effecting certain changes required by the Dodd-Frank Act ( “Basel III”). Basel III was released in the form of enforceable regulations by eachstock of the applicableBank, and, therefore, we are considered to be a bank holding company under the federal Bank Holding Company Act of 1956 (the “Bank Holding Company Act”). As a result, we are primarily subject to the supervision, examination and reporting requirements of the Federal Reserve under the Bank Holding Company Act and its regulations promulgated thereunder. Moreover, as a bank regulatory agencies. Basel III is applicable to all banking organizations thatholding company of a bank located in South Carolina, we also are subject to minimum capital requirements, including federalthe South Carolina Banking 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 smallBranching Efficiency Act.

Permitted Activities. Under the Bank Holding Company Act, a bank holding company is generally permitted to engage in, or acquire direct or indirect control of more than 5% of the voting shares of any company engaged in, the following activities:

·banking or managing or controlling banks;

·furnishing services to or performing services for our subsidiaries; and

·any activity that the Federal Reserve determines to be so closely related to banking as to be a proper incident to the business of banking;

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Activities that the Federal Reserve has found to be so closely related to banking as to be a qualifyingproper incident to the business of banking include:

·factoring accounts receivable;

·making, acquiring, brokering or servicing loans and usual related activities;

·leasing personal or real property;

·operating a non-bank depository institution, such as a savings association;

·trust company functions;

·financial and investment advisory activities;

·conducting discount securities brokerage activities;

·underwriting and dealing in government obligations and money market instruments;

·providing specified management consulting and counseling activities;

·performing selected data processing services and support services;

·acting as agent or broker in selling credit life insurance and other types of insurance in connection with credit transactions; and

·performing selected insurance underwriting activities.

As a bank holding company, we also can elect to be treated as a “financial holding company,” which would allow us to engage in a broader array of activities. In summary, a financial holding company can engage in activities that are financial in nature or incidental or complimentary to financial activities, including insurance underwriting, sales and brokerage activities, providing financial and investment advisory services, underwriting services and limited merchant banking activities. We have not sought financial holding company status, but may elect such status in the future as our business matures. If we were to elect in writing for financial holding company status, each insured depository institution we control would have to be well capitalized, well managed and have at least a satisfactory rating under the Community Reinvestment Act (“CRA”) (discussed below).

The Federal Reserve has the authority to order a bank holding company or savingsits subsidiaries to terminate any of these activities or to terminate its ownership or control of any subsidiary when it has reasonable cause to believe that the bank holding company’s continued ownership, activity or control constitutes a serious risk to the financial safety, soundness or stability of it or any of its bank subsidiaries.

Source of Strength. There are a number of obligations and loanrestrictions 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 lessits 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 $3.0 billiona 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 consolidateddanger 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.

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Any capital loans by a bank holding company to any of its subsidiary banks are subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary bank. In the event of a bank holding company’s bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee and entitled to a priority of payment.

Capital Requirements. The Federal Reserve generally imposes certain capital requirements on a bank holding company under the Bank Holding Company Act, including a minimum leverage ratio and a minimum ratio of “qualifying” capital to risk-weighted assets. More stringentIf applicable, these requirements are imposed on “advanced approaches” banking organizations—generallyessentially the same as those organizations with $250 billion or more in total consolidated assets, $10 billion or more in total foreign exposures applicablethat apply to advanced approaches banking organizations.

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Based on the foregoing,Bank and are described above under “Capital and Related Requirements.” However, because the Company currently qualifies as a small bank holding company, these capital requirements do not currently apply to the Company. Subject to certain restrictions, we are generally notable 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 capital requirements at theBank by issuing securities without having to receive regulatory approval, subject to compliance with federal and state securities laws.

Dividends. As a bank holding company, level unless otherwise advisedthe Company’s ability to declare and pay dividends is dependent on certain federal and state regulatory considerations, including the guidelines of the Federal Reserve. The Federal Reserve has issued a policy statement regarding the payment of dividends by bank holding companies. In general, the Federal Reserve’s policies provide that dividends should be paid only out of current earnings and only if the prospective rate of earnings retention by the bank holding company appears consistent with the organization’s capital needs, asset quality and overall financial condition. The Federal Reserve; however, our Bank remains subjectReserve’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 capital requirements. Accordingly,financial flexibility and capital-raising capacity to obtain additional resources for assisting its subsidiary banks where necessary. In addition, under the Bank is required to maintainprompt corrective action regulations, the following capital levels:

·a Common Equity Tier 1 risk-based capital ratio of 4.5%;
·a Tier 1 risk-based capital ratio of 6%;
·a total risk-based capital ratio of 8%; and
·a leverage ratio of 4%.

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

Under Basel III, Tier 1 capital includes two components: Common Equity Tier 1 capital and additional Tier 1 capital. The highest form of capital, Common Equity Tier 1 capital, consists solely of common stock (plus related surplus), retained earnings, accumulated other comprehensive income, otherwise referred to as AOCI, and limited amounts of minority interests that are in the form of common stock. Additional Tier 1 capital is primarily comprised of noncumulative perpetual preferred stock, Tier 1 minority interests and grandfathered trust preferred securities. Tier 2 capital generally includes the allowance for loan losses up to 1.25% of risk-weighted assets, qualifying preferred stock, subordinated debt and qualifying Tier 2 minority interests, less any deductions in Tier 2 instruments of an unconsolidated financial institution. AOCI is presumptively included in Common Equity Tier 1 capital and often would operate to reduce this category of capital. When implemented, Basel III provided a one-time opportunity at the end of the first quarter of 2015 for covered banking organizations to opt outability of a large part of this treatment of AOCI. We made this opt-out election and, asbank holding company to pay dividends may be restricted if a result, retained our pre-existing treatment for AOCI.subsidiary bank becomes undercapitalized. These regulatory policies could affect the Company’s ability to pay dividends or otherwise engage in capital distributions.

In addition, in order to avoid restrictions on capital distributions or discretionary bonus payments to executives, under Basel III, a banking organization must maintain a “capital conservation buffer” on top of its minimum risk-based capital requirements. This buffer must consist solely of Tier 1 Common Equity, butsince the buffer applies to all three risk-based measurements (Common Equity Tier 1, Tier 1 capital and total capital). The 2.5% capital conservation buffer was phased in incrementally over time, and became fully effective for us on January 1, 2019, resulting in the following effective minimum capital plus capital conservation buffer ratios: (i) a Common Equity Tier 1 capital ratio of 7.0%, (ii) a Tier 1 risk-based capital ratio of 8.5%, and (iii) a total risk-based capital ratio of 10.5%.

On December 21, 2018, the federal banking agencies issued a joint final rule to revise their regulatory capital rules to (i) address the upcoming implementation of a new credit impairment model, the Current Expected Credit Loss, or CECL model, an accounting standard under GAAP; (ii) provide an optional three-year phase-in period for the day-one adverse regulatory capital effects that banking organizations are expected to experience upon adopting CECL; and (iii) require the use of CECL in stress tests beginning with the 2023 capital planning and stress testing cycle for certain banking organizations that are subject to stress testing. We are currently evaluating the impact the CECL model will have on our accounting, and expect to recognize a one-time cumulative-effect adjustment to our allowance for loan losses as of the beginning of the first quarter of 2023, the first reporting period in which the new standard is effective. At this time, we cannot yet reasonably determine the magnitude of such one-time cumulative adjustment, if any, or of the overall impact of the new standard on our business, financial condition or results of operations.

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Change in Control.

Two statutes, the Change in Bank Control Act and the Bank Holding Company Act, together with regulations promulgated under them, require some form of regulatory review before any company may acquire “control” of a bank or a bank holding company. Under the Change in Bank Control Act, a person or company is required to file a notice with the Federal Reserve if it will, as a result of the transaction, own or control 10% or more of any class of voting securities or direct the management or policies of a bank or bank holding company and either if the bank or bank holding company has registered securities or if the acquirer would be the largest holder of that class of voting securities after the acquisition. For a change in control at the holding company level, both the Federal Reserve and the subsidiary bank’s primary federal regulator must approve the change in control; at the bank level, only the bank’s primary federal regulator is involved.

In addition, the Bank Holding Company Act prohibits any entity from acquiring 25% (5% if the acquirer is a bank holding company) or more of a bank holding company’s voting securities, or otherwise obtaining control or a controlling influence over the management or policies of a bank or bank holding company without regulatory approval. On January 30, 2020, the Federal Reserve issued a final rule (which became effective September 30, 2020) that clarified and codified the Federal Reserve’s standards for determining whether one company has control over another. The final rule established four categories of tiered presumptions of noncontrol that are based on the percentage of voting shares held by the investor (less than 5%, 5-9.9%, 10-14.9% and 15-24.9%) and the presence of other indicia of control. As the percentage of ownership increases, fewer indicia of control are permitted without falling outside of the presumption of noncontrol. These indicia of control include nonvoting equity ownership, director representation, management interlocks, business relationship and restrictive contractual covenants. Under the final rule, investors can hold up to 24.9% of the voting securities and up to 33% of the total equity of a company without necessarily having a controlling influence.

Transactions subject to the Bank Holding Company Act are exempt from Change in Control Act requirements. For state banks, state laws, including those of South Carolina, typically require approval by the state bank regulator as well.

Transactions with Affiliates and Insiders.

The Company is a legal entity separate and distinct from the Bank and does not conduct stand-alone operations, its other subsidiaries. Various legal limitations restrictability to pay dividends depends on the ability of the Bank to pay dividends to it, which is also subject to regulatory restrictions as described below in “First Community Bank—Dividends.”

South Carolina State Regulation. As a South Carolina bank holding company under the South Carolina Banking and Branching Efficiency Act, we are subject to limitations on any sale to, or merger with, other financial institutions. We are not required to obtain the approval of the S.C. Board prior to acquiring the capital stock of a national bank, but we must notify them at least 15 days prior to doing so. We must receive the S.C. Board’s approval prior to engaging in the acquisition of a South Carolina state-chartered bank or another South Carolina bank holding company.

First Community Bank

As a South Carolina state bank, the Bank’s primary federal regulator is the FDIC and the Bank is also regulated and examined by the S.C. Board. Deposits in the Bank are insured by the FDIC up to a maximum amount of $250,000. The FDIC insurance coverage limit applies per depositor, per insured depository institution for each account ownership category.

The S.C. Board and the FDIC regulate or monitor virtually all areas of the Bank’s operations, including:

·security devices and procedures;

·adequacy of capitalization and loss reserves;

·loans;

·investments;

·borrowings;

·deposits;

·mergers;

·issuances of securities;

·payment of dividends;

·interest rates payable on deposits;

·interest rates or fees chargeable on loans;

·establishment of branches;

·corporate reorganizations;

·maintenance of books and records; and

·adequacy of staff training to carry on safe lending and deposit gathering practices.

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These agencies, and the federal and state laws applicable to the Bank’s operations, extensively regulate various aspects of our banking business, including, among other things, permissible types and amounts of loans, investments and other activities, capital adequacy, branching, interest rates on loans and on deposits, the maintenance of reserves on demand deposit liabilities, and the safety and soundness of our banking practices.

Prompt Corrective Action. The FDICIA established a “prompt corrective action” program in which every bank is placed in one of five regulatory categories, depending primarily on its regulatory capital levels. The FDIC and the other federal banking regulators are permitted to take increasingly severe action as a bank’s capital position or financial condition declines below the “Adequately Capitalized” level described below. Regulators are also empowered to place in receivership or require the sale of a bank to another depository institution when a bank’s leverage ratio reaches two percent. Better capitalized institutions are generally subject to less onerous regulation and supervision than banks with lesser amounts of capital. The FDIC’s regulations set forth five capital categories, each with specific regulatory consequences. The categories are:

·Well Capitalized—The institution exceeds the required minimum level for each relevant capital measure. A well capitalized institution (i) has a total risk-based capital ratio of 10% or greater, (ii) has a Tier 1 risk-based capital ratio of 8% or greater, (iii) has a common equity Tier 1 risk-based capital ratio of 6.5% or greater, (iv) has a leverage capital ratio of 5% or greater, and (v) is not subject to any order or written directive to meet and maintain a specific capital level for any capital measure.

·Adequately Capitalized—The institution meets the required minimum level for each relevant capital measure. No capital distribution may be made that would result in the institution becoming undercapitalized. An adequately capitalized institution (i) has a total risk-based capital ratio of 8% or greater, (ii) has a Tier 1 risk-based capital ratio of 6% or greater, (iii) has a common equity Tier 1 risk-based capital ratio of 4.5% or greater, and (iv) has a leverage capital ratio of 4% or greater.

·Undercapitalized—The institution fails to meet the required minimum level for any relevant capital measure. An undercapitalized institution (i) has a total risk-based capital ratio of less than 8%, (ii) has a Tier 1 risk-based capital ratio of less than 6%, (iii) has a common equity Tier 1 risk-based capital ratio of less than 4.5% or greater, or (iv) has a leverage capital ratio of less than 4%.

·Significantly Undercapitalized—The institution is significantly below the required minimum level for any relevant capital measure. A significantly undercapitalized institution (i) has a total risk-based capital ratio of less than 6%, (ii) has a Tier 1 risk-based capital ratio of less than 4%, (iii) has a common equity Tier 1 risk-based capital ratio of less than 3% or greater, or (iv) has a leverage capital ratio of less than 3%.

·Critically Undercapitalized—The institution fails to meet a critical capital level set by the appropriate federal banking agency. A critically undercapitalized institution has a ratio of tangible equity to total assets that is equal to or less than 2%.

If the FDIC determines, after notice and an opportunity for hearing, that the bank is in an unsafe or unsound condition, the regulator is authorized to reclassify the bank to the next lower capital category (other than critically undercapitalized) and require the submission of a plan to correct the unsafe or unsound condition.

If a bank is not well capitalized, it cannot accept brokered deposits without prior regulatory approval. In addition, a bank that is not well capitalized cannot offer an effective yield in excess of 75 basis points over interest paid on deposits of comparable size and maturity in such institution’s normal market area for deposits accepted from lendingwithin its normal market area, or national rate paid on deposits of comparable size and maturity for deposits accepted outside the bank’s normal market area. Moreover, the FDIC generally prohibits a depository institution from making any capital distributions (including payment of a dividend) or paying any management fee to its parent holding company if the depository institution would thereafter be categorized as undercapitalized. Undercapitalized institutions are subject to growth limitations (an undercapitalized institution may not acquire another institution, establish additional branch offices or engage in any new line of business unless determined by the appropriate federal banking agency to be consistent with an accepted capital restoration plan, or unless the FDIC determines that the proposed action will further the purpose of prompt corrective action) and are required to submit a capital restoration plan. The agencies may not accept a capital restoration plan without determining, among other things, that the plan is based on realistic assumptions and is likely to succeed in restoring the depository institution’s capital. In addition, for a capital restoration plan to be acceptable, the depository institution’s parent holding company must guarantee that the institution will comply with the capital restoration plan. The aggregate liability of the parent holding company is limited to the lesser of an amount equal to 5.0% of the depository institution’s total assets at the time it became categorized as undercapitalized or the amount that is necessary (or would have been necessary) to bring the institution into compliance with all capital standards applicable with respect to such institution as of the time it fails to comply with the plan. If a depository institution fails to submit an acceptable plan, it is categorized as significantly undercapitalized.

Significantly undercapitalized categorized depository institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become categorized as adequately capitalized, requirements to reduce total assets, and cessation of receipt of deposits from correspondent banks. The appropriate federal banking agency may take any action authorized for a significantly undercapitalized institution if an undercapitalized institution fails to submit an acceptable capital restoration plan or fails in any material respect to implement a plan accepted by the agency. A critically undercapitalized institution is subject to having a receiver or conservator appointed to manage its affairs and for loss of its charter to conduct banking activities.

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An insured depository institution may not pay a management fee to a bank holding company controlling that institution or any other person having control of the institution if, after making the payment, the institution, would be undercapitalized. In addition, an institution cannot make a capital distribution, such as a dividend or other distribution that is in substance a distribution of capital to the owners of the institution if following such a distribution the institution would be undercapitalized. Thus, if payment of such a management fee or the making of such would cause a bank to become undercapitalized, it could not pay a management fee or dividend to the bank holding company.

As of December 31, 2021, the Bank was deemed to be “well capitalized.”

Standards for Safety and Soundness. The FDIA also requires the federal banking regulatory agencies to prescribe, by regulation or guideline, operational and managerial standards for all insured depository institutions relating to: (i) internal controls, information systems and internal audit systems; (ii) loan documentation; (iii) credit underwriting; (iv) interest rate risk exposure; and (v) asset growth. The agencies also must prescribe standards for asset quality, earnings, and stock valuation, as well as standards for compensation, fees and benefits. The federal banking agencies have adopted regulations and Interagency Guidelines Prescribing Standards for Safety and Soundness to implement these required standards. These guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. Under the regulations, if the FDIC determines that the Bank fails to meet any standards prescribed by the guidelines, the agency may require the Bank to submit to the agency an acceptable plan to achieve compliance with the standard, as required by the FDIC. The final regulations establish deadlines for the submission and review of such safety and soundness compliance plans.

Regulatory Examination. The FDIC also requires the Bank to prepare annual reports on the Bank’s financial condition and to conduct an annual audit of its financial affairs in compliance with its minimum standards and procedures.

All insured institutions must undergo regular on-site examinations by their appropriate banking agency. The cost of examinations of insured depository institutions and any affiliates may be assessed by the appropriate federal banking agency against each institution or affiliate as it deems necessary or appropriate. Insured institutions are required to submit annual reports to the FDIC, their federal regulatory agency, and state supervisor when applicable. The FDIC has developed a method for insured depository institutions to provide supplemental disclosure of the estimated fair market value of assets and liabilities, to the extent feasible and practicable, in any balance sheet, financial statement, report of condition or any other report of any insured depository institution. The federal banking regulatory agencies prescribe, by regulation, standards for all insured depository institutions and depository institution holding companies relating, among other things, to the following:

·internal controls;

·information systems and audit systems;

·loan documentation;

·credit underwriting;

·interest rate risk exposure; and

·asset quality.

Dividends. The Company’s principal source of cash flow, including cash flow to pay dividends to its shareholders, is dividends it receives from the Bank. Statutory and regulatory limitations apply to the Bank’s payment of dividends to the Company. As a South Carolina chartered bank, the Bank is subject to limitations on the amount of dividends that it is permitted to pay. Unless otherwise supplying fundsinstructed by the S.C. Board, the Bank is generally permitted under South Carolina state banking regulations to pay cash dividends of up to 100% of net income in any calendar year without obtaining the prior approval of the S.C. Board. The FDIC also has the authority under federal law to enjoin a bank from engaging in what in its opinion constitutes an unsafe or unsound practice in conducting its business, including the payment of a dividend under certain circumstances. The Bank must also maintain the Common Equity Tier 1 capital conservation buffer of 2.5%, in excess of its minimum regulatory risk-based capital ratios, to avoid becoming subject to restrictions on capital distributions, including dividends, as described above.

Branching. Federal legislation permits out-of-state acquisitions by bank holding companies, interstate branching by banks, and interstate merging by banks. The Dodd-Frank Act removed previous state law restrictions on de novo interstate branching in states such as South Carolina and Georgia. This change effectively permits out of state banks to open de novo branches in states where the laws of such state would permit a bank chartered by that state to open a de novo branch.

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Anti-Tying Restrictions. Under amendments to the Bank Holding Company Act and Federal Reserve regulations, a bank is prohibited from engaging in certain tying or reciprocity arrangements with its customers. In general, a bank may not extend credit, lease, sell property, or furnish any services or fix or vary the consideration for these on the condition that (i) the customer obtain or provide some additional credit, property, or services from or to the bank, the bank holding company or subsidiaries thereof or (ii) the customer may not obtain some other credit, property, or services from a competitor, except to the extent reasonable conditions are imposed to assure the soundness of the credit extended. Certain arrangements are permissible: a bank may offer combined-balance products and may otherwise offer more favorable terms if a customer obtains two or more traditional bank products; and certain foreign transactions are exempt from the general rule. A bank holding company or any bank affiliate also is subject to anti-tying requirements in connection with electronic benefit transfer services.

Community Reinvestment Act. The Bank is subject to certain requirements and reporting obligations under the CRA, which requires federal banking regulators to evaluate the record of each financial institution in meeting the credit needs of its local community, including low- and moderate- income neighborhoods. The CRA further requires these criteria to be considered in evaluating mergers, acquisitions and applications to open a branch or facility. Failure to adequately meet these criteria could result in the imposition of additional requirements and limitations on the Bank. Additionally, financial institutions must publicly disclose the terms of various CRA-related agreements. In its most recent CRA examination, the Bank received a “satisfactory” rating.

In December 2019, the FDIC and the Office of the Comptroller of the Currency (“OCC”) issued a notice of proposed rulemaking intended to (i) clarify which activities qualify for CRA credit; (ii) update where activities count for CRA credit; (iii) create a more transparent and objective method for measuring CRA performance; and (iv) provide for more transparent, consistent, and timely CRA-related data collection, recordkeeping, and reporting. However, the Federal Reserve has not joined the proposed rulemaking. In May 2020, the OCC issued its final CRA rule, which was later rescinded in December 2021. The FDIC has not finalized any revisions to its CRA rule. In September 2020, the Federal Reserve issued an advance notice of proposed rulemaking that seeks public comment on ways to modernize the Federal Reserve’s CRA regulations. The effects on the Company and the Bank of any potential change to the CRA rules will depend on the final form of any federal rulemaking and cannot be predicted at this time. Management will continue to evaluate any changes to the CRA’s regulations and their impact to the Company and the Bank.

Fair Lending Requirements. We are subject to certain fair lending requirements and reporting obligations involving lending operations. A number of laws and regulations provide these fair lending requirements and reporting obligations, including, at the federal level, the Equal Credit Opportunity Act (“ECOA”), as amended by the Dodd-Frank Act, and Regulation B, as well as the Fair Housing Act (“FHA”) and regulations implementing FHA found at 24 C.F.R. Part 100. ECOA and Regulation B prohibit discrimination in any aspect of a credit transaction based on a number of prohibited factors, including race or color, religion, national origin, sex, marital status, age, the applicant’s receipt of income derived from public assistance programs, and the applicant’s exercise, in good faith, of any right under the Consumer Credit Protection Act. ECOA and Regulation B include lending acts and practices that are specifically prohibited, permitted, or required, and these laws and regulations proscribe data collection requirements, legal action statute of limitations, and disclosure of the consumer’s ability to receive a copy of any appraisal(s) and valuation(s) prepared in connection with certain loans secured by dwellings. FHA prohibits discrimination in all aspects of residential real-estate related transactions based on prohibited factors, including race or color, national origin, religion, sex, familial status, and handicap.

In addition to prohibiting discrimination in credit transactions on the basis of prohibited factors, these laws and regulations can cause a lender to be liable for policies that result in a disparate treatment of or have a disparate impact on a protected class of persons. If a pattern or practice of lending discrimination is alleged by a regulator, then the matter may be referred by the agency to the U.S. Department of Justice (“DOJ”) for investigation. In December 2012, the DOJ and CFPB entered into a Memorandum of Understanding under which the agencies have agreed to share information, coordinate investigations, and have generally committed to strengthen their coordination efforts.

In addition to substantive penalties and corrective measures that may be required for a violation of certain fair lending laws, the federal banking agencies may take compliance with fair lending requirements into account when regulating and supervising other activities of the bank, including in acting on expansionary proposals.

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

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Consumer Protection Regulations. Activities of the Bank are subject to a variety of statutes and regulations—both at the federal and state levels—designed to protect consumers. This includes Title X of the Dodd-Frank Act, which prohibits engaging in any unfair, deceptive, or abusive acts or practices (“UDAAP”). UDAAP claims involve detecting and assessing risks to consumers and to markets for consumer financial products and services. Interest and other charges collected or contracted for by the Bank are subject to state usury laws and federal laws concerning interest rates. The Bank’s loan operations are also subject to federal laws applicable to credit transactions, such as:

·the Dodd-Frank Act that created the Consumer Financial Protection Bureau (“CFPB”), an independent regulatory authority housed within the Federal Reserve, which has broad rule-making authority over a wide range of consumer laws that apply to insured depository institutions;

·the Truth-In-Lending Act (“TILA”) and Regulation Z, governing disclosures of credit terms to consumer borrowers and including substantial requirements for mortgage lending and servicing, as mandated by the Dodd-Frank Act;

·the Home Mortgage Disclosure Act (“HMDA”) and Regulation C, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves, and requiring collection and disclosure of data about applicant and borrower characteristics to assist in identifying possible discriminatory lending patterns and enforcing antidiscrimination statutes;

·the Equal Credit Opportunity Act (“ECOA”) and Regulation B, prohibiting discrimination on the basis of race, color, religion, or other prohibited factors in any aspect of a credit transaction;

·the Fair Credit Reporting Act, as amended by the Fair and Accurate Credit Transactions Act, and Regulation V, governing the use of consumer reports, provision of information to credit reporting agencies, certain identity theft protections, and certain credit and other disclosures, and requiring Bank to have in place an “identity theft red flags” program to detect, prevent and mitigate identity theft.

·the Fair Debt Collection Practices Act and Regulation F, governing the manner in which consumer debts may be collected by collection agencies and intending to eliminate abusive, deceptive, and unfair debt collection practices;

·the Real Estate Settlement Procedures Act (“RESPA”) and Regulation X, which governs various aspects of residential mortgage loans, including the settlement and servicing process, dictates certain disclosures to be provided to consumers, and imposes other requirements related to compensation of service providers, insurance escrow accounts, and loss mitigation procedures;

·The Secure and Fair Enforcement for Mortgage Licensing Act (“SAFE Act”) which mandates a nationwide licensing and registration system for residential mortgage loan originators. The SAFE Act also prohibits individuals from engaging in the business of a residential mortgage loan originator without first obtaining and maintaining annually registration as either a federal or state licensed mortgage loan originator;

·The Homeowners Protection Act (“HPA”), or the PMI Cancellation Act, provides requirements relating to private mortgage insurance (PMI) on residential mortgages, including the cancelation and termination of PMI, disclosure and notification requirements, and the requirement to return unearned premiums;

·The Fair Housing Act (“FHA”) prohibits discrimination in all aspects of residential real-estate related transactions based on race or color, national origin, religion, sex, and other prohibited factors;

·The Servicemembers Civil Relief Act (“SCRA”) and Military Lending Act (“MLA”), providing certain protections for servicemembers, members of the military, and their respective spouses, dependents and others;

·Section 106(c)(5) of the Housing and Urban Development Act requires making home ownership available to eligible homeowners; and

·the rules and regulations of the various federal agencies charged with the responsibility of implementing such federal laws.

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The deposit operations of the Bank also are subject to laws, such as the following federal laws:

·the FDIA, which, among other things, imposes a minimum amount of deposit insurance available per account to $250,000 and imposes other limits on deposit-taking;

·the Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records;

·the Electronic Funds Transfer Act and Regulation E, which governs the rights, liabilities, and responsibilities of consumers and financial institutions using electronic fund transfer services, and which generally mandates disclosure requirements, establishes limitations on liability applicable to consumers for unauthorized electronic fund transfers, dictates certain error resolution processes, and applies other requirements relating to automatic deposits to and withdrawals from deposit accounts;

·the Check Clearing for the 21st Century Act (also known as “Check 21”), which gives “substitute checks,” such as digital check images and copies made from that image, the same legal standing as the original paper check;

·The Expedited Funds Availability Act (“EFA Act”) and Regulation CC, setting forth requirements to make funds deposited into transaction accounts available according to specified time schedules, disclose funds availability policies to customers, and relating to the collection and return of checks and electronic checks, including the rules regarding the creation or receipt of substitute checks; and

·the Truth in Savings Act (“TISA”) and Regulation DD, which requires depository institutions to provide disclosures so that consumers can make meaningful comparisons about depository institutions and accounts.

The CFPB has broad authority to regulate the offering and provision of consumer financial products and services. The CFPB has the authority to supervise and examine depository institutions with more than $10 billion in assets for compliance with federal consumer laws. The authority to supervise and examine depository institutions with $10 billion or less in assets, such as the Bank, for compliance with federal consumer laws remains largely with those institutions’ primary regulators. However, the CFPB may participate in examinations of these smaller institutions on a “sampling basis” and may refer potential enforcement actions against such institutions to their primary regulators. As such, the CFPB may participate in examinations of the Bank. In addition, states are permitted to adopt consumer protection laws and regulations that are stricter than the regulations promulgated by the CFPB.

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

Bank regulators take into account compliance with consumer protection laws when considering approval of a proposed expansionary proposals.

Enforcement Powers. The Bank and its “institution-affiliated parties,” including its management, employee’s agent’s independent contractors and consultants, such as attorneys and accountants, and others who participate in the conduct of the financial institution’s affairs, are subject to potential civil and criminal penalties for violations of law, regulations or written orders of a government agency. These practices can include the failure of an institution to timely file required reports or the filing of false or misleading information or the submission of inaccurate reports. Civil penalties may be as high as $1,000,000 a day for such violations. Criminal penalties for some financial institution crimes have been increased to twenty years. In addition, regulators are provided with greater flexibility to commence enforcement actions against institutions and institution-affiliated parties. Possible enforcement actions include the termination of deposit insurance. Furthermore, banking agencies’ powers to issue cease-and-desist orders have been expanded. Such orders may, among other things, require affirmative action to correct any harm resulting from a violation or practice, including restitution, reimbursement, indemnifications or guarantees against loss. A financial institution may also be ordered to restrict its growth, dispose of certain assets, rescind agreements or contracts, or take other actions as determined by the ordering agency to be appropriate.

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Anti-Money Laundering; the USA Patriot Act; the Office of Foreign Asset Control. Financial institutions must maintain anti-money laundering programs that include established internal policies, procedures, and controls; a designated compliance officer; an ongoing employee training program; and testing of the program by an independent audit function. The program must comply with the anti-money laundering provisions of the Bank Secrecy Act (“BSA”). The Company and the Bank are subjectalso prohibited from entering into specified financial transactions and account relationships and must meet enhanced standards for due diligence and “knowing your customer” in their dealings with foreign financial institutions, foreign customers, and other high risk customers. Financial institutions must take reasonable steps to Sections 23Aconduct enhanced scrutiny of account relationships to guard against money laundering and 23Bto report any suspicious transactions, and certain laws provide law enforcement authorities with increased access to financial information maintained by banks. Financial institutions must comply with requirements regarding risk-based procedures for conducing ongoing customer due diligence, which requires the institutions to take appropriate steps to understand the nature and purpose of customer relationships and identify and verify the identity of the beneficial owners of legal entity customers.

Anti-money laundering obligations have been substantially strengthened as a result of the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act (which we refer to as the “USA PATRIOT Act”). Bank regulators routinely examine institutions for compliance with these obligations and are required to consider compliance in connection with the regulatory review of applications. The regulatory authorities have been active in imposing cease and desist orders and money penalty sanctions against institutions that have not complied with these requirements.

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

Under the USA PATRIOT Act, the regulators can provide lists of the names of persons suspected of involvement in terrorist activities. The Bank can be requested, to search its records for any relationships or transactions with persons on those lists. If the Bank finds any relationships or transactions, it must file a suspicious activity report and contact the applicable governmental authorities.

On January 1, 2021, Congress overrode former President Trump’s veto and thereby enacted the National Defense Authorization Act for Fiscal Year 2021 (“NDAA”). The NDAA provides for one of the most significant overhauls of the BSA and related anti-money laundering laws since the USA Patriot Act. Notably, changes include:

·expansion of coordination and information sharing efforts among the agencies tasked with administering anti-money laundering and countering the financing of terrorism requirements, including the Financial Crimes Enforcement Network (“FinCEN”), the primary federal banking regulators, federal law enforcement agencies, national security agencies, the intelligence community, and financial institutions;

·providing additional penalties with respect to violations of BSA and enhancing the powers of FinCEN;

·significant updates to the beneficial ownership collection rules and the creation of a registry of beneficial ownership which will track the beneficial owners of reporting companies which may be shared with law enforcement and financial institutions conducting due diligence under certain circumstances;

·improvements to existing information sharing provisions that permit financial institutions to share information relating to suspicious activity reports with foreign branches, subsidiaries, and affiliates (except those located in China, Russia, or certain other jurisdictions) for the purpose of combating illicit finance risks; and

·enhanced whistleblower protection provisions, allowing whistleblower(s) who provide original information which leads to successful enforcement of anti-money laundering laws in certain judicial or administrative actions resulting in certain monetary sanctions to receive up to 30 percent of the amount that is collected in monetary sanctions as well as increased protections.

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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 ensure that United States entities do not engage in transactions with “enemies” of the United States, as defined by various Executive Orders and Acts of Congress. OFAC publishes lists of names of persons and organizations with which the Bank is prohibited from engaging in business. If the Bank finds a name on any transaction, account or wire transfer that is on an OFAC list, it must freeze such account, file a suspicious activity report and notify the FBI. The Bank has appointed an OFAC compliance officer to oversee the inspection of its accounts and the filing of any notifications. The Bank actively checks high-risk OFAC areas such as new accounts, wire transfers and customer files. The Bank performs these checks utilizing software, which is updated each time a modification is made to the lists provided by OFAC and other agencies of Specially Designated Nationals and Blocked Persons.

Privacy and Data Security. There are a number of state and federal laws and regulations that govern financial privacy and cybersecurity. At the federal level, this includes the privacy protection provisions of the Gramm-Leach-Bliley Act (“GLBA”) and related regulations, including Regulation P, which govern the treatment of nonpublic personal information. Under these privacy protection provisions, we are limited in our ability to disclose non-public information about consumers to nonaffiliated third parties. These limitations require disclosure of privacy policies and notices to consumers and, in some circumstances, allow consumers to prevent disclosure of certain personal information to a nonaffiliated third party.

Recent cyber attacks against banks and other institutions that resulted in unauthorized access to confidential customer information have prompted the Federal banking agencies to issue several warnings and extensive guidance on cyber security. Guidance includes the establishment of information security standards and cybersecurity programs for implementing safeguards. This guidance, along with related regulatory materials, increasingly focus on risk management and processes related to information technology and the use of third parties in the provision of financial services. The agencies are likely to devote more resources to this part of their safety and soundness examination than they have in the past.

Effect of Governmental Monetary Policies. Our earnings are affected by domestic economic conditions and the monetary and fiscal policies of the United States government and its agencies. The Federal Reserve’s monetary policies have had, and are likely to continue to have, an important impact on the operating results of commercial banks through its power to implement national monetary policy in order, among other things, to curb inflation or combat a recession. The monetary policies of the Federal Reserve Acthave major effects upon the levels of bank loans, investments and deposits through its open market operations in United States government securities and through its regulation of the discount rate on borrowings of member banks and the reserve requirements against member bank deposits. It is not possible to predict the nature or impact of future changes in monetary and fiscal policies. On July 31, 2019, September 18, 2019 and October 30, 2019, the Federal Reserve Regulation W.Open Market Committee (the “FMOC”) decreased the federal funds target rate by 25 basis points, which resulted in a total reduction of 75 basis points during 2019. On March 3, 2020, the FMOC decreased the federal funds target rate by 50 basis points to a target range of 1.00% to 1.25%; and on March 15, 2020, the FMOC decreased the federal funds target rate by 100 basis points to the current target range of 0.00% to 0.25%.

Section 23A

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 Federal Reserve Act places limits onFDIC. As insurer, the amountFDIC imposes deposit insurance premiums and is authorized to conduct examinations of loans or extensions of creditand to require reporting by a bank toFDIC insured institutions. It also may prohibit 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 anFDIC insured institution from engaging in any activity the FDIC determines by regulation or order to pose a serious risk to the insurance fund. The FDIC also has the authority to initiate enforcement actions against savings institutions, after giving the bank’s regulatory authority an opportunity to take such action, and may terminate the deposit insurance if it determines that the institution has engaged in unsafe or unsound practices or is in an unsafe or unsound condition.

As an FDIC-insured bank, the Bank must pay deposit insurance assessments to the FDIC based on its average total assets minus its average tangible equity. The Bank’s assessment rates are currently based on its risk classification (i.e., the level of risk it poses to the FDIC’s deposit insurance fund). Institutions classified as higher risk pay assessments at higher rates than institutions that pose a lower risk.

In addition to the ordinary assessments described above, the FDIC has the ability to impose special assessments in certain transactions with certain affiliates unlessinstances. For example, the transactionsDodd-Frank Act increased the minimum target Deposit Insurance Fund ratio from 1.15% of estimated insured deposits to 1.35% of estimated insured deposits. The FDIC was required to seek to achieve the 1.35% ratio by September 30, 2020. The FDIC indicated that the 1.35% ratio was exceeded in November 2018. Insured institutions of less than $10 billion of assets received credits for the portion of their assessments that contributed to the reserve ratio between 1.15% and 1.35%. All remaining small bank credits were refunded on the September 30, 2020 assessment invoice effectively ending the application of small bank credits. Assessment rates are on terms substantiallyexpected to decrease if the same,reserve ratio increases such that it exceeds 2%.

The FDIC may terminate the deposit insurance of any insured depository institution, including the Bank, if it determines after a hearing that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. It also may suspend deposit insurance temporarily during the hearing process for the permanent termination of insurance, if the institution has no tangible capital. If insurance of accounts is terminated, the accounts at least as favorable to suchthe institution or its subsidiaries, as those prevailing at the time of the termination, less subsequent withdrawals, shall continue to be insured for comparable transactionsa 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.

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Incentive Compensation.The Dodd-Frank Act required the federal bank regulators and the SEC to establish joint regulations or guidelines prohibiting incentive-based payment arrangements at specified regulated entities having at least $1 billion in total assets that encourage inappropriate risks by providing an executive officer, employee, director or principal shareholder with nonaffiliated companies. If there are no comparable transactions,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 bank’s (or onenew proposal in May 2016, which makes explicit that the involvement of its subsidiaries’) affiliate transaction mustrisk management and control personnel includes not only compliance, risk management and internal audit, but also legal, human resources, accounting, financial reporting and finance roles responsible for identifying, measuring, monitoring or controlling risk-taking. No final rule has been issued yet.

In June 2010, the Federal Reserve, the FDIC and the OCC issued a comprehensive final guidance on incentive compensation policies intended to ensure that the incentive compensation policies of banking organizations do not undermine the safety and soundness of such organizations by encouraging excessive risk-taking. The guidance, which covers all employees that have the ability to materially affect the risk profile of an organization, either individually or as part of a group, is based upon the key principles that a banking organization’s incentive compensation arrangements should (i) provide incentives that do not encourage risk-taking beyond the organization’s ability to effectively identify and manage risks, (ii) be on termscompatible with effective internal controls and under circumstances,risk management, and (iii) be supported by strong corporate governance, 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.active and effective oversight by the organization’s board of directors.

The affiliates of a bank include any holding companyFederal Reserve will review, as part of the regular, risk-focused examination process, the incentive compensation arrangements of banking organizations, such as the Company, that are not “large, complex banking organizations.” These reviews will be tailored to each organization based on the scope and complexity of the organization’s activities and the prevalence of incentive compensation arrangements. The findings of the supervisory initiatives will be included in reports of examination. Deficiencies will be incorporated into the organization’s supervisory ratings, which can affect the organization’s ability to make acquisitions and take other actions. Enforcement actions may be taken against a banking organization if its incentive compensation arrangements, or related risk-management control or governance processes, pose a risk to the organization’s safety and soundness and the organization is not taking prompt and effective measures to correct the deficiencies.

In addition, the Tax Cuts and Jobs Act (the “Tax Act”), which was signed into law in December 2017, contains certain provisions affecting performance-based compensation. Specifically, the pre-existing exception to the $1.0 million deduction limitation applicable to performance-based compensation was repealed. The deduction limitation is now applied to all compensation exceeding $1.0 million, for our covered employees, regardless of how it is classified, which could have an adverse effect on our income tax expense and net income.

Concentrations in Commercial Real Estate. Concentration risk exists when FDIC-insured institutions deploy too many assets to any one industry or segment. A concentration in commercial real estate is one example of regulatory concern. The interagency Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices guidance (“CRE Guidance”) provides supervisory criteria, including the following numerical indicators, to assist bank any other company under common controlexaminers in identifying banks with potentially significant commercial real estate loan concentrations that may warrant greater supervisory scrutiny: (i) total non-owner-occupied commercial real estate loans, including loans secured by apartment buildings, investor commercial real estate, and construction and land loans, exceeding 300% or more of an institution’s total risk-based capital and the outstanding balance of the commercial real estate loan portfolio has increased by 50% or more in the preceding three years or (ii) construction and land development loans exceeding 100% of total risk-based capital. The CRE Guidance does not limit banks’ levels of commercial real estate lending activities, but rather guides institutions in developing risk management practices and levels of capital that are commensurate with the bank (including any company controlled by the same shareholders who control the bank), any subsidiarylevel and nature 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.

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The Bank is also subject to certain restrictions on extensions of credit to executive officers, directors, certain principal shareholders, and their related interests. Extensions of credit include derivative transactions, repurchase and reverse repurchase agreements, and securities borrowing and lending transactions to the extent that such transactions cause a bank to have credit exposure to an insider. Any extension of credit to an insider (i) must be made on substantially the same terms, including interest rates and collateral requirements, as those prevailing at the time for comparable transactions with unrelated third parties and (ii) must not involve more than the normal risk of repayment or present other unfavorable features.

commercial real estate concentrations. On December 22, 2020,18, 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 interagency statement extendingeasing 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 temporary reliefrisks arising from enforcement action against banks or asset managers, which become principal stockholders of banks, with respect to certain extensions of credit by banks that otherwise would violate Regulation O, provided the asset managers and banks satisfy certain conditions designed to ensure that there is a lack of control by the asset manager over the bank. This temporary relief will apply until January 1, 2022, unless amended or extended, while the Federal Reserve, in consultationcommercial real estate lending. In addition, FDIC-insured institutions must maintain capital commensurate with the other federal banking agencies, considers whetherlevel and nature of their commercial real estate concentration risk. Based on the Bank’s loan portfolio as of December 31, 2021, its non-owner occupied commercial loans and its construction and land development loans were approximately 258% and 69% of total risk-based capital, respectively. Management will continue to amend Regulation O.monitor the level of the concentration in commercial real estate loans within the bank’s loan portfolio.

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First Community Corporation

We own 100% of the outstanding capital stock of the Bank, and, therefore, we are considered to be a bank holding company under the federal Bank Holding Company Act of 1956 (the “Bank Holding Company Act”). As a result, we are primarily subject to the supervision, examination and reporting requirements of the Federal Reserve under the Bank Holding Company Act and its regulations promulgated thereunder. Moreover, as a bank holding company of a bank located in South Carolina, we also are subject to the South Carolina Banking and Branching Efficiency Act.

Permitted Activities. Under the Bank Holding Company Act, a bank holding company is generally permitted to engage in, or acquire direct or indirect control of more than 5% of the voting shares of any company engaged in, the following activities:

 

·banking or managing or controlling banks;

·furnishing services to or performing services for our subsidiaries; and

·any activity that the Federal Reserve determines to be so closely related to banking as to be a proper incident to the business of banking;

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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.
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As a bank holding company, we also can elect to be treated as a “financial holding company,” which would allow us to engage in a broader array of activities. In summary, a financial holding company can engage in activities that are financial in nature or incidental or complimentary to financial activities, including insurance underwriting, sales and brokerage activities, providing financial and investment advisory services, underwriting services and limited merchant banking activities. We have not sought financial holding company status, but may elect such status in the future as our business matures. If we were to elect in writing for financial holding company status, each insured depository institution we control would have to be well capitalized, well managed and have at least a satisfactory rating under the Community Reinvestment Act (“CRA”) (discussed below).

The Federal Reserve has the authority to order a bank holding company or its subsidiaries to terminate any of these activities or to terminate its ownership or control of any subsidiary when it has reasonable cause to believe that the bank holding company’s continued ownership, activity or control constitutes a serious risk to the financial safety, soundness or stability of it or any of its bank subsidiaries.

Source of Strength. There are a number of obligations and restrictions imposed by law and regulatory policy on bank holding companies with regard to their depository institution subsidiaries that are designed to minimize potential loss to depositors and to the FDIC insurance funds in the event that the depository institution becomes in danger of defaulting under its obligations to repay deposits. Under a policy of the Federal Reserve, a bank holding company is required to serve as a source of financial strength to its subsidiary depository institutions and to commit resources to support such institutions in circumstances where it might not do so absent such policy. Under the Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”), to avoid receivership of its insured depository institution subsidiary, a bank holding company is required to guarantee the compliance of any insured depository institution subsidiary that may become “undercapitalized” within the terms of any capital restoration plan filed by such subsidiary with its appropriate federal banking agency up to the lesser of (i) an amount equal to 5% of the institution’s total assets at the time the institution became undercapitalized, or (ii) the amount which is necessary (or would have been necessary) to bring the institution into compliance with all applicable capital standards as of the time the institution fails to comply with such capital restoration plan.

The Federal Reserve also has the authority under the Bank Holding Company Act to require a bank holding company to terminate any activity or relinquish control of a nonbank subsidiary (other than a nonbank subsidiary of a bank) upon the Federal Reserve’s determination that such activity or control constitutes a serious risk to the financial soundness or stability of any subsidiary depository institution of the bank holding company. Further, federal law grants federal bank regulatory authorities’ additional discretion to require a bank holding company to divest itself of any bank or nonbank subsidiary if the agency determines that divestiture may aid the depository institution’s financial condition.

In addition, the “cross guarantee” provisions of the Federal Deposit Insurance Act (“FDIA”) require insured depository institutions under common control to reimburse the FDIC for any loss suffered or reasonably anticipated by the FDIC as a result of the default of a commonly controlled insured depository institution or for any assistance provided by the FDIC to a commonly controlled insured depository institution in danger of default. The FDIC’s claim for damages is superior to claims of shareholders of the insured depository institution or its holding company, but is subordinate to claims of depositors, secured creditors and holders of subordinated debt (other than affiliates) of the commonly controlled insured depository institutions.

The FDIA also provides that amounts received from the liquidation or other resolution of any insured depository institution by any receiver must be distributed (after payment of secured claims) to pay the deposit liabilities of the institution prior to payment of any other general or unsecured senior liability, subordinated liability, general creditor or shareholder. This provision would give depositors a preference over general and subordinated creditors and shareholders in the event a receiver is appointed to distribute the assets of our Bank.

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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.

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Capital Requirements. The Federal Reserve generally imposes certain capital requirements on a bank holding company under the Bank Holding Company Act, including a minimum leverage ratio and a minimum ratio of “qualifying” capital to risk-weighted assets. If applicable, these requirements are essentially the same as those that apply to the Bank and are described above under “Capital and Related Requirements.” However, because the Company currently qualifies as a small bank holding company, these capital requirements do not currently apply to the Company. Subject to certain restrictions, we are able to borrow money to make a capital contribution to the Bank, and these loans may be repaid from dividends paid from the Bank to the Company. Our ability to pay dividends depends on, among other things, the Bank’s ability to pay dividends to us, which is subject to regulatory restrictions as described below in “First Community Bank—Dividends.” We are also able to raise capital for contribution to the Bank by issuing securities without having to receive regulatory approval, subject to compliance with federal and state securities laws.

Dividends. As a bank holding company, the Company’s ability to declare and pay dividends is dependent on certain federal and state regulatory considerations, including the guidelines of the Federal Reserve. The Federal Reserve has issued a policy statement regarding the payment of dividends by bank holding companies. In general, the Federal Reserve’s policies provide that dividends should be paid only out of current earnings and only if the prospective rate of earnings retention by the bank holding company appears consistent with the organization’s capital needs, asset quality and overall financial condition. The Federal Reserve’s policies also require that a bank holding company serve as a source of financial strength to its subsidiary banks by standing ready to use available resources to provide adequate capital funds to those banks during periods of financial stress or adversity and by maintaining the financial flexibility and capital-raising capacity to obtain additional resources for assisting its subsidiary banks where necessary. In addition, under the prompt corrective action regulations, the ability of a bank holding company to pay dividends may be restricted if a subsidiary bank becomes undercapitalized. These regulatory policies could affect the Company’s ability to pay dividends or otherwise engage in capital distributions.

In addition, since the Company is legal entity separate and distinct from the Bank and does not conduct stand-alone operations, its ability to pay dividends depends on the ability of the Bank to pay dividends to it, which is also subject to regulatory restrictions as described below in “First Community Bank—Dividends.”

South Carolina State Regulation. As a South Carolina bank holding company under the South Carolina Banking and Branching Efficiency Act, we are subject to limitations on any sale to, or merger with, other financial institutions. We are not required to obtain the approval of the S.C. Board prior to acquiring the capital stock of a national bank, but we must notify them at least 15 days prior to doing so. We must receive the S.C. Board’s approval prior to engaging in the acquisition of a South Carolina state-chartered bank or another South Carolina bank holding company.

First Community Bank

As a South Carolina state bank, the Bank’s primary federal regulator is the FDIC and the Bank is also regulated and examined by the S.C. Board. Deposits in the Bank are insured by the FDIC up to a maximum amount of $250,000. The FDIC insurance coverage limit applies per depositor, per insured depository institution for each account ownership category.

The S.C. Board and the FDIC regulate or monitor virtually all areas of the Bank’s operations, including:

 

·security devices and procedures;

·adequacy of capitalization and loss reserves;

·loans;

·investments;

·borrowings;

·deposits;

·mergers;

·issuances of securities;

·payment of dividends;

·interest rates payable on deposits;

·interest rates or fees chargeable on loans;

·establishment of branches;

·corporate reorganizations;

·maintenance of books and records; and

·adequacy of staff training to carry on safe lending and deposit gathering practices.

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These agencies, and the federal and state laws applicable to the Bank’s operations, extensively regulate various aspects of our banking business, including, among other things, permissible types and amounts of loans, investments and other activities, capital adequacy, branching, interest rates on loans and on deposits, the maintenance of reserves on demand deposit liabilities, and the safety and soundness of our banking practices.

Prompt Corrective Action. The FDICIA established a “prompt corrective action” program in which every bank is placed in one of five regulatory categories, depending primarily on its regulatory capital levels. The FDIC and the other federal banking regulators are permitted to take increasingly severe action as a bank’s capital position or financial condition declines below the “Adequately Capitalized” level described below. Regulators are also empowered to place in receivership or require the sale of a bank to another depository institution when a bank’s leverage ratio reaches two percent. Better capitalized institutions are generally subject to less onerous regulation and supervision than banks with lesser amounts of capital. The FDIC’s regulations set forth five capital categories, each with specific regulatory consequences. The categories are:

·Well Capitalized—The institution exceeds the required minimum level for each relevant capital measure. A well capitalized institution (i) has a total risk-based capital ratio of 10% or greater, (ii) has a Tier 1 risk-based capital ratio of 8% or greater, (iii) has a common equity Tier 1 risk-based capital ratio of 6.5% or greater, (iv) has a leverage capital ratio of 5% or greater, and (v) is not subject to any order or written directive to meet and maintain a specific capital level for any capital measure.

·Adequately Capitalized—The institution meets the required minimum level for each relevant capital measure. No capital distribution may be made that would result in the institution becoming undercapitalized. An adequately capitalized institution (i) has a total risk-based capital ratio of 8% or greater, (ii) has a Tier 1 risk-based capital ratio of 6% or greater, (iii) has a common equity Tier 1 risk-based capital ratio of 4.5% or greater, and (iv) has a leverage capital ratio of 4% or greater.

·Undercapitalized—The institution fails to meet the required minimum level for any relevant capital measure. An undercapitalized institution (i) has a total risk-based capital ratio of less than 8%, (ii) has a Tier 1 risk-based capital ratio of less than 6%, (iii) has a common equity Tier 1 risk-based capital ratio of less than 4.5% or greater, or (iv) has a leverage capital ratio of less than 4%.

·Significantly Undercapitalized—The institution is significantly below the required minimum level for any relevant capital measure. A significantly undercapitalized institution (i) has a total risk-based capital ratio of less than 6%, (ii) has a Tier 1 risk-based capital ratio of less than 4%, (iii) has a common equity Tier 1 risk-based capital ratio of less than 3% or greater, or (iv) has a leverage capital ratio of less than 3%.

·Critically Undercapitalized—The institution fails to meet a critical capital level set by the appropriate federal banking agency. A critically undercapitalized institution has a ratio of tangible equity to total assets that is equal to or less than 2%.

Effective with the March 31, 2020 Call Report, qualifying community banking organizations that elect to use the new community bank leverage ratio framework and that maintain a leverage ratio of greater than 9.0% will be considered to have satisfied the risk-based and leverage capital requirements to be deemed well capitalized. See the discussion about the community bank leverage ratio above in “Supervision and Regulation— Legislative and Regulatory Developments—2018 Regulatory Reform. We do not have any immediate plans to elect to use the community bank leverage ratio framework but may make such an election in the future.

If the FDIC determines, after notice and an opportunity for hearing, that the bank is in an unsafe or unsound condition, the regulator is authorized to reclassify the bank to the next lower capital category (other than critically undercapitalized) and require the submission of a plan to correct the unsafe or unsound condition.

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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.

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.

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An insured depository institution may not pay a management fee to a bank holding company controlling that institution or any other person having control of the institution if, after making the payment, the institution, would be undercapitalized. In addition, an institution cannot make a capital distribution, such as a dividend or other distribution that is in substance a distribution of capital to the owners of the institution if following such a distribution the institution would be undercapitalized. Thus, if payment of such a management fee or the making of such would cause a bank to become undercapitalized, it could not pay a management fee or dividend to the bank holding company.

As of December 31, 2020,2021, the Bank was deemed to be “well capitalized.”

Standards for Safety and Soundness. The FDIA also requires the federal banking regulatory agencies to prescribe, by regulation or guideline, operational and managerial standards for all insured depository institutions relating to: (i) internal controls, information systems and internal audit systems; (ii) loan documentation; (iii) credit underwriting; (iv) interest rate risk exposure; and (v) asset growth. The agencies also must prescribe standards for asset quality, earnings, and stock valuation, as well as standards for compensation, fees and benefits. The federal banking agencies have adopted regulations and Interagency Guidelines Prescribing Standards for Safety and Soundness to implement these required standards. These guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. Under the regulations, if the FDIC determines that the Bank fails to meet any standards prescribed by the guidelines, the agency may require the Bank to submit to the agency an acceptable plan to achieve compliance with the standard, as required by the FDIC. The final regulations establish deadlines for the submission and review of such safety and soundness compliance plans.

Regulatory Examination. The FDIC also requires the Bank to prepare annual reports on the Bank’s financial condition and to conduct an annual audit of its financial affairs in compliance with its minimum standards and procedures.

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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 federal banking regulatory agencies prescribe, by regulation, standards for all insured depository institutions and depository institution holding companies relating, among other things, to the following:

 

·internal controls;

·information systems and audit systems;

·loan documentation;

·credit underwriting;

·interest rate risk exposure; and

·asset quality.

Dividends. The Company’s principal source of cash flow, including cash flow to pay dividends to its shareholders, is dividends it receives from the Bank. Statutory and regulatory limitations apply to the Bank’s payment of dividends to the Company. As a South Carolina chartered bank, the Bank is subject to limitations on the amount of dividends that it is permitted to pay. Unless otherwise instructed by the S.C. Board, the Bank is generally permitted under South Carolina state banking regulations to pay cash dividends of up to 100% of net income in any calendar year without obtaining the prior approval of the S.C. Board. The FDIC also has the authority under federal law to enjoin a bank from engaging in what in its opinion constitutes an unsafe or unsound practice in conducting its business, including the payment of a dividend under certain circumstances. The Bank must also maintain the Common Equity Tier 1 capital conservation buffer of 2.5%, in excess of its minimum regulatory risk-based capital ratios, to avoid becoming subject to restrictions on capital distributions, including dividends, as described above.

Branching. Federal legislation permits out-of-state acquisitions by bank holding companies, interstate branching by banks, and interstate merging by banks. The Dodd-Frank Act removed previous state law restrictions on de novo interstate branching in states such as South Carolina and Georgia. This change effectively permits out of state banks to open de novo branches in states where the laws of such state would permit a bank chartered by that state to open a de novo branch.

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Anti-Tying Restrictions. Under amendments to the Bank Holding Company Act and Federal Reserve regulations, a bank is prohibited from engaging in certain tying or reciprocity arrangements with its customers. In general, a bank may not extend credit, lease, sell property, or furnish any services or fix or vary the consideration for these on the condition that (i) the customer obtain or provide some additional credit, property, or services from or to the bank, the bank holding company or subsidiaries thereof or (ii) the customer may not obtain some other credit, property, or services from a competitor, except to the extent reasonable conditions are imposed to assure the soundness of the credit extended. Certain arrangements are permissible: a bank may offer combined-balance products and may otherwise offer more favorable terms if a customer obtains two or more traditional bank products; and certain foreign transactions are exempt from the general rule. A bank holding company or any bank affiliate also is subject to anti-tying requirements in connection with electronic benefit transfer services.

Community Reinvestment Act. The Bank is subject to certain requirements and reporting obligations under the CRA, which requires federal banking regulators to evaluate the record of each financial institution in meeting the credit needs of its local community, including low- and moderate- income neighborhoods. The CRA further requires these criteria to be considered in evaluating mergers, acquisitions and applications to open a branch or facility. Failure to adequately meet these criteria could result in the imposition of additional requirements and limitations on the Bank. Additionally, financial institutions must publicly disclose the terms of various CRA-related agreements. In its most recent CRA examination, the Bank received a “satisfactory” rating.

In December 2019, the FDIC and the Office of the Comptroller of the Currency (“OCC”) issued a notice of proposed changesrulemaking intended to the regulations implementing the(i) clarify which activities qualify for CRA which, if adopted will result in changes to their currentcredit; (ii) update where activities count for CRA framework. Thecredit; (iii) create a more transparent and objective method for measuring CRA performance; and (iv) provide for more transparent, consistent, and timely CRA-related data collection, recordkeeping, and reporting. However, the Federal Reserve Board didhas not joinjoined the proposal. Onproposed rulemaking. In May 20, 2020, the OCC issued its final CRA rule, which was later rescinded in December 2021. The FDIC has not finalized any revisions to its CRA rule. In September 2020, the Federal Reserve issued an advance notice of proposed rulemaking that seeks public comment on ways to modernize the Federal Reserve’s CRA regulations. The effects on the Company and the Bank of any potential change to the CRA rules will depend on the final form of any federal rulemaking and cannot be predicted at this time. Management will continue to evaluate any changes to the CRA’s regulations and their impact to the Company and the Bank.

Fair Lending Requirements. We are subject to certain fair lending requirements and reporting obligations involving lending operations. A number of laws and regulations provide these fair lending requirements and reporting obligations, including, at the federal level, the Equal Credit Opportunity Act (“ECOA”), as amended by the Dodd-Frank Act, and Regulation B, as well as the Fair Housing Act (“FHA”) and regulations implementing FHA found at 24 C.F.R. Part 100. ECOA and Regulation B prohibit discrimination in any aspect of a final rulecredit transaction based on a number of prohibited factors, including race or color, religion, national origin, sex, marital status, age, the applicant’s receipt of income derived from public assistance programs, and the applicant’s exercise, in good faith, of any right under the Consumer Credit Protection Act. ECOA and Regulation B include lending acts and practices that are specifically prohibited, permitted, or required, and these laws and regulations proscribe data collection requirements, legal action statute of limitations, and disclosure of the consumer’s ability to receive a copy of any appraisal(s) and valuation(s) prepared in connection with certain loans secured by dwellings. FHA prohibits discrimination in all aspects of residential real-estate related transactions based on prohibited factors, including race or color, national origin, religion, sex, familial status, and handicap.

In addition to prohibiting discrimination in credit transactions on the basis of prohibited factors, these laws and regulations can cause a lender to be liable for policies that result in a disparate treatment of or have a disparate impact on a protected class of persons. If a pattern or practice of lending discrimination is alleged by a regulator, then the matter may be referred by the agency to the U.S. Department of Justice (“DOJ”) for investigation. In December 2012, the DOJ and CFPB entered into a Memorandum of Understanding under which the agencies have agreed to share information, coordinate investigations, and have generally committed to strengthen their coordination efforts.

In addition to substantive penalties and modernize its existing CRA framework, butcorrective measures that may be required for a violation of certain fair lending laws, the FDIC was not prepared to finalize its CRA proposal at that time.federal banking agencies may take compliance with fair lending requirements into account when regulating and supervising other activities of the bank, including in acting on expansionary proposals.

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

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Consumer Protection Regulations. Activities of the Bank are subject to a variety of statutes and regulations regulations—both at the federal and state levels—designed to protect consumers. This includes Title X of the Dodd-Frank Act, which prohibits engaging in any unfair, deceptive, or abusive acts or practices (“UDAAP”). UDAAP claims involve detecting and assessing risks to consumers and to markets for consumer financial products and services. Interest and other charges collected or contracted for by the Bank are subject to state usury laws and federal laws concerning interest rates. The Bank’s loan operations are also subject to federal laws applicable to credit transactions, such as:

 

·the Dodd-Frank Act that created the CFPBConsumer Financial Protection Bureau (“CFPB”), an independent regulatory authority housed within the Federal Reserve, which has broad rule-making authority over a wide range of consumer laws that apply to all insured depository institutions;

·the federal Truth-In-Lending Act otherwise referred to as TILA,(“TILA”) and Regulation Z, governing disclosures of credit terms to consumer borrowers and including substantial new requirements for mortgage lending and servicing, as mandated by the Dodd-Frank Act;

·the Home Mortgage Disclosure Act of 1975,(“HMDA”) and Regulation C, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves;serves, and requiring collection and disclosure of data about applicant and borrower characteristics to assist in identifying possible discriminatory lending patterns and enforcing antidiscrimination statutes;

·the Equal Credit Opportunity Act (“ECOA”) and Regulation B, prohibiting discrimination on the basis of race, creedcolor, religion, or other prohibited factors in extending credit;any aspect of a credit transaction;

·the Fair Credit Reporting Act, of 1978,as amended by the Fair and Accurate Credit Transactions Act, and Regulation V, governing the use andof consumer reports, provision of information to credit reporting agencies;agencies, certain identity theft protections, and certain credit and other disclosures, and requiring Bank to have in place an “identity theft red flags” program to detect, prevent and mitigate identity theft.

·the Fair Debt Collection Practices Act and Regulation F, governing the manner in which consumer debts may be collected by collection agencies;agencies and intending to eliminate abusive, deceptive, and unfair debt collection practices;

·the Real Estate Settlement Procedures Act (“RESPA”) and Regulation X, which governs various aspects of residential mortgage loans, including the settlement and servicing process, dictates certain disclosures to be provided to consumers, and imposes other requirements related to compensation of service providers, insurance escrow accounts, and loss mitigation procedures;

·The Secure and Fair Enforcement for Mortgage Licensing Act (“SAFE Act”) which mandates a nationwide licensing and registration system for residential mortgage loan originators. The SAFE Act also prohibits individuals from engaging in the business of a residential mortgage loan originator without first obtaining and maintaining annually registration as either a federal or state licensed mortgage loan originator;

·The Homeowners Protection Act (“HPA”), or the PMI Cancellation Act, provides requirements relating to private mortgage insurance (PMI) on residential mortgages, including the cancelation and termination of PMI, disclosure and notification requirements, and the requirement to return unearned premiums;

·The Fair Housing Act (“FHA”) prohibits discrimination in all aspects of residential real-estate related transactions based on race or color, national origin, religion, sex, and other prohibited factors;

·The Servicemembers Civil Relief Act (“SCRA”) and Military Lending Act (“MLA”), providing certain protections for servicemembers, members of the military, and their respective spouses, dependents and others;

·Section 106(c)(5) of the Housing and Urban Development Act requires making home ownership available to eligible homeowners; and

·the rules and regulations of the various federal agencies charged with the responsibility of implementing such federal laws.

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The deposit operations of the Bank also are subject to:to laws, such as the following federal laws:

·the FDIA, which, among other things, limits theimposes a minimum amount of deposit insurance available per account to $250,000 and imposes other limits on deposit-taking;

·the Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records;

·the Electronic Funds Transfer Act and Regulation E, which governs the rights, liabilities, and responsibilities of consumers and financial institutions using electronic fund transfer services, and which generally mandates disclosure requirements, establishes limitations on liability applicable to consumers for unauthorized electronic fund transfers, dictates certain error resolution processes, and applies other requirements relating to automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services;accounts;

·the Check Clearing for the 21st Century Act (also known as “Check 21”), which gives “substitute checks,” such as digital check images and copies made from that image, the same legal standing as the original paper check;

·The Expedited Funds Availability Act (“EFA Act”) and Regulation CC, setting forth requirements to make funds deposited into transaction accounts available according to specified time schedules, disclose funds availability policies to customers, and relating to the collection and return of checks and electronic checks, including the rules regarding the creation or receipt of substitute checks; and

·the Truth in Savings Act (“TISA”) and Regulation DD, which requires depository institutions to provide disclosures so that consumers can make meaningful comparisons about depository institutions and accounts.

 

The CFPB 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.products and services. The CFPB has the authority to supervise and examine depository institutions with more than $10 billion in assets for compliance with federal consumer laws. The authority to supervise and examine depository institutions with $10 billion or less in assets, such as the Bank, for compliance with federal consumer laws remains largely with those institutions’ primary regulators. However, the CFPB may participate in examinations of these smaller institutions on a “sampling basis” and may refer potential enforcement actions against such institutions to their primary regulators. As such, the CFPB may participate in examinations of the Bank. In addition, states are permitted to adopt consumer protection laws and regulations that are stricter than the regulations promulgated by the CFPB.

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

Bank regulators take into account compliance with consumer protection laws when considering approval of a proposed expansionary proposals.

Enforcement Powers. The Bank and its “institution-affiliated parties,” including its management, employee’s agent’s independent contractors and consultants, such as attorneys and accountants, and others who participate in the conduct of the financial institution’s affairs, are subject to potential civil and criminal penalties for violations of law, regulations or written orders of a government agency. These practices can include the failure of an institution to timely file required reports or the filing of false or misleading information or the submission of inaccurate reports. Civil penalties may be as high as $1,000,000 a day for such violations. Criminal penalties for some financial institution crimes have been increased to twenty years. In addition, regulators are provided with greater flexibility to commence enforcement actions against institutions and institution-affiliated parties. Possible enforcement actions include the termination of deposit insurance. Furthermore, banking agencies’ powers to issue cease-and-desist orders have been expanded. Such orders may, among other things, require affirmative action to correct any harm resulting from a violation or practice, including restitution, reimbursement, indemnifications or guarantees against loss. A financial institution may also be ordered to restrict its growth, dispose of certain assets, rescind agreements or contracts, or take other actions as determined by the ordering agency to be appropriate.

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Anti-Money LaunderingLaundering; the USA Patriot Act; the Office of Foreign Asset Control. Financial institutions must maintain anti-money laundering programs that include established internal policies, procedures, and controls; a designated compliance officer; an ongoing employee training program; and testing of the program by an independent audit function. The program must comply with the anti-money laundering provisions of the Bank Secrecy Act (“BSA”). The Company and the Bank are also prohibited from entering into specified financial transactions and account relationships and must meet enhanced standards for due diligence and “knowing your customer” in their dealings with foreign financial institutions, foreign customers, and foreignother high risk customers. Financial institutions must take reasonable steps to conduct enhanced scrutiny of account relationships to guard against money laundering and to report any suspicious transactions, and recentcertain laws provide law enforcement authorities with increased access to financial information maintained by banks. Financial institutions must comply with requirements regarding risk-based procedures for conducing ongoing customer due diligence, which requires the institutions to take appropriate steps to understand the nature and purpose of customer relationships and identify and verify the identity of the beneficial owners of legal entity customers.

Anti-money laundering obligations have been substantially strengthened as a result of the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (which we refer to as the “USA PATRIOT Act”). Bank regulators routinely examine institutions for compliance with these obligations and are required to consider compliance in connection with the regulatory review of applications. The regulatory authorities have been active in imposing cease and desist orders and money penalty sanctions against institutions that have not complied with these requirements.

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

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Under the USA PATRIOT Act, the Federal Bureau of Investigation (“FBI”)regulators can send to the banking regulatory agenciesprovide 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.applicable governmental authorities.

On January 1, 2021, Congress overrode former President Trump’s veto and thereby enacted the National Defense Authorization Act for Fiscal Year 2021 (“NDAA”). The NDAA provides for one of the most significant overhauls of the BSA and related anti-money laundering laws since the USA Patriot Act. Notably, changes include:

·expansion of coordination and information sharing efforts among the agencies tasked with administering anti-money laundering and countering the financing of terrorism requirements, including the Financial Crimes Enforcement Network (“FinCEN”), the primary federal banking regulators, federal law enforcement agencies, national security agencies, the intelligence community, and financial institutions;

·providing additional penalties with respect to violations of BSA and enhancing the powers of FinCEN;

·significant updates to the beneficial ownership collection rules and the creation of a registry of beneficial ownership which will track the beneficial owners of reporting companies which may be shared with law enforcement and financial institutions conducting due diligence under certain circumstances;

·improvements to existing information sharing provisions that permit financial institutions to share information relating to suspicious activity reports with foreign branches, subsidiaries, and affiliates (except those located in China, Russia, or certain other jurisdictions) for the purpose of combating illicit finance risks; and

·enhanced whistleblower protection provisions, allowing whistleblower(s) who provide original information which leads to successful enforcement of anti-money laundering laws in certain judicial or administrative actions resulting in certain monetary sanctions to receive up to 30 percent of the amount that is collected in monetary sanctions as well as increased protections.

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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 insureensure 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 agenciespublishes lists of names of persons and organizations suspected of aiding, harboring orwith which the Bank is prohibited from engaging in terrorist acts.business. If the Bank finds a name on any transaction, account or wire transfer that is on an OFAC list, it must freeze such account, file a suspicious activity report and notify the FBI. The Bank has appointed an OFAC compliance officer to oversee the inspection of its accounts and the filing of any notifications. The Bank actively checks high-risk OFAC areas such as new accounts, wire transfers and customer files. The Bank performs these checks utilizing software, which is updated each time a modification is made to the lists provided by OFAC and other agencies of Specially Designated Nationals and Blocked Persons.

Privacy and Data SecuritySecurity. There are a number of state and Credit Reporting. Financial institutionsfederal laws and regulations that govern financial privacy and cybersecurity. At the federal level, this includes the privacy protection provisions of the Gramm-Leach-Bliley Act (“GLBA”) and related regulations, including Regulation P, which govern the treatment of nonpublic personal information. Under these privacy protection provisions, we are requiredlimited in our ability to disclose their policies for collecting and protecting confidential information. Customers generally may prevent financial institutions from sharing nonpublic personal financialnon-public information withabout consumers to nonaffiliated third parties except under narrowparties. These limitations require disclosure of privacy policies and notices to consumers and, in some circumstances, such as the processingallow consumers to prevent disclosure of transactions requested by the consumer. Additionally, financial institutions generally may not disclose consumer account numberscertain personal information to anya 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.party.

Recent cyber attacks against banks and other institutions that resulted in unauthorized access to confidential customer information have prompted the Federal banking agencies to issue several warnings and extensive guidance on cyber security. Guidance includes the establishment of information security standards and cybersecurity programs for implementing safeguards. This guidance, along with related regulatory materials, increasingly focus on risk management and processes related to information technology and the use of third parties in the provision of financial services. The agencies are likely to devote more resources to this part of their safety and soundness examination than they have in the past.

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

Effect of Governmental Monetary Policies. Our earnings are affected by domestic economic conditions and the monetary and fiscal policies of the United States government and its agencies. The Federal Reserve’s monetary policies have had, and are likely to continue to have, an important impact on the operating results of commercial banks through its power to implement national monetary policy in order, among other things, to curb inflation or combat a recession. The monetary policies of the Federal Reserve have major effects upon the levels of bank loans, investments and deposits through its open market operations in United States government securities and through its regulation of the discount rate on borrowings of member banks and the reserve requirements against member bank deposits. It is not possible to predict the nature or impact of future changes in monetary and fiscal policies. On August 1,July 31, 2019, September 19,18, 2019 and October 31,30, 2019, the Federal Open Market Committee (the “FMOC”) decreased the federal funds target rate by 25 basis points, which resulted in a total reduction of 75 basis points during 2019. On March 4,3, 2020, the FMOC decreased the federal funds target rate by 50 basis points to a target range of 1.00% to 1.25%; and on March 16,15, 2020, the FMOC decreased the federal funds target rate by 100 basis points to athe current target range of 0.00% to 0.25%. Further changes may occur in 2021, but, if so, there is no announced timetable.

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Insurance of Accounts and Regulation by the FDIC. The Bank’s deposits are insured up to applicable limits by the Deposit Insurance Fund of the FDIC. As insurer, the FDIC imposes deposit insurance premiums and is authorized to conduct examinations of and to require reporting by FDIC insured institutions. It also may prohibit any FDIC insured institution from engaging in any activity the FDIC determines by regulation or order to pose a serious risk to the insurance fund. The FDIC also has the authority to initiate enforcement actions against savings institutions, after giving the bank’s regulatory authority an opportunity to take such action, and may terminate the deposit insurance if it determines that the institution has engaged in unsafe or unsound practices or is in an unsafe or unsound condition.

As an FDIC-insured bank, the Bank must pay deposit insurance assessments to the FDIC based on its average total assets minus its average tangible equity. The Bank’s assessment rates are currently based on its risk classification (i.e., the level of risk it poses to the FDIC’s deposit insurance fund). Institutions classified as higher risk pay assessments at higher rates than institutions that pose a lower risk.

In addition to the ordinary assessments described above, the FDIC has the ability to impose special assessments in certain instances. For example, under the Dodd-Frank Act increased the minimum designated reservetarget Deposit Insurance Fund ratio for the deposit insurance fund was increasedfrom 1.15% of estimated insured deposits to 1.35% of the estimated total amount of insured deposits. OnThe FDIC was required to seek to achieve the 1.35% ratio by September 30, 2018,2020. The FDIC indicated that the deposit insurance fund reached 1.36%, exceeding the statutorily required minimum reserve1.35% ratio was exceeded in November 2018. Insured institutions of 1.35%. On reaching the minimum reserve ratio of 1.35%, FDIC regulations provided for two changes to deposit insurance assessments: (i) surcharges on insured depository institutions with total consolidated assets ofless than $10 billion or more (large institutions) ceased; and (ii) small banks will receive assessmentof assets received credits for the portion of their assessments that contributed to the growth in the reserve ratio from between 1.15% and 1.35%, to be applied when the reserve ratio is at or above 1.38%. These assessment credits started with the June 30, 2019 assessment invoiced in September 2019 and the FDIC continued to apply the assessment credits so long as the reserve ratio was at least 1.35%. The reserve ratio fell to 1.30% as of June 30, 2020 as a result of extraordinary insured deposit growth caused by an unprecedented inflow of more than $1 trillion in estimated insured deposits in the first half of 2020 stemming mainly from the COVID-19 pandemic, specifically monetary policy actions, direct government assistance to consumers and businesses, and an overall reduction in spending. Therefore, on September 15, 2020, the FDIC waived the provision of the FDIC’s assessment regulations requiring that the reserve ratio must be at least 1.35% for the FDIC to remit the full nominal value of an insured depository institution’s remaining assessment credits. All remaining small bank credits were refunded on the September 30, 2020 assessment invoice effectively ending the application of small bank credits. Assessment rates are expected to decrease if the reserve ratio increases such that it exceeds 2%.

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

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Incentive Compensation. The Dodd-Frank Act requiresrequired the federal bank regulators and the SEC to establish joint regulations or guidelines prohibiting incentive-based payment arrangements at specified regulated entities having at least $1 billion in total assets that encourage inappropriate risks by providing an executive officer, employee, director or principal shareholder with excessive compensation, fees, or benefits or that could lead to material financial loss to the entity. In addition, these regulators must establish regulations or guidelines requiring enhanced disclosure to regulators of incentive-based compensation arrangements. The agencies proposed such regulations in April 2011. However, the 2011 proposal was replaced with a new proposal in May 2016, which makes explicit that the involvement of risk management and control personnel includes not only compliance, risk management and internal audit, but also legal, human resources, accounting, financial reporting and finance roles responsible for identifying, measuring, monitoring or controlling risk-taking. ANo final rule had nothas been adopted as of December 31, 2020.issued yet.

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In June 2010, the Federal Reserve, the FDIC and the OCC issued a comprehensive final guidance on incentive compensation policies intended to ensure that the incentive compensation policies of banking organizations do not undermine the safety and soundness of such organizations by encouraging excessive risk-taking. The guidance, which covers all employees that have the ability to materially affect the risk profile of an organization, either individually or as part of a group, is based upon the key principles that a banking organization’s incentive compensation arrangements should (i) provide incentives that do not encourage risk-taking beyond the organization’s ability to effectively identify and manage risks, (ii) be compatible with effective internal controls and risk management, and (iii) be supported by strong corporate governance, including active and effective oversight by the organization’s board of directors.

 

The Federal Reserve will review, as part of the regular, risk-focused examination process, the incentive compensation arrangements of banking organizations, such as the Company, that are not “large, complex banking organizations.” These reviews will be tailored to each organization based on the scope and complexity of the organization’s activities and the prevalence of incentive compensation arrangements. The findings of the supervisory initiatives will be included in reports of examination. Deficiencies will be incorporated into the organization’s supervisory ratings, which can affect the organization’s ability to make acquisitions and take other actions. Enforcement actions may be taken against a banking organization if its incentive compensation arrangements, or related risk-management control or governance processes, pose a risk to the organization’s safety and soundness and the organization is not taking prompt and effective measures to correct the deficiencies.

 

In addition, the Tax Cuts and Jobs Act (the “Tax Act”), which was signed into law in December 2017, contains certain provisions affecting performance-based compensation. Specifically, the pre-existing exception to the $1.0 million deduction limitation applicable to performance-based compensation was repealed. The deduction limitation is now applied to all compensation exceeding $1.0 million, for our covered employees, regardless of how it is classified, which could have an adverse effect on our income tax expense and net income.

 

Concentrations in Commercial Real Estate. Concentration risk exists when FDIC-insured institutions deploy too many assets to any one industry or segment. A concentration in commercial real estate is one example of regulatory concern. The interagency Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices guidance (“CRE Guidance”) provides supervisory criteria, including the following numerical indicators, to assist bank examiners in identifying banks with potentially significant commercial real estate loan concentrations that may warrant greater supervisory scrutiny: (i) total non-owner-occupied commercial real estate loans, including loans secured by apartment buildings, investor commercial real estate, and construction and land loans, exceeding 300% or more of an institution’s total risk-based capital and the outstanding balance of the commercial real estate loan portfolio has increased by 50% or more in the preceding three years or (ii) construction and land development loans exceeding 100% of total risk-based capital. The CRE Guidance does not limit banks’ levels of commercial real estate lending activities, but rather guides institutions in developing risk management practices and levels of capital that are commensurate with the level and nature of their commercial real estate concentrations. On December 18, 2015, the federal banking agencies issued a statement to reinforce prudent risk-management practices related to commercial real estate lending, having observed substantial growth in many commercial real estate asset and lending markets, increased competitive pressures, rising commercial real estate concentrations in banks, and an easing of commercial real estate underwriting standards. The federal bank agencies reminded FDIC-insured institutions to maintain underwriting discipline and exercise prudent risk-management practices to identify, measure, monitor and manage the risks arising from commercial real estate lending. In addition, FDIC-insured institutions must maintain capital commensurate with the level and nature of their commercial real estate concentration risk. Based on the Bank’s loan portfolio as of December 31, 2020,2021, its non-owner occupied commercial loans and its construction and land development loans were approximately 270%258% and 85%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.

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Proposed Legislation and Regulatory Action.From time to time, various legislative and regulatory initiatives are introduced in Congress and state legislatures, as well as by regulatory agencies. Such initiatives may include proposals to expand or contract the powers of bank holding companies and depository institutions or proposals to substantially change the financial institution regulatory system. Such legislation could change banking statutes and our operating environment in substantial and unpredictable ways. If enacted, such legislation could increase or decrease the cost of doing business, limit or expand permissible activities or affect the competitive balance among banks, savings associations, credit unions, and other financial institutions. We cannot predict whether any such legislation will be enacted, and, if enacted, the effect that it, or any implementing regulations, would have on our financial condition or results of operations. A change in statutes, regulations or regulatory policies applicable to the Company or the Bank could have a material effect on our business.

Item 1A. Risk Factors.

There are risks, many beyond our control, which could cause our results to differ significantly from management’s expectations. Some of these risk factors are described below. Any factor described in this Annual Report on Form 10-K could, by itself or together with one or more other factors, adversely affect our business, results of operations and/or financial condition. Additional risks and uncertainties not currently known to us or that we currently consider to not be material also may materially and adversely affect us. In assessing these risks, you should also refer to other information disclosed in our SEC filings, including the financial statements and notes thereto. The risks discussed below also include forward-looking statements, and actual results may differ substantially from those discussed or implied in these forward-looking statements.

Economic and Geographic-Related Risks

The globalongoing COVID-19 pandemic could have an adverse impact on our financial performance and results of operations.

As the COVID-19 pandemic has adversely affectedevolved from its emergence in early 2020, so has its global impact. Many countries have re-instituted, or strongly encouraged, varying levels of quarantines and restrictions on travel and in some cases have at times limited operations of certain businesses and taken other restrictive measures designed to help slow the spread of COVID-19 and its variants. Governments and businesses have also instituted vaccine mandates and testing requirements for employees. While vaccine availability and uptake has increased, the longer-term macro-economic effects on global supply chains, inflation, labor shortages and wage increases continue to impact many industries, including the collateral underlying certain of our business,loans. Moreover, with the potential for new strains of COVID-19 to emerge, governments and businesses may re-impose aggressive measures to help slow its spread in the future. For this reason, among others, as the COVID-19 pandemic continues, the potential global impacts are uncertain and difficult to assess.

The COVID-19 pandemic may have a material adverse impact on our financial condition, liquidity and results of operations and the ultimate affectmarket price of our common stock, among other things. Although financial markets have largely rebounded from the significant declines that occurred earlier in the pandemic on our business, financial condition and results of operations will depend on future developments and other factors that are highly uncertain.

The global COVID-19 pandemic and related government-imposed and other measures intended to control the spread of the disease, including restrictions on travel and the conduct of business, such as stay-at-home orders, quarantines, travel bans, border closings, business and school closures and other similar measures, have had a significant impact on global economic conditions showed signs of improvement during the second half of 2020 and have negatively impacted certain aspects of our business, financial condition and results of operations, and may continue to do so in the future. The governmental and social response to the COVID-19 pandemic has resulted in an unprecedented slow-down in economic activity and a related increase in unemployment. The COVID-19 pandemic, and related efforts to contain it, have also caused significant disruptions in the functioningthroughout 2021, many of the financial markets and have increased economic and market uncertainty and volatility.

Givencircumstances that arose or became more pronounced after the ongoing, dynamic and unprecedented natureonset of the COVID-19 pandemic it is difficult to predict the full impact the pandemic will have on our business. While certain factors point to improving economic conditions, uncertainty remains regarding the path of the economic recovery, the mitigating impacts of government interventions, the success of vaccine distribution and the efficacy of administered vaccines, as well as the effects of the change in leadership resulting from the recent elections. The COVID-19 pandemicpersist, which may subject us to any of the following risks, any of which could have a material adverse effect on our business, financial condition, liquidity, results of operations, risk-weighted assets and regulatory capital:risks:

·because the incidencelower loan demand and an increased risk of reported COVID-19 casesloan delinquencies, defaults, and related hospitalizationsforeclosures due a number of factors, including continuing supply chain issues, decreased consumer and deaths varies significantly by statebusiness confidence and locality, the economic downturn caused by the pandemic may be deeper and more sustained in certain areas, including those in which we do business, relative to other areas of the country;activity;
·our ability to market our products and services may be impaired by a variety of external factors, including a prolonged reduction in economic activity and continued economic and financial market volatility, which could cause demand for our products and services to decline, in turn making it difficult for us to grow assets and income;
·if the economy is unable to substantially reopen and high levels of unemployment continue for an extended period of time, loan delinquencies, problem assets, and foreclosures may increase, resulting in increased charges and reduced income;
·collateral for loans, especially real estate, may decline in value, which may reduce our ability to liquidate such collateral and could cause loan losses to increase and impair our ability over the long run to maintain our targeted loan origination volume;volume;
·our allowance credit losses may have to be increased if borrowers experiencevolatility in financial difficulties beyond forbearance periods, which will adversely affect our net income;and capital markets, interest rates, and exchange rates;
·an increasea significant decline in non-performing loans due to the COVID-19 pandemic wouldmarket value of our common stock, which may result in us recording a corresponding increase in the risk-weightinggoodwill impairment charge, which could adversely affect our results of assets and therefore an increase in required regulatory capital;operations;
·the net worthincreased demands on capital and liquidity of borrowers and loan guarantors may decline, impairing their ability to honor commitments to us;
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·as the result of the reduction of the Federal Reserve’s target federal funds rate to near 0%, the yield on our assets may decline to a greater extent than the decline in our cost of interest-bearing liabilities, reducing our net interest margin and spread and reducing net income;liquidity;
·deposits could decline if customers need to draw on available balances as a resultreduction in the value of the economic downturn;assets that we manage or otherwise administer or service for others, affecting related fee income and demand for our services;
·heightened cybersecurity, information security, and operational risks as cybercriminals attempt to profit from the disruption resulting from the pandemic given increased online and remote activity, including as a material decrease in net income or a net loss over several quarters could result in a decrease in the rate of our quarterly cash dividend;work-from-home arrangements;
·the borrowing needs of our clients may increase, especially during this challenging economic environment, which could result in increased borrowing against our contractual obligationsdisruptions to extend credit;business operations experienced by counterparties and service providers;
·we face heightened cybersecurityincreased risk of business disruption from the loss of employees due to their inability to work effectively because of illness, quarantines, government actions, failures in systems or technology that disrupt work-from-home arrangements, or other effects of the COVID-19 pandemic (including the increase in employee resignations currently taking place throughout the United States in connection with our operation of a remote working environment, which risks include, among others, greater phishing, malware, and other cybersecurity attacks, vulnerability to disruptions of our information technology infrastructure and telecommunications systems, increased risk of unauthorized dissemination of confidential information, limited ability to restore our systems in the event of a systems failure or interruption, greater risk of a security breach resulting in destruction or misuse of valuable information, and potential impairment of our ability to perform critical functions—all of which could expose us to risks of data or financial loss, litigation and liability and could seriously disrupt our operations and the operations of any impacted customers;
·we rely on third party vendors for certain services and the unavailability of a critical service or limitations on the business capacities of our vendors for extended periods of time due to the COVID-19 pandemic, could have an adverse effect on our operations;which is commonly referred to as the “great resignation”); and
·as a result of the COVID-19 pandemic, there may be unexpected developments in financial markets, legislation, regulationsdecreased demands for our products and consumer and customer behavior.services.

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Even afterIn addition, COVID-19 initially caused us to materially increase our allowance for credit losses. During the year ended December 31, 2020, we recorded a $3.8 million net increase in our allowance for loan losses, bringing our total allowance to $10.4 million or 1.23% of loans held-for- investment as of December 31, 2020. During the year ended December 31, 2021, we recorded a $790 thousand net increase in our allowance for loan losses, bringing our total allowance to $11.2 million or 1.29% of loans held-for-investment. Our allowance as a percentage of loans held-for-investment excluding PPP loans was 1.30% at both December 31, 2021 and December 31, 2020. The increase in the allowance for loan losses compared to December 31, 2020 is primarily related to loan growth of $19.5 million ($60.3 million growth in non-PPP loans partially offset by $40.8 million reduction in PPP loans); $455 thousand in net recoveries; an increase in our economic conditions qualitative factor by four basis points during 2021 due to higher inflation, supply chain bottlenecks, and labor shortages in certain industries; and a one basis point increase in our change in legal or regulatory requirements qualitative factor. These increases were partially offset by a reduction in the loss emergence period assumption on our COVID-19 qualitative factor, which was added to our allowance for loan losses methodology during 2020, to 21 months at December 31, 2021 from 24 months at December 31, 2020. Our COVID-19 qualitative factor represented $1.9 million of our allowance for loan losses at December 31, 2021. The allowance for loan losses reflects, among other things, the macroeconomic impact of the COVID-19 outbreak has subsided,pandemic. If the macroeconomic effects of the COVID-19 pandemic improve or worsen, we may continuematerially decrease or increase our allowance for loan losses, which may have a material effect on our business, financial condition and results of operations.

The immediately preceding outcomes are those we consider to be most material as a result of the pandemic. We have also experienced and may experience materially adverseother negative impacts to our business as a result of the virus’s global economic impact, including the availabilitypandemic that could exacerbate other risks discussed in this “Risk Factors” section.

The ongoing fluidity of credit, adverse impacts on our liquidity andthis situation precludes any recession that has occurred or may occur in the future. There are no comparable recent events that provide guidanceprediction as to the effect the spreadultimate adverse impact of COVID-19 as a global pandemic may have,on economic and market conditions, and, as a result, the ultimate impact of the outbreak is highly uncertainpresents material uncertainty and subjectrisk with respect to change. We do not yet know theus. The full extent of the impactsimpact and effects of COVID-19 will depend on our business, our operations orfuture developments, including, among other factors, the duration and spread of the virus and its variants, availability, acceptance and effectiveness of vaccines along with related travel advisories, quarantines and restrictions, the recovery time of the disrupted supply chains and industries, the impact of labor market interruptions, the impact of government interventions, and uncertainty with respect to the duration of the global economy as a whole. However,economic slowdown. COVID-19 and the effects could have a material impact oncurrent financial, economic and capital markets environment, and future developments in these and other areas present uncertainty and risk with respect to our performance and results of operations and heighten many of our known risks described herein.operations.

 

Our business may be adversely affected by economic conditions generally.

Our financial performance generally, and in particular the ability of borrowers to pay interest on and repay principal of outstanding loans and the value of collateral securing those loans, as well as demand for loans and other products and services we offer and whose success we rely on to drive our growth, is highly dependent upon the business environment in the primary markets where we operate and in the U.S. as a whole. Unlike larger banks that are more geographically diversified, we are a regional bank that provides banking and financial services to customers primarily in South Carolina and Georgia. The economic conditions in these local markets may be different from, and in some instances worse than, the economic conditions in the U.S. as a whole.

Some elements of the business environment that affect our financial performance include short-term and long-term interest rates, the prevailing yield curve, inflation and price levels, monetary and trade policy, unemployment and the strength of the domestic economy and the local economy in the markets in which we operate. Unfavorable market conditions can result in a deterioration in the credit quality of our borrowers and the demand for our products and services, an increase in the number of loan delinquencies, defaults and charge-offs, foreclosures, additional provisions for loan losses, adverse asset values of the collateral securing our loans and an overall material adverse effect on the quality of our loan portfolio. The majority of our loan portfolio is secured by real estate. A decline in real estate values can negatively impact our ability to recover our investment should the borrower become delinquent. Loans secured by stock or other collateral may be adversely impacted by a downturn in the economy and other factors that could reduce the recoverability of our investment. Unsecured loans are dependent on the solvency of the borrower, which can deteriorate, leaving us with a risk of loss. Unfavorable or uncertain economic and market conditions can be caused by declines in economic growth, business activity or investor or business confidence; limitations on the availability or increases in the cost of credit and capital; increases in inflation or interest rates; high unemployment; natural disasters; epidemics and pandemics (such as COVID-19); or a combination of these or other factors.

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The impact of the COVID-19 pandemic is fluid and continues to evolve and there is pervasive uncertainty surrounding the future economic conditions that will emerge in the months and years following the onset of the pandemic. Even afterMoreover, as economic conditions relating to the COVID-19 pandemic subsides,have improved over time, the U.S. economy will likely require some timeFederal Reserve has shifted its focus to recover from itslimiting inflationary and other potentially adverse effects of the lengthextensive pandemic-related government stimulus, which signals the potential for a continued period of which is unknown, and during which we may experience a recession.economic uncertainty even if the pandemic subsides. In addition, there are continuing concerns related to, among other things, the level of U.S. government debt and fiscal actions that may be taken to address that debt, depressed oil prices and athe potential resurgence of economic and political tensions with China, thatthe Russian invasion of Ukraine and increasing oil prices due to Russian supply disruptions, each of which may have a destabilizing effect on financial markets and economic activity. Economic pressure on consumers and overall economic uncertainty may result in changes in consumer and business spending, borrowing and saving habits. These economic conditions and/or other negative developments in the domestic or international credit markets may significantly affect the markets in which we do business, the value of our loans and investments, and our ongoing operations, costs and profitability. Declines in real estate values and sales volumes and high unemployment may also result in higher than expected loan delinquencies, increases in our levels of nonperforming and classified assets and a decline in demand for our products and services. These negative events may cause us to incur losses and may adversely affect our capital, liquidity and financial condition.

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Credit and Interest Rate Risk

 

Our decisions regarding credit risk and reserves for loan losses may materially and adversely affect our business.

 

Making loans and other extensions of credit is an essential element of our business. Although we seek to mitigate risks inherent in lending by adhering to specific underwriting practices, our loans and other extensions of credit may not be repaid. The risk of nonpayment is affected by a number of factors, including:

 

·the duration of the credit;

·credit risks of a particular customer;

·changes in economic and industry conditions; and

·in the case of a collateralized loan, risks resulting from uncertainties about the future value of the collateral.

We attempt to maintain an appropriate allowance for loan losses to provide for potential losses in our loan portfolio. We periodically determine the amount of the allowance based on consideration of several factors, including:

 

·an ongoing review of the quality, mix, and size of our overall loan portfolio;

·our historical loan loss experience;

·evaluation of economic conditions;

·regular reviews of loan delinquencies and loan portfolio quality; and

·the amount and quality of collateral, including guarantees, securing the loans.

There is no precise method of predicting credit losses; therefore, we face the risk that charge-offs in future periods will exceed our allowance for loan losses and that additional increases in the allowance for loan losses will be required. Additions to the allowance for loan losses would result in a decrease of our net income, and possibly our capital.

Federal and state regulators periodically review our allowance for loan losses and may require us to increase our provision for loan losses or recognize further loan charge-offs, based on judgments different than those of our management. Any increase in the amount of our provision or loans charged-off as required by these regulatory agencies could have a negative effect on our operating results.

We may have higher loan losses than we have allowed for in our allowance for loan losses.

Our actual loan losses could exceed our allowance for loan losses. Our average loan size continues to increase and reliance on our historic allowance for loan losses may not be adequate. As of December 31, 2020,2021, approximately 85.6%90.4% of our loan portfolio (excluding loans held for sale) is composed of construction (11.3%(11.0%), commercial mortgage (67.9%(71.5%) and commercial (excluding PPP) (6.4%(7.9%) loans. Repayment of such loans is generally considered more subject to market risk than residential mortgage loans. Industry experience shows that a portion of loans will become delinquent and a portion of loans will require partial or entire charge-off. Regardless of the underwriting criteria utilized, losses may be experienced as a result of various factors beyond our control, including among other things, changes in market conditions affecting the value of loan collateral and problems affecting the credit of our borrowers.

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While the fiscal stimulus and relief programs appear to have delayed any materially adverse financial impact to the Bank, once these stimulus programs have been exhausted, If we believe our credit metrics could worsen andsuffer loan losses that exceed our allowance for loans losses, our financial condition, liquidity or results of operations could ultimately materialize. be materially and adversely affected.

Any potential loan losses will be contingent upon a number of factors beyond our control, such as the resurgence of the virus, including any new strains, offset by the potency of the vaccine along with its extensive distribution, and the ability for customers and businesses to return to their pre-pandemic routines.

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We have a concentration of credit exposure in commercial real estate and challenges faced by the commercial real estate market could adversely affect our business, financial condition, and results of operations.

As of December 31, 2020,2021, we had approximately $655.5$703.3 million in loans outstanding to borrowers whereby the collateral securing the loan was commercial real estate, representing approximately 77.7%81.4% of our total loans outstanding as of that date. Approximately 28.7%,$244.0 million or $242.1 million,28.3% of thisour total loans and 34.7% of our commercial real estate isloans are secured by owner-occupied properties. Commercial real estate loans are generally viewed as having more risk of default than residential real estate loans. They are also typically larger than residential real estate loans and consumer loans and depend on cash flows from the owner’s business or the property to service the debt. Cash flows may be affected significantly by general economic conditions, and a downturn in the local economy or in occupancy rates in the local economy where the property is located could increase the likelihood of default. Because our loan portfolio contains a number of commercial real estate loans with relatively large balances, the deterioration of one or a few of these loans could cause a significant increase in our level of non-performing loans. An increase in non-performing loans could result in a loss of earnings from these loans, an increase in the related provision for loan losses and an increase in charge-offs, all of which could have a material adverse effect on our financial condition and results of operations.

Our commercial real estate loans have grown 11.6%7.3%, or $68$47.8 million, since December 31, 2019.2020. The banking regulators are givinggive commercial real estate lending greater scrutiny, and may require banks with higher levels of commercial real estate loans to implement more stringent underwriting, internal controls, risk management policies and portfolio stress testing, as well as possibly higher levels of allowances for losses and capital levels as a result of commercial real estate lending growth and exposures.

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

In 2006, the FDIC, the Federal Reserve and the Office of the Comptroller of the Currency issued joint guidance entitled “Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices” (the “CRE Guidance”). Although the CRE Guidance did not establish specific lending limits, it provides that a bank’s commercial real estate lending exposure could receive increased supervisory scrutiny where (i) total non-owner-occupied commercial real estate loans, including loans secured by apartment buildings, investor commercial real estate, and construction and land loans, represent 300% or more of an institution’s total risk-based capital, and the outstanding balance of the commercial real estate loan portfolio has increased by 50% or more during the preceding 36 months, or (ii) construction and land development loans exceed 100% of total risk-based capital. Our total non-owner-occupied commercial real estate loans represented 270%258% of the Bank’s total risk-based capital at December 31, 2020,2021, and our construction and land development loans represented 85%69% of the Bank’s total risk-based capital at December 31, 2020.2021.

In December 2015, the regulatory agencies released a new statement on prudent risk management for commercial real estate lending (the “2015 Statement”). In the 2015 Statement, the regulatory agencies, among other things, indicated their intent to continue “to pay special attention” to commercial real estate lending activities and concentrations going forward. If the FDIC, our primary federal regulator, were to impose restrictions on the amount of commercial real estate loans we can hold in our portfolio, for reasons noted above or otherwise, our earnings would be adversely affected.

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Repayment of our commercial business loans is often dependent on the cash flows of the borrower, which may be unpredictable, and the collateral securing these loans may fluctuate in value.

At December 31, 2020,2021, commercial business loans excluding PPP loans comprised 6.4%7.9% of our total loan portfolio. Our commercial business loans are originated primarily based on the identified cash flow and general liquidity of the borrower and secondarily on the underlying collateral provided by the borrower and/or repayment capacity of any guarantor. The borrower’s cash flow may be unpredictable, and collateral securing these loans may fluctuate in value. Although commercial business loans are often collateralized by equipment, inventory, accounts receivable, or other business assets, the liquidation of collateral in the event of default is often an insufficient source of repayment because accounts receivable may be uncollectible and inventories may be obsolete or of limited use. In addition, business assets may depreciate over time, may be difficult to appraise, and may fluctuate in value based on the success of the business. Accordingly, the repayment of commercial business loans depends primarily on the cash flow and credit worthiness of the borrower and secondarily on the underlying collateral value provided by the borrower and liquidity of the guarantor. If these borrowers do not have sufficient cash flows or resources to pay these loans as they come due or the value of the underlying collateral is insufficient to fully secure these loans, we may suffer losses on these loans that exceed our allowance for loan losses.

Our focus on lending to small to mid-sized community-based businesses may increase our credit risk.

Most of our commercial business and commercial real estate loans are made to small business or middle market customers. These businesses generally have fewer financial resources in terms of capital or borrowing capacity than larger entities and have a heightened vulnerability to economic conditions. If general economic conditions in the markets in which we operate negatively impact this important customer sector, our results of operations and financial condition and the value of our common stock may be adversely affected. Moreover, a portion of these loans have been made by us in recent years and the borrowers may not have experienced a complete business or economic cycle. Furthermore, the deterioration of our borrowers’ businesses may hinder their ability to repay their loans with us, which could have a material adverse effect on our financial condition and results of operations.

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Our underwriting decisions may materially and adversely affect our business.

While we generally underwrite the loans in our portfolio in accordance with our own internal underwriting guidelines and regulatory supervisory guidelines, in certain circumstances we have made loans which exceed either our internal underwriting guidelines, supervisory guidelines, or both. As of December 31, 2020,2021, approximately $36.6$17.6 million of our loans, or 28.6%12.2% of the Bank’s regulatory capital, had loan-to-value ratios that exceeded regulatory supervisory guidelines, of which only one loantwo loans totaling approximately $210 thousand$2.0 million had loan-to-value ratios of 100% or more. In addition, supervisory limits on commercial loan-to-value exceptions are set at 30% of the Bank’s capital. At December 31, 2020, $27.62021, $13.4 million of our commercial loans, or 21.1%9.3% of the Bank’s regulatory capital, exceeded the supervisory loan-to-value ratio. The number of loans in our portfolio with loan-to-value ratios in excess of supervisory guidelines, our internal guidelines, or both could increase the risk of delinquencies and defaults in our portfolio.portfolio, which could have a material adverse effect on our financial condition and results of operations.

We depend on the accuracy and completeness of information about clients and counterparties and our financial condition could be adversely affected if we rely on misleading information.

In deciding whether to extend credit or to enter into other transactions with clients and counterparties, we may rely on information furnished to us by or on behalf of clients and counterparties, including financial statements and other financial information, which we do not independently verify. We also may rely on representations of clients and counterparties as to the accuracy and completeness of that information and, with respect to financial statements, on reports of independent auditors. For example, in deciding whether to extend credit to clients, we may assume that a customer’s audited financial statements conform with GAAP and present fairly, in all material respects, the financial condition, results of operations and cash flows of the customer. Our financial condition and results of operations could be negatively impacted to the extent we rely on financial statements that do not comply with GAAP or are materially misleading.

If we fail to effectively manage credit risk and interest rate risk, our business and financial condition will suffer.

We must effectively manage credit risk. There are risks inherent in making any loan, including risks with respect to the period of time over which the loan may be repaid, risks relating to proper loan underwriting and guidelines, risks resulting from changes in economic and industry conditions, risks inherent in dealing with individual borrowers and risks resulting from uncertainties as to the future value of collateral. Many of these risks have been and may further be exacerbated by the effects of the COVID-19 pandemic. There is no assurance that our credit risk monitoring and loan approval procedures are or will be adequate or will reduce the inherent risks associated with lending. Our credit administration personnel, policies and procedures may not adequately adapt to changes in economic or any other conditions affecting customers and the quality of our loan portfolio. Any failure to manage such credit risks may materially adversely affect our business and our consolidated results of operations and financial condition.

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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 investment securities, which include mortgage-backed securities (“MBSs”), and interest expense on interest-bearing liabilities, such as deposits and other borrowings. Depending on the terms and maturities of our assets and liabilities, we believe a significant change in interest rates could potentially have a material adverse effect on our profitability. Many factors cause changes in interest rates, including governmental monetary policies and domestic and international economic and political conditions. While we intend to manage the effects of changes in interest rates by adjusting the terms, maturities, and pricing of our assets and liabilities, our efforts may not be effective and our financial condition and results of operations could suffer.

 

Capital and Liquidity Risks

 

Changes in the financial markets could impair the value of our investment portfolio.

 

Our investment securities portfolio is a significant component of our total earning assets. Total investment securities averaged $456.8 million in 2021, as compared to $300.9 million in 2020, as compared to $257.6 million in 2019.2020. This represents 25.1%32.2% and 25.3%25.1% of the average earning assets for the years ended December 31, 20202021 and 2019,2020, respectively. At December 31, 2020,2021, the portfolio was 38.2% of earning assets compared to 27.9% of earning assets.assets at December 31, 2020. Turmoil in the financial markets could impair the market value of our investment portfolio, which could adversely affect our net income and possibly our capital.

 

As of December 31, 20202021 and 2019,2020, securities which have unrealized losses were not considered to be “other than temporarily impaired,” and we believe it is more likely than not we will be able to hold these until they mature or recover our current book value. We currently maintain substantial liquidity which supports our ability to hold these investments until they mature, or until there is a market price recovery. However, if we were to cease to have the ability and intent to hold these investments until maturity or the market prices do not recover, and we were to sell these securities at a loss, it could adversely affect our net income and possibly our capital.

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We areThe Bank is subject to strict capital requirements, which could be amended to be more stringent, in the future.

We areThe Bank is subject to regulatory requirements specifying minimum amounts and types of capital that we must maintain and an additional capital conservation buffer. From time to time, the regulators change these regulatory capital adequacy guidelines. If we fail to meet these capital guidelines and other regulatory requirements, we or our subsidiaries may be restricted in the types of activities we may conduct and we may be prohibited from taking certain capital actions, such as paying dividends, repurchasing or redeeming capital securities, and paying certain bonuses.

In particular, the capital requirements applicable to the Bank under the Basel III rules became fully phased-in on January 1, 2019. Therequire the Bank is now required to satisfy additional, more stringent, capital adequacy standards than it had in the past. While we expect to meet the requirements of the Basel III rules, we may fail to do so. Failure to meet minimum capital requirements could result in certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have an adverse material effect on our financial condition and results of operations. In addition, these requirements could have a negative impact on our ability to lend, grow deposit balances, make acquisitions, make capital distributions in the form of dividends or share repurchases, or pay certain bonuses needed to attract and retain key personnel. Higher capital levels could also lower our return on equity.

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Risks Related to Our Industry

 

The phase-out of LIBOR could negatively impact our net interest income and require significant operational work.

 

The United Kingdom’s Financial Conduct Authority which(“FCA”) regulates the London Interbank Offered Rate (“LIBOR”), hasthe reference rate previously used for many of our transactions, including our lending and borrowing and our purchase and sale of securities, as well as the derivatives that we use to manage risk related to such transactions. The FCA announced in July 2017 that it willthe sustainability of LIBOR could not compel panelbe guaranteed. Accordingly, although the FCA confirmed the extension of overnight and 1-, 3-, 6-, and 12-month LIBOR through June 30, 2023 in order to accord financial institutions greater time with which to manage the transition from LIBOR, the FCA is no longer persuading, or compelling, banks to contributesubmit to LIBOR after 2021. It is likelyLIBOR. The federal banking agencies, including the OCC, previously determined that banks will not continuemust cease entering into any new contract that uses LIBOR as a reference rate by no later than December 31, 2021. In addition, banks have been encouraged to provide submissions for the calculation of LIBOR after 2021identify contracts that extend beyond June 30, 2023 and possibly priorimplement plans to then.identify and address insufficient contingency provisions in those contracts. The discontinuance of LIBOR has resulted in significant uncertainty regarding the transition to suitable alternative reference rates and could adversely impact our business, operations, and financial results. Although the full impact of transition remains unclear, this change may have an adverse impact on the value of, return on and trading markets for a broad array of financial products, including any LIBOR-based securities, loans and derivatives that are included in our financial assets and liabilities. If LIBOR is discontinued after 2021 as expected, there will be uncertainty or differences in the calculation of the applicable interest rate or payment amount depending on the terms of the governing instruments, which may also impact our net interest income and account and service fees. In addition, LIBOR may perform differently during the phase-out period than in the past which could result in lower interest earned on certain assets and a reduction in the value of certain assets. The Federal Reserve Board, in conjunction with the Alternative Reference Rates Committee, a steering committee comprised of large U.S. financial institutions, has endorsed replacing the U.S. dollar LIBOR with a new index calculated by short-term repurchase agreements, backed by Treasury securities (“SOFR”). SOFR is observed and backward looking, which stands in contrast with LIBOR under the current methodology, which is an estimated forward-looking rate and relies, to some degree, on the expert judgment of submitting panel members. Given that SOFR is a secured rate backed by government securities, it will be a rate that does not take into account bank credit risk (as is the case with LIBOR). In November 2020, the federal banking agencies issued a statement that says that banks may use any reference rate for its loans that the bank determines to be appropriate for its funding model and customer needs.

 

The discontinuation of LIBOR, changes in LIBOR, or changes in market perceptions of the acceptability of LIBOR as a benchmark could result in changes to our risk exposures (for example, if the anticipated discontinuation of LIBOR adversely affects the availability or cost of floating-rate funding and, therefore, our exposure to fluctuations in interest rates) or otherwise result in losses on a product or having to pay more or receive less on securities that we own or have issued. In addition, such uncertainty could result in pricing volatility and increased capital requirements, loss of market share in certain products, adverse tax or accounting impacts, and compliance, legal and operational costs and risks associated with client disclosures, discretionary actions taken or negotiation of fallback provisions, systems disruption, business continuity, and model disruption. The implementation of LIBOR reform proposals may result in increased compliance costs and operational costs, including costs related to continued participation in LIBOR and the transition to a replacement reference rate or rates. We cannot reasonably estimate the expected cost.

As of December 31, 2020,2021, we had $20.6$19.4 million in LIBOR-based loans, $71.3$64.7 million in securities, and $15.0 million in junior subordinated debt indexed to LIBOR. Uncertainty as to the nature of alternative reference rates and as to potential changes or other reforms to LIBOR may adversely affect LIBOR rates and the value of LIBOR-based loans, if such loans do not mature or pre-pay before the transition. For new loan originations and renewals with maturities greater than one year, we have generally ceased relying on LIBOR and have moved to alternative indices.

 

Higher FDIC deposit insurance premiums and assessments could adversely affect our financial condition.

 

Our deposits are insured up to applicable limits by the Deposit Insurance Fund of the FDIC and are subject to deposit insurance assessments to maintain deposit insurance. As an FDIC-insured institution, we are required to pay quarterly deposit insurance premium assessments to the FDIC. Although we cannot predict what the insurance assessment rates will be in the future, either deterioration in our risk-based capital ratios or adjustments to the base assessment rates could have a material adverse impact on our business, financial condition, results of operations, and cash flows.

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

 

We face substantial competition in all areas of our operations from a variety of different competitors, both within and beyond our principal markets, many of which are larger and may have more financial resources. Such competitors primarily include national, regional, community and internet banks within the various markets in which we operate. We also face competition from many other types of financial institutions, including, without limitation, savings and loans, credit unions, finance companies, brokerage firms, insurance companies, and other financial intermediaries. The financial services industry could become even more competitive as a result of legislative and regulatory changes and continued consolidation. In addition, as customer preferences and expectations continue to evolve, technology has lowered barriers to entry and made it possible for banks to offer products and services in more areas in which they do not have a physical location and for nonbanks, such as FinTech companies, to offer products and services traditionally provided by banks, such as automatic transfer and automatic payment systems. Banks, securities firms, and insurance companies can merge under the umbrella of a financial holding company, which can offer virtually any type of financial service, including banking, securities underwriting, insurance (both agency and underwriting), and merchant banking. Many of our competitors have fewer regulatory constraints and may have lower cost structures. Additionally, due to their size, many competitors may be able to achieve economies of scale and, as a result, may offer a broader range of products and services as well as better pricing for those products and services than we can.

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Our ability to compete successfully depends on a number of factors, including, among other things:

 

·our ability to develop, maintain, and build upon long-term customer relationships based on top quality service, high ethical standards, and safe, sound assets;

·our ability to expand our market position;

·the scope, relevance, and pricing of the products and services we offer to meet our customers’ needs and demands;

·the rate at which we introduce new products and services relative to our competitors;

·customer satisfaction with our level of service; and

·industry and general economic trends.

Failure to perform in any of these areas could significantly weaken our competitive position, which could adversely affect our growth and profitability, which, in turn, could have a material adverse effect on our business, financial condition and results of operations.

We may be adversely affected by the soundness of other financial institutions.

Financial services institutions are interrelated as a result of trading, clearing, counterparty, or other relationships. We have exposure to many different industries and counterparties, and routinely execute transactions with counterparties in the financial services industry, including commercial banks, brokers and dealers, investment banks, and other institutional clients. Many of these transactions expose us to credit risk in the event of a default by a counterparty or client. In addition, our credit risk may be exacerbated when the collateral held by the bank cannot be realized upon or is liquidated at prices not sufficient to recover the full amount of the credit or derivative exposure due to the bank. Any such losses could have a material adverse effect on our financial condition and results of operations.

Failure to keep pace with technological change could adversely affect our business.

The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology-driven products and services. The effective use of technology increases efficiency and enables financial institutions to better serve customers and to reduce costs. Our future success depends, in part, upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in our operations. Many of our competitors have substantially greater resources to invest in technological improvements. We may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to our customers. In addition, we depend on internal and outsourced technology to support all aspects of our business operations. Failure to successfully keep pace with technological change affecting the financial services industrychanges could have a material adverse impact on our business, financial condition and results of operations.

New lines of business or new products and services may subject us to additional risk.

From time to time, we may implement new lines of business or offer new products and services within existing lines of business. There are substantial risks and uncertainties associated with these efforts, particularly in instances where the markets are not fully developed. In developing and marketing new lines of business and/or new products and services, we may invest significant time and resources. Initial timetables for the introduction and development of new lines of business and/or new products or services may not be achieved and price and profitability targets may not prove feasible. External factors, such as compliance with regulations, competitive alternatives, and shifting market preferences, may also impact the successful implementation of a new line of business and/or a new product or service. Furthermore, any new line of business and/or new product or service could have a significant impact on the effectiveness of our system of internal controls. Failure to successfully manage these risks in the development and implementation of new lines of business and/or new products or services could have a material adverse effect on our business, financial condition and results of operations.

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Consumers may decide not to use banks to complete their financial transactions.

Technology and other changes are allowing parties to complete financial transactions through alternative methods that historically have involved banks. For example, consumers can now maintain funds that would have historically been held as bank deposits in brokerage accounts, mutual funds or general-purpose reloadable prepaid cards. Consumers can also complete transactions such as paying bills and/or transferring funds directly without the assistance of banks. The process of eliminating banks as intermediaries, known as “disintermediation,” could result in the loss of fee income, as well as the loss of customer deposits and the related income generated from those deposits. The loss of these revenue streams and the lower cost of deposits as a source of funds could have a material adverse effect on our financial condition and results of operations.

Risks Related to Our Strategy

We may be adversely affected by risks associated with future mergers and acquisitions, including execution risk, which could disrupt our business and dilute shareholder value.

From time to time, we may seek to acquire other financial institutions or parts of those institutions. We may also expand into new markets or lines of business or offer new products or services. These activities would involve a number of risks, including:

 

·the potential inaccuracy of the estimates and judgments used to evaluate credit, operations, management, and market risks with respect to a target institution;

·regulatory approvals could be delayed, impeded, restrictively conditioned or denied due to existing or new regulatory issues we have, or may have, with regulatory agencies, including, without limitation, issues related to anti-money laundering/Bank Secrecy Act compliance, fair lending laws, fair housing laws, consumer protection laws, unfair, deceptive, or abusive acts or practices regulations, CRA issues, and other similar laws and regulations;

·the time and costs of evaluating new markets, hiring or retaining experienced local management, and opening new offices and the time lags between these activities and the generation of sufficient assets and deposits to support the costs of the expansion;

·difficulty or unanticipated expense associated with converting the operating systems of the acquired or merged company into ours;

·the incurrence and possible impairment of goodwill and other intangible assets associated with an acquisition or merger and possible adverse effects on our results of operations; and

·the risk of loss of key employees and customers of the Company or the acquired or merged company.

 

If we do not successfully manage these risks, our merger and acquisition activities could have a material adverse effect on our business, financial condition, and results of operations, including short-term and long-term liquidity, and our ability to successfully implement our strategic plan.

 

We may be exposed to difficulties in combining the operations of acquired businesses into our own operations, which may prevent us from achieving the expected benefits from our acquisition activities.

 

We may not be able to fully achieve the strategic objectives and operating efficiencies that we anticipate in our acquisition activities. Inherent uncertainties exist in integrating the operations of an acquired business. In addition, the markets and industries in which we and our potential acquisition targets operate are highly competitive. We may lose customers or the customers of acquired entities as a result of an acquisition. We also may lose key personnel from the acquired entity as a result of an acquisition. We may not discover all known and unknown factors when examining a company for acquisition during the due diligence period. These factors could produce unintended and unexpected consequences for us. Undiscovered factors as a result of acquisitions, pursued by non-related third party entities, could bring civil, criminal, and financial liabilities against us, our management, and the management of those entities acquired. These factors could contribute to us not achieving the expected benefits from acquisitions within desired time frames.

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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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Risks Related to Our Human Capital

 

We are dependent on key individuals, and the loss of one or more of these key individuals could curtail our growth and adversely affect our prospects.

Michael C. Crapps, our president and chief executive officer, has extensive and long-standing ties within our primary market area and substantial experience with our operations, and he has contributed significantly to our business. If we lose the services of Mr. Crapps, he would be difficult to replace and our business and development could be materially and adversely affected.

Our success also depends, in part, on our continued ability to attract and retain experienced loan originators, as well as other management personnel. Competition for personnel is intense, and we may not be successful in attracting or retaining qualified personnel. Our failure to compete for these personnel, or the loss of the services of several of such key personnel, could adversely affect our business strategy and materially and adversely affect our business, results of operations, and financial condition.

Operational Risks

A failure in or breach of our operational or security systems or infrastructure, or those of our third party vendors and other service providers or other third parties, including as a result of cyber attacks, could disrupt our businesses, result in the disclosure or misuse of confidential or proprietary information, damage our reputation, increase our costs, and cause losses.

 

We rely heavily on communications and information systems to conduct our business. Information security risks for financial institutions such as ours have generally increased in recent years in part because of the proliferation of new technologies, the use of the internet and telecommunications technologies to conduct financial transactions, and the increased sophistication and activities of organized crime, hackers, and terrorists, activists, and other external parties. As customer, public, and regulatory expectations regarding operational and information security have increased, our operating systems and infrastructure must continue to be safeguarded and monitored for potential failures, disruptions, and breakdowns. Our business, financial, accounting, and data processing systems, or other operating systems and facilities may stop operating properly or become disabled or damaged as a result of a number of factors, including events that are wholly or partially beyond our control. For example, there could be electrical or telecommunication outages; natural disasters such as earthquakes, tornadoes, and hurricanes; disease pandemics; events arising from local or larger scale political or social matters, including terrorist acts; and as described below, cyber attacks.

As noted above, our business relies on our digital technologies, computer and email systems, software and networks to conduct its operations. Although we have information security procedures and controls in place, our technologies, systems, networks, and our customers’ devices may become the target of cyber attacks or information security breaches that could result in the unauthorized release, gathering, monitoring, misuse, loss, or destruction of our or our customers’ or other third parties’ confidential information. Third parties with whom we do business or that facilitate our business activities, including financial intermediaries, or vendors that provide service or security solutions for our operations, and other unaffiliated third parties, including the South Carolina Department of Revenue, which had customer records exposed in a 2012 cyber attack, could also be sources of operational and information security risk to us, including from breakdowns or failures of their own systems or capacity constraints.

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While we have disaster recovery and other policies, plans and procedures designed to prevent or limit the effect of the failure, interruption or security breach of our information systems, there can be no assurance that any such failures, interruptions or security breaches will not occur or, if they do occur, that they will be adequately addressed. Our risk and exposure to these matters remains heightened because of the evolving nature of these threats. As a result, cyber security and the continued development and enhancement of our controls, processes, and practices designed to protect our systems, computers, software, data, and networks from attack, damage or unauthorized access remain a focus for us. As threats continue to evolve, we may be required to expend additional resources to continue to modify or enhance our protective measures or to investigate and remediate information security vulnerabilities. Disruptions or failures in the physical infrastructure or operating systems that support our businesses and clients, or cyber attacks or security breaches of the networks, systems or devices that our clients use to access our products and services could result in client attrition, regulatory fines, penalties or intervention, reputation damage, reimbursement or other compensation costs, and/or additional compliance costs, any of which could have a material effect on our results of operations or financial condition.

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We are at risk of increased losses from fraud.

Criminals committing fraud increasingly are using more sophisticated techniques and in some cases are part of larger criminal rings, which allow them to be more effective.

The fraudulent activity has taken many forms, ranging from check fraud, mechanical devices attached to ATM machines, social engineering and phishing attacks to obtain personal information or impersonation of our clients through the use of falsified or stolen credentials. Additionally, an individual or business entity may properly identify themselves, particularly when banking online, yet seek to establish a business relationship for the purpose of perpetrating fraud. Further, in addition to fraud committed against us, we may suffer losses as a result of fraudulent activity committed against third parties. Increased deployment of technologies, such as chip card technology, defray and reduce aspects of fraud; however, criminals are turning to other sources to steal personally identifiable information, such as unaffiliated healthcare providers and government entities, in order to impersonate the consumer to commit fraud. Many of these data compromises are widely reported in the media. As a result of the increased sophistication of fraud activity, we have increased our spending on systems and controls to detect and prevent fraud. This will result in continued ongoing investments in the future.

Nevertheless, these investments may prove insufficient and fraudulent activity could result in losses to us or our customers; loss of business and/or customers; damage to our reputation; the incurrence of additional expenses (including the cost of notification to consumers, credit monitoring and forensics, and fees and fines imposed by the card networks); disruption to our business; our inability to grow our online services or other businesses; additional regulatory scrutiny or penalties; or our exposure to civil litigation and possible financial liability any of which could have a material adverse effect on our business, financial condition and results of operations.

Our use of third party vendors and our other ongoing third party business relationships are subject to increasing regulatory requirements and attention.

We regularly use third party vendors as part of our business. We also have substantial ongoing business relationships with other third parties. These types of third party relationships are subject to increasingly demanding regulatory requirements and attention by our federal bank regulators. Recent regulation requires us to enhance our due diligence, ongoing monitoring and control over our third party vendors and other ongoing third party business relationships. We expect that our regulators will hold us responsible for deficiencies in our oversight and control of our third party relationships and in the performance of the parties with which we have these relationships. As a result, if our regulators conclude that we have not exercised adequate oversight and control over our third party vendors or other ongoing third party business relationships or that such third parties have not performed appropriately, we could be subject to enforcement actions, including civil money penalties or other administrative or judicial penalties or fines as well as requirements for customer remediation, any of which could have a material adverse effect on our business, financial condition or results of operations.

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

Reputation risk, or the risk to our business, earnings and capital from negative public opinion surrounding ourthe Bank and the financial institutions industry generally, is inherent in our business. Negative public opinion can result from our actual or alleged conduct in any number of activities, including lending practices, corporate governance, mergers and acquisitions, and from actions taken by government regulators and community organizations in response to those activities. Negative public opinion can adversely affect our ability to keep and attract clients and employees, could impair the confidence of our investors, counterparties and business partners and can affect our ability to effect transactions and can expose us to litigation and regulatory action. Although we take steps to minimize reputation risk in dealing with our clients and communities, this risk will always be present given the nature of our business.

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Legal, Accounting, Regulatory and Compliance Risks

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

We operate in a highly regulated industry and are subject to examination, supervision, and comprehensive regulation by various regulatory agencies. We are subject to Federal Reserve regulation. OurThe Bank is subject to extensive regulation, supervision, and examination by our primary federal regulator, the FDIC, the regulating authority that insures customer deposits; and by our state regulator, the S.C. Board. Also, as a member of the Federal Home Loan Bank (the “FHLB”), ourthe 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. OurThe Bank’s activities are also regulated under consumer protection laws applicable to our lending, deposit, and other activities. A sufficient claim against us under these laws could have a material adverse effect on our results of operations.

Failure to comply with laws, regulations or policies could also result in heightened regulatory scrutiny and in sanctions by regulatory agencies (such as a memorandum of understanding, a written supervisory agreement or a cease and desist order), civil money penalties and/or reputation damage. Any of these consequences could restrict our ability to expand our business or could require us to raise additional capital or sell assets on terms that are not advantageous to us or our shareholders and could have a material adverse effect on our business, financial condition and results of operations. While we have policies and procedures designed to prevent any such violations, such violations may occur despite our best efforts.

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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.

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Changes in accounting standards could materially affect our financial statements.

Our accounting policies and methods are fundamental to how we record and report our financial condition and results of operations. From time to time, FASB, the SEC and our bank regulators change the financial accounting and reporting standards, or the interpretation thereof, and guidance that govern the preparation and disclosure of external financial statements. Such changes are beyond our control, can be hard to predict and could materially impact how we report and disclose our financial condition and results of operations. In some cases, we could be required to apply a new or revised standard retrospectively, or apply an existing standard differently, also retrospectively, which under some circumstances could potentially result in a need to revise or restate prior period financial statements.

New accounting standards will likely require us to increase our allowance for loan losses and may have a material adverse effect on our financial condition and results of operations.

The measure of our allowance for loan losses is dependent on the adoption and interpretation of accounting standards. The Financial Accounting Standards Board (the “FASB”) has issued a new credit impairment model, the Current Expected Credit Loss, or CECL model, which will become applicable to us in 2023. Under the CECL model, we will be required to present certain financial assets carried at amortized cost, such as loans held for investment and held-to-maturity debt securities, at the net amount expected to be collected. The measurement of expected credit losses is to be based on information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. This measurement will take place at the time the financial asset is first added to the balance sheet and periodically thereafter. This differs significantly from the “incurred loss” model currently required under GAAP, which delays recognition until it is probable a loss has been incurred. Accordingly, we expect that the adoption of the CECL model will materially affect how we determine our allowance for loan losses and could require us to significantly increase our allowance. Moreover, the CECL model may create more volatility in the level of our allowance for loan losses. If we are required to materially increase our level of allowance for loan losses for any reason, such increase could adversely affect our business, financial condition and results of operations.

The new CECL standard will become effective for us on January 1, 2023 and for interim periods within that year. We are currently evaluating the impact the CECL model will have on our accounting, but we expect to recognize a one-time cumulative-effect adjustment to our allowance for loan losses as of the beginning of the first reporting period in which the new standard is effective, consistent with regulatory expectations set forth in interagency guidance issued at the end of 2016. We cannot yet determine the magnitude of any such one-time cumulative adjustment or of the overall impact of the new standard on our business, financial condition and results of operations.

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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.

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We face risks related to the adoption of future legislation and potential changes in federal regulatory agency leadership, policies, and priorities.

 

With a new Congress taking office in January 2021, Democrats have retained control of the U.S. House of Representatives, and have gained control of the U.S. Senate, albeit with a majority found only in the tie-breaking vote of Vice President Harris. However slim the majorities, though, the net result iswas a unified Democratic control of the White House and both chambers of Congress, and consequently Democrats will beare able to set the agenda both legislatively, in the Administration, and in the Administration. We expectregulatory agencies that Democratic-ledhave rulemaking and supervisory authority over the financial services industry generally and the Company and the Bank specifically. Congressional committees will pursue greaterwith jurisdiction over the banking sector have pursued oversight and will also pay increased attention tolegislative initiatives in a variety of areas, including addressing climate-related risks, promoting diversity and equality within the banking sector’s roleindustry and addressing other Environmental, Social, and Governance matters, improving competition in providing COVID-19-related assistance.the banking sector and enhancing oversight of bank mergers and acquisitions, establishing a regulatory framework for digital assets and markets, and oversight of the COVID-19 pandemic response and economic recovery. The prospects for the enactment of major banking reform legislation under the new Congress are unclear at this time.

 

Moreover, the turnover of the presidential administration has produced, and likely will continue to produce,resulted in certain changes in the leadership and senior staffs of the federal banking agencies, the CFPB, CFTC, SEC, and the Treasury Department.Department, with certain significant leadership positions yet to be filled, including the Comptroller of the Currency, the Chair of the FDIC and three vacancies among the Governors of the Federal Reserve Board, including the Vice Chair for Supervision. These changes could impacthave impacted the rulemaking, supervision, examination and enforcement priorities and policies of the agencies. Of note, promptly after taking office, President Biden issued an Executive Order instituting a “freeze” of certain recently-finalizedagencies and pending regulationslikely will continue to allow for review by incoming Administration officials. As a result of this Executive Order, recently-adopted regulations may be subject to further notice-and-comment rulemaking and, more broadly, agency rulemaking agendas may be disrupted.do so over the next several years. The potential impact of any changes in agency personnel, policies and priorities on the financial services sector, including the Company and the Bank, cannot be predicted at this time. Regulations and laws may be modified at any time, and new legislation may be enacted that will affect us. Any future changes in federal and state laws and regulations, as well as the interpretation and implementation of such laws and regulations, could affect us in substantial and unpredictable ways, including those listed above or other ways that could have a material adverse effect on our business, financial condition or results of operations.

 

We are party to various claims and lawsuits incidental to our business. Litigation is subject to many uncertainties such that the expenses and ultimate exposure with respect to many of these matters cannot be ascertained.

 

From time to time, we, our directors and our management are or may be the subject of various claims and legal actions by customers, employees, shareholders and others. Whether such claims and legal actions are legitimate or unfounded, if such claims and legal actions are not resolved in our favor, they may result in significant financial liability and/or adversely affect the market perception of us and our products and services as well as impact customer demand for those products and services. In light of the potential cost, reputational damage and uncertainty involved in litigation, we have in the past and may in the future settle matters even when we believe we have a meritorious defense. Certain claims may seek injunctive relief, which could disrupt the ordinary conduct of our business and operations or increase our cost of doing business. Our insurance or indemnities may not cover all claims that may be asserted against us. Any judgments or settlements in any pending litigation or future claims, litigation or investigation could have a material adverse effect on our business, reputation, financial condition and results of operations.

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From time to time we are, or may become, involved in suits, legal proceedings, information-gatherings, investigations and proceedings by governmental and self-regulatory agencies that may lead to adverse consequences.

Many aspects of the banking business involve a substantial risk of legal liability. From time to time, we are, or may become, the subject of information-gathering requests, reviews, investigations and proceedings, and other forms of regulatory inquiry, including by bank regulatory agencies, self-regulatory agencies, the SEC and law enforcement authorities. The results of such proceedings could lead to significant civil or criminal penalties, including monetary penalties, damages, adverse judgements, settlements, fines, injunctions, restrictions on the way we conduct our business or reputational harm.

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We could be adversely affected by changes in tax laws and regulations or the interpretations of such laws and regulations.

 

We are subject to the income tax laws of the U.S., and its states and municipalities in which we do business. These tax laws are complex and may be subject to different interpretations. We must make judgments and interpretations about the application of these inherently complex tax laws when determining our provision for income taxes, our deferred tax assets and liabilities, and our valuation allowance. Changes to the tax laws, administrative rulings or court decisions could increase our provision for income taxes and reduce our net income.

 

In addition, our ability to continue to record our deferred tax assets is dependent on our ability to realize their value through future projected earnings. Future changes in tax laws or regulations could adversely affect our ability to record our deferred tax assets. Loss of part or all of our deferred tax assets would have a material adverse effect on our financial condition and results of operations.

 

Our ability to realize deferred tax assets may be reduced, which may adversely impact our results of operations.

 

Deferred tax assets are reported as assets on our balance sheet and represent the decrease in taxes expected to be paid in the future because of net operating losses (“NOLs”) and tax credit carryforwards and because of future reversals of temporary differences in the bases of assets and liabilities as measured by enacted tax laws and their bases as reported in the financial statements. As of December 31, 2019,2021, we had net deferred tax assets of $1.0 million, which included deferred tax assets for a federal net operating loss carryforward of $331 thousand that is expected to expire in 2037.$1.8 million. Realization of deferred tax assets is dependent upon the generation of sufficient future taxable income during the periods in which existing deferred tax assets are expected to become deductible for federal income tax purposes. Based on projections of future taxable income in periods in which deferred tax assets are expected to become deductible, management determined that the realization of our net deferred tax asset was more likely than not. As a result, we did not recognize a valuation allowance on our net deferred tax asset as of December 31, 2019 or December 31, 2018.2021. If it becomes more likely than not that some portion or the entire deferred tax asset will not be realized, a valuation allowance must be recognized. In December 2017, the Tax Act was enacted, which reduced the corporate federal income tax rate to 21% and resulted in an approximate $1.2 million write-down of our deferred tax asset in the fourth quarter of 2017, through income tax expense. These tax rate changes, in conjunction with our net income in 2018 and 2019, have resulted in a significant reduction of the deferred tax asset over the last two years. Our deferred tax asset may be further reduced in the future if estimates of future income or our tax planning strategies do not support the amount of the deferred tax assets. Charges to establish a valuation allowance with respect to our deferred tax asset could have a material adverse effect on our financial condition and results of operations.

Risks Related to an Investment in Our Common Stock

 

Our ability to pay cash dividends is limited, and we may be unable to pay future dividends even if we desire to do so.

The Federal Reserve has issued a policy statement regarding the payment of dividends by bank holding companies. In general, the Federal Reserve’s policies provide that dividends should be paid only out of current earnings and only if the prospective rate of earnings retention by the bank holding company appears consistent with the organization’s capital needs, asset quality and overall financial condition. The Federal Reserve’s policies also require that a bank holding company serve as a source of financial strength to its subsidiary banks by standing ready to use available resources to provide adequate capital funds to those banks during periods of financial stress or adversity and by maintaining the financial flexibility and capital-raising capacity to obtain additional resources for assisting its subsidiary banks where necessary. In addition, under the prompt corrective action regulations, the ability of a bank holding company to pay dividends may be restricted if a subsidiary bank becomes undercapitalized. These regulatory policies could affect our ability to pay dividends or otherwise engage in capital distributions.

Our ability to pay cash dividends may be limited by regulatory restrictions, by our Bank’s ability to pay cash dividends to the Company and by our need to maintain sufficient capital to support our operations. As a South Carolina-chartered bank, the Bank is subject to limitations on the amount of dividends that it is permitted to pay. Unless otherwise instructed by the S.C. Board, the Bank is generally permitted under South Carolina state banking regulations to pay cash dividends of up to 100% of net income in any calendar year without obtaining the prior approval of the S.C. Board. If our Bank is not permitted to pay cash dividends to us, it is unlikely that we would be able to pay cash dividends on our common stock. Moreover, holders of our common stock are entitled to receive dividends only when, and if declared by our board of directors. Although we have historically paid cash dividends on our common stock, we are not required to do so and our board of directors could reduce or eliminate our common stock dividend in the future.

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Our stock price may be volatile, which could result in losses to our investors and litigation against us.

Our stock price has been volatile in the past and several factors could cause the price to fluctuate substantially in the future. These factors include but are not limited to: actual or anticipated variations in earnings, changes in analysts’ recommendations or projections, our announcement of developments related to our businesses, operations and stock performance of other companies deemed to be peers, new technology used or services offered by traditional and non-traditional competitors, news reports of trends, irrational exuberance on the part of investors, new federal banking regulations, and other issues related to the financial services industry. Our stock price may fluctuate significantly in the future, and these fluctuations may be unrelated to our performance. General market declines or market volatility in the future, especially in the financial institutions sector, could adversely affect the price of our common stock, and the current market price may not be indicative of future market prices. Stock price volatility may make it more difficult for you to resell your common stock when you want and at prices you find attractive. Moreover, in the past, securities class action lawsuits have been instituted against some companies following periods of volatility in the market price of its securities. We could in the future be the target of similar litigation. Securities litigation could result in substantial costs and divert management’s attention and resources from our normal business.

Future sales of our stock by our shareholders or the perception that those sales could occur may cause our stock price to decline.

Although our common stock is listed for trading on The NASDAQ Capital Market, the trading volume in our common stock is lower than that of other larger financial services companies. A public trading market having the desired characteristics of depth, liquidity and orderliness depends on the presence in the marketplace of willing buyers and sellers of our common stock at any given time. This presence depends on the individual decisions of investors and general economic and market conditions over which we have no control. Given the relatively low trading volume of our common stock, significant sales of our common stock in the public market, or the perception that those sales may occur, could cause the trading price of our common stock to decline or to be lower than it otherwise might be in the absence of those sales or perceptions.

Economic and other circumstances may require us to raise capital at times or in amounts that are unfavorable to us. If we have to issue shares of common stock, they will dilute the percentage ownership interest of existing shareholders and may dilute the book value per share of our common stock and adversely affect the terms on which we may obtain additional capital.

We may need to incur additional debt or equity financing in the future to make strategic acquisitions or investments or to strengthen our capital position. Our ability to raise additional capital, if needed, will depend on, among other things, conditions in the capital markets at that time, which are outside of our control and our financial performance. We cannot provide assurance that such financing will be available to us on acceptable terms or at all, or if we do raise additional capital that it will not be dilutive to existing shareholders.

If we determine, for any reason, that we need to raise capital, subject to applicable NASDAQ rules, our board generally has the authority, without action by or vote of the shareholders, to issue all or part of any authorized but unissued shares of stock for any corporate purpose, including issuance of equity-based incentives under or outside of our equity compensation plans. Additionally, we are not restricted from issuing additional common stock or preferred stock, including any securities that are convertible into or exchangeable for, or that represent the right to receive, common stock or preferred stock or any substantially similar securities. The market price of our common stock could decline as a result of sales by us of a large number of shares of common stock or preferred stock or similar securities in the market or from the perception that such sales could occur. If we issue preferred stock that has a preference over the common stock with respect to the payment of dividends or upon liquidation, dissolution or winding-up, or if we issue preferred stock with voting rights that dilute the voting power of the common stock, the rights of holders of the common stock or the market price of our common stock could be adversely affected. Any issuance of additional shares of stock will dilute the percentage ownership interest of our shareholders and may dilute the book value per share of our common stock. Shares we issue in connection with any such offering will increase the total number of shares and may dilute the economic and voting ownership interest of our existing shareholders.

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Provisions of our articles of incorporation and bylaws, South Carolina law, and state and federal banking regulations, could delay or prevent a takeover by a third party.

 

Our articles of incorporation and bylaws could delay, defer, or prevent a third party takeover, despite possible benefit to the shareholders, or otherwise adversely affect the price of our common stock. Our governing documents:

·authorize a class of preferred stock that may be issued in series with terms, including voting rights, established by the board of directors without shareholder approval;

·authorize 20,000,000 shares of common stock and 10,000,000 shares of preferred stock that may be issued by the board of directors without shareholder approval;

·classify our board with staggered three yearthree-year terms, preventing a change in a majority of the board at any annual meeting;

·require advance notice of proposed nominations for election to the board of directors and business to be conducted at a shareholder meeting;

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·grant the board of directors the discretion, when considering whether a proposed merger or similar transaction is in the best interests of the Company and our shareholders, to take into account the effect of the transaction on our employees, clients and suppliers and upon the communities in which ourwe are located, to the extent permitted by South Carolina law;

·provide that the number of directors shall be fixed from time to time by resolution adopted by a majority of the directors then in office, but may not consist of fewer than nine nor more than 25 members; and

·provide that no individual who is or becomes a “business competitor” or who is or becomes affiliated with, employed by, or a representative of any individual, corporation, or other entity which the board of directors, after having such matter formally brought to its attention, determines to be in competition with us or any of our subsidiaries (any such individual, corporation, or other entity being a “business competitor”) shall be eligible to serve as a director if the board of directors determines that it would not be in our best interests for such individual to serve as a director (any financial institution having branches or affiliates within the counties in which we operate is presumed to be a business competitor unless the board of directors determines otherwise).

In addition, the South Carolina business combinations statute provides that a 10% or greater shareholder of a resident domestic corporation cannot engage in a “business combination” (as defined in the statute) with such corporation for a period of two years following the date on which the 10% shareholder became such, unless the business combination or the acquisition of shares is approved by a majority of the disinterested members of such corporation’s board of directors before the 10% shareholder’s share acquisition date. This statute further provides that at no time (even after the two-year period subsequent to such share acquisition date) may the 10% shareholder engage in a business combination with the relevant corporation unless certain approvals of the board of directors or disinterested shareholders are obtained or unless the consideration given in the combination meets certain minimum standards set forth in the statute. The law is very broad in its scope and is designed to inhibit unfriendly acquisitions but it does not apply to corporations whose articles of incorporation contain a provision electing not to be covered by the law. Our articles of incorporation do not contain such a provision. An amendment of our articles of incorporation to that effect would, however, permit a business combination with an interested shareholder even though such status was obtained prior to the amendment.

 

Finally, the Change in Bank Control Act and the Bank Holding Company Act generally require filings and approvals prior to certain transactions that would result in a party acquiring control of the Company or the Bank.

 

An investment in our common stock is not an insured deposit.

Our common stock is not a bank deposit and, therefore, is not insured against loss by the FDIC, any other deposit insurance fund or by any other public or private entity. An investment in our common stock is inherently risky for the reasons described in this “Risk Factors” section and elsewhere in this report and is subject to the same market forces that affect the price of common stock in any company. As a result, if you acquire our common stock, you may lose some or all of your investment.

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General Risk Factors

Our historical operating results may not be indicative of our future operating results.

We may not be able to sustain our historical rate of growth, and, consequently, our historical results of operations will not necessarily be indicative of our future operations. Various factors, such as economic conditions, regulatory and legislative considerations, and competition, may also impede our ability to expand our market presence. If we experience a significant decrease in our historical rate of growth, our results of operations and financial condition may be adversely affected because a high percentage of our operating costs are fixed expenses.

A downgrade of the U.S. credit rating could negatively impact our business, results of operations and financial condition.

In August 2011, Standard & Poor’s Ratings Services lowered its long-term sovereign credit rating on the U.S. from “AAA” to “AA+”. If U.S. debt ceiling, budget deficit or debt concerns, domestic or international economic or political concerns, or other factors were to result in further downgrades to the U.S. government’s sovereign credit rating or its perceived creditworthiness, it could adversely affect the U.S. and global financial markets and economic conditions. A downgrade of the U.S. government’s credit rating or any failure by the U.S. government to satisfy its debt obligations could create financial turmoil and uncertainty, which could weigh heavily on the global banking system. It is possible that any such impact could have a material adverse effect on our business, results of operations and financial condition.

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Item 1B. Unresolved Staff Comments.

Not applicable.

Item 2. Properties.

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

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Item 3. Legal Proceedings.

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.

Not applicable.

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PART II

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

As of February 28, 2021,2022, there were approximately 1,9361,854 shareholders of record of our common stock. Our common stock trades on The NASDAQ Capital Market under the trading symbol of “FCCO.”

Quarterly Common Stock Price Ranges and Dividends

The following table sets forth the high and low sales price information as reported by NASDAQ for the periods indicated, and the dividends per share declared on our common stock in each such quarter. All information has been adjusted for any stock splits and stock dividends effected during the periods presented.

 High Low Dividends  High  Low  Dividends 
2021 
Quarter ended March 31, 2021 $22.00  $16.18  $0.12 
Quarter ended June 30, 2021 $20.85 $18.00 $0.12 
Quarter ended September 30, 2021 $21.49 $18.57 $0.12 
Quarter ended December 31, 2021 $23.42 $19.21 $0.12 
2020           
Quarter ended March 31, 2020 $21.89 $12.60 $0.12  $21.89 $12.60 $0.12 
Quarter ended June 30, 2020 $16.80 $13.11 $0.12  $16.80 $13.11 $0.12 
Quarter ended September 30, 2020 $15.32 $12.23 $0.12  $15.32 $12.23 $0.12 
Quarter ended December 31, 2020 $19.00 $12.95 $0.12  $19.00 $12.95 $0.12 
2019       
Quarter ended March 31, 2019 $22.79 $17.93 $0.11 
Quarter ended June 30, 2019 $20.28 $17.08 $0.11 
Quarter ended September 30, 2019 $20.45 $17.55 $0.11 
Quarter ended December 31, 2019 $22.00 $18.48 $0.11 

 

Dividend Policy

We currently intend to continue to pay quarterly cash dividends on our common stock, subject to approval by our board of directors, although we may elect not to pay dividends or to change the amount of such dividends. The payment of dividends is a decision of our board of directors based upon then-existing circumstances, including our rate of growth, profitability, financial condition, existing and anticipated capital requirements, the amount of funds legally available for the payment of cash dividends, regulatory constraints and such other factors as the board determines relevant. The Company is a legal entity separate and distinct from the Bank. The Federal Reserve has issued a policy statement on the payment of cash dividends by bank holding companies, which expresses the Federal Reserve’s view that a bank holding company generally should pay cash dividends only to the extent that the holding company’s net income for the past year is sufficient to cover both the cash dividends and a rate of earnings retention that is consistent with the holding company’s capital needs, asset quality, and overall financial condition. The Federal Reserve has also indicated that a bank holding company should not maintain a level of cash dividends that places undue pressure on the capital of its bank subsidiaries, or that can be funded only through additional borrowings or other arrangements that undermine the bank holding company’s ability to act as a source of strength.

OurThe Company’s ability to pay dividends is generally limited by the ability of the Bank to pay dividends to the Company. As a South Carolina-chartered bank, the Bank is subject to limitations on the amount of dividends that it is permitted to pay. Unless otherwise instructed by the S.C. Board, the Bank is generally permitted under South Carolina state banking regulations to pay cash dividends of up to 100% of net income in any calendar year without obtaining the prior approval of the S.C. Board. In addition, the Bank must maintain a capital conservation buffer, above its regulatory minimum capital requirements, consisting entirely of Common Equity Tier 1 capital, in order to avoid restrictions with respect to its payment of dividends to the Company.

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Unregistered Sales of Equity Securities

Pursuant to our 2006Amended and Restated Non-Employee Director Deferred Compensation Plan, non-employee directors may elect to defer all or any part of annual retainer fees payable in respect of the following calendar year to the director for his or her service on the board of directors or any committee of the board of directors. During the year, a number of deferred stock units are credited quarterly to the director’s account at the time such compensation would otherwise have been payable absent the election to defer equal to (i) the otherwise payable amount divided by (ii) the fair market value of a share of our common stock on the last trading day preceding the credit date.of such calendar quarter. In general, a director’s vested account balance will be distributed in a lump sum of our common stock on the 30th day following termination of service on the board and on the board of directors of all of our subsidiaries, including termination of service as a result of death or disability.participants separation from service. During the year ended December 31, 2020,2021, we credited an aggregate of 8,8417,050 deferred stock units, gross of 9,697 deferred stock units converted to common stock due to the retirement of Mr. J. Thomas Johnson, chairman of our board of directors, to accounts for directors who elected to defer monthly fees or annual retainer fees for 2020.2021. These deferred stock units include dividend equivalents in the form of additional stock units. The deferred stock units were issued pursuant to an exemption from registration under the Securities Act of 1933 in reliance upon Section 4(a)(2) of the Securities Act of 1933.

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Repurchases of Equity Securities

In September 2019,On April 12, 2021, we announced that our boardBoard of directorsDirectors approved the repurchase of up to 200,000 additional375,000 shares of our common stock (the “New“2021 Repurchase Plan”), which were in addition to therepresented approximately 5% of our 7,548,638 shares repurchasedoutstanding as of December 31, 2021. No share repurchases have been made under the 2021 Repurchase Plan as of December 31, 2021. The 2021 Repurchase Plan expires at the market close on March 31, 2022. We intend to seek approval in 2022 for a new repurchase program we announced in May 2019 for 300,000plan of up to 375,000 shares of our common stock (the “Prior Repurchase Plan”). We completedto replace the repurchase of all 300,000 shares covered by the Prior Repurchase Plan at a cost of $5.6 million with an average price per share of $18.79 prior to our adoption of the Newexpiring 2021 Repurchase Plan.

 

No share repurchases were made under the New Repurchase Plan prior to its expiration date of December 31, 2020.

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Item 6. Selected Financial Data[Reserved].

  As of or For the Years Ended December 31, 
(Dollars in thousands except per share amounts) 2020  2019  2018  2017  2016 
Balance Sheet Data:                    
Total assets $1,395,382  $1,170,279  $1,091,595  $1,050,731  $914,793 
Loans held for sale  45,020   11,155   3,223   5,093   5,707 
Loans  844,157   737,028   718,462   646,805   546,709 
Deposits  1,189,413   988,201   925,523   888,323   766,622 
Total common shareholders’ equity  136,337   120,194   112,497   105,663   81,861 
Total shareholders’ equity  136,337   120,194   112,497   105,663   81,861 
Average shares outstanding, basic  7,446   7,510   7,581   6,849   6,617 
Average shares outstanding, diluted  7,482   7,588   7,731   6,998   6,787 
Results of Operations:                    
Interest income $43,778  $42,630  $39,729  $32,156  $29,506 
Interest expense  3,755   5,781   3,981   2,762   3,047 
Net interest income  40,023   36,849   35,748   29,394   26,459 
Provision for loan losses  3,663   139   346   530   774 
Net interest income after provision for loan losses  36,360   36,710   35,402   28,864   25,685 
Non-interest income  13,769   11,736   10,644   9,639   8,940 
Non-interest expenses  37,534   34,617   32,123   29,358   25,776 
Income before taxes  12,595   13,829   13,923   9,145   8,849 
Income tax expense  2,496   2,858   2,694   3,330   2,167 
Net income  10,099   10,971   11,229   5,815   6,682 
Net income available to common shareholders  10,099   10,971   11,229   5,815   6,682 
Per Share Data:                    
Basic earnings per common share $1.36  $1.46  $1.48  $0.85  $1.01 
Diluted earnings per common share  1.35   1.45   1.45   0.83   0.98 
Book value at period end  18.18   16.16   14.73   13.93   12.24 
Tangible book value at period end (non-GAAP)  16.08   13.99   12.55   11.66   11.31 
Dividends per common share  0.48   0.44   0.40   0.36   0.32 
Asset Quality Ratios:                    
Non-performing assets to total assets(3)  0.50%  0.32%  0.37%  0.51%  0.57%
Non-performing loans to period end loans  0.69%  0.31%  0.36%  0.52%  0.75%
Net charge-offs (recoveries) to average loans  (0.01)%  (0.03)%  (0.02)%  (0.01)%  0.03%
Allowance for loan losses to period-end total loans  1.23%  0.90%  0.87%  0.89%  0.94%
Allowance for loan losses to non-performing assets  148.10%  177.23%  155.14%  79.52%  99.35%
Selected Ratios:                    
Return on average assets  0.78%  0.98%  1.04%  0.62%  0.75%
Return on average common equity:  7.84%  9.38%  10.48%  6.56%  8.08%
Return on average tangible common equity (non-GAAP):  8.94%  10.91%  12.44%  7.22%  8.76%
Efficiency Ratio (non-GAAP)(1)  69.99%  70.51%  68.20%  74.69%  72.09%
Noninterest income to operating revenue(2)  25.60%  24.16%  24.94%  24.69%  25.26%
Net interest margin (tax equivalent)  3.37%  3.65%  3.69%  3.52%  3.35%
Equity to assets  9.77%  10.27%  10.31%  10.06%  8.95%
Tangible common shareholders’ equity to tangible assets (non-GAAP)  8.74%  9.02%  8.92%  8.56%  8.33%
Tier 1 risk-based capital (Bank)(4)  12.83%  13.47%  13.19%  13.40%  13.84%
Total risk-based capital (Bank)(4)  13.94%  14.26%  13.96%  14.18%  14.66%
Leverage (Bank)(4)  8.84%  9.97%  9.98%  9.66%  9.77%
Average loans to average deposits(5)  76.79%  78.65%  75.01%  73.08%  69.62%
                     
(1)The efficiency ratio is a key performance indicator in our industry. The ratio is calculated by dividing non-interest expense less merger expenses by net interest income on a tax equivalent basis and non-interest income, excluding gains (losses) on sales of securities and other assets, write-downs on premises held-for-sale, non-recurring bank owned life insurance (BOLI) income, and losses on early extinguishment of debt. The efficiency ratio is a measure of the relationship between operating expenses and net revenue.
(2)Operating revenue is defined as net interest income plus noninterest income.
(3)Includes non-accrual loans, loans > 90 days delinquent and still accruing interest and other real estate owned (“OREO”).
(4)As a small bank holding company, we are generally not subject to the capital requirements at the holding company level unless otherwise advised by the Federal Reserve; however, our Bank remains subject to capital requirements.
(5)Includes loans held for sale.

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Certain financial information presented above is determined by methods other than in accordance with GAAP. These non-GAAP financial measures include “efficiency ratio,” “tangible book value at period end,” “return on average tangible common equity” and “tangible common shareholders’ equity to tangible assets.” The “efficiency ratio” is defined as non-interest expense less merger expenses, divided by the sum of net interest income on a tax equivalent basis and non-interest income, excluding gains (losses) on sales of securities and other assets, write-downs on premises held-for-sale, non-recurring bank owned life insurance (BOLI) income, and losses on early extinguishment of debt. The efficiency ratio is a measure of the relationship between operating expenses and net revenue. “Tangible book value at period end” is defined as total equity reduced by recorded intangible assets divided by total common shares outstanding. “Tangible common shareholders’ equity to tangible assets” is defined as total common equity reduced by recorded intangible assets divided by total assets reduced by recorded intangible assets. Our management believes that these non-GAAP measures are useful because they enhance the ability of investors and management to evaluate and compare our operating results from period-to-period in a meaningful manner. Non-GAAP measures have limitations as analytical tools, and investors should not consider them in isolation or as a substitute for analysis of our results as reported under GAAP.

The table below provides a reconciliation of non-GAAP measures to GAAP for the five years ended December 31:

Tangible book value per common share 2020  2019  2018  2017  2016 
Tangible common equity per common share (non-GAAP) $16.08  $13.99  $12.55  $11.66  $11.31 
Effect to adjust for intangible assets  2.10   2.17   2.18   2.27   0.93 
Book value per common share (GAAP) $18.18  $16.16  $14.73  $13.93  $12.24 
Return on average tangible common equity                    
Return on average tangible common equity (non-GAAP)  8.94%  10.91%  12.44%  7.22%  8.76%
Effect to adjust for intangible assets  (1.10)%  (1.53)%  (1.96)%  (0.66)%  (0.68)%
Return on average common equity (GAAP)  7.84%  9.38%  10.48%  6.56%  8.08%
Tangible common shareholders’ equity to tangible assets                    
Tangible common equity to tangible assets (non-GAAP)  8.74%  9.02%  8.92%  8.56%  8.33%
Effect to adjust for intangible assets  1.03%  1.25%  1.39%  1.50%  0.62%
Common equity to assets (GAAP)  9.77%  10.27%  10.31%  10.06%  8.95%

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

The following discussion and analysis identifies significant factors that have affected our financial position and operating results during the periods included in the accompanying financial statements. We encourage you to read this discussion and analysis in conjunction with the financial statements and the related notes and the other statistical information also included in this Annual Report on Form 10-K.

Overview

We are headquartered in Lexington, South Carolina and serve as the bank holding company for the Bank. We engage in a general commercial and retail banking business characterized by personalized service and local decision making, emphasizing the banking needs of small to medium-sized businesses, professional concerns and individuals. We operate from our main office in Lexington, South Carolina, and our 21 full-service offices located in the South Carolina counties of Lexington County (6 offices), Richland County (4 offices), Newberry County (2 offices), Kershaw County (1 office), Aiken County (1 office), Greenville County (2 offices), Anderson County (1 office), and Pickens County (1 office); and in the Georgia counties of Richmond County (2 offices) and Columbia County (1 office). On March 1, 2022, we announced the hiring of a team of experienced lenders in Rock Hill, South Carolina. We intend to establish a loan production office in Rock Hill, South Carolina, subject to prior notice and nonobjection from the Office of the Commissioner of Banking of South Carolina. Thereafter, we may open a full-service banking office in Rock Hill, South Carolina, subject to approval by our regulators.

The following discussion describes our results of operations for 2020,2021, as compared to 20192020 and 2018,2019, and also analyzes our financial condition as of December 31, 2020,2021, as compared to December 31, 2019.2020. Like most community banks, we derive most of our income from interest we receive on our loans and investments. A primary source of funds for making these loans and investments is our deposits, on which we pay interest. Consequently, one of the key measures of our success is our amount of net interest income, or the difference between the income on our interest-earning assets, such as loans and investments, and the expense on our interest-bearing liabilities, such as deposits and borrowings.

We have included a number of tables to assist in our description of these measures. For example, the “Average Balances” table shows the average balance during 2021, 2020 2019 and 20182019 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.

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There are risks inherent in all loans, so we maintain an allowance for loan losses to absorb probable losses on existing loans that may become uncollectible. We establish and maintain this allowance by charging a provision for loan losses against our operating earnings. In the following section, we have included a detailed discussion of this process, as well as several tables describing our allowance for loan losses and the allocation of this allowance among our various categories of loans.

In addition to earning interest on our loans and investments, we earn income through fees and other expenses we charge to our customers. We describe the various components of this noninterest income, as well as our noninterest expense, in the following discussion. The discussion and analysis also identifies significant factors that have affected our financial position and operating results during the periods included in the accompanying financial statements. We encourage you to read this discussion and analysis in conjunction with the financial statements and the related notes and the other statistical information also included in this report.

Recent Events – COVID-19 Pandemic

 

Our financial performance generally, and in particular the ability of our borrowers to repay their loans, the value of collateral securing those loans, as well as demand for loans and other products and services we offer, is highly dependent on the business environment in our primary markets where we operate and in the United States as a whole. The COVID-19 pandemic continuesand variants of the virus continue to create extensive disruptions to the global economy and financial markets and to businesses and the lives of individuals throughout the world. In particular, the COVID-19 pandemic has severely restricted the level of economic activity in our markets. Federal and state governments have taken, and may continue to take, unprecedented actions to contain the spread of the disease, including quarantines, travel bans, shelter-in-place orders, closures of businesses and schools, fiscal stimulus, and legislation designed to deliver monetary aid and other relief to businesses and individuals impacted by the pandemic. Although in various locations certain activity restrictions have been relaxed and businesses and schools have reopened with some level of success, in many states and localities the number of individuals diagnosed with COVID-19 has increased significantly, which may cause a freezing or, in certain cases, a reversal of previously announced relaxation of activity restrictions and may prompt the need for additional aid and other forms of relief.

The impact of the COVID-19 pandemic and its related variants is fluid and continues to evolve. The unprecedented and rapid spreadevolve, adversely affecting many of COVID-19 and its associated impacts on trade (including supply chains and export levels), travel, employee productivity, unemployment, consumer spending, and other economic activities has resulted in less economic activity, significant volatility and disruption in financial markets. In addition, due to the COVID-19 pandemic, market interest rates have declined significantly, with the 10-year Treasury bond falling below 1.00% on March 3, 2020, for the first time. The 10-year Treasury bond was 0.69% at September 30, 2020 compared to 0.66% at June 30, 2020 and 1.92% at December 31, 2019. Further, long-term bond yields have recently begun to rise, nearing where they were before the pandemic in February 2020. In March 2020, the Federal Open Market Committee reduced the targeted federal funds interest rate range to 0% to 0.25%. These reductions in interest rates and the other effects of the COVID-19 pandemic have had, and are expected to continue to have, possibly materially, an adverse effect on our business, financial condition and results of operations. For instance, the pandemic has had negative effects on the Bank’s net interest margin, provision for loan losses, deposit service charges, salaries and benefits, occupancy expense, and equipment expense. The ultimate extent of the impact of the COVID-19 pandemic on our business, financial condition and results of operations is currently uncertain and will depend on various developments and other factors, including the effect of governmental and private sector initiatives, the effect of the recent rollout of vaccinations for the virus, whether such vaccinations will be effective against any resurgence of the virus, including any new strains, and the ability for customers and businesses to return to their pre-pandemic routine.

customers. Our business, financial condition and results of operations generally rely upon the ability of our borrowers to repay their loans, the value of collateral underlying our secured loans, and demand for loans and other products and services we offer, which are highly dependent on the business environment in our primary markets where we operate and in the United States as a whole. WeThe unprecedented and rapid spread of COVID-19 and its variants and their associated impacts on trade (including supply chains and export levels), travel, employee productivity, unemployment, consumer spending, and other economic activities have a business continuity plan that covers a varietyresulted and continue to result in less economic activity, and volatility and disruption in financial markets.

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Commercial activity has improved, but has not returned to the levels existing before the outbreak of potential impactsthe pandemic, which may result in our borrowers’ inability to business operations. These plans are periodically reviewedmeet their loan obligations. Economic pressures and tested and have been designed to protect the ongoing viability of bank operations in the event of a disruption such as a pandemic. Beginning in March 2020, we activated our pandemic preparedness plan and began to roll it out in phasesuncertainties related to the COVID-19 pandemic.

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Following recommendations frompandemic have also resulted in changes in consumer spending behaviors, which may negatively impact the Centersdemand for Disease Controlloans and Preventionother services we offer. In addition, our loan portfolio includes customers in industries such as hotels, restaurants and assisted living facilities, all of which have been significantly impacted by the South Carolina Department of Health and Environmental Control, we implemented enhanced cleaning of bank facilities and provided guidanceCOVID-19 pandemic. We recognize that these industries may take longer to employees and customersrecover as consumers may be hesitant to return to full social interaction or may change their spending habits on best practices to minimize the spreada more permanent basis as a result of the virus. As part of our effortspandemic. We continue to exercise social distancing, we modified our delivery channels with a shift to drive thru only service at the banking offices supplemented by appointments for service in the office lobbies. We have encouraged the use of online and mobile channels and have seen the number of online banking users increase, as well as the dollar volume of bill payment, Zelle, and mobile deposit transactions trend higher. To support the health and well-being of our employees, a portion of our workforce is working from home. We have enhanced our remote work capabilities by providing additional laptops and various audio and video meeting technologies. Communication channels for employees andmonitor these customers were created to provide periodic updates during this rapidly changing environment. These are still in place and in use.closely.

 

WeIn addition, due to the COVID-19 pandemic, market interest rates declined to historical lows; however, market interest rates are focusedexpected to increase in 2022 and future periods. The reductions in interest rates, low interest rate environment, and the other effects of the COVID-19 pandemic have had, and are expected to continue to have, adverse effects on servicingour business, financial condition and results of operations.

As the financial needsCOVID-19 pandemic has evolved from its emergence in early 2020, so has its impact. While vaccine availability and uptake has increased, the longer-term macro-economic effects on global supply chains, inflation, labor shortages and wage increases continue to impact many industries, including the collateral underlying certain of our commercialloans. Moreover, with the potential for new strains of COVID-19 to emerge, governments and consumer customers with flexible loan payment arrangements, including short-term loan modificationsbusinesses may re-impose aggressive measures to help slow its spread in the future. For this reason, among others, as the COVID-19 pandemic continues, the potential or forbearance paymentslasting impacts on our business, financial condition and reducing or waiving certain feesresults of operations remains uncertain and difficult to assess.

Lending Operations and Accommodations to Borrowers; Impact of COVID-19 on deposit accounts. Future governmental actions may require theseAsset Quality and other typesValue of customer-related responses. Investment Securities

Beginning in March 2020, we proactively offered payment deferrals for up to 90 days to our loan customers. We continue to consider potential deferrals with respect to certain customers which we evaluateregardless of the impact of the pandemic on a case-by-case basis. Loans on which payments have been deferred declined to $16.1 million at December 31, 2020 from $27.3 million at September 30, 2020. At its peak, which occurred during the second quarter of 2020, we granted payment deferments on loans totaling $206.9 million.their business or personal finances.  As a result of payments being resumed at the conclusion of their payment deferral period, loans in which payments have beenwere being deferred decreased from the peak of $206.9 million to $175.0 million at June 30, 2020, to $27.3 million at September 30, 2020, to $16.1 million at December 31, 2020, and to $8.7 million at March 5,31, 2021, to $4.5 million at June 30, 2021, to $4.1 million at September 30, 2021, and to zero at December 31, 2021. We had no loans on which payments were deferred related to the COVID-19 pandemic at December 31, 2019. We had no loans remaining on initial deferral status in which both principal and interest werehave been deferred at December 31, 2020 and March 5, 2021. The2021 compared to $16.1 million in deferrals at December 31, 2020 consists of seven loans on which only principal is being deferred. We had three loans totaling $8.7 million in continuing deferral status in which only principal is being deferred at March 5, 2021. Two of the continuing deferrals at March 5, 2021 totaling $4.5 million are in the retail industry segment identified by us as one of the industry segments most impacted by the COVID-19 pandemic; the other continuing deferral totaling $4.2 million is a mixed use office space that we do not consider to be in an industry segment most impacted by the COVID-19 pandemic. Some of these deferments were to businesses that temporarily closed or reduced operations and some were requested as a pre-cautionary measure to conserve cash.  We proactively offered deferrals to our customers regardless of the impact of the pandemic on their business or personal finances. 2020.

We arewere also a small business administration approved lender and participated in the PPP, established under the CARES Act. We hadDuring 2020 and 2021, we originated 1,417 PPP loans totaling $43.3$88.5 million, gross of deferred fees and costs and $42.2 million net of deferred fees and costs at December 31, 2020. We hadwhich includes 843 PPP loans totaling $58.5$51.2 million grossoriginated in 2020 and 574 PPP loans totaling $37.3 million originated in 2021. Furthermore, during 2020, we facilitated the origination of deferred fees111 PPP loans totaling $31.2 million for our customers through a third party prior to establishing our own PPP platform. As of December 31, 2021, 1,406 PPP loans totaling $87.0 million (840 PPP loans totaling $51.2 million originated in 2020 and costs and $57.1566 PPP loans totaling $35.8 million net of deferred fees and costs at January 31, 2021. Theoriginated in 2021) were forgiven through the SBA PPP deferred fees net of deferred costs will be recognized as interest income over the remaining life of the PPP loans.  forgiveness process.

 

Our asset quality metrics as of December 31, 20202021 remained sound.  The non-performing asset ratio was 0.50% of total assets with the nominal level of $7.0 million in non-performing assets.  Loans past due 30 days or more represented 0.23% of the loan portfolio.  The ratio of classified loans plus OREO was 6.89% of total bank regulatory risk-based capital.  During the twelve months ended December 31, 2020, we experienced net loan recoveries of $142 thousand and net overdraft charge-offs of $43 thousand.

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At December 31, 2020,2021, our non-performing assets were not yet materially impacted by the economic pressures of the COVID-19 pandemic. However,The non-performing asset ratio was 0.09% of total assets with the increasenominal level of $1.4 million in non-performing assets at December 31, 2021 compared to 0.50% and $7.0 million at December 31, 20202020. The decline in the non-performing asset ratio was related to the successful resolution of several non-accrual and accruing loans past due of 90 days or more. Non-accrual loans declined $4.3 million to $250 thousand at December 31, 2021 from $3.7$4.6 million at December 31, 2019 was related to one credit relationship, which was impacted by the COVID-19 pandemic. As we closely monitor credit risk and our exposure to increased loan losses resulting from the impact of COVID-19 on our customers, we evaluated and identified our exposure to certain industry segments most impacted by the COVID-19 pandemic as of2020. We had no accruing loans past due 90 days or more at December 31, 2020:2021 compared to $1.3 million at December 31, 2021. Loans past due 30 days or more represented 0.03% of the loan portfolio at December 31, 2021 compared to 0.23% at December 31, 2020.  The ratio of classified loans plus OREO and repossessed assets declined to 6.27% of total bank regulatory risk-based capital at December 31, 2021 from 6.89% at December 31, 2020.  During the twelve months ended December 31, 2021, we experienced net loan recoveries of $478 thousand and net overdraft charge-offs of $22 thousand.

 

Industry Segments Outstanding  % of Loan  Avg. Loan  Avg. Loan to��
(Dollars in millions) Loan Balance  Portfolio  Size  Value 
Hotels $32.0   3.8% $2.3   70%
Restaurants $19.0   2.4% $0.7   69%
Assisted Living $8.9   1.1% $1.5   47%
Retail $80.8   9.6% $0.7   57%

We are also monitoring the impact of the COVID-19 pandemic on the operations and value of our investments. We mark to market our publicly tradedavailable-for-sale investments and review our investment portfolio for impairment at, a minimum, quarterly. We do not consider any securities in our investment portfolio to be other-than-temporarily impaired at December 31, 2020.2021. However, because of changing economic and market conditions affecting issuers, we may be required to recognize future impairments on the securities we hold as well as reductions in other comprehensive income. We cannot currently determine the ultimate impact of the pandemic on the long-term value of our portfolio.

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Capital and Liquidity

 

Our capital remained strong and exceeded the well-capitalized regulatory requirements at December 31, 2020.  Total shareholders’ equity increased $16.1 million or 13.4% to $136.3 million at December 31, 2020 from $120.2 million at December 31, 2019.  In 2018, the Federal Reserve increased the asset size to qualify as a small bank holding company.  As a result of this change, we are generally not subject to the Federal Reserve capital requirements unless advised otherwise.  The Bank remains subject to capital requirements including a minimum leverage ratio and a minimum ratio of “qualifying capital” to risk weighted assets.  These requirements are essentially the same as those that applied to the Company prior to the change in the definition of a small bank holding company.strong.  Each of the regulatory capital ratios for the Bank exceeds the well capitalized minimum levels currently required by regulatory statute at December 31, 20202021 and December 31, 2019. Refer to the Liquidity Management section for more details.

Dollars in thousands    Prompt Corrective Action
(PCA) Requirements
  Excess Capital $s of
PCA Requirements
 
Capital Ratios Actual  Well
Capitalized
  Adequately
Capitalized
  Well
Capitalized
  Adequately
Capitalized
 
December 31, 2020               
Leverage Ratio  8.84%  5.00%  4.00% $52,270  $65,893 
Common Equity Tier 1 Capital Ratio  12.83%  6.50%  4.50%  59,406   78,169 
Tier 1 Capital Ratio  12.83%  8.00%  6.00%  45,334   64,097 
Total Capital Ratio  13.94%  10.00%  8.00%  36,961   55,723 
December 31, 2019                    
Leverage Ratio  9.97%  5.00%  4.00% $56,197  $67,508 
Common Equity Tier 1 Capital Ratio  13.47%  6.50%  4.50%  58,345   75,086 
Tier 1 Capital Ratio  13.47%  8.00%  6.00%  45,789   62,530 
Total Capital Ratio  14.26%  10.00%  8.00%  35,675   52,416 

2020. Based on our strong capital, conservative underwriting, and internal stress testing, we expect to remain well capitalized throughout the COVID-19 pandemic. However, the Bank’s reported regulatory capital ratios could be adversely impacted by future credit losses related to the COVID-19 pandemic. We recognize that we face extraordinary circumstances, and we intend to monitor developments and potential impacts on our capital.

We believe that we have ample liquidity to meet the needs of our customers and to manage through the COVID-19 pandemic through our low cost deposits;deposits, our ability to borrow against approved lines of credit (federal funds purchased) from correspondent banks;banks, and our ability to obtain advances secured by certain securities and loans from the Federal Home Loan Bank.Bank (“FHLB”).

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Critical Accounting Policies and Estimates

We have adopted various accounting policies that govern the application of accounting principles generally accepted in the United States and with general practices within the banking industry in the preparation of our financial statements. Our significant accounting policies are described in the notes to our consolidated financial statements in this report.

 

Certain accounting policies inherently involve a greater reliance on the use of estimates, assumptions and judgments and, as such, have a greater possibility of producing results that could be materially different than originally reported, which could have a material impact on the carrying values of our assets and liabilities and our results of operations. We consider these accounting policies and estimates to be critical accounting policies. We have identified the determination of the allowance for loan losses goodwill and other intangibles, income taxes and deferred tax assets, other-than-temporary impairment, business combinations, and method of accounting for loans acquired to be the accounting areas that require the most subjective or complex judgments and, as such, could be most subject to revision as new or additional information becomes available or circumstances change, including overall changes in the economic climate and/or market interest rates. Therefore, management has reviewed and approved these critical accounting policies and estimates and has discussed these policies with our Audit and Compliance Committee.

Allowance for Loan Losses

We believe the allowance for loan losses is the critical accounting policy that requires the most significant judgment and estimates used in preparation of our consolidated financial statements. Some of the more critical judgments supporting the amount of ourThe allowance for loan losses include judgmentsrepresents an amount which we believe will be adequate to absorb probable losses on existing loans that may become uncollectible. Our judgment as to the adequacy of the allowance for loan losses is based on assumptions about future events, which we believe to be reasonable, but which may or may not prove to be accurate. Our determination of the allowance for loan losses is based on evaluations of the credit worthiness of borrowers, collectability of loans, including consideration of factors such as the estimated valuebalance of impaired loans, the underlyingquality, mix, and size of our overall loan portfolio, the knowledge and depth of lending personnel, economic conditions (local and national) that may affect the borrower’s ability to repay, the amount and quality of collateral securing the assumptions about cash flow, determinationloans, our historical loan loss experience, and a review of lossspecific problem loans. We also consider qualitative factors for estimating credit losses,such as changes in the impactlending policies and procedures, changes in the local/national economy, changes in volume or type of current eventscredits, changes in volume/severity of problem loans, quality of loan review and conditions,board of director oversight, and other factors impactingconcentrations of credit. During the levelfirst quarter 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. Refer2020, we added a new qualitative factor related to the portioneconomic uncertainties caused by the COVID-19 pandemic. We charge recognized losses to the allowance and add subsequent recoveries back to the allowance for loan losses. There can be no assurance that charge-offs of this discussion that addresses ourloans in future periods will not exceed the allowance for loan losses for a more complete discussion of our processes and methodology for determining our allowanceas estimated at any point in time or that provisions for loan losses.losses will not be significant to a particular accounting period, especially considering the uncertainties related to the COVID-19 pandemic.

FASB has issued a new credit impairment model,As discussed above, the Current Expected Credit Loss, or CECL model. The CECL model will become effective for us on January 1, 2023 and2023. However, for interim periods within that year. Under the CECL model,now, we will be required to present certain financial assets carried at amortized cost, such as loans heldaccount 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 under the incurred loss model. We perform an analysis quarterly to assess the risk within the loan portfolio. The portfolio is segregated into similar risk components for which historical loss ratios are calculated and could require usadjusted for identified changes in current portfolio characteristics. Historical loss ratios are calculated by product type and by regulatory credit risk classification (See Note 4 to significantly increase ourthe Consolidated Financial Statements). The annualized weighted average loss ratios over the last 36 months for loans classified as substandard, special mention and pass have been approximately 0.18%, 0.03% and 0.00%, respectively. The allowance consists of an allocated and unallocated allowance. Moreover,The allocated portion is determined by types and ratings of loans within the CECL model may create more volatilityportfolio. The unallocated portion of the allowance is established for losses that exist in the levelremainder of the portfolio and compensates for uncertainty in estimating the loan losses. The allocated portion of the allowance is based on historical loss experience as well as certain qualitative factors as explained above. The qualitative factors have been established based on certain assumptions made as a result of the current economic conditions and are adjusted as conditions change to be directionally consistent with these changes. The unallocated portion of the allowance is composed of factors based on management’s evaluation of various conditions that are not directly measured in the estimation of probable losses through the experience formula or specific allowances.

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The allowance represents management’s best estimate, [and we believe our estimate has been reasonably accurate in determining allowance for loan loss adequacy], but significant downturns in circumstances relating to loan quality and economic conditions could result in a requirement for additional allowance. Likewise, an upturn in loan quality and improved economic conditions may allow a reduction in the required allowance. In either instance, unanticipated changes could have a significant impact on results of operations. In addition, regulatory agencies, as an integral part of their examination process, periodically review our allowance for loan losses. If we are required to materially increase our level of allowance for loan losses for any reason, such increase could adversely affect our business, financial condition and results of operations.

We are currently evaluating the impact the CECL model will have on our accounting, but we expectSuch agencies may require us to recognize a one-time cumulative-effect adjustmentadditions to our allowance for loan losses as of the beginning of the first reporting period in which the new standard is effective, consistent with regulatory expectations set forth in interagency guidance issuedallowances based on their judgments about information available to them at the endtime of 2016. We cannot yet determine the magnitude of any such one-time cumulative adjustment or of the overall impact of the new standard on our business, financial condition and results of operations.

On December 21, 2018, the federal banking agencies issued a joint final rule to revise their regulatory capital rules to (i) address the implementation of CECL; (ii) provide an optional three-year phase-in period for the day-one adverse regulatory capital effects that banking organizations are expected to experience upon adopting CECL; and (iii) require for certain banking organizations that are subject to stress testing, the use of CECL in stress tests beginning with the 2020 capital planning and stress testing cycle.

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

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

In January 2017, the FASB issued ASU No. 2017-04, which simplifies the accounting for goodwill impairment for all entities by requiring impairment charges to be based on the first step in the two-step impairment test under ASC Topic 350 and eliminating the second step from the goodwill impairment test. This guidance was effective for us as of January 1, 2020.

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

We performed our required annual goodwill impairment test as of December 31, 2020 and there was no impairment. Throughout 2020, financial institution stocks in general as well as our market capitalization declined because of events surrounding the COVID-19 pandemic. As a result, we performed qualitative goodwill impairment analyses as of March 31, 2020, June 30, 2020, September 30, 2020, and December 31, 2020. These qualitative analyses included a review of our earnings, pretax pre-provision earnings (PTPPE), net interest income, mortgage banking income, investment advisory fees and non-deposit commissions, non-PPP loan growth and asset quality trends, loan charge-offs and recoveries, deposit growth, capital levels, and the economic conditions in our markets. Based on our analyses, we do not believe the decline in our publicly-traded common stock is indicative of a permanent deterioration of the fundamental value of the Company. Furthermore, our common stock has traded above both book value and tangible book value during the first quarter of 2021. As such, we do not believe that it is more-likely-than-not a goodwill impairment exists at December 31, 2020, September, 30, 2020, June 30, 2020, and March 31, 2020. Depending on, among other things, the duration and severity of the impacts of the COVID-19 pandemic, we may have to reevaluate our financial condition and potential impairment of our goodwill.

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examination.   

Income Taxes, Deferred Tax Assets, and Deferred Tax Liabilities

We are subject to the income tax laws of the U.S., its states, and the municipalities in which we operate. These tax laws are complex and subject to different interpretations by the taxpayer and the relevant government taxing authorities.

 

Income taxes are provided for the tax effects of the transactions reported in our consolidated financial statements and consist of taxes currently due plus deferred taxes related to differences between the tax basis and accounting basis of certain assets and liabilities, including available-for-sale securities, allowance for loan losses, write-downs of OREO properties, write-downs on premises held-for-sale, accumulated depreciation, net operating loss carry forwards, accretion income, deferred compensation, intangible assets, and pension plan and post-retirement benefits. The deferred tax assets and liabilities represent the future tax return consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. Deferred tax assets and liabilities are reflected at income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. A valuation allowance is recorded when it is “more likely than not” that a deferred tax asset will not be realized. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. We file a consolidated federal income tax return for the Bank. We were in a $538 thousand net deferred tax liability position at December 31, 2020 and a $1.0 million net deferred tax asset position at December 31, 2019. The change to a net deferred tax liability position at December 31, 2020 from a net deferred tax asset position at December 31, 2019 is primarily due to the deferred tax impact related to an $11.1 million increase in our pretax unrealized gains net of unrealized losses on our available-for-sale investments to $14.3 million at December 31, 2020 from $3.2 million at December 31, 2019. The $11.1 million increase in our pretax unrealized gains net of unrealized losses on our available-for-sale securities was primarily due to a reduction in market interest rates at December 31, 2020 compared to December 31, 2019.

 

In establishing our provision for income taxes, our deferred tax assets and liabilities, and our valuation allowance, we must make judgments and interpretations about the application of these inherently complex tax laws. We must also make estimates about when in the future certain items will affect taxable income in the various tax jurisdictions. Disputes over interpretations of the tax laws may be subject to review/adjudication by the court systems of the various tax jurisdictions or may be settled with the taxing authority upon examination or audit. Although we believe that the judgments and estimates used are reasonable, and we believe our estimates have been reasonably accurate, actual results could differ, and we may be exposed to losses or gains that could be material. To the extent we prevail in matters for which reserves have been established, or are required to pay amounts in excess of our reserves, our effective income tax rate in a given financial statement period could be materially affected. An unfavorable tax settlement would result in an increase in our effective income tax rate in the period of resolution. A favorable tax settlement would result in a reduction in our effective income tax rate in the period of resolution.

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Other-Than-Temporary ImpairmentFinancial Highlights

We evaluate securities for other-than-temporary impairment at least on a quarterly basis. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) the outlook for receiving the contractual cash flows of the investments, (4) the anticipated outlook for changes in the general level of interest rates, and (5) our intent and ability to retain our investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value or for a debt security whether it is more-likely-than-not that we will be required to sell the debt security prior to recovering its fair value (See Note 4 to the Consolidated Financial Statements). Our management has determined there are no other-than-temporary impaired securities as of December 31, 2020 and that we have the ability to hold any of the securities in which the fair value is less than cost until maturity or until these securities recover their book value.

Business Combinations, Method of Accounting for Loans Acquired

  As of or For the Years Ended December 31, 
(Dollars in thousands except per share amounts) 2021  2020  2019 
Balance Sheet Data:            
Total assets $1,584,508  $1,395,382  $1,170,279 
Loans held for sale  7,120   45,020   11,155 
Loans  863,702   844,157   737,028 
Deposits  1,361,291   1,189,413   988,201 
Total common shareholders’ equity  140,998   136,337   120,194 
Total shareholders’ equity  140,998   136,337   120,194 
Average shares outstanding, basic  7,491   7,446   7,510 
Average shares outstanding, diluted  7,549   7,482   7,588 
Results of Operations:            
Interest income $47,520  $43,778  $42,630 
Interest expense  2,241   3,755   5,781 
Net interest income  45,279   40,023   36,849 
Provision for loan losses  335   3,663   139 
Net interest income after provision for loan losses  44,944   36,360   36,710 
Non-interest income  13,904   13,769   11,736 
Non-interest expenses  39,201   37,534   34,617 
Income before taxes  19,647   12,595   13,829 
Income tax expense  4,182   2,496   2,858 
Net income  15,466   10,099   10,971 
Net income available to common shareholders  15,466   10,099   10,971 
Per Share Data:            
Basic earnings per common share $2.06  $1.36  $1.46 
Diluted earnings per common share  2.05   1.35   1.45 
Book value at period end  18.68   18.18   16.16 
Tangible book value at period end (non-GAAP)  16.62   16.08   13.99 
Dividends per common share  0.48   0.48   0.44 
Asset Quality Ratios:            
Non-performing assets to total assets(3)  0.09%  0.50%  0.32%
Non-performing loans to period end loans  0.03%  0.69%  0.31%
Net charge-offs (recoveries) to average loans  (0.05)%  (0.01)%  (0.03)%
Allowance for loan losses to period-end total loans  1.29%  1.23%  0.90%
Allowance for loan losses to non-performing assets  789.98%  148.10%  177.23%
Selected Ratios:            
Return on average assets  1.02%  0.78%  0.98%
Return on average common equity:  11.22%  7.84%  9.38%
Return on average tangible common equity (non-GAAP):  12.65%  8.94%  10.91%
Efficiency Ratio (non-GAAP)(1)  66.09%  69.99%  70.51%
Noninterest income to operating revenue(2)  23.49%  25.60%  24.16%
Net interest margin (tax equivalent)  3.23%  3.37%  3.65%
Equity to assets  8.90%  9.77%  10.27%
Tangible common shareholders’ equity to tangible assets (non-GAAP)  8.00%  8.74%  9.02%
Tier 1 risk-based capital (Bank)(4)  14.00%  12.83%  13.47%
Total risk-based capital (Bank)(4)  15.80%  13.94%  14.26%
Leverage (Bank)(4)  8.45%  8.84%  9.97%
Average loans to average deposits(5)  68.77%  76.79%  78.65%

 

(1)The efficiency ratio is a key performance indicator in our industry. The ratio is calculated by dividing non-interest expense less merger expenses by net interest income on a tax equivalent basis and non-interest income, excluding gains (losses) on sales of securities and other assets, write-downs on premises held-for-sale, non-recurring bank owned life insurance (BOLI) income, losses on early extinguishment of debt, gains on insurance proceeds, and collection of summary judgments on loans charged-off at a bank we acquired. The efficiency ratio is a measure of the relationship between operating expenses and net revenue.
(2)Operating revenue is defined as net interest income plus noninterest income.
(3)Includes non-accrual loans, loans > 90 days delinquent and still accruing interest and other real estate owned (“OREO”).
(4)As a small bank holding company, we are generally not subject to the capital requirements at the holding company level unless otherwise advised by the Federal Reserve; however, our Bank remains subject to capital requirements.
(5)Includes loans held for sale.

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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 loansCertain financial information presented above 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 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 fordetermined by methods other than in accordance with FASB ASC Topic 310-20, whereGAAP. These non-GAAP financial measures include “efficiency ratio,” “tangible book value at period end,” “return on average tangible common equity” and “tangible common shareholders’ equity to tangible assets.” The “efficiency ratio” is defined as non-interest expense less merger expenses, divided by the discountsum of net interest income on a tax equivalent basis and non-interest income, excluding gains (losses) on sales of securities and other assets, write-downs on premises held-for-sale, non-recurring bank owned life insurance (BOLI) income, losses on early extinguishment of debt, gains on insurance proceeds, and collection of summary judgments on loans charged off at a bank we acquired. The efficiency ratio is accreted through earnings based on estimated cash flows over the estimated lifea measure of the loan.relationship between operating expenses and net revenue. “Tangible book value at period end” is defined as total equity reduced by recorded intangible assets divided by total common shares outstanding. “Tangible common shareholders’ equity to tangible assets” is defined as total common equity reduced by recorded intangible assets divided by total assets reduced by recorded intangible assets. Our management believes that these non-GAAP measures are useful because they enhance the ability of investors and management to evaluate and compare our operating results from period-to-period in a meaningful manner. Non-GAAP measures have limitations as analytical tools, and investors should not consider them in isolation or as a substitute for analysis of our results as reported under GAAP.

The table below provides a reconciliation of non-GAAP measures to GAAP for the five years ended December 31:

Tangible book value per common share 2021  2020  2019 
Tangible common equity per common share (non-GAAP) $16.62  $16.08  $13.99 
Effect to adjust for intangible assets  2.06   2.10   2.17 
Book value per common share (GAAP) $18.68  $18.18  $16.16 
Return on average tangible common equity            
Return on average tangible common equity (non-GAAP)  12.65%  8.94%  10.91%
Effect to adjust for intangible assets  (1.43)%  (1.10)%  (1.53)%
Return on average common equity (GAAP)  11.22%  7.84%  9.38%
Tangible common shareholders’ equity to tangible assets            
Tangible common equity to tangible assets (non-GAAP)  8.00%  8.74%  9.02%
Effect to adjust for intangible assets  0.90%  1.03%  1.25%
Common equity to assets (GAAP)  8.90%  9.77%  10.27%
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44

Results of Operations

Year Ended December 31, 2021 and 2020

Our net income for the twelve months ended December 31, 2021 was $15.5 million, or $2.05 diluted earnings per common share, as compared to $10.1 million, or $1.35 diluted earnings per common share, for the twelve months ended December 31, 2020. The $5.4 million increase in net income between the two periods is primarily due to a $5.3 million increase in net interest income, a $135 thousand increase in non-interest income, and a $3.3 million reduction in provision for loan losses partially offset by a $1.7 million increase in non-interest expense and $1.7 million increase in income tax expense.

·The increase in net interest income results from an increase of $220.3 million in average earning assets partially offset by a 15-basis point decline in the net interest margin between the two periods. The increase in non-interest income is primarily related to increases in investment advisory fees and non-deposit commissions of $1.3 million, ATM/debit card income of $412 thousand, rental income of $40 thousand, gain on bank premises held-for-sale of $104 thousand, gain on sale of bank owned land of $13 thousand, gain on insurance proceeds of $24 thousand, and the collection of summary judgments of $147 thousand related to two loans charged off at a bank we acquired, partially offset by lower mortgage loan fees of $1.2 million, lower deposit service charges of $144 thousand, lower loan late charges of $33 thousand, lower gain on sale of securities of $99 thousand, lower gain on sale of other real estate owned of $70 thousand, lower non-recurring bank owned life insurance (BOLI) income of $311 thousand, and lower recurring BOLI income of $31 thousand.

·The reduction in provision for loan losses is primarily related to net recoveries of $455 thousand during the twelve months ended December 31, 2021 compared to net recoveries of $99 thousand during the same period in 2020; and a reduction in the qualitative factors in our allowance for loan losses methodology during 2021 related to the economic uncertainties caused by the COVID-19 pandemic and the change in total past due, rated, and non-accrual loans; partially offset by increases in the qualitative factors for the change in economic conditions and the change in legal or regulatory requirements; and loan growth of $19.5 million including PPP Loans and $60.3 million excluding PPP Loans. We reduced the loss emergence period assumption on our COVID-19 qualitative factor, which was added to our allowance for loan losses methodology during 2020, to 18 months at June 30, 2021 from 24 months at December 31, 2020 due to reductions in the number of COVID-19 cases, hospitalizations, and deaths in our markets. However, we increased the loss emergence period to 21 months at December 31, 2021 due to the prevalence of the highly transmittable COVID-19 Omicron variant. We partially offset these reductions by increasing our economic conditions qualitative factor by four basis points during 2021 (two basis points at June 30, 2021 and two basis points at September 30, 2021) due to higher inflation, supply chain bottlenecks, and labor shortages in certain industries; and we increased our change in legal or regulatory requirements qualitative factor by one basis point at December 31, 2021 due to the resignation of the Chair of the FDIC on December 31, 2021, which may lead to regulatory changes that negatively affect banks.

·The increase in non-interest expense is primarily related to increased salaries and employee benefits expense of $468 thousand, increased occupancy expense of $238 thousand, increased marketing and public relations expense of $130 thousand, increased FDIC assessment of $214 thousand, increased director fees and benefits of $165 thousand, increased third party broker dealer expenses of $90 thousand related to our higher investment advisory fees and non-deposit commissions, and increased ATM/debit card and computer processing expense of $700 thousand partially offset by lower legal and professional fees of $180 thousand and lower amortization of intangibles of $162 thousand.

·Our effective tax rate was 21.27% during the twelve months of 2021 compared to 19.82% during the same period in 2020.

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Year Ended December 31, 2020 and 2019

 

Our net income for the twelve months ended December 31, 2020 was $10.1 million, or $1.35 diluted earnings per common share, as compared to $11.0 million, or $1.45 diluted earnings per common share, for the twelve months ended December 31, 2019. The $872 thousand decrease in net income between the two periods is primarily due to increases in provision for loan losses expense of $3.5 million and non-interest expense of $2.9 million, partially offset by an increase in net interest income of $3.2 million, an increase in non-interest income of $2.0 million, and a decrease in income tax expense of $362 thousand. The increase in provision for loan losses is primarily related to an increase in the qualitative factors in our allowance for loan losses methodology related to the deteriorating economic conditions and economic uncertainties caused by the COVID-19 pandemic. The increase in non-interest expense is primarily related to increased salaries and employee benefits expense of $2.8 million, FDIC assessments of $347 thousand, other real estate expense of $120 thousand, and data processing expense of $289 thousand, partially offset by a lower equipment expense of $256 thousand and amortization of intangibles of $160 thousand. The increase in net interest income results from an increase of $180.4 million in average earning assets partially offset by a 28 basis point decline in the net interest margin between the two periods.  The increase in non-interest income is primarily related to increases in mortgage banking income of $1.0 million, investment advisory fees and non-deposit commissions of $699 thousand, gains on sale of securities of $99 thousand, gains on sale of other real estate owned of $147 thousand, non-recurring bank owned life insurance (BOLI) income of $311 thousand, and ATM debit card income of $197 thousand, partially offset by a $528 thousand decrease in deposit service charges. Our effective tax rate was 19.82% during twelve months of 2020 compared to 20.67% during the twelve months of 2019. The $311 thousand in non-recurring BOLI income was recorded as non-taxable income.

 

·The increase in provision for loan losses is primarily related to an increase in the qualitative factors in our allowance for loan losses methodology related to the deteriorating economic conditions and economic uncertainties caused by the COVID-19 pandemic.

Net income was $11.0 million, or $1.45 diluted earnings per common share, for the year ended December 31, 2019, as compared to net income of $11.2 million, or $1.45 diluted earnings per common share, for the year ended December 31, 2018. Net interest income increased $1.1 million, or 3.1% to $36.8 million, in 2019 from $35.7 million in 2018. The increase in net interest income is primarily due to a $37.3 million increase in average earning assets, which was partially offset by a four basis points decline in the net interest margin in 2019 as compared to 2018. Net interest margin on a fully tax equivalent basis was 3.65% in 2019 as compared to 3.69% in 2018. Provision for loan losses declined $207 thousand to $139 thousand in 2019 from $346 thousand in 2018. Noninterest income increased $1.1 million, or 10.3% to $11.7 million, in 2019 from $10.6 million in 2018. The increase in noninterest income was primarily due to increases in mortgage banking income, investment advisory fees and non-deposit commissions, gains/(losses) on sale of securities, and ATM debit card income, which were partially offset by lower deposit service charges and a write-down on bank premises held-for-sale. We conducted business from a mortgage loan production office in Richland County, South Carolina until January 24, 2020 and have since consolidated such business with other existing Bank offices. This closure and consolidation resulted in a write-down of the real estate of $282 thousand during the fourth quarter of 2019 based on the appraised value of the real estate less estimated selling costs. The real estate is recorded at $591 thousand in Premises held-for-sale at December 31, 2019. Once the real estate is sold, our occupancy expense will decline by approximately $91 thousand annually. Noninterest expense increased $2.5 million, or 7.8% to $34.6 million, in 2019 from $32.1 million in 2018. The increase in noninterest expense was primarily due to increases in salaries and employee benefits, occupancy expense, ATM/debit card and data processing expense, and marketing and public relations expense, which were partially offset by lower FDIC /FICO premiums in 2019 as compared to 2018. During 2019, we made significant strategic investments in our franchise, including two new full-service offices, our mobile and digital banking platforms, and hiring additional team members. Income tax expense increased $164 thousand, or 6.1%, to $2.9 million, in 2019 as compared to $2.7 million in 2018. Our effective tax rate was 20.67% in 2019 as compared to 19.35% in 2018.

·The increase in non-interest expense is primarily related to increased salaries and employee benefits expense of $2.8 million, FDIC assessments of $347 thousand, other real estate expense of $120 thousand, and data processing expense of $289 thousand, partially offset by a lower equipment expense of $256 thousand and amortization of intangibles of $160 thousand.

·The increase in net interest income results from an increase of $180.4 million in average earning assets partially offset by a 28-basis point decline in the net interest margin between the two periods.  

·The increase in non-interest income is primarily related to increases in mortgage banking income of $1.0 million, investment advisory fees and non-deposit commissions of $699 thousand, gains on sale of securities of $99 thousand, gains on sale of other real estate owned of $147 thousand, non-recurring bank owned life insurance (BOLI) income of $311 thousand, and ATM debit card income of $197 thousand, partially offset by a $528 thousand decrease in deposit service charges.

·Our effective tax rate was 19.82% during the twelve months of 2020 compared to 20.67% during the twelve months of 2019. The $311 thousand in non-recurring BOLI income was recorded as non-taxable income.

  

Net Interest Income

Net interest income is our primary source of revenue. Net interest income is the difference between income earned on assets and interest paid on deposits and borrowings used to support such assets. Net interest income is determined by the rates earned on our interest-earning assets and the rates paid on our interest-bearing liabilities, the relative amounts of interest-earning assets and interest-bearing liabilities, and the degree of mismatch and the maturity and repricing characteristics of our interest-earning assets and interest-bearing liabilities.

Year Ended December 31, 2021 and 2020

Net interest income increased $5.3 million, or 13.1%, to $45.3 million for the twelve months ended December 31, 2021 from $40.0 million for the twelve months ended December 31, 2020. Our net interest income has been trending up over the last two years as net interest income totaled $45.3 million in 2021, $40.0 million in 2020, and $36.8 million in 2019. The yield on earning assets was 3.35%, 3.65%, and 4.19% in 2021, 2020, and 2019, respectively. The rate paid on interest-bearing liabilities was 0.24%, 0.46%, and 0.80% in 2021, 2020, and 2019, respectively. The fully taxable equivalent net interest margin was 3.23% in 2021, 3.37% in 2020, and 3.65% in 2019.

Loans typically provide a higher yield than other types of earning assets and, thus, one of our goals continues to be growing the loan portfolio as a percentage of earning assets in order to improve the overall yield on earning assets and the net interest margin. Our average loan portfolio (including loans held-for-sale) as a percentage of average earning assets was 62.6% in 2021, 69.7% in 2020, and 72.2% in 2019. Loans held-for-investment as a percentage of earning assets declined to 58.2% at December 31, 2021 from 65.1% at December 31, 2020. Our loan (including loans held-for-sale) to deposit ratio on average during 2021 was 68.8%, as compared to 76.8% during 2020, and 78.7% during 2019. The loan to deposit ratio declined to 64.0% at December 31, 2021 as compared to 74.8% at December 31, 2020. This decline was due to our deposit growth of $171.9 million exceeding our loan (including loans held-for-sale) decline of $18.4 million and loan (excluding loans held-for-sale) growth of $19.5 million from December 31, 2020 to December 31, 2021.

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Our net interest margin declined by 15 basis points to 3.19% during the twelve months ended December 31, 2021 from 3.34% during the twelve months ended December 31, 2020. Our net interest margin, on a taxable equivalent basis, was 3.23% for the twelve months ended December 31, 2021 compared to 3.37% for the twelve months ended December 31, 2020. Average earning assets increased $220.3 million, or 18.4%, to $1.4 billion for the twelve months ended December 31, 2021 compared to $1.2 billion in the same period of 2020. The increase in net interest income was due to a higher level of average earning assets partially offset by lower net interest margin. The increase in average earning assets was due to increases in loans, securities, and other short-term investments primarily due to Non-PPP loan growth, PPP loans, organic deposit growth, and excess liquidity from PPP loan proceeds and other stimulus funds related to the COVID-19 pandemic. The decline in net interest margin was primarily due to the Federal Reserve reducing the target range of the federal funds rate twice totaling 150 basis points during the first quarter of 2020 and the excess liquidity generated from PPP loan proceeds and other stimulus funds related to the COVID-19 pandemic being deployed in lower yielding securities and other short-term investments. Lower market rates, the competitive loan pricing environment, and the COVID-19 pandemic put downward pressure on our net interest margin during 2020 and 2021.

The net interest margin was positively affected by PPP loans and a $140 thousand interest recovery on a non-accrual loan that was successfully resolved during the twelve months ended December 31, 2021. We earned $3.3 million in PPP loan interest income, which includes $3.0 million in accretion of PPP deferred fees net of deferred costs, on an average balance of $36.8 million during the twelve months ended December 31, 2021 compared to $1.1 million in PPP loan interest income, which includes $738 thousand in accretion of PPP deferred loan fees net of deferred costs, on an average balance of $32.3 million during the twelve months ended December 31, 2020. Excluding PPP loans, our net margin declined by 31 basis points to 3.03% during the twelve months ended December 31, 2021 from 3.34% during the twelve months ended December 31, 2020. Excluding PPP loans, our net interest margin, on a taxable equivalent basis, was 3.07% for the twelve months ended December 31, 2021 compared to 3.37% for the twelve months ended December 31, 2020.

Average loans increased $53.9 million, or 6.5%, to $889.0 million for the twelve months ended December 31, 2021 from $835.1 million for the same period in 2020. Average PPP loans increased $4.5 million to $36.8 million and average Non-PPP loans increased $49.4 million to $852.1 million for the twelve months ended December 31, 2021. Average loans represented 62.6% of average earning assets during the twelve months ended December 31, 2021 compared to 69.7% of average earning assets during the same period in 2020. The decline in average loans as a percentage of average earning assets was primarily due to increases in deposits of $205.3 million and securities sold under agreements to repurchase of $12.7 million. The growth in our deposits and securities sold under agreements to repurchase was higher than the growth in our loans, which resulted in the excess funds being deployed in our securities portfolio and other short-term investments and to reduce the amount of our FHLB advances. The yield on loans increased two basis points to 4.46% during the twelve months ended December 31, 2021 from 4.44% during the same period in 2020. Excluding PPP loans, the yield on Non-PPP loans declined 22 basis points to 4.26% during the twelve months ended December 31, 2021 from 4.48% during the same period in 2020. The yield on loans during the twelve months ended December 31, 2021 also included $140 thousand in interest recoveries on a non-accrual relationship that was successfully resolved during the third quarter of 2021. The yield on PPP loans was 9.07% during the twelve months ended December 31, 2021 compared to 3.32% during the same period in 2020. PPP loans declined to $1.5 million at December 31, 2021 from $42.2 million at December 31, 2020 due to PPP loans forgiven through the SBA PPP forgiveness process. When PPP loans are forgiven any remaining deferred fees net of deferred costs are recognized in interest income through accelerated accretion of the deferred fees net of deferred costs. Interest income on PPP loans increased $2.3 million to $3.3 million during the twelve months of 2021 from $1.1 million during the same period in 2020. The $3.3 million in interest income on PPP loans during the twelve months ended December 31, 2021 includes $3.0 million in accretion of deferred fees net of deferred costs.

Average securities and average other short-term investments for the twelve months ended December 31, 2021 increased $155.9 million and $10.5 million, respectively, from the prior year period. The yield on our securities portfolio declined to 1.69% for the twelve months ended December 31, 2021 from 2.15% for the same period in 2020; and the yield on our other short-term investments declined to 0.18% for the twelve months ended December 31, 2021 from 0.44% for the same period in 2020. These declines were primarily related to the Federal Reserve reducing the target range of the federal funds rate as described above. The yield on earning assets for the twelve months ended December 31, 2021 and 2020 was 3.35% and 3.65%, respectively. The cost of interest-bearing liabilities was at 24 basis points during the twelve months ended December 31, 2021 compared to 46 basis points during the same period in 2020.

The cost of deposits, including demand deposits, was 13 basis points during the twelve months ended December 31, 2021 compared to 28 basis points during the same period in 2020. The cost of funds, including demand deposits, was 16 basis points during the twelve months ended December 31, 2021 compared to 33 basis points during the same period in 2020. We continue to focus on growing our pure deposits (demand deposits, interest-bearing transaction accounts, savings deposits, money market accounts, and IRAs) as these accounts tend to be low-cost deposits and assist us in controlling our overall cost of funds. During the twelve months ended December 31, 2021, these deposits averaged 90.1% of total deposits as compared to 87.4% during the same period of 2020. This increase was due to PPP loan proceeds, other stimulus funds related to the COVID-19 pandemic, and organic deposit growth.

47

Year Ended December 31, 2020 and 2019

Net interest income increased $3.2 million, or 8.6%, to $40.0 million for the twelve months ended December 31, 2020 from $36.8 million for the twelve months ended December 31, 2019. Our net interest margin declined by 28 basis points to 3.34% during the twelve months of 2020 from 3.62% during the twelve months of 2019. Our net interest margin, on a taxable equivalent basis, was 3.37% for the twelve months of 2020 compared to 3.65% for the twelve months of 2019. Average earning assets increased $180.4 million, or 17.7%, to $1.2 billion for the twelve months ended December 31, 2020 as compared to $1.0 billion in the same period of 2019. The increase in net interest income was primarily due to a higher level of average earning assets partially offset by lower net interest margin. The increase in average earning assets was due to increases in loans, securities, and other short-term investments primarily due to Non-PPP loan growth, PPP loans, organic deposit growth, and excess liquidity from PPP loan proceeds and other stimulus funds related to the COVID-19 pandemic. The decline in net interest margin was primarily due to the Federal Reserve reducing the target range of the federal funds rate three times totaling 75 basis points during 2019 and two times totaling 150 basis points during the first quarter of 2020, lower yields on PPP loans, and the excess liquidity generated from PPP loan proceeds and other stimulus funds related to the COVID-19 pandemic being deployed in lower yielding securities and other short-term investments. Lower market rates, the competitive loan pricing environment, and the COVID-19 pandemic put downward pressure on our net interest margin during 2020.

56

Average loans increased $99.7 million, or 13.6%, to $835.1 million for the twelve months of 2020 from $735.3 million for the twelve months of 2019. Average PPP loans increased $32.3 million and average Non-PPP loans increased $67.4 million to $32.3 million and $802.8 million, respectively, for the twelve months of 2020. We had no PPP loans at December 31, 2019. Average loans represented 69.7% of average earning assets during the twelve months of 2020 compared to 72.2% of average earning assets during the twelve months of 2019. The decline in average loans as a percentage of average earning assets was primarily due to increases in deposits of $152.5 million and securities sold under agreements to repurchase of $14.1 million. The growth in our deposits and securities sold under agreements to repurchase was higher than the growth in our loans, which resulted in the excess funds being deployed in our securities portfolio and other short-term investments and to reduce our Federal Home Loan Bank advances. The yield on loans declined 38 basis points to 4.44% in the twelve months of 2020 from 4.82% in the twelve months of 2019. The yield on PPP loans was 3.32% and the yield on Non-PPP loans was 4.48% in the twelve months of 2020. Average securities and average other short-term investments for the twelve months ended December 31, 2020 increased $43.3 million and $37.3 million, respectively, from the prior year period.

The yield on our securities portfolio declined to 2.15% for the twelve months ended December 31, 2020 from 2.58% for the same period in 2019 while the yield on our other short-term investments declined to 0.44% for the twelve months ended December 31, 2020 from 2.14% for the same period in 2019. These declines were primarily related to the Federal Reserve reducing the target range of the federal funds rate as described above. The yield on earning assets for the twelve months ended December 31, 2020 and 2019 was 3.65% and 4.19%, respectively. The cost of interest-bearing liabilities was at 46 basis points in the twelve months of 2020 compared to 80 basis points in the twelve months of 2019. We continue to focus on growing our pure deposits (demand deposits, interest-bearing transaction accounts, savings deposits and money market accounts) as these accounts tend to be low-cost deposits and assist us in controlling our overall cost of funds. In the twelve months of 2020, these deposits averaged 84.7% of total deposits as compared to 81.1% in the same period of 2019.

48

Net interest income totaled $40.0 million in 2020, $36.8 million in 2019, and $35.7 million in 2018. The yield on earning assets was 3.65%, 4.19%, and 4.05% in 2020, 2019, and 2018, respectively. The rate paid on interest-bearing liabilities was 0.46%, 0.80%, and 0.55% in 2020, 2019, and 2018, respectively. The fully taxable equivalent net interest margin was 3.37% in 2020, 3.65% in 2019, and 3.69% in 2018. Loans typically provide a higher yield than other types of earning assets and, thus, one of our goals continues to be growing the loan portfolio as a percentage of earning assets in order to improve the overall yield on earning assets and the net interest margin. Our average loan portfolio (including loans held-for-sale) as a percentage of average earning assets was 69.7% in 2020, 72.2% in 2019, and 70.0% in 2018. The loan portfolio as a percentage of earning assets declined to 65.1% at December 31, 2020 from 68.9% at December 31, 2019. Our loan (including loans held-for-sale) to deposit ratio on average during 2020 was 76.8%, as compared to 78.7% during 2019, and 75.0% during 2018. The loan to deposit ratio declined to 74.8% at December 31, 2020 as compared to 75.7% at December 31, 2019. This decline was due to our deposit growth of $201.2 million exceeding our loan growth of $141.0 million from December 31, 2019 to December 31, 2020.

The net interest margin and the net interest margin on a fully tax equivalent basis declined by two basis points and four basis points, respectively, in 2019 as compared to 2018. The yield on earning assets increased by 14 basis points while our cost of interest-bearing liabilities increased by 25 basis points in 2019 as compared to 2018. The decline in net interest margin in 2019 as compared to 2018 was partially a result of the Federal Reserve reducing the federal funds target rate in 2019 after increasing it in 2018 and a flat-to-inverted yield curve during periods of 2019. In 2018, the federal funds target rate was increased four times. These increases over time positively impact our net interest margin because the yields on our variable rate assets in the loan and investment portfolios, and our short term investments reprice at higher rates faster than the rates that we pay on our interest-bearing liabilities reprice higher in a rising rate environment. However, the Federal Reserve reduced the target range for the federal funds rate by 25 basis points at each of its meetings in in July 2019, September 2019, and October 2019, which resulted in a total reduction of 75 basis points during 2019. These reductions, along with a flat-to-inverted yield curve during periods of 2019, negatively impacted our net interest margin during the second half of 2019 because the yields on our variable rate assets in the loan and investment portfolios, and our short term investments reprice at lower rates faster than the rates that we pay on our interest-bearing liabilities reprice lower in a declining rate environment. Furthermore, the three reductions in the federal funds target rate, the flat-to-inverted yield curve during periods of 2019, and the competitive environment put downward pressure on the pricing of new loan originations in 2019. The yield on our earning assets increased 14 basis points to 4.19% in 2019 from 4.05% in 2018. However, the cost of our interest-bearing liabilities increased 25 basis points to 0.80% in 2019 from 0.55% in 2018. The positive impact from the 2018 federal funds target rate increases were more than offset by the negative impacts from the 2019 federal funds target rate reductions, the flat-to-inverted yield curve, and the competitive loan pricing environment during periods of 2019. The average loan balance as a percentage of average earning assets was 72.2% in 2019 as compared to 70.0% in 2018. This increase in earning asset mix along with the increases in short term rates noted previously accounted for the improved yield on our earning assets. Our lower cost funding sources include non-interest bearing transaction accounts, interest-bearing transaction accounts, money-market accounts and savings deposits. During 2018, the average balance in these accounts represented 79.5% of total deposits whereas in 2019 they represented 81.1% of total deposits. Our average other borrowings, which are typically a higher cost funding source, increased $6.3 million in 2019 as compared to 2018. Managing this interest rate risk continues to be a primary focus of management (see discussion of Market Rate and Interest Rate Sensitivity discussion below).

57

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, 
 2020 2019 2018  2021  2020  2019 
(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                                                       
PPP loans $32,312  $1,073   3.32% $  $   N/A  $  $   N/A  $36,837  $3,340   9.07% $32,312  $1,073   3.32% $  $   N/A 
Non-PPP loans  802,779 35,964 4.48% 735,343 35,447 4.82% 686,438 32,789 4.78%  852,136   36,331   4.26%  802,779   35,964   4.48%  735,343   35,447   4.82%
Total loans(1) $835,091 $37,037 4.44% $735,343 $35,447 4.82% $686,438 $32,789 4.78% $888,973  $39,671   4.46% $835,091  $37,037   4.44% $735,343  $35,447   4.82%
Securities 300,893 6,465 2.15% 257,587 6,636 2.58% 271,621 6,522 2.40%
Other short-term investments(2)  62,903 276 0.44% 25,580 547 2.14% 23,156 418 1.81%
Non-Taxable Securities  425,523   6,993   1.64%  286,979   6,102   2.13%  254,364   6,549   2.57%
Taxable Securities  31,282   726   2.32%  13,915   363   2.61%  3,223   87   2.70 
Int Bearing Deposits in Other Banks  72,823   130   0.18%  62,313   275   0.44%  24,860   532   2.14%
Fed Funds Sold  564   0   0.00%  590   1   0.14%  720   15   2.13%
Total earning assets  1,198,887 43,778 3.65% 1,018,510 42,630 4.19% 981,215 39,729 4.05%  1,419,165   47,520   3.35%  1,198,887   43,778   3.65%  1,018,510   42,630   4.19%
Cash and due from banks 15,552     14,362     13,446       23,668           15,552           14,362         
Premises and equipment 34,769     35,893     34,905       33,780           34,769           35,893         
Goodwill and other intangible assets 15,922     16,376     16,881       15,649           15,922           16,376         
Other assets 39,541     37,513     36,299       38,846           39,541           37,513         
Allowance for loan losses  (8,590)      (6,437)      (6,075)       (10,750)          (8,590)          (6,437)        
Total assets $1,296,081     $1,116,217     $1,076,671      $1,520,358          $1,296,081          $1,116,217         
Liabilities                                                       
Interest-bearing liabilities                                                       
Interest-bearing transaction accounts $246,385 $284 0.12% $208,750 $591 0.28% $192,420 $443 0.23% $303,633  $196   0.06% $246,385  $284   0.12% $208,750  $591   0.28%
Money market accounts 217,018 820 0.38% 181,695 1,690 0.93% 184,413 869 0.47%  273,005   471   0.17%  217,018   820   0.38%  181,695   1,690   0.93%
Savings deposits 113,255 84 0.07% 104,236 138 0.13% 106,752 143 0.13%  134,980   78   0.06%  113,255   84   0.07%  104,236   138   0.13%
Time deposits 166,791 1,833 1.10% 176,243 2,139 1.21% 188,023 1,450 0.77%  158,053   995   0.63%  166,791   1,833   1.10%  176,243   2,139   1.21%
Other borrowings  66,528 734 1.10% 52,427 1,223 2.33% 46,155 1,076 2.34%
Fed Funds Purchased  0   0   2.14%  7   0   0.61%  38   1   3.07%
Securities Sold Under Agreements to Repurchase  62,194   85   0.14%  49,537   190   0.38%  34,229   385   1.12%
Other Short-Term Debt  0   0   0.18%  2,020   8   0.39%  3,196   76   2.39%
Other Long-Term Debt  14,964   416   2.78%  14,964   536   3.58%  14,964   760   5.08%
Total interest-bearing liabilities $809,977 $3,755 0.46% $723,351 $5,781 0.80% $717,763 $3,981 0.55% $946,829  $2,241   0.24% $809,977  $3,755   0.46% $723,351  $5,781   0.80%
Demand deposits 343,999     264,017     243,530       423,056           343,999           264,017         
Other liabilities 13,242     11,869     8,200       12,607           13,242           11,869         
Shareholders’ equity $128,863     $116,980     $107,178      $137,866          $128,863          $116,980         
Total liabilities and shareholders’ equity $1,296,081     $1,116,217     $1,076,671      $1,520,358          $1,296,081          $1,116,217         
Net interest spread     3.19%     3.39%     3.49%          3.11%          3.19%          3.39%
Net interest income/margin   $40,023  3.34%   $36,849  3.62%   $35,748  3.64%     $45,279   3.19%     $40,023   3.34%     $36,849   3.62%
Net interest margin
(tax equivalent)(3)
      3.37%      3.65%      3.69%     $45,776   3.23%     $40,413   3.37%     $37,208   3.65%

 

 
(1)All loans and deposits are domestic. Average loan balances include non-accrual loans and loans held for sale.

(2)The computation includes federal funds sold, securities purchased under agreement to resell and interest bearing deposits.

(3)Based on a 21.0% marginal tax rate for 2020, 2019 and 2018.rate.
58

49

The following table presents the dollar amount of changes in interest income and interest expense attributable to changes in volume and the amount attributable to changes in rate. The combined effect related to volume and rate which cannot be separately identified, has been allocated proportionately, to the change due to volume and the change due to rate.

  2020 versus 2019
Increase (decrease) due to
  2019 versus 2018
Increase (decrease) due to
 
(In thousands) Volume  Rate  Net  Volume  Rate  Net 
Assets                        
Earning assets                        
Loans $3,872  $(2,282) $1,590  $2,356  $302  $2,658 
Investment securities  (13,452)  13,281   (171)  (278)  393   115 
Other short-term investments  (595)  324   (271)  47   81   128 
Total earning assets  4,105   (2,957)  1,148   1,538   1,363   2,901 
Interest-bearing liabilities                        
Interest-bearing transaction accounts  134   (441)  (307)  40   108   148 
Money market accounts  424   (1,294)  (870)  (13)  835   822 
Savings deposits  13   (67)  (54)  (3)  (2)  (5)
Time deposits  (111)  (195)  (306)  (84)  774   690 
Other short-term borrowings  510   (999)  (489)  146   (1)  145 
Total interest-bearing liabilities  808   (2,834)  (2,026)  31   1,769   1,800 
Net interest income         $3,174          $1,101 

  2021 versus 2020
Increase (decrease) due to
  2020 versus 2019
Increase (decrease) due to
 
(In thousands) Volume  Rate  Net  Volume  Rate  Net 
Assets                  
Earning assets                        
Loans $2,403  $231  $2,634  $3,872  $(2,282) $1,590 
Investment securities  2,133   (879)  1,254   (13,452)  13,281   (171)
Other short-term investments  57   (203)  (146)  (595)  324   (271)
Total earning assets  6,826   (3,084)  3,742   4,105   (2,957)  1,148 
Interest-bearing liabilities                        
Interest-bearing transaction accounts  98   (186)  (88)  134   (441)  (307)
Money market accounts  315   (664)  (349)  424   (1,294)  (870)
Savings deposits  40   (46)  (6)  13   (67)  (54)
Time deposits  (92)  (746)  (838)  (111)  (195)  (306)
Other short-term borrowings  148   (381)  (233)  510   (999)  (489)
Total interest-bearing liabilities  798   (2,312)  (1,514)  808   (2,834)  (2,026)
Net interest income         $5,256          $3,174 

Market Risk and Interest Rate Sensitivity

Market risk reflects the risk of economic loss resulting from adverse changes in market prices and interest rates. The risk of loss can be measured in either diminished current market values or reduced current and potential net income. Our primary market risk is interest rate risk. We have established an Asset/Liability Management Committee (the “ALCO”) to monitor and manage interest rate risk. The ALCO monitors and manages the pricing and maturity of our assets and liabilities in order to diminish the potential adverse impact that changes in interest rates could have on our net interest income. The ALCO has established policy guidelines and strategies with respect to interest rate risk exposure and liquidity.

59

A

We employ a monitoring technique employed by us is the measurementto measure of our interest sensitivity “gap,” which is the positive or negative dollar difference between assets and liabilities that are subject to interest rate repricing within a given period of time. Simulation modeling is performed to assess the impact varying interest rates and balance sheet mix assumptions will have on net interest income. We model the impact on net interest income for several different changes, to include a flattening, steepening and parallel shift in the yield curve. For each of these scenarios, we model the impact on net interest income in an increasing and decreasing rate environment of 100 and 200 basis points. We also periodically stress certain assumptions such as loan prepayment rates, deposit decay rates and interest rate betas to evaluate our overall sensitivity to changes in interest rates. Policies have been established in an effort to maintain the maximum anticipated negative impact of these modeled changes in net interest income at no more than 10% and 15%, respectively, in a 100 and 200 basis point change in interest rates over a 12-month period. Interest rate sensitivity can be managed by repricing assets or liabilities, selling securities available-for-sale, replacing an asset or liability at maturity or by adjusting the interest rate during the life of an asset or liability. Managing the amount of assets and liabilities repricing in the same time interval helps to hedge the risk and minimize the impact on net interest income of rising or falling interest rates. Neither the “gap” analysis or asset/liability modeling are precise indicators of our interest sensitivity position due to the many factors that affect net interest income including, the timing, magnitude and frequency of interest rate changes as well as changes in the volume and mix of earning assets and interest-bearing liabilities.

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The following table illustrates our interest rate sensitivity at December 31, 2020.2021.

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) $373,517  $240,324  $123,343  $91,967  $829,150  $313,271  $244,479  $155,205  $139,302  $852,257 
Loans Held for Sale  45,020            45,020   7,120            7,120 
Securities(2)  126,524   47,123   32,291   145,205   351,143   247,558   36,738   46,758   211,551   542,605 
Federal funds sold, securities purchased under agreements to resell and other earning assets  43,562            43,562   46,299            46,299 
Total earning assets  588,623   287,447   155,634   237,172   1,268,876   614,248   281,217   201,963   350,853   1,448,281 
Liabilities                                        
Interest bearing liabilities                                        
Interest bearing deposits                                        
Interest checking accounts  107,830         554,193   662,023   131,551         643,143   774,694 
Money market accounts  153,093         89,036   242,128   182,068         105,351   287,419 
Savings deposits  33,971         90,626   124,597   39,890         105,506   145,396 
Time deposits  113,803   40,337   6,509      160,650   117,612   28,279   7,789   100   153,780 
Total interest-bearing deposits  408,696   40,337   6,509   733,855   1,189,398   471,121   28,279   7,789   854,100   1,361,289 
Other borrowings  55,878            55,878   69,180            69,180 
Total interest-bearing liabilities  464,574   40,337   6,509   733,855   1,245,275   540,301   28,279   7,789   854,100   1,430,469 
Period gap $129,671  $247,109  $149,125  $(396,207) $129,699  $73,947  $252,938  $194,174  $(403,830) $117,229 
Cumulative gap $129,671  $376,781  $525,906  $129,699  $129,699  $73,947  $326,885  $521,059  $117,229  $117,229 
Ratio of cumulative gap to total earning assets  22.03%  43.01%  50.97%  10.22%  10.22%  8.82%  36.50%  47.48%  123.92%  186.21%

 
(1)Loans classified as non-accrual as of December 31, 20202021 are not included in the balances.

(2)Securities based on amortized cost.
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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, 20202021 and 20192020 over the subsequent 12 months. At December 31, 2020,2021, we are slightly liability sensitive over the first three month period and over the balance of a 12-month period are asset sensitive on a cumulative basis.sensitive. As a result, our modeling reflects slight exposure to falling rates and our rising rate exposure trends from neutral to slightly liability sensitive as rates move higher over the first 12 months. This negative impact of rising rates reverses andan increase in net interest income is favorably impacted overin a 24-month period.rising interest rate environment and a reduction in net interest income in a declining interest rate environment. In a declining rate environment, the model reflects a decline in net interest income. Thisincome is primarily results fromdue to the current level of interest rates being paid on our interest bearing transaction accounts as well as money market accounts. The interest rates on these accounts are at a level where they cannot be repriced in proportion to the change in interest rates. The increase and decrease of 100 and 200 basis points, respectively, reflected in the table below assume a simultaneous and parallel change in interest rates along the entire yield curve.

Net Interest Income Sensitivity

Change in short-term interest rates Hypothetical
percentage change in
net interest income
December 31,
  Hypothetical
percentage change in
net interest income
December 31,
 
 2020 2019  2021  2020 
+200bp  -0.73%  -2.30%  3.04%  -0.73%
+100bp +0.08% -1.09%  2.12%  +0.08%
Flat         
-100bp -3.37% -1.88%  -5.12%  -3.37%
-200bp -3.58% -5.08%  -9.81%  -3.58%

 

During the second 12-month period after 100 basis point and 200 basis point simultaneous and parallel increases in interest rates along the entire yield curve, our net interest income is projected to increase 7.82% and 15.00%, respectively.

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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, 20202021 and 2019,2020, the PVE exposure in a plus 200 basis point increase in market interest rates was estimated to be 11.47%9.73% and 5.85%11.47%, respectively. The PVE exposure in a down 100 basis point decrease was estimated to be (9.86)% at December 31, 2021 compared to (14.32)% at December 31, 2020 compared to (7.68)% at December 31, 2019.2020.

Provision and Allowance for Loan Losses

We account for our allowance for loan losses under the incurred loss model. As discussed above, the CECL model will become effective for us on January 1, 2023. At December 31, 2020,2021, the allowance for loan losses was $11.2 million, or 1.29% of total loans (excluding loans held-for-sale), compared to $10.4 million, or 1.23% of total loans (excluding loans held-for-sale), compared to $6.6 million, or 0.90% of total loans (excluding loans held-for-sale) at December 31, 2019.2020. Excluding PPP loans and loans held-for-sale, the allowance for loan losses was 1.30% of total loans at December 31, 2021 compared to 1.30% of total loans at December 31, 2020. The increase in the allowance for loan losses compared to December 31, 2020 is primarily related to loan growth of $19.5 million; $455 thousand in net recoveries; an increase in our economic conditions qualitative factor by four basis points during 2021 due to higher inflation, supply chain bottlenecks, and labor shortages in certain industries; and a one basis point increase in our change in legal or regulatory requirements qualitative factor. These increases were partially offset by a reduction in the loss emergence period assumption on our COVID-19 qualitative factors infactor, which was added to our allowance for loan losses methodology during 2020, to 21 months at December 31, 2021 from 24 months at December 31, 2020. At June 30, 2021, we reduced the loss emergence period in the COVID-19 qualitative factor to 18 months from 24 months due to a reduction in the number of COVID-19 related cases, hospitalizations, and deaths within our markets. However, we increased the loss emergence period to 21 months at December 31, 2021 due to the deteriorating economic conditions and economic uncertainties caused byprevalence of the highly transmittable COVID-19 pandemic.Omicron variant.

Loans that werewe acquired in theour acquisition of Cornerstone Bancorp, otherwise referred to herein as Cornerstone, in 2017 as well as in theour acquisition of Savannah River Financial Corp., otherwise referred to herein as Savannah River, in 2014 are accounted for under FASB ASC 310-30. These acquired loans were initially measured at fair value, which includes estimated future credit losses expected to be incurred over the life of the loans. The credit component on loans related to cash flows not expected to be collected is not subsequently accreted (non-accretable difference) into interest income. Any remaining portion representing the excess of a loan’s or pool’s cash flows expected to be collected over the fair value is accreted (accretable difference) into interest income. At December 31, 20202021 and December 31, 2019,2020, the remaining credit component on loans attributable to acquired loans in the Cornerstone and Savannah River transactions was $264$130 thousand and $534$264 thousand, respectively.

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Our provision for loan losses was $335 thousand for the twelve months ended December 31, 2021 compared to $3.7 million during the same period in 2020, $139 thousand in 2019, and $346 thousand in 2018.2020. The increasedecline in the provision for loan losses is primarily related to an increase during the twelve months of 2020 in the qualitative factors in our allowance for loan losses methodology related to the deteriorating economic conditions and economic uncertainties caused by the COVID-19 pandemic. As discussed above, during the twelve months of 2020, we added a qualitative factor for the COVID-19 pandemic to our allowance for loan losses methodology. This new qualitative factor was based on the dollar amount of our deferrals and a one-year loss emergence period based on the highest period of annual historical loss rate since the Bank’s inception. As the pandemic worsened, we added our exposure to certain industry segments most impacted by the COVID-19 pandemic (hotels, restaurants, assisted living, and retail) to the COVID-19 qualitative factor and we extended the loss emergence period to two years based on the highest two periods of annual historical loss rates since the Bank’s inception. At December 31, 2021, the COVID-19 qualitative factor represented $1.9 million of our allowance for loan losses.

 

We also recognized $455 thousand in net recoveries during the twelve months ended December 31, 2021. These items were partially offset by $19.5 million in loan growth; a four basis points increase (two basis points at June 30, 2021 and two basis points at September 30, 2021) in our qualitative factor related to economic conditions due to an increase in inflation, supply chain bottlenecks, and labor shortages in our markets; and a one basis point increase in our change in legal or regulatory requirements qualitative factor at December 31, 2021 due to the resignation of the Chair of the FDIC on December 31, 2021, which may lead to regulatory changes that negatively affect banks.

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The allowance for loan losses represents an amount which we believe will be adequate to absorb probable losses on existing loans that may become uncollectible. Our judgment as to the adequacy of the allowance for loan losses is based on assumptions about future events, which we believe to be reasonable, but which may or may not prove to be accurate. Our determination of the allowance for loan losses is based on evaluations of the collectability of loans, including consideration of factors such as the balance of impaired loans, the quality, mix, and size of our overall loan portfolio, the knowledge and depth of lending personnel, economic conditions (local and national) that may affect the borrower’s ability to repay, the amount and quality of collateral securing the loans, our historical loan loss experience, and a review of specific problem loans. We also consider qualitative factors such as changes in the lending policies and procedures, changes in the local/local or national economy,economies, changes in volume or type of credits, changes in volume/severity of problem loans, quality of loan review and board of director oversight, and concentrations of credit. During the first quarter of 2020, we added a new qualitative factor related to the economic uncertainties caused by the COVID-19 pandemic. We charge recognized losses to the allowance and add subsequent recoveries back to the allowance for loan losses. There can be no assurance that charge-offs of loans in future periods will not exceed the allowance for loan losses as estimated at any point in time or that provisions for loan losses will not be significant to a particular accounting period, especially considering the uncertainties related to the COVID-19 pandemic.

 

We perform an analysis quarterly to assess the risk within the loan portfolio. The portfolio is segregated into similar risk components for which historical loss ratios are calculated and adjusted for identified changes in current portfolio characteristics. Historical loss ratios are calculated by product type and by regulatory credit risk classification (See Note 4 to the Consolidated Financial Statements). The annualized weighted average loss ratios over the last 36 months for loans classified as substandard, special mention and pass have been approximately 0.05%0.18%, 0.00%0.03% and 0.01%0.00%, respectively. The allowance consists of an allocated and unallocated allowance. The allocated portion is determined by types and ratings of loans within the portfolio. The unallocated portion of the allowance is established for losses that exist in the remainder of the portfolio and compensates for uncertainty in estimating the loan losses. The allocated portion of the allowance is based on historical loss experience as well as certain qualitative factors as explained above. The qualitative factors have been established based on certain assumptions made as a result of the current economic conditions and are adjusted as conditions change to be directionally consistent with these changes. The unallocated portion of the allowance is composed of factors based on management’s evaluation of various conditions that are not directly measured in the estimation of probable losses through the experience formula or specific allowances. The overall risk as measured in our three-year lookback, both quantitatively and qualitatively, does not encompass a full economic cycle. Net charge-offs in the 2009 to 2011 period averaged 63 basis points annualized in our loan portfolio. Over the most recent three-year period, our net charge-offs have experienced a modest net recovery. We currently believe the unallocated portion of our allowance represents potential risk associated throughout a full economic cycle; however, the COVID-19 pandemic and the government and economic responses thereto may materially affect the risk within our loan portfolios.

 

We have a significant portion of our loan portfolio with real estate as the underlying collateral (see Note 16 to the Consolidated Financial Statements for concentrations of credit).collateral. At December 31, 20202021 and December 31, 2019,2020, approximately 87.5%90.9% and 91.6%87.5%, respectively, of the loan portfolio had real estate collateral. The reductionincrease in the percent of our loan portfolio with real estate as the underlying collateral is due to a $46.1 million increase in loans with real estate as the increaseunderlying collateral and a $40.8 million decline in PPP loans, which increaseddeclined to $42.2$1.5 million at December 31, 20202021 from $0$42.2 at December 31, 2019.2020. When loans, whether commercial or personal, are granted, they are based on the borrower’s ability to generate repayment cash flows from income sources sufficient to service the debt. Real estate is generally taken to reinforce the likelihood of the ultimate repayment and as a secondary source of repayment. We work closely with all our borrowers that experience cash flow or other economic problems, and we believe that we have the appropriate processes in place to monitor and identify problem credits. There can be no assurance that charge-offs of loans in future periods will not exceed the allowance for loan losses as estimated at any point in time or that provisions for loan losses will not be significant to a particular accounting period. The allowance is also subject to examination and testing for adequacy by regulatory agencies, which may consider such factors as the methodology used to determine adequacy and the size of the allowance relative to that of peer institutions. Such regulatory agencies could require us to adjust our allowance based on information available to them at the time of their examination.

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Non-performing assets were $7.0 million (0.50%The non-performing asset ratio was 0.09% of total assets)assets with the nominal level of $1.4 million in non-performing assets at December 31, 2020 as2021 compared to $3.70.50% and $7.0 million (0.32% of total assets) at December 31, 2019,2020. The decline in the non-performing asset ratio was related to the successful resolution of several non-accrual and $4.0accruing loans past due of 90 days or more. Non-accrual loans declined $4.3 million (0.37% of total assets)to $250 thousand at December 31, 2018. This increase was related2021 from $4.6 million at December 31, 2020. Accruing loans past due 90 days or more declined to one credit relationship, which was impacted by the COVID-19 pandemic. While this is the appropriate recognitionnone at December 31, 2021 from $1.3 million at December 31, 2020. Loans past due 30 days or more represented 0.03% of the current statusloan portfolio at December 31, 2021 compared to 0.23% at December 31, 2020.  The ratio of this credit, there are encouraging signsclassified loans plus OREO and repossessed assets declined to 6.27% of ultimate resolution of this matter and based on current appraisals, this credit relationship is well collateralized. While we believe the non-performing assets to total assets ratios are favorable in comparison to current industry results (both nationally and locally), webank regulatory risk-based capital at December 31, 2021 from 6.89% at December 31, 2020.

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We continue to monitor the impact of the COVID-19 pandemic on our customer base of local businesses and professionals. There were 19seven loans totaling $4.6 million (0.54%$250 thousand (0.03% of total loans) included inon non-performing status (non-accrual loans and loans past due 90 days and still accruing) at December 31, 2020.2021. All seven of these loans were on non-accrual status. The largest loan included inon non-accrual status is in the amount of $1.7 million and is secured by commercial real estate located in North Augusta, South Carolina.$103 thousand. The average balance of the remaining 18six loans on non-accrual status is approximately $160$25 thousand with a range between $3 and $1.2 million,$87 thousand, and the majority of these loans are secured by first mortgage liens. Furthermore, we had $1.6$1.4 million in accruing trouble debt restructurings, or TDRs, at December 31, 20202021 compared to $1.7$1.6 million at December 31, 2019.2020. We consider a loan impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due, including both principal and interest, according to the contractual terms of the loan agreement. Nonaccrual loans and accruing TDRs are considered impaired. At December 31, 2020,2021, we had 10 impaired loans totaling $1.7 million compared to 23 impaired loans totaling $6.1 million compared to 33 impaired loans totaling $4.0 million at December 31, 2019.2020. These loans were measured for impairment under the fair value of collateral method or present value of expected cash flows method. For collateral dependent loans, the fair value of collateral method is used and the fair value is determined by an independent appraisal less estimated selling costs. At December 31, 2020,2021, we had loans totaling $665$235 thousand that were delinquent 30 days to 89 days representing 0.08%0.03% of total loans compared to $476$665 thousand or 0.06%0.08% of total loans at December 31, 2019.2020.

 

During the ongoing COVID-19 pandemic and because of our proactive offering ofBeginning in March 2020, we proactively offered payment deferrals loans on which payments have been deferred declinedfor up to $16.1 million at December 31, 2020, from $27.3 million at September 30, 2020, from $175.0 million at June 30, 2020 and from $118.3 million at March 31, 2020. We had no loans on which payments were deferred related90 days to the COVID-19 pandemic at December 31, 2019. The $16.1 million in deferrals at December 31, 2020 consist of seven loans on which only principal is being deferred. We had three loans totaling $8.7 million in continuing deferral status in which only principal is being deferred at March 5, 2021. Two of the continuing deferrals at March 5, 2021 totaling $4.5 million are in the retail industry segment identified by us as one of the industry segments most impacted by the COVID-19 pandemic; the other continuing deferral totaling $4.2 million is a mixed use office space that we do not consider to be in an industry segment most impacted by the COVID-19 pandemic. Some of these deferments were to businesses that temporarily closed or reduced operations and some were requested as a pre-cautionary measure to conserve cash.  We proactively offered initial deferrals to our loan customers regardless of the impact of the pandemic on their business or personal finances.  As a result of payments being resumed at the conclusion of their payment deferral period, loans in which payments were being deferred decreased from the peak of $206.9 million to $175.0 million at June 30, 2020, to $27.3 million at September 30, 2020, to $16.1 million at December 31, 2020, to $8.7 million at March 31, 2021, to $4.5 million at June 30, 2021, to $4.1 million at September 30, 2021, and to zero at December 31, 2021. We obtained additional information from customers who requested secondhad no loans on which payments have been deferred at December 31, 2021 compared to $16.1 million at December 31, 2020. The $16.1 million in deferrals and we performed additional analyses to justify the need for the second deferral requests.at December 31, 2020 consisted of seven loans on which only principal was being deferred. Our management continuously monitors non-performing, classified and past due loans to identify deterioration regarding the condition of these loans and given the ongoing and uncertain impact of the COVID-19 pandemic, we will continue to monitor our loan portfolio for potential risks.

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54

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

Allowance for Loan Losses

(Dollars in thousands) 2020  2019  2018  2017  2016  2021  2020   2019  
Average loans and loans held for sale outstanding $835,091  $735,343  $686,438  $577,730  $514,766 
Loans and loans held for sale outstanding at period end $844,157  $748,183  $721,685  $651,898  $552,416 
Average loans outstanding (excluding loans held-for-sale) $871,551  $806,583  $726,279 
Loans outstanding at period end (excluding loans held-for-sale) $863,702  $844,157  $737,028 
Total nonaccrual loans $4,562  $2,329  $2,545  $3,342  $4,049  $250  $4,562  $2,329 
Loans past due 90 days and still accruing $1,260  $  $31  $32  $53  $  $1,260  $ 
Beginning balance of allowance $6,627  $6,263  $5,797  $5,214  $4,596  $10,389  $6,627  $6,263 
Loans charged-off:                                
1-4 family residential mortgage     12   1      25         12 
Real Estate - Construction  2                      2     
Real Estate Mortgage - Residential           30   92          
Real Estate Mortgage - Commercial  1            31   110   1    
Consumer - Home equity     1   23   7   19         1 
Commercial     12      5            12 
Consumer - Other  107   107   137   112   60   72   107   107 
Overdrafts     13   3   19   12         13 
Total loans charged-off  110   145   164   173   239   182   110   145 
Recoveries:                                
1-4 family residential mortgage        83   46   41          
Real Estate - Construction  2      4   5         2    
Real Estate Mortgage - Residential     307   127   126   21   10      307 
Real Estate Mortgage - Commercial  23   15   6   24   3   473   23   15 
Consumer - Home equity  2   3   3   5   5   69   2   3 
Commercial  130   43   59   19   2   39   130   43 
Consumer - Other  52   2   2   1   11   46   52   2 
Total recoveries  209   370   284   226   83   637   209   370 
Net loans recovered (charged off)  99   225   120   53   (156)  455   99   225 
Provision for loan losses  3,663   139   346   530   774   335   3,663   139 
Balance at period end $10,389  $6,627  $6,263  $5,797  $5,214  $11,179  $10,389  $6,627 
Net charge -offs to average loans and loans held for sale  (0.01)%  (0.03)%  (0.02)%  (0.01)%  0.03%
Net charge -offs (recoveries) to average loans and loans held for sale  (0.05)%  (0.01)%  (0.03)%
Allowance as percent of total loans  1.23%  0.90%  0.87%  0.89%  0.94%  1.29%  1.23%  0.90%
Non-performing loans as% of total loans  0.50%  0.31%  0.77%  0.52%  0.75%  0.09%  0.50%  0.31%
Allowance as% of non-performing loans  178.23%  285.54%  112.32%  171.81%  127.11%  4,471.60%  178.23%  285.54%
Nonaccrual loans as% of total loans 0.03% 0.54% 0.32%
Allowance as % of nonaccrual loans 4,473.93% 227.79% 284.56%

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The following table details net charge-offs to average loans outstanding by loan category for the years ended December 31,

(Dollars in thousands) 2021  2020  2019 
Commercial, financial & agricultural            
Net charge-offs (recoveries) $(39) $(130) $9 
Average loans for the year $98,301  $82,191  $53,589 
Net charge-offs (recoveries)/average loans  (0.04)%  (0.16)%  0.02%
Real estate:            
Construction            
Net charge-offs (recoveries) $  $  $ 
Average loans for the year $98,196  $86,089  $60,873 
Net charge-offs (recoveries)/average loans  0.00%  0.00%  0.00%
Mortgage-residential            
Net charge-offs (recoveries) $(10) $  $12 
Average loans for the year $42,880  $46,024  $49,358 
Net charge-offs (recoveries)/average loans  (0.02)%  0.00%  0.02%
Mortgage-commercial            
Net charge-offs (recoveries) $(363) $(22) $(307)
Average loans for the year $597,721  $555,090  $523,577 
Net charge-offs (recoveries)/average loans  (0.06)%  0.00%  (0.06)%
Consumer:            
Home Equity            
Net charge-offs (recoveries) $(69) $(2) $(14)
Average loans for the year $26,399  $27,904  $29,146 
Net charge-offs (recoveries)/average loans  (0.26)%  (0.01)%  (0.05)%
Other            
Net charge-offs (recoveries) $26  $55  $75 
Average loans for the year $8,054  $9,286  $9,736 
Net charge-offs (recoveries)/average loans  0.32%  0.59%  0.77%
Total:            
Net charge-offs (recoveries) $(455) $(99) $(225)
Average loans for the year $871,551  $806,583  $726,279 
Net charge-offs (recoveries)/average loans  (0.05)%  (0.01)%  (0.03)%

64(1)Average loans exclude loans held for sale

56

The following table presents an allocation of the allowance for loan losses at the end of each of the past fivethree 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

 

  2020  2019  2018  2017  2016 
(Dollars in
thousands)
 Amount  % of
loans
in
category
  Amount  % of
loans
in
category
  Amount  % of
loans
in
category
  Amount  % of
loans
in
category
  Amount  % of
loans
in
category
 
Commercial, Financial and Agricultural $778   8.0% $427   7.3% $430   7.7% $221   7.9% $145   7.8%
Real Estate Construction  145   1.5%  111   1.9%  89   1.6%  101   7.0%  104   8.4%
Real Estate Mortgage:                              
Commercial  7,855   80.4%  4,602   78.7%  4,318   76.8%  3,077   71.2%  2,793   67.9%
Residential  865   8.8%  607   10.4%  692   12.3%  461   7.2%  438   8.7%
Consumer  125   1.3%  97   1.7%  88   1.6%  343   6.7%  280   7.2%
Unallocated  621   N/A   783   N/A   646   N/A   1,594   N/A   1,454   N/A 
Total $10,389   100.0% $6,627   100.0% $6,263   100.0% $5,797   100.0% $5,214   100.0%
                                         

  2021  2020  2019 
(Dollars in thousands) Amount  % of
loans
in
category
  Amount  % of
loans
in
category
  Amount  % of
loans
in
category
 
Commercial, Financial and Agricultural $853   8.1% $778   8.0% $427   7.3%
Real Estate Construction  113   1.1%  145   1.5%  111   1.9%
Real Estate Mortgage:                  
Commercial  8,570   81.2%  7,855   80.4%  4,602   78.7%
Residential  893   8.4%  865   8.8%  607   10.4%
Consumer  126   1.2%  125   1.3%  97   1.7%
Unallocated  624   N/A   621   N/A   783   N/A 
Total $11,179   100.0% $10,389   100.0% $6,627   100.0%
                         

Loans acquired in the Cornerstone transaction are excluded from our evaluation of the adequacy of the allowance as they were measured at fair value at acquisition. The assumptions used in this evaluation included a credit component and an interest rate component. These loans amounted to approximately $16.7$9.5 million and $26.0$16.7 million at December 31, 20202021 and 2019,2020, respectively.

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

Non-interest Income and Expense

Non-interest Income. A significant source of noninterest income is service charges on deposit accounts. We also originate and sell residential loans on a servicing released basis in the secondary market. These loans are fixed rate residential loans that are originated in our name. The loans have locked in price commitments to be purchased by investors at the time of closing. Therefore, these loans present very little market risk for us. We typically deliver to, and receive funding from, the investor within 30 days. Other sources of noninterest income are derived from investment advisory fees and commissions on non-deposit investment products, ATM/debit card fees, commissions on check sales, safe deposit box rent, wire transfer and official check fees.

Non-interest income during the twelve months ended December 31, 2021 was $13.9 million compared to $13.8 million during the same period in 2020. Deposit service charges declined $144 thousand during the twelve months ended December 31, 2021 compared to the same period in 2020 primarily due to lower overdraft fees. Mortgage banking income declined by $1.2 million to $4.3 million during the twelve months ended December 31, 2021 from $5.6 million during the same period in 2020 due to a reduction in mortgage production partially offset by an increase in the gain-on-sale margin. Mortgage production during the twelve months ended December 31, 2021 was $142.1 million compared to $199.3 million during the same period in 2020. The gain on sale margin was 3.04% in the twelve months ended December 31, 2021 compared to 2.79% during the same period in 2020. The gain on sale margin was limited during 2020 and the first quarter of 2021 as we worked on certain loans not yet sold, in an effort to resolve processing and delivery issues. We anticipate the future gain-on-sale margin will be approximately 3.25%.

Investment advisory fees increased $1.3 million to $4.0 million during the twelve months ended December 31, 2021 from $2.7 million during the same period in 2020. Total assets under management increased to $650.9 million at December 31, 2021 compared to $501.6 million at December 31, 2020 due to both organic growth and higher equity markets. Management continues to focus on increasing both the mortgage banking income as well as the investment advisory fees and commissions.

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We had no gain on sale of securities during the twelve months ended December 31, 2021 compared to $99 thousand during the same period in 2020. We had a (i)$13 thousand gain on the sale of bank owned land during the twelve months ended December 31, 2021 compared to zero during the prior year period; (ii)$104 thousand gain on the sale of bank premises held-for-sale during the twelve months ended December 31, 2021 compared to zero during the prior year period; and (iii) $77 thousand gain on sale of other real estate owned during the twelve months ended December 31, 2021 compared to $147 thousand during the prior year period. Other non-recurring income includes a $24 thousand gain on insurance proceeds during the twelve months ended December 31, 2021 compared to zero during the prior year period; $147 thousand received from the collection of summary judgments during the twelve months ended December 31, 2021 related to two loans charged off at a bank we acquired; $311 thousand in non-recurring bank owned life insurance (BOLI) income during the twelve months ended December 31, 2020. The $311 thousand in non-recurring BOLI income was due to insurance benefits on two former members of the boards of directors of acquired banks who passed away during the third quarter of 2020.

Non-interest income, other increased $434 thousand during the twelve months ended December 31, 2021 compared to the same period in 2020 primarily due increases in ATM debit card income of $412 thousand and rental income of $40 thousand partially offset by lower recurring BOLI income of $31 thousand and lower loan late charges of $33 thousand.

Non-interest income was $13.8 million in 2020 as compared to $11.7 million during the same period in 2019. Deposit service charges decreased $528 thousand during the twelve months of 2020 as compared to the same period in 2019 primarily due to customers holding higher balances in their deposit accounts due to proceeds from PPP loans and other stimulus funds related to the COVID-19 pandemic. Mortgage banking income increased by $1.0 million from $4.6 million in 2019 to $5.6 million in 2020. Mortgage production including loans held-for-sale and portfolio loans in 2020 was $199.3 million as compared to $139.7 million in the same period of 2019. With the decline in mortgage interest rates, refinance activity increased during 2020 and represented 55.5% of production. The gain on sale margin declined to 2.79% from 3.26% due to disruptions in the mortgage market causing certain loans not to be sold. As capacity rebuilds, this issue will be mitigated. Investment advisory fees increased $699 thousand to $2.7 million in 2020 from $2.0 million in 2019. Total assets under management, or AUM, were $502 million at December 31, 2020 as compared to $370 million at December 31, 2019. Management continues to focus on increasing both the mortgage banking income as well as the investment advisory fees and commissions. Gain on sale of securities was $99 thousand in 2020 compared to $136 thousand in 2019. Gain on sale of other assets was $147 thousand in 2020 compared to a $3 thousand loss on sale of other assets in 2019. The $147 thousand gain on sale of other assets in 2020 is primarily due to the sale of an other real estate owned property. The $311 thousand in non-recurring BOLI income was due to insurance benefits on two former members of the boards of directors of acquired banks who passed away during the third quarter of 2020. Noninterest income other increased $154 thousand to $3.8 million in 2020 from $3.7 million in 2019 primarily due to increases in ATM debit card income and recurring BOLI income.

  

Non-interest income was $11.7 million and $10.6 million in 2019 and 2018, respectively. From 2019 to 2018, the deposit service charges decreased by $120 thousand, or 6.8%. Changes in the regulatory requirements related to overdraft protection fees continue to contribute to the decrease in the overall fees from deposit service charges. Our mortgage banking income increased $660 thousand in 2019, as compared to 2018. Mortgage loan production was $139.6 million in 2019 (including construction to permanent loans to be sold upon completion of construction) as compared to $119.7 million in 2018. Investment advisory fees and non-deposit commissions increased by $338 thousand in 2019 compared to 2018. Total assets under management at December 31, 2019 were $369.7 million as compared to $288.5 million at December 31, 2018. The net gain on sale of securities for 2019 amounted to $136 thousand as compared to a loss of $342 thousand in 2018. The sales in 2019 and 2018 resulted from modest restructurings of the investment portfolio. These sales were made after evaluating specific investments and comparing them to an alternative asset or liability strategy. We recognized a gain on sale of other real estate of $24 thousand in 2018 as compared to a loss of $3 thousand in 2019. ATM debit card income increased by $216 thousand or 11.7% in 2019 as compared to 2018. The overall increase in ATM debit card fees was due to the increase in transaction accounts. Further, a write-down of Bank premises held-for-sale decreased our Non-interest income by $282 thousand in 2019. Income on recurring BOLI declined from $649 thousand in 2018 to $687 thousand in 2019. Non-interest income other decreased from $535 thousand in 2018 to $361 thousand in 2019. In addition, we received proceeds of approximately $73 thousand related to a death benefit on BOLI, which was credited to “Non-recurring BOLI income” in 2018.

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

  Year ended December 31, 
(In thousands) 2020  2019  2018 
ATM debit card income $2,257  $2,060  $1,844 
Recurring income on bank owned life insurance  724   687   649 
Rental income  271   291   280 
Loan late charges  101   124   96 
Safe deposit fees  55   56   58 
Wire transfer fees  93   81   80 
Other  313   361   535 
Total $3,814  $3,660  $3,542 

  Year ended December 31, 
(In thousands) 2021  2020  2019 
ATM debit card income $2,669  $2,257  $2,060 
Recurring income on bank owned life insurance  693   724   687 
Rental income  311   271   291 
Loan late charges  68   101   124 
Safe deposit fees  59   55   56 
Wire transfer fees  118   93   81 
Other  330   313   361 
Total $4,248  $3,814  $3,660 

Non-interest Expense. In the very competitive financial services industry, we recognize the need to place a great deal of emphasis on expense management and continually evaluate and monitor growth in discretionary expense categories in order to control future increases.

Non-interest expense increased $1.7 million during the twelve months ended December 31, 2021 to $39.2 million compared to $37.5 million during the same period in 2020. Salary and benefit expense increased $468 thousand to $24.5 million during the twelve months ended December 31, 2021 from $24.0 million during the same period in 2020. This increase is primarily a result of the normal salary adjustments and increased financial planning and investment advisory commissions. We had 250 employees at December 31, 2021 compared to 244 at December 31, 2020. Occupancy expense increased $238 thousand to $2.9 million during the twelve months ended December 31, 2021 compared to $2.7 million during the same period in 2020. Marketing and public relations expense increased $130 thousand to $1.2 million during the twelve months ended December 31, 2021 from $1.0 million during the same period in 2020 due to the production of new ad campaigns and related creative materials. FDIC assessments increased $214 thousand due to a higher assessment rate in 2021 related to a decrease in our leverage ratio and an increase in our assessment base due to higher average assets as well as $39 thousand of small bank assessment credits utilized in the twelve months ended December 31, 2020. The reduction in our leverage ratio and the increase in our assessment base were partially related to PPP loans and the excess liquidity generated from PPP loan proceeds and other stimulus funds related to the COVID-19 pandemic. Furthermore, we received FDIC small bank assessment credits during the twelve months ended December 31, 2020 compared to none during the same period in 2021. The FDIC small bank assessment credits were fully utilized during the first quarter of 2020. Other real estate expense declined $96 thousand to $105 thousand during the twelve months ended December 31, 2021 compared to $201 thousand during the same period in 2020. Amortization of intangibles declined $162 thousand to $201 thousand during the twelve months ended December 31, 2021 compared to $363 thousand during the same period in 2020.

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Non-interest expense, other increased $816 thousand during the 12 months ended December 31, 2021 as compared to the same period in 2020 primarily due to increased director fees and benefits of $165 thousand, increased third party broker dealer expenses of $90 thousand related to our higher investment advisory fees and non-deposit commissions, and increased ATM/debit card and computer processing expense of $700 thousand due to higher ATM/debit card transactions, which resulted in higher income and expense, partially offset by lower legal and professional fees of $180 thousand.  

Non-interest expense increased $2.9 million to $37.5 million in 2020 from $34.6 million in 2019 primarily due to increases in salaries and benefits expense, FDIC assessments, other real estate owned expense, data processing expense, insurance, legal and professional fees, and COVID-19 related expenses partially offset by lower equipment expense, marketing and public relations, amortization of intangibles, telephone expense, subscriptions, and loss on limited partnership interest. Salary and benefit expense increased $2.8 million from $21.2 million in 2019 to $24.0 million in 2020 primarily due to increased production and new hires in the mortgage line of business, normal salary adjustments, temporary bonuses related to the COVID-19 pandemic paid to certain employees, and the opening of our full-service de novo office in June 2019 in Evans, Georgia in Columbia County, a suburb of Augusta, Georgia, which was partially offset by a reduction in salaries and benefits related to deferred origination costs on PPP loans originated in 2020. We had 244 full time equivalent employees at December 31, 2020 compared to 237 at December 31, 2019. Furthermore, we incurred COVID-19 related expenses in occupancy expense for additional cleaning of our offices and personal protective equipment for our employees and offices and in equipment expense for laptops and other technology to promote a remote work environment. FDIC assessments increased $347 thousand due to a higher assessment rate in 2020 related to a reduction in our leverage ratio and an increase in our assessment base due to higher average assets. Both the reduction in our leverage ratio and the increase in our assessment base were partially related to PPP loans and the excess liquidity generated from PPP loan proceeds and other stimulus funds related to the COVID-19 pandemic. Furthermore, we received more FDIC small bank assessment credits during the twelve months in 2019 compared to the twelve months in 2020. The FDIC small bank assessment credits were fully utilized during the first quarter of 2020. Other real estate owned expense increased $120 thousand in 2020 compared to 2019 primarily due to write-downs on several other real estate owned properties.

 

 Non-interest expense, other increased $159 thousand in 2020 as compared to the same period in 2019 primarily due to higher data processing expense, which includes ATM debit card expense, insurance, and legal and professional fees.  

 

Total non-interest expense increased $2.5 million in 2019 to $34.6 million as compared to $32.1 million in in 2018. Salary and benefit expense increased $1.8 million to $21.3 million in 2019 as compared to $19.5 million in 2018. This increase is primarily a result of the normal salary adjustments, as well as the addition of two new full-service offices opened in the first half of 2019. In February 2019, we opened a downtown Greenville, South Carolina office and later in June 2019, we opened an Evans, Georgia office. Prior to opening, we hired staff for these offices, as such, the cost for such staffing and benefits impacts substantially all of 2019. At December 31, 2019 and 2018, we had 242 and 226 full time equivalent employees, respectively. Our Occupancy expense increased $316 thousand from $2.4 million in 2018 to $2.7 million in 2019, which was a result of the two additional offices opened during 2019. Our ATM/debit card and Data processing expense increased by $534 thousand in 2019 compared to 2018, which was largely due to our increased investment in our mobile platform and growing customer base. Our FDIC assessments decreased by $318 thousand in 2019 as compared to 2018 due to outstanding credits as a result of overpayments.

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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) 2020  2019  2018  2021  2020  2019 
Salary and employee benefits $24,026  $21,261  $19,515  $24,494  $24,026  $21,261 
Occupancy  2,709   2,696   2,380   2,947   2,709   2,696 
Furniture and Equipment  1,237   1,493   1,513   1,296   1,237   1,493 
Marketing and public relations  1,043   1,114   919   1,173   1,043   1,114 
ATM/debit card and data processing*  3,123   2,834   2,300   3,823   3,123   2,834 
Supplies  138   151   142   116   138   151 
Telephone  350   413   422   365   350   413 
Courier  176   152   149   181   176   152 
Correspondent services  272   248   270   280   272   248 
Subscriptions  137   193   199   111   137   193 
FDIC/FICO premium  404   57   375   618   404   57 
Insurance  316   263   254   325   316   263 
Other real estate expenses including OREO write downs  201   81   98   105   201   81 
Legal and Professional fees  1,058   959   864   878   1,058   959 
Loss on limited partnership interest     88   60         88 
Postage  36   47   56   50   36   47 
Director fees  336   348   366   360   336   348 
Amortization of intangibles  363   523   563   201   363   523 
Shareholder expense  192   171   173   212   192   171 
Other  1,417   1,525   1,505   1,666   1,417   1,525 
 $37,534  $34,617  $32,123  $39,201  $37,534  $34,617 
                        

*Data processing includes core processing, bill payment, online banking, remote deposit capture, and postage costs for mailing customer notices and statements.

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Income Tax Expense

Our Incomeincome tax expense for 20202021 was $2.5$4.2 million as compared to income tax expense for the year ended December 31, 20192020 of $2.9$2.5 million and $2.7$2.9 million for the year ended December 31, 20182019 (see Note 1514 “Income Taxes” to the Consolidated Financial Statements for additional information). We recognize deferred tax assets for future deductible amounts resulting from differences in the financial statement and tax bases of assets and liabilities and operating loss carry forwards. The deferred tax assets are established based on the amounts expected to be paid/recovered at existing tax rates. A valuation allowance is established to reduce the deferred tax asset to the level that it is more likely than not that the tax benefit will be realized. In 2018, we purchased a $205 thousand South Carolina rehabilitation tax credit. We did not purchase any tax credits in 2019 or 2020. The cost of this credit for 2018 was $164 thousand and is included in “Other” non-interest expense. As a result of our current level of tax exempttax-exempt securities in our investment portfolio and our BOLI holdings, assuming the current corporate rate remains unchanged, our effective tax rate is expected to be approximately 20.5%21.25% to 21.0%21.75%.

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Financial Position

Assets totaled $1.6 billion at December 31, 2021 and $1.4 billion at December 31, 2020 and $1.2 billion at December 31, 2019.2020. Loans (excluding loans held-for-sale) increased $107.1$19.5 million or 14.5%, to $863.7 million at December 31, 2021 from $844.2 million at December 31, 2020 from $737.0 million at December 31, 2019. Non-PPP loans increased $64.9 million, or 8.8%, to $801.9 million at December 31, 2020 from $737.0 million at December 31, 2019. PPP loans totaled $43.3 million gross of deferred fees and costs and $42.2 million net of deferred fees and costs at December 31, 2020. We originated 843 PPP loans totaling $51.2 million gross of deferred fees and costs and $49.8 million net of deferred fees and costs in 2020. Furthermore, we facilitated the origination of 111 PPP loans totaling $31.2 million related to our customers with a third party prior to establishing our own PPP platform. 159 PPP loans totaling $8.0 million were forgiven through the SBA PPP forgiveness process in 2020. As of March 10, 2021, there were 326 PPP loans totaling $17.8 million that were forgiven. We had no PPP loans at December 31, 2019. The $1.0 million in PPP deferred fees net of deferred costs at December 31, 2020 will be recognized as interest income over the remaining life of the PPP loans.

Total loan production excluding PPP loans and a PPP related credit facility was $177.1$217.1 million during the twelve months of 2020ended December 31, 2021 compared to $137.8$177.1 million during the same period in 2019.2020. Loans held-for-sale increaseddeclined to $7.1 million at December 31, 2021 from $45.0 million at December 31, 2020 from $11.2 million at December 31, 2019 due to strongan improvement in mortgage processing, which has resulted in a reduction in the number of days to sell loans to investors, and the movement of 30 loans totaling $7.6 million to loans held-for-investment. Mortgage production of $199.3was $142.1 million during the twelve months of 2020ended December 31, 2021 compared to $139.6$199.3 million during the same period in 2019.2020. The loan-to-deposit ratio (including loans held-for-sale) at December 31, 20202021 and December 31, 20192020 was 74.8%64.0% and 75.7%74.8%, respectively. The loan-to-deposit ratio (excluding loans held-for-sale) at December 31, 20202021 and December 31, 20192020 was 71.0%63.4% and 74.6%71.0%, respectively. Investment securities increased to $566.6 million at December 31, 2021 from $361.9 million at December 31, 2020 from $288.8 million at December 31, 2019.2020. Other short-term investments increased to $47.0 million at December 31, 2021 from $46.1 million at December 31, 2020 from $32.7 million at December 31, 2019.2020. The increases in investments and other short-term investments are primarily due to organic deposit growth, and excess liquidity from customer’s PPP loan proceeds and other stimulus funds related to the COVID-19 pandemic.pandemic, and from forgiven PPP loans.

Non-PPP loans increased $60.3 million to $862.2 million at December 31, 2021 from $801.9 million at December 31, 2020. PPP loans declined $40.8 million to $1.5 million at December 31, 2021 from $42.2 million at December 31, 2020. PPP loans totaled $1.5 million gross of deferred fees and costs and $1.5 million net of deferred fees and costs at December 31, 2021. The $55 thousand in PPP deferred fees net of deferred costs at December 31, 2021 will be recognized as interest income over the remaining life of the PPP loans.

During 2020 and 2021, we originated 1,417 PPP loans totaling $88.5 million, which includes 843 PPP loans totaling $51.2 million originated in 2020 and 574 PPP loans totaling $37.3 million originated in 2021. Furthermore, during 2020, we facilitated the origination of 111 PPP loans totaling $31.2 million for our customers through a third party prior to establishing our own PPP platform. As of December 31, 2021, 1,406 PPP loans totaling $87.0 million (840 PPP loans totaling $51.2 million originated in 2020 and 566 PPP loans totaling $35.8 million originated in 2021) were forgiven through the SBA PPP forgiveness process.

 

One of our goals as a community bank has been, and continues to be, to grow our assets through quality loan growth by providing credit to small and mid-size businesses and individuals within the markets we serve. We remain committed to meeting the credit needs of our local markets. 

 

Deposits increased $201.2$171.9 million or 20.4%,to $1.4 billion at December 31, 2021 compared to $1.2 billion at December 31, 2020 as compared to $988.2 million at December 31, 2019.2020.  Our pure deposits, which are defined as total deposits less certificates of deposits, increased $211.6$177.9 million or 25.0%, to $1.2 billion at December 31, 2021 from $1.1 billion at December 31, 2020 from $847.3 million at December 31, 2019.  The increase in pure deposits was primarily due to organic deposit growth and customer’s proceeds from PPP loans and other stimulus funds related to the COVID-19 pandemic. We had no brokered deposits and no listing services deposits at December 31, 2020.  Our securities sold under agreements to repurchase, which are related to our customer cash management accounts, increased $7.6 million, or 22.9%, to $40.9 million at December 31, 2020 from $33.3 million at December 31, 2019.  We continue to focus on growing our pure deposits as a percentage of total deposits in order to better manage our overall cost of funds. We had no brokered deposits and no listing services deposits at December 31, 2021.  Our securities sold under agreements to repurchase, which are related to our customer cash management accounts, increased $13.3 million to $54.2 million at December 31, 2021 from $40.9 million at December 31, 2020. 

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Total shareholders’ equity increased $16.1$4.7 million, or 13.4%3.4%, to $141.0 million at December 31, 2021 from $136.3 million at December 31, 2020 from $120.22020. The $4.7 million at December 31, 2019.  The increase in shareholders’ equity is primarilywas due to an $11.9 million increase in retention of earnings less dividends paid, of $6.5a $0.3 million an increase in accumulated other comprehensive income of $8.8 million, $0.4 thousand relateddue to executiveemployee and director stock awards, and a $0.4 thousand relatedmillion increase due to our dividend reinvestment plan.plan (DRIP) purchases partially offset by an $8.0 million reduction in accumulated other comprehensive income. The increasedecline in accumulated other comprehensive income was due to a reductionan increase in longer-term market interest rates, which resulted in an increasea reduction in the net unrealized gains in our investment securities portfolio.

During the third quarter of 2019, we completed athe repurchase plan approved in May 2019 of 300,000 shares of our outstanding common stock at a cost of approximately $5.6 million with an average price per share of $18.79 per share. As of June 30, 2019, we repurchased 185,361 shares of our outstanding common stock of approximately $3.4 million with an average price of $18.41 per share. The remaining 114,639 shares were repurchased in July 2019.$18.79.  We also announced during the third quarter of 2019 the approval of a new share repurchase plan which was the second share repurchase plan announced during 2019, of up to 200,000 shares of our outstanding common stock.  No share repurchases were made under this second share repurchase plan prior to its expiration on December 31, 2020. On April 12, 2021, we announced that our Board of Directors approved the repurchase of up to 375,000 shares of our common stock (the “2021 Repurchase Plan”), which represents approximately 5% of our 7,548,638 shares outstanding as of December 31, 2021. No share repurchases have been made under the 2021 Repurchase Plan as of December 31, 2021. The 2021 Repurchase Plan expires at the market close on March 31, 2022. We intend to seek approval in 2022 for a new repurchase plan of up to 375,000 shares of common stock to replace the expiring 2021 Repurchase Plan.

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Earning Assets

Loans and loans held for sale

Loans typically provide higher yields than the other types of earning assets. During 2020,2021, loans accounted for 69.7%62.6% of average earning assets. The loan portfolio (including held-for-sale) averaged $889.0 million in 2021 as compared to $835.1 million in 2020 as compared to $735.3 million in 2019.2020. Quality loan portfolio growth continued to be a strategic focus of ours in 2020.2021. However, with the higher loan yields, there are inherent credit and liquidity risks, which we attempt to control and counterbalance. One of our goals as a community bank continues to be to grow our assets through quality loan growth by providing credit to small and mid-size businesses, as well as individuals within the markets we serve. In 2020,2021, we funded new loans (excluding loans originated for sale, PPP loans, and a PPP related credit facility) of approximately $137.8$217.1 million, as compared to $177.1 million in 2019.2020. We originated $37.3 million in PPP loans in 2021; and $51.7 million in PPP loans and $10.0 million in a PPP related credit facility in 2020. PPP loans net of deferred fees and costs were $42.2$1.5 million and the PPP related credit facility was $5.2 million$0 at December 31, 2020. We did not have any PPP loans or the PPP related credit facility2021 compared to $42.2 million and $5.2 million, respectively, at December 31, 2019.2020. We remain committed to meeting the credit needs of our local markets, but adverse national and local economic conditions, as well as deterioration of our asset quality, could significantly impact our ability to grow our loan portfolio. Significant increases in regulatory capital expectations beyond the traditional “well capitalized” ratios and significantly increased regulatory burdens could impede our ability to leverage our balance sheet and expand the loan portfolio.

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

 December 31,        
(In thousands) 2020  2019  2018  2017  2016  2021  2020  2019 
Commercial, financial & agricultural $96,688  $51,805  $53,933  $51,040  $42,704  $69,952  $96,688  $51,805 
Real estate:                                
Construction  95,282   73,512   58,440   45,401   45,746   94,969   95,282   73,512 
Mortgage—residential  43,928   45,357   52,764   46,901   47,472   45,498   43,928   45,357 
Mortgage—commercial  573,258   527,447   513,833   460,276   371,112   617,464   573,258   527,447 
Consumer:                                
Home equity  26,442   28,891   29,583   32,451   31,368   27,116   26,442   28,891 
Other  8,559   10,016   9,909   10,736   8,307   8,703   8,559   10,016 
Total gross loans  844,157   737,028   718,462   646,805   546,709   863,702   844,157   737,028 
Allowance for loan losses  (10,389)  (6,627)  (6,263)  (5,797)  (5,214)  (11,179)  (10,389)  (6,627)
Total net loans $833,768  $730,401  $712,199  $641,008  $541,495  $852,523  $833,768  $730,401 
                                

In the context of this discussion, a real estate mortgage loan is defined as any loan, other than loans for construction purposes, secured by real estate, regardless of the purpose of the loan. We follow the common practice of financial institutions in our market area of obtaining a security interest in real estate whenever possible, in addition to any other available collateral. This collateral is taken to reinforce the likelihood of the ultimate repayment of the loan and tends to increase the magnitude of the real estate loan components. Generally, we limit the loan-to-value ratio to 80%. The principal components of our loan portfolio at year-end 20202021 and 20192020 were commercial mortgage loans in the amount of $573.3$617.5 million and $527.4$573.3 million, respectively, representing 67.9%71.5% and 71.6%67.9% of the portfolio, respectively, excluding loans held for sale. Significant portions of these commercial mortgage loans are made to finance owner-occupied real estate. We continue to maintain a conservative philosophy regarding our underwriting guidelines, and believe it will reduce the risk elements of the loan portfolio through strategies that diversify the lending mix.

The previously referenced PPP loans and PPP related credit facility are included in “Commercial, financial & agricultural” loans above.

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The repayment of loans in the loan portfolio as they mature is a source of liquidity. The following table sets forth the loans maturing within specified intervals at December 31, 2020.2021.

Loan Maturity Schedule and Sensitivity to Changes in Interest Rates

 December 31, 2020     December 31, 2021 
(In thousands) One Year
or Less
 Over one Year
Through Five
Years
 Over five
years
 Total  One Year
or Less
 Over One Year
Through Five
Years
 Over Five Years
Through Fifteen
years
   Over Fifteen
Years
  Total 
Commercial, financial and agricultural $10,237  $79,589  $6,862  $96,688  $8,188  $32,428  $29,336  $  $69,952 
Real Estate and Home Equity 100,937 316,640 321,333 738,910   79,575   323,771   356,829   24,873   785,047 
All other loan  1,812 6,214 533 8,559   2,387   5,642   282   391   8,703 
 $112,986 $402,443 $328,728 $844,157  $90,150  $361,841  $386,447  $25,264  $863,702 
                             

Loans maturing after one year with:

Variable Rate $111,411  $103,550 
Fixed Rate  619,760   670,002 
 $731,171  $773,552 
   

The information presented in the above table is based on the contractual maturities of the individual loans, including loans which may be subject to renewal at their contractual maturity. Renewal of such loans is subject to review and credit approval, as well as modification of terms upon their maturity.

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Investment Securities

 

Our investment securities portfolio is a significant component of our total earning assets. Total investment securities averaged $456.8 million in 2021, as compared to $300.9 million in 2020, as compared to $257.6 million in 2019, which represents 25.1%32.2% and 25.3%25.1% of the average earning assets for the years ended December 31, 20202021 and 2019,2020, respectively. At December 31, 20202021 and 2019,2020, our investment securities portfolio amounted to $359.9$564.8 million and $286.8$359.9 million, respectively. The increase in investment securities in 20202021 is primarily due to organic deposit growth and excess liquidity from customer’s PPP loan proceeds and other stimulus funds related to the COVID-19 pandemic.

 

At December 31, 2021, the estimated weighted average life of our investment portfolio was approximately 6.8 years, duration of approximately 3.6, and a weighted average tax equivalent yield of approximately 1.73%. At December 31, 2020, the estimated weighted average life of our investment portfolio was approximately 5.3 years, duration of approximately 3.7, and a weighted average tax equivalent yield of approximately 2.16%. At December 31, 2019, the estimated weighted average life of our investment portfolio was approximately 5.1 years, duration of approximately 3.3, and a weighted average tax equivalent yield of approximately 2.71%.

We held no debt securities rated below investment grade at December 31, 2020.2021.

The following table shows the investment portfolio composition.

 December 31,  December 31, 
(Dollars in thousands) 2020 2019 2018  2021 2020 2019 
Securities available-for-sale at fair value:                   
US Treasury $1,502  $7,203  $15,457 
US Government sponsored enterprises 1,006 1,001 1,100 
US Treasury Securities $15,436  $1,502  $7,203 
Government sponsored enterprises  2,501   1,006   1,001 
Small Business Administration pools 35,498 45,343 55,336   31,273   35,498   45,343 
Mortgage-backed securities 229,929 183,586 115,475   397,729   229,929   183,586 
State and local government 88,603 49,648 50,506   109,848   88,603   49,648 
Corporate & Other Securities  3,328 19 19 
 $359,866 $286,800 $237,893 
Securities held-to-maturity at amortized cost:       
State and local government $ $ $16,174 
Corporate and Other Securities  8,052   3,328   19 
Total $359,866 $286,800 $254,067  $564,839  $359,866  $286,800 

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We hold other investments carried at cost totaling $1.8 million and $2.1 million at December 31, 2021 and 2020, respectively, which representsincludes our investment in FHLB stock. ThisOur investment in FHLB stock amounted to $698.4 thousand and $1.1 million and $991.4 thousand at December 31, 20202021 and 2019,2020, respectively.

Investment Securities Maturity Distribution and Yields

The following table shows, at amortized cost, the expected maturities and weighted average yield, which is calculated using amortized cost as the weight and tax-equivalent book yield, of securities held at December 31, 2020:2021:

(In thousands)                                      
  After One But After Five But      After One But After Five But     
 Within One Year Within Five Years Within Ten Years After Ten Years  Within One Year Within Five Years Within Ten Years After Ten Years 
Available-for-sale: Amount Yield Amount Yield Amount Yield Amount Yield  Amount Yield Amount Yield Amount Yield Amount Yield 
                 
US Treasury $1,501 1.48%$  $  $  
US Treasury Securities $     $     $15,736   1.21% $    
Government sponsored enterprises 996 2.86%         2,499   0.58%                  
Small Business Administration pools 514 1.30% 25,096 1.89% 7,547 2.27% 1,420 1.80%  466   1.90%  22,398   1.84%  5,613   2.27%  2,359   1.87%
Mortgage-backed securities 6,786 1.64% 97,318 1.86% 69,228 2.06% 49,405 1.24%  12,828   2.04%  129,221   1.31%  135,147   1.65%  120,931   1.08%
State and local government 1,216 1.57% 15,966 3.00% 61,226 2.56% 4,087 3.19%  4,244   1.35%  18,667   2.99%  78,435   2.33%  4,123   3.18%
Corporate and other securities    1,284 5.24% 1,981 4.66% 9 3.70%        5,029   3.82%  2,984   4.18%  9   3.70%
Total investment securities available-for-sale $11,013 1.71%$139,664 2.03%$139,982 2.33%$54,921 1.40% $20,037   1.71% $175,315   1.63% $237,915   1.89% $127,422   1.16%

 

(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 $73.4 million in 2021, as compared to $62.9 million in 2020, as compared to $25.6 million in 2019.2020. The increase in short-term investments in 20202021 is primarily due to organic deposit growth, and excess liquidity from customer’s PPP loan proceeds and other stimulus funds related to the COVID-19 pandemic.pandemic, and forgiven PPP loans. We maintain the majority of our short termshort-term overnight investments in our account at the Federal Reserve rather than in federal funds at various correspondent banks due to the lower regulatory capital risk weighting. At December 31, 2020,2021, short-term investments including funds on deposit at the Federal Reserve totaled $46.1$45.9 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 $1.3 billion during 2021, compared to $1.1 billion during 2020, compared to $934.9 million during 2019.2020. Average interest-bearing deposits were $869.7 million during 2021, as compared to $743.4 million during 2020, as compared to $670.9 million during 2019.2020. These increases are primarily due to organic deposit growth and PPP loan proceeds and other stimulus funds related to the COVID-19 pandemic being held in customers deposit accounts.

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The following table sets forth the deposits by category:

 December 31,  December 31, 
 2020 2019 2018  2021  2020  2019 
(In thousands) Amount % of
Deposits
 Amount % of
Deposits
 Amount % of
Deposits
  Amount  % of
Deposits
  Amount  % of
Deposits
  Amount  % of
Deposits
 
Demand deposit accounts $388,868  32.6%$289,828  29.3%$244,686  26.4% $444,688   32.7% $385,511   32.4% $289,828   29.3%
Interest bearing checking accounts 278,077 23.3% 229,168 23.2% 201,936 21.8%  331,638   24.4%  278,077   23.4%  229,168   23.2%
Money market accounts 242,128 20.3% 194,089 19.6% 191,537 20.7%  287,419   21.1%  242,128   20.4%  194,089   19.6%
Savings accounts 123,032 10.3% 104,456 10.6% 108,369 11.7%  143,765   10.6%  123,032   10.3%  104,456   10.6%
Time deposits less than $100,000 78,794 6.6% 84,730 8.6% 93,480 10.1%  74,489   5.5%  78,794   6.6%  84,730   8.6%
Time deposits more than $100,000  81,871  6.9% 85,930  8.7% 85,515  9.3%  79,792   5.8%  81,871   6.9%  85,930   8.7%
 $1,192,770  100.0%$988,201  100.0%$925,523  100.0% $1,361,291   100.0% $1,189,413   100.0% $988,201   100.0%
                                     

Large certificate of deposit customers, whom we identify as those of $100 thousand or more, tend to be extremely sensitive to interest rate levels, making these deposits less reliable sources of funding for liquidity planning purposes than core deposits. Core deposits, which exclude time deposits of $100 thousand or more, provide a relatively stable funding source for the loan portfolio and other earning assets. Core deposits were $1.1$1.3 billion and $902.3 million$1.1 billion at December 31, 20202021 and 2019,2020, respectively. Time deposits greater than $250 thousand, the FDIC deposit insurance coverage limit, amounted to $28.6$27.9 million and $32.2$28.6 million at December 31, 20202021 and December 31, 2019,2020, respectively.

 

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

Maturities of Certificates of Deposit and Other Time Deposit of $100,000$250,000 or moreMore

  December 31, 2020 
(In thousands) Within Three
Months
 After Three
Through
Six Months
 After Six
Through
Twelve Months
 After
Twelve
Months
 Total 
Time deposits of $100,000 or more $11,981 $541 $69,235 $115 $81,872 
                 

At December 31, 2021, time deposits in excess of the FDIC insurance limit were as follows:

  December 31, 2021 
(In thousands) Within Three
Months
  After Three
Through
Six Months
  After Six
Through
Twelve Months
  After
Twelve
Months
  Total 
Time deposits of $250,000 or more $1,586  $1,399  $1,458  $5,206  $9,649 
                     

Borrowed funds. Borrowed funds consist of fed funds purchased, securities sold under agreements to repurchase, FHLB advances and long-term debt as a result of issuing $15.0 million in trust preferred securities. Short-term borrowings in the form of securities sold under agreements to repurchase averaged $62.2 million, $49.5 million and $34.2 million during 2021, 2020 and $27.0 million during 2020, 2019, and 2018, respectively. The maximum month-end balances during 2021, 2020 and 2019 and 2018 were $72.4 million, $73.0 million $36.7 million and $33.4$36.7 million, respectively. The average rates paid during these periods were 0.38%0.14%, 1.12%0.38% and 1.08%1.12%, respectively. The balances of securities sold under agreements to repurchase were $40.9$54.2 million and $33.3$40.9 million at December 31, 20202021 and 2019,2020, respectively. The repurchase agreements all mature within one to four days and are generally originated with customers that have other relationships with us and tend to provide a stable and predictable source of funding. As a member of the FHLB, the Bank has access to advances from the FHLB for various terms and amounts. During 20202021 and 2019,2020, the average outstanding advances amounted to $2.0 million$0 and $3.2$2.0 million, respectively.

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The following is a schedule of the maturities forThere were no FHLB Advances scheduled to mature as of December 31, 20202021 and 2019:2020:

  December 31, 
(In thousands) 2020 2019 
Maturing Amount Rate Amount Rate 
2020      211  1.00%

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In addition to the above borrowings, we issued $15.5 million in trust preferred securities on September 16, 2004. During the fourth quarter of 2015, we redeemed $500 thousand of these securities. The securities accrue and pay distributions quarterly at a rate of three month LIBOR plus 257 basis points. The remaining debt may be redeemed in full anytime with notice and matures on September 16, 2034.

Capital Adequacy and Dividend Policy

Capital Adequacy

Our capital remained strong and exceeded the well-capitalized regulatory requirements at December 31, 2021.  Total shareholders’ equity as ofincreased $4.7 million, or 3.4%, to $141.0 million at December 31, 2020 was2021 from $136.3 million as compared to $120.2 million as ofat December 31, 2019.2020. The $4.7 million increase in shareholders’ equity is primarilywas due to an $11.9 million increase in retention of earnings less dividends paid, of $6.5a $0.3 million an increase in accumulated other comprehensive income of $8.8 million, $0.4 thousand relateddue to executiveemployee and director stock awards, and a $0.4 thousand relatedmillion increase due to our dividend reinvestment plan.plan (DRIP) purchases partially offset by a $8.0 million reduction in accumulated other comprehensive income. The increasedecline in accumulated other comprehensive income was due to a reductionan increase in longer-term market interest rates, which resulted in an increasea reduction in the net unrealized gains in our investment securities portfolio.

During the third quarter of 2019, we completed the repurchase of 300,000 shares of our outstanding common stock at a cost of approximately $5.6 million with an average price per share of $18.79.  We also announced during the third quarter of 2019 the approval of a new repurchase plan of up to 200,000 shares of our outstanding common stock.  No share repurchases were made under the new repurchase plan prior to its expiration on December 31, 2020. On April 12, 2021, we announced that our Board of Directors approved the repurchase of up to 375,000 shares of our common stock (the “2021 Repurchase Plan”), which represents approximately 5% of our 7,548,638 shares outstanding as of December 31, 2021. No share repurchases have been made under the 2021 Repurchase Plan as of December 31, 2021. The 2021 Repurchase Plan expires at the market close on March 31, 2022. We intend to seek approval in 2022 for a new repurchase plan of up to 375,000 shares of common stock to replace the expiring 2021 Repurchase Plan.

 

In 2018, we paid a dividend of $0.10 per shareDuring each quarter and during each quarter ofin 2019, we paid aan $0.11 per share dividend on our common stock of $0.11 per share.stock. During each quarter in 2020 and 2021, we paid an $0.12 per share dividend on our common stock. On January 19, 2022, we announced a $0.13 per share dividend payable on February 15, 2022 to shareholders of record of our common stock on February 1, 2022.

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

The following table shows the return on average assets (net income divided by average total assets), return on average equity (net income divided by average equity), and equity to assets ratio for the three years ended December 31, 2020.2021.

 2020 2019 2018  2021  2020  2019 
Return on average assets  0.78%  0.98%  1.04%  1.02%  0.78%  0.98%
Return on average common equity 7.84% 9.38% 10.48%  11.22%  7.84%  9.38%
Equity to assets ratio 9.77% 10.27% 10.31%  8.90%  9.77%  10.27%
Dividend Payout Ratio 35.38% 30.29% 27.02%  23.24%  35.38%  30.29%

 

While the Company is currently a small bank holding company and so generally is not subject to Basel III capital requirements, our Bank remains subject to such capital requirements. As of December 31, 2018, the Company and the Bank met all capital adequacy requirements under the Basel III rules. See “Supervision and Regulation—Basel Capital Standards” for additional information on Basel III and the Dodd-Frank Act.

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The Bank exceeded the regulatory capital ratios at December 31, 20202021 and 2019,2020, as set forth in the following table:

(In thousands) Required
Amount
  %  Actual
Amount
  %  Excess
Amount
  % 
The Bank(1)(2):                        
December 31, 2020                        
Risk Based Capital                        
Tier 1 $56,288   6.0% $120,385   12.8% $64,097   6.8%
Total Capital  75,051   8.0%  130,774   13.9%  55,723   5.9%
CET1  42,216   4.5%  120,385   12.8%  78,169   8.3%
Tier 1 Leverage  54,492   4.0%  120,385   8.8%  65,893   4.8%
December 31, 2019                        
Risk Based Capital                        
Tier 1 $50,224   6.0% $112,754   13.5% $62,530   7.5%
Total Capital  66,965   8.0%  119,381   14.3%  52,416   6.3%
CET1  37,668   4.5%  112,754   13.5%  75,086   9.0%
Tier 1 Leverage  45,246   4.0%  112,754   10.0%  67,508   6.0%
                         

(In thousands) Required
Amount
  %  Actual
Amount
  %  Excess
Amount
  % 
The Bank(1)(2):                        
December 31, 2021                        
Risk Based Capital                        
Tier 1 $57,075   6.0% $132,918   14.0% $75,843   8.0%
Total Capital  76,101   8.0%  144,097   15.1%  67,996   7.1%
CET1  42,807   4.5%  132,918   14.0%  90,111   9.5%
Tier 1 Leverage  62,897   4.0%  132,918   8.5%  70,021   4.5%
December 31, 2020                        
Risk Based Capital                        
Tier 1 $56,288   6.0% $120,385   12.8% $64,097   6.8%
Total Capital  75,051   8.0%  130,774   13.9%  55,723   5.9%
CET1  42,216   4.5%  120,385   12.8%  78,169   8.3%
Tier 1 Leverage  54,492   4.0%  120,385   8.8%  65,893   4.8%
                         
(1)As a small bank holding company, the Company is generally not subject to the Basel III capital requirements unless otherwise advised by the Federal Reserve.

(2)Required Amounts and Required Ratios do not include the capital conservation buffer of 2.5%.

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Dividend Policy

Since we are a bank holding company, our ability to declare and pay dividends is dependent on certain federal and state regulatory considerations, including the guidelines of the Federal Reserve. The Federal Reserve has issued a policy statement regarding the payment of dividends by bank holding companies. In general, the Federal Reserve’s policies provide that dividends should be paid only out of current earnings and only if the prospective rate of earnings retention by the bank holding company appears consistent with the organization’s capital needs, asset quality and overall financial condition. The Federal Reserve’s policies also require that a bank holding company serve as a source of financial strength to its subsidiary banks by standing ready to use available resources to provide adequate capital funds to those banks during periods of financial stress or adversity and by maintaining the financial flexibility and capital-raising capacity to obtain additional resources for assisting its subsidiary banks where necessary. In addition, under the prompt corrective action regulations, the ability of a bank holding company to pay dividends may be restricted if a subsidiary bank becomes undercapitalized. These regulatory policies could affect our ability to pay dividends or otherwise engage in capital distributions.

Because the Company is a legal entity separate and distinct from the Bank and does not conduct stand-alone operations, the Company’s ability to pay dividends depends on the ability of the Bank to pay dividends to the Company, which is also subject to regulatory restrictions. As a South Carolina-chartered bank, the Bank is subject to limitations on the amount of dividends that it is permitted to pay. Unless otherwise instructed by the S.C. Board, the Bank is generally permitted under South Carolina state banking regulations to pay cash dividends of up to 100% of net income in any calendar year without obtaining the prior approval of the S.C. Board. In addition, the Bank must maintain a capital conservation buffer, above its regulatory minimum capital requirements, consisting entirely of Common Equity Tier 1 capital, in order to avoid restrictions with respect to its payment of dividends to First Community Corporation. The FDIC also has the authority under federal law to enjoin a bank from engaging in what in its opinion constitutes an unsafe or unsound practice in conducting its business, including the payment of a dividend under certain circumstances.

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Liquidity Management

Liquidity management involves monitoring sources and uses of funds in order to meet our day-to-day cash flow requirements while maximizing profits. Liquidity represents our ability to convert assets into cash or cash equivalents without significant loss and to raise additional funds by increasing liabilities. Liquidity management is made more complicated because different balance sheet components are subject to varying degrees of management control. For example, the timing of maturities of the investment portfolio is very predictable and subject to a high degree of control at the time investment decisions are made. However, net deposit inflows and outflows are far less predictable and are not subject to nearly the same degree of control. Asset liquidity is provided by cash and assets which are readily marketable, or which can be pledged, or which will mature in the near future. Liability liquidity is provided by access to core funding sources, principally the ability to generate customer deposits in our market area. In addition, liability liquidity is provided through the ability to borrow against approved lines of credit (federal funds purchased) from correspondent banks and to borrow on a secured basis through securities sold under agreements to repurchase. The Bank is a member of the FHLB and has the ability to obtain advances for various periods of time. These advances are secured by eligible securities pledged by the Bank or assignment of eligible loans within the Bank’s portfolio.

 

As of December 31, 2020,2021, we have not experienced any unusual pressure on our deposit balances or our liquidity position as a result of the COVID-19 pandemic. We had no brokered deposits and no listing services deposits at December 31, 2020.2021. We believe that we have ample liquidity to meet the needs of our customers and to manage through the COVID-19 pandemic through our low cost deposits;deposits, our ability to borrow against approved lines of credit (federal funds purchased) from correspondent banks;banks, and our ability to obtain advances secured by certain securities and loans from the Federal Home Loan Bank.FHLB. 

We generally maintain a high level of liquidity and adequate capital, which along with continued retained earnings, we believe will be sufficient to fund the operations of the Bank for at least the next 12 months.   Furthermore, we believe that we will have access to adequate liquidity and capital to support the long-term operations of the Bank. Shareholders’ equity declined to 9.8%8.9% of total assets at December 31, 20202021 from 10.3%9.8% at December 31, 20192020 due to total asset growth of $189.1 million compared to total shareholders’ equity growth of $4.7 million. The growth in total assets was primarily due to PPP loans and excess liquidity from customer’s PPP loan proceeds andloans, other stimulus funds related to the COVID-19 pandemic.pandemic, organic deposit growth, and loan growth. The $4.7 million increase in shareholder’s equity was due to an $11.9 million increase in retention of earnings less dividends paid, a $0.3 million increase due to employee and director stock awards, and a $0.4 million increase due to dividend reinvestment plan (DRIP) purchases partially offset by a $8.0 million reduction in accumulated other comprehensive income. The decline in accumulated other comprehensive income was due to an increase in longer-term market interest rates, which resulted in a reduction in the net unrealized gains in our investment securities portfolio. The Bank maintains federal funds purchased lines in the total amount of $60.0 million with two financial institutions, although these were not utilized at December 31, 20202021 and $10.0$10 million through the Federal Reserve Discount Window. The FHLB of Atlanta has approved a line of credit of up to 25% of the Bank’s assets, which, when utilized, is collateralized by a pledge against specific investment securities and/or eligible loans. We had PPP loans totaling $43.3 million gross of deferred fees and costs and $42.2 million net of deferred fees and costs at December 31, 2020. Furthermore, the Federal Reserve provided us a lending facility, the PPPLF, that permitted us to obtain funding specifically for loans that we made under the PPP; however, the Bank had sufficient liquidity to fund PPP loans without accessing the PPPLF. The PPP program expired on August 8, 2020.

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Through the operations of our Bank, we have made contractual commitments to extend credit in the ordinary course of our business activities. These commitments are legally binding agreements to lend money to our customers at predetermined interest rates for a specified period of time. At December 31, 2020,2021, we had issued commitments to extend unused credit of $142.6$137.4 million, including $42.3$42.9 million in unused home equity lines of credit, through various types of lending arrangements. At December 31, 2019,2020, we had issued commitments to extend unused credit of $135.7$142.6 million, including $39.8$42.3 million in unused home equity lines of credit, through various types of lending arrangements. We evaluate each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by us upon extension of credit, is based on our credit evaluation of the borrower. Collateral varies but may include accounts receivable, inventory, property, plant and equipment, commercial and residential real estate. We manage the credit risk on these commitments by subjecting them to normal underwriting and risk management processes.

 

We regularly review our liquidity position and have implemented internal policies establishing guidelines for sources of asset-based liquidity and evaluate and monitor the total amount of purchased funds used to support the balance sheet and funding from noncore sources. Although uncertain, we may encounter stress on liquidity management as a direct result of the COVID-19 pandemic and the Bank’s prior participation in the PPP as a participating lender. We had PPP loans totaling $1.5 million gross of deferred fees and costs and $1.5 million net of deferred fees and costs at December 31, 2021 compared to $43.3 million gross of deferred fees and costs and $42.2 million net of deferred fees and costs at December 31, 2020. As customers manage their own liquidity stress, we could experience an increase in the utilization of existing lines of credit.

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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 1615 of our financial statements for a discussion of our off-balance sheet arrangements.

Impact of Inflation

Unlike most industrial companies, the assets and liabilities of financial institutions such as the Company and the Bank are primarily monetary in nature. Therefore, interest rates have a more significant effect on our performance than do the effects of changes in the general rate of inflation and change in prices. In addition, interest rates do not necessarily move in the same direction or in the same magnitude as the prices of goods and services. As discussed previously, we continually seek to manage the relationships between interest sensitive assets and liabilities in order to protect against wide interest rate fluctuations, including those resulting from inflation.

Item 7A. Quantitative and Qualitative Disclosures 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 25.23.

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MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) promulgated under the Securities Exchange Act of 1934 as a process designed by, or under the supervision of, our principal executive and principal financial officers and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles and includes those policies and procedures that:

 ·Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;

 ·Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and

 ·Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Our management assessed the effectiveness of our internal controls over financial reporting as of December 31, 2020.2021. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control—Integrated Framework issued in 2013.

Based on that assessment, we believe that, as of December 31, 2020,2021, our internal control over financial reporting is effective based on those criteria.

/s/ Michael C. Crapps /s/ D. Shawn Jordan
Chief Executive Officer and President Executive Vice President and Chief Financial Officer

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78

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”)Company) as of December 31, 20202021 and 2019 and2020, the related consolidated statements of income, comprehensive income, changes in shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2020,2021, and the related notes to the consolidated financial statements and schedules (collectively, the “consolidatedconsolidated financial statements”)statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 20202021 and 2019,2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020,2021, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB)(PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Allowance for Loan Losses

As described in Note 54 to the Company’s financial statements, the Company has a gross loan portfolio, net of deferred fees of approximately $844.2$863.7 million and related allowance for loan losses of approximately $10.4$11.2 million as of December 31, 2020.2021. As described by the Company in Note 1,2, the evaluation of the allowance for loan losses is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. The allowance for loan losses is evaluated on a regular basis and is based upon the Company’s review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic conditions.

79

We identified the Company’s estimate of the allowance for loan losses as a critical audit matter. The principal considerations for our determination of the allowance for loan losses as a critical audit matter related to the high degree of subjectivity in the Company’s judgments in determining the qualitative factors. Auditing these complex judgments and assumptions by the Company involves especially challenging auditor judgment due to the nature and extent of audit evidence and effort required to address these matters, including the extent of specialized skill or knowledge needed.

The primary procedures we performed to address this critical audit matter included the following:

 

·We evaluated the relevance and the reasonableness of assumptions related to evaluation of the loan portfolio, current economic conditions, and other risk factors used in development of the qualitative factors for collectively evaluated loans.
·We validated the completeness and accuracy of the underlying data used to develop the factors.
·We validated the mathematical accuracy of the calculation.
·We evaluated the reasonableness of assumptions and data used by the Company in developing the qualitative factors by comparing these data points to internally developed and third-party sources, andas well as other audit evidence gathered.
·Analytical procedures were performed to evaluate the directional consistency of changes that occurred in the allowance for loan losses for loans collectively evaluated for impairment.

 

/s/ Elliott Davis, LLC

Firm ID: 149 

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

 

Columbia, South Carolina

March 12, 202116, 2022 

80

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FIRST COMMUNITY CORPORATION

Consolidated Balance Sheets

  December 31, 
(Dollars in thousands, except par values) 2021  2020 
ASSETS      
Cash and due from banks $21,973  $18,930 
Interest-bearing bank balances  47,049   46,062 
Investment securities available-for-sale  564,839   359,866 
Other investments, at cost  1,785   2,053 
Loans held-for-sale  7,120   45,020 
Loans held-for-investment  863,702   844,157 
Less, allowance for loan losses  11,179   10,389 
Net loans held-for-investment  852,523   833,768 
Property and equipment - net  32,831   34,458 
Lease right-of-use asset  2,842   3,032 
Premises held-for-sale  0   591 
Bank owned life insurance  29,231   27,688 
Other real estate owned  1,165   1,194 
Intangible assets  919   1,120 
Goodwill  14,637   14,637 
Other assets  7,594   6,963 
Total assets $1,584,508  $1,395,382 
LIABILITIES        
Deposits:        
Non-interest bearing $444,688  $385,511 
Interest bearing  916,603   803,902 
Total deposits  1,361,291   1,189,413 
Securities sold under agreements to repurchase  54,216   40,914 
Junior subordinated debt  14,964   14,964 
Lease liability  2,950   3,114 
Other liabilities  10,089   10,640 
Total liabilities  1,443,510   1,259,045 
Commitments and Contingencies (Note 15)        
SHAREHOLDERS’ EQUITY        
Preferred stock, par value $1.00 per share; 10,000,000 shares authorized; 0 issued and outstanding      
Common stock, par value $1.00 per share; 20,000,000 shares authorized; issued and outstanding 7,548,638 at December 31, 2021 and 7,500,338 at December 31, 2020  7,549   7,500 
Nonvested restricted stock  (294)  (283)
Additional paid in capital  92,139   91,380 
Retained earnings  38,325   26,453 
Accumulated other comprehensive income  3,279   11,287 
Total shareholders’ equity  140,998   136,337 
Total liabilities and shareholders’ equity $1,584,508  $1,395,382 

  December 31, 
(Dollars in thousands, except par values) 2020  2019 
ASSETS        
Cash and due from banks $18,930  $14,951 
Interest-bearing bank balances  46,062   32,741 
Investment securities available-for-sale  359,866   286,800 
Other investments, at cost  2,053   1,992 
Loans held-for-sale  45,020   11,155 
Total Loans held-for-investment  844,157   737,028 
Less, allowance for loan losses  10,389   6,627 
Net loans held-for-investment  833,768   730,401 
Property and equipment - net  34,458   35,008 
Lease right-of-use asset  3,032   3,215 
Premises held-for-sale  591   591 
Bank owned life insurance  27,688   28,041 
Other real estate owned  1,194   1,410 
Intangible assets  1,120   1,483 
Goodwill  14,637   14,637 
Other assets  6,963   7,854 
Total assets $1,395,382  $1,170,279 
LIABILITIES        
Deposits:        
Non-interest bearing $385,511  $289,829 
Interest bearing  803,902   698,372 
Total deposits  1,189,413   988,201 
Securities sold under agreements to repurchase  40,914   33,296 
Federal Home Loan Bank Advances     211 
Junior subordinated debt  14,964   14,964 
Lease liability .  3,114   3,266 
Other liabilities  10,640   10,147 
Total liabilities  1,259,045   1,050,085 
Commitments and Contingencies (Note 16)        
SHAREHOLDERS’ EQUITY        
Preferred stock, par value $1.00 per share; 10,000,000 shares authorized; 0 issued and outstanding      
Common stock, par value $1.00 per share; 20,000,000 shares authorized; issued and outstanding 7,500,338 at December 31, 2020 and 7,440,026 at December 31, 2019  7,500   7,440 
Nonvested restricted stock  (283)  (151)
Additional paid in capital  91,380   90,488 
Retained earnings  26,453   19,927 
Accumulated other comprehensive income  11,287   2,490 
Total shareholders’ equity  136,337   120,194 
Total liabilities and shareholders’ equity $1,395,382  $1,170,279 

 

See Notes to Consolidated Financial Statements

81

70

FIRST COMMUNITY CORPORATION

Consolidated Statements of Income

 Year Ended December 31,  Year Ended December 31, 
(Dollars in thousands except per share amounts) 2020 2019 2018  2021 2020 2019 
       
Interest income:                        
Loans, including fees $37,037  $35,447  $32,789  $39,671  $37,037  $35,447 
Investment securities - taxable  5,011   5,271   4,755   6,155   5,011   5,271 
Investment securities - non taxable  1,454   1,365   1,767   1,564   1,454   1,365 
Other short term investments  276   547   418   130   276   547 
Total interest income  43,778   42,630   39,729   47,520   43,778   42,630 
Interest expense:                        
Deposits  3,021   4,558   2,905   1,740   3,021   4,558 
Securities sold under agreement to repurchase  190   386   293   85   190   386 
Other borrowed money  544   837   783   416   544   837 
Total interest expense  3,755   5,781   3,981   2,241   3,755   5,781 
Net interest income  40,023   36,849   35,748   45,279   40,023   36,849 
Provision for loan losses  3,663   139   346   335   3,663   139 
Net interest income after provision for loan losses  36,360   36,710   35,402   44,944   36,360   36,710 
Non-interest income:                        
Deposit service charges  1,121   1,649   1,769   977   1,121   1,649 
Mortgage banking income  5,557   4,555   3,895   4,319   5,557   4,555 
Investment advisory fees and non-deposit commissions  2,720   2,021   1,683   3,995   2,720   2,021 
Gain (loss) on sale of securities  99   136   (342)
Gain (loss) on sale of other assets  147   (3)  24 
Gain on sale of securities     99   136 
Gain (loss) on sale of other real estate owned  77   147   (3)
Gain on sale of other assets  117       
Write-down on premises held for sale     (282)           (282)
Non-recurring BOLI income  311      73 
Other non-recurring income  171   311    
Other  3,814   3,660   3,542   4,248   3,814   3,660 
Total non-interest income  13,769   11,736   10,644   13,904   13,769   11,736 
Non-interest expense:                        
Salaries and employee benefits  24,026   21,261   19,515   24,494   24,026   21,261 
Occupancy  2,709   2,696   2,380   2,947   2,709   2,696 
Equipment  1,237   1,493   1,513   1,296   1,237   1,493 
Marketing and public relations  1,043   1,114   919   1,173   1,043   1,114 
FDIC Insurance assessments  404   57   375   618   404   57 
Other real estate expense  201   81   98   105   201   81 
Amortization of intangibles  363   523   563   201   363   523 
Other  7,551   7,392   6,760   8,367   7,551   7,392 
Total non-interest expense  37,534   34,617   32,123   39,201   37,534   34,617 
Net income before tax  12,595   13,829   13,923   19,647   12,595   13,829 
Income tax expense  2,496   2,858   2,694   4,182   2,496   2,858 
Net income $10,099  $10,971  $11,229  $15,465  $10,099  $10,971 
Basic earnings per common share $1.36  $1.46  $1.48  $2.06  $1.36  $1.46 
Diluted earnings per common share $1.35  $1.45  $1.45  $2.05  $1.35  $1.45 

 

See Notes to Consolidated Financial Statements

82

71

FIRST COMMUNITY CORPORATION

Consolidated Statements of Comprehensive Income

       
(Dollars in thousands) Year ended December 31,  Year ended December 31, 
 2020 2019 2018  2021 2020 2019 
Net income $10,099  $10,971  $11,229  $15,465  $10,099  $10,971 
                        
Other comprehensive income (loss):                        
Unrealized gain (loss) during the period on available for sale securities, net of tax of ($2,360), ($1,311) and 574, respectively  8,875   4,931   (2,160)
Unrealized gain (loss) during the period on available for sale securities, net of tax benefit (expense) of $2,128, ($2,360) and ($1,311), respectively  (8,008)  8,875   4,931 
                        
Less: Reclassification adjustment for loss (gain) included in net income, net of tax of $21, $29, and ($72), respectively  (78)  (107)  270 
Other comprehensive income (loss)  8,797   4,824   (1,890)
Less: Reclassification adjustment for gain included in net income, net of tax of $0, $21, and $29, respectively     (78)  (107)
Other comprehensive income  (8,008)  8,797   4,824 
Comprehensive income $18,896  $15,795  $9,339  $7,457  $18,896  $15,795 

See Notes to Consolidated Financial Statements 

72

FIRST COMMUNITY CORPORATION

Consolidated Statements of Changes in Shareholders’ Equity

                         
  Common Stock              Accumulated    
(Dollars and shares in thousands) Number
Shares
Issued
  Common
Stock
  Common
Stock
Warrants
  Additional
Paid-in
Capital
  Nonvested
Restricted
Stock
  Retained
Earnings
  Other
Comprehensive
Income (loss)
  Total 
Balance, December 31, 2018  7,639  $7,639  $31  $95,048  $(149) $12,262  $(2,334) $112,497 
Net income                 10,971      10,971 
Other comprehensive income net of tax expense of $1,282                    4,824   4,824 
Issuance of restricted stock  8   8      162   (170)         
Exercise of stock warrants  46   46   (31)  (15)            
Shares forfeited  (8)  (8)     (151)           (159)
Amortization of compensation on restricted stock              168         168 
Stock repurchase plan  (300)  (300)     (5,336)           (5,636)
Shares issued-deferred compensation  24   24      241            265 
Dividends: Common ($0.44 per share)                 (3,306)     (3,306)
Dividend reinvestment plan  31   31      539            570 
Balance, December 31, 2019  7,440  $7,440  $  $90,488  $(151) $19,927  $2,490  $120,194 
                                 
Net income                 10,099      10,099 
Other comprehensive income net of tax expense of $2,339                    8,797   8,797 
Issuance of restricted stock  20   20      371   (391)         
Issuance of common stock           4            4 
Issuance of common stock-deferred compensation  18   18      182            200 
Amortization of compensation on restricted stock              259         259 
Shares forfeited  (1)  (1)     (14)           (15)
Dividends: Common ($0.48 per share)                 (3,573)     (3,573)
Dividend reinvestment plan  23   23      349            372 
Balance, December 31, 2020  7,500  $7,500  $  $91,380  $(283) $26,453  $11,287  $136,337 
                                 
Net income                 15,465      15,465 
Other comprehensive income net of tax benefit of $2,128                     (8,008)  (8,008)
Issuance of restricted stock  21   21      353   (374)         
Issuance of common stock  2   2      44            46 
Issuance of common stock-deferred compensation  10   10      80            90 
Amortization of compensation on restricted stock              363         363 
Shares forfeited  (4)  (4)     (66)           (70)
Dividends: Common ($0.48 per share)                 (3,593)     (3,593)
Dividend reinvestment plan  20   20      348            368 
Balance, December 31, 2021  7,549  $7,549  $  $92,139  $(294) $38,325  $3,279  $140,998 
                                 

See Notes to Consolidated Financial Statements

73

FIRST COMMUNITY CORPORATION

Consolidated Statements of Cash Flows

          
(Amounts in thousands) Year Ended December 31, 
  2021  2020  2019 
Cash flows from operating activities:            
Net income $15,465  $10,099  $10,971 
Adjustments to reconcile net income to net cash (used) provided in operating activities            
Depreciation  1,714   1,637   1,598 
Net premium amortization  2,317   2,016   2,042 
Provision for loan losses  335   3,663   139 
Write-downs of other real estate owned  50   128    
Loss (gain) loss on sale of other real estate owned  (77)  (147)  3 
Originations of HFS loans  (139,773)  (197,608)  (139,640)
Sales of HFS loans  177,673   163,743   131,708 
Amortization of intangibles  201   363   523 
Gain on sale of securities     (99)  (136)
Loss on fair value of equity investments  (4)      
Accretion on acquired loans  (135)  (271)  (492)
Write-down of premises held for sale        282 
Gain on sale of other assets  (117)      
(Increase) decrease in other assets  994   (911)  (5,227)
Increase (decrease) in other liabilities  (715)  341   3,054 
Net cash (used) provided in operating activities  57,928   (17,046)  4,825 
Cash flows from investing activities:            
Proceeds from sale of securities available-for-sale     1,200   44,398 
Purchase of investment securities available-for-sale  (271,293)  (111,972)  (113,064)
Purchase of other investment securities  (87)  (70)  (36)
Maturity/call of investment securities available-for-sale  53,872   46,933   40,170 
Proceeds from sale of other investments  355       
Increase in loans  (19,100)  (106,874)  (18,219)
Proceeds from sale of other real estate owned  201   349   47 
Proceeds from sale of fixed assets  1,414      301 
Purchase of property and equipment  (813)  (1,087)  (2,793)
Net disposal of property and equipment  19       
Purchase of BOLI  (850)     (2)
Net cash used in investing activities  (236,282)  (171,521)  (49,198)
Cash flows from financing activities:            
Increase in deposit accounts  171,878   201,213   62,716 
Advances from the Federal Home Loan Bank     34,001   82,000 
Repayment of advances from the Federal Home Loan Bank     (34,212)  (82,020)
Increase in securities sold under agreements to repurchase  13,302   7,618   5,274 
Deferred compensation shares  90   200   265 
Shares Retired  (70)  (15)  (159)
Change in non-vested restricted stock  363   259   168 
Dividend reinvestment plan  368   372   570 
Repurchase of common stock        (5,636)
Proceeds from issuance of common stock  46   4    
Dividends paid on Common Stock  (3,593)  (3,573)  (3,306)
Net cash provided in financing activities  182,384   205,867   59,872 
Net increase in cash and cash equivalents  4,030   17,300   15,424 
Cash and cash equivalents at beginning of year  64,992   47,692   32,268 
Cash and cash equivalents at end of year $69,022  $64,992  $47,692 
Supplemental disclosure:            
Cash paid during the period for: interest $3,312  $4,258  $5,471 
Income Taxes $5,097  $3,043  $2,410 
Non-cash investing and financing activities:            
Unrealized gain (loss) on securities available-for-sale, net of tax $(8,008) $8,797  $4,824 
Transfer of loans to other real estate owned $145  $114  $ 
Recognition of operating lease right of use asset $  $  $3,260 
Recognition of operating lease liability $  $  $3,291 
Transfer of investment securities held-to-maturity to available-for-sale $  $  $16,144 

 

See Notes to Consolidated Financial Statements

83

74

FIRST COMMUNITY CORPORATION

Consolidated Statements of Changes in Shareholders’ Equity

  Common Stock             
(Dollars and shares in thousands) Number
Shares
Issued
 Common
Stock
 Common
Stock
Warrants
 Additional
Paid-in
Capital
 Nonvested
Restricted
Stock
 Retained
Earnings
 Accumulated
Other
Comprehensive
Income (loss)
 Total 
Balance, December 31, 2017  7,588 $7,588 $46 $94,516 $(109)$4,066 $(444)$105,663 
Net income                 11,229     11,229 
Other comprehensive loss net of tax of $502                    (1,890) (1,890)
Issuance of restricted stock  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 
Net income                 10,971     10,971 
Other comprehensive income net of tax of $1,282                    4,824  4,824 
Issuance of restricted stock  8  8     162  (170)        
Exercise of stock warrants  46  46  (31) (15)           
Shares retired  (8) (8)    (151)          (159
Amortization of compensation on restricted stock              168        168 
Stock repurchase plan  (300) (300)    (5,336)          (5,636)
Shares issued-deferred compensation  24  24     241           265 
Dividends: Common ($0.44 per share)                 (3,306)    (3,306)
Dividend reinvestment plan 31  31     539           570 
Balance, December 31, 2019  7,440 $7,440 $ $90,488 $(151)$19,927 $2,490 $120,194 
Net income                 10,099     10,099 
Other comprehensive income net of tax of $2,339                   8,797  8,797 
Issuance of restricted stock  20  20     371  (391)        
Issuance of common stock           4           4 
Issuance of common stock-deferred compensation  18  18     182           200 
Amortization of compensation on restricted stock              259        259 
Shares retired  (1) (1)    (14)           (15) 
Dividends: Common ($0.48 per share)                 (3,573)    (3,573)
Dividend reinvestment plan 23  23     349           372 
Balance, December 31, 2020  7,500 $7,500 $ $91,380 $(283)$26,453 $11,287 $136,337 
                          

See Notes to Consolidated Financial Statements

84

FIRST COMMUNITY CORPORATION

Consolidated Statements of Cash Flows

(Amounts in thousands) Year Ended December 31, 
  2020  2019  2018 
Cash flows from operating activities:            
Net income $10,099  $10,971  $11,229 
Adjustments to reconcile net income to net cash (used) provided in operating activities            
Depreciation  1,637   1,598   1,519 
Net premium amortization  2,016   2,042   2,243 
Provision for loan losses  3,663   139   346 
Write-downs of other real estate owned  128       
Loss (gain) loss on sale of other real estate owned  (147)  3   (24
Originations of HFS loans  (197,608)  (139,640)  (114,959)
Sales of HFS loans  163,743   131,708   116,829 
Amortization of intangibles  363   523   563 
(Gain) loss on sale of securities  (99)  (136)  342 
Accretion on acquired loans  (271)  (492)  (620)
Write-down of premises held for sale     282    
Write-down of fixed assets        42 
Gain on sale of fixed assets        (123)
(Increase) decrease in other assets  (911)  (5,227)  489 
Increase in other liabilities  341   3,054   2,097 
Net cash (used) provided in operating activities  (17,046)  4,825   19,973 
Cash flows from investing activities:            
Proceeds from sale of securities available-for-sale  1,200   44,398   44,299 
Proceeds from sale of securities held-to-maturity        655 
Purchase of investment securities available-for-sale  (111,972)  (113,064)  (64,146)
Purchase of other investment securities  (70)  (36)    
Maturity/call of investment securities available-for-sale  46,933   40,170   41,564 
Proceeds from sale of other investments        604 
Increase in loans  (106,874)  (18,219)  (71,266)
Proceeds from sale of other real estate owned  349   47   796 
Proceeds from sale of fixed assets     301   1,145 
Purchase of property and equipment  (1,087)  (2,793)  (1,465)
Purchase of BOLI     (2)   
Net cash used in investing activities  (171,521)  (49,198)  (47,814)
Cash flows from financing activities:            
Increase in deposit accounts  201,213   62,716   37,290 
Advances from the Federal Home Loan Bank  34,001   82,000   79,000 
Repayment of advances from the Federal Home Loan Bank  (34,212)  (82,020)  (93,019)
Increase in securities sold under agreements to repurchase  7,618   5,274   8,752 
Deferred compensation shares  200   265   19 
Shares Retired  (15)  (159)  (57)
Change in non-vested restricted stock  259   168   204 
Dividend reinvestment plan  372   570   362 
Repurchase of common stock     (5,636)   
Proceeds from issuance of common stock  4       
Dividends paid on Common Stock  (3,573)  (3,306)  (3,033)
Net cash provided in financing activities  205,867   59,872   29,518 
Net increase in cash and cash equivalents  17,300   15,424   1,677 
Cash and cash equivalents at beginning of year  47,692   32,268   30,591 
Cash and cash equivalents at end of year $64,992  $47,692  $32,268 
             
Supplemental disclosure:            
Cash paid during the period for: interest $4,258  $5,471  $3,592 
Income Taxes $3,043  $2,410  $2,215 
Non-cash investing and financing activities:            
Unrealized gain (loss) on securities available-for-sale, net of tax $8,797  $4,824  $(1,890)
Transfer of loans to other real estate owned $114  $  $346 
Recognition of operating lease right of use asset $  $3,260  $ 
Recognition of operating lease liability $  $3,291  $ 
Transfer of investment securities held-to-maturity to available-for-sale $  $16,144  $ 

See Notes to Consolidated Financial Statements

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FIRST COMMUNITY CORPORATION

Notes to Consolidated Financial Statements

Note 1—ORGANIZATION AND BASIS OF PRESENTATION

The consolidated financial statements include the accounts of First Community Corporation (the “Company”) and its wholly owned subsidiary, First Community Bank (the “Bank”). The Company owns all of the common stock of FCC Capital Trust I. All material intercompany transactions are eliminated in consolidation. The Company was organized on November 2, 1994, as a South Carolina corporation, and was formed to become a bank holding company. The Bank opened for business on August 17, 1995. FCC Capital Trust I is an unconsolidated special purpose subsidiary organized for the sole purpose of issuing trust preferred securities.

Risk and Uncertainties

The coronavirus (COVID-19) pandemic, which was declared a national emergency in the United States in March 2020, continues to create extensive disruptions to the global economy and financial markets and to businesses and the lives of individuals throughout the world. In particular, the COVID-19 pandemic has severely restricted the level of economic activity in our markets. Federal and state governments have taken, and may continue to take, unprecedented actions to contain the spread of the disease, including quarantines, travel bans, shelter-in-place orders, closures of businesses and schools, fiscal stimulus, and legislation designed to deliver monetary aid and other relief to businesses and individuals impacted by the pandemic. Although in various locations certain activity restrictions have been relaxed and businesses and schools have reopened with some level of success, in many states and localities the number of individuals diagnosed with COVID-19 increased significantly during 2020, which may cause a freezing or, in certain cases, a reversal of previously announced relaxation of activity restrictions and may prompt the need for additional aid and other forms of relief.

The impact of the COVID-19 pandemic is fluid and continues to evolve, adversely affecting many of the Bank’s customers. The unprecedented and rapid spread of COVID-19 and its associated impacts on trade (including supply chains and export levels), travel, employee productivity, unemployment, consumer spending, and other economic activities has resulted in less economic activity, significant volatility and disruption in financial markets, and has had an adverse effect on the Company’s business, financial condition and results of operations. The ultimate extent of the impact of the COVID-19 pandemic on the Company’s business, financial condition and results of operations is currently uncertain and will depend on various developments and other factors, including the effect of governmental and private sector initiatives, the effect of the recent rollout of vaccinations for the virus, whether such vaccinations will be effective against any resurgence of the virus, including any new strains, and the ability for customers and businesses to return to their pre-pandemic routine.

The Company’s business, financial condition and results of operations generally rely upon the ability of the Bank’s borrowers to repay their loans, the value of collateral underlying the Bank’s secured loans, and demand for loans and other products and services the Bank offers, which are highly dependent on the business environment in the Bank’s primary markets where it operates and in the United States as a whole.

On March 3, 2020, the Federal Reserve reduced the target federal funds rate by 50 basis points, followed by an additional reduction of 100 basis points on March 16, 2020. These reductions in interest rates and the other effects of the COVID-19 pandemic have had, and are expected to continue to have, possibly materially, an adverse effect on the Company’s business, financial condition and results of operations. For instance, the pandemic has had a negative effect on the Bank’s net interest margin, provision for loan losses, and deposit service charges, salaries and benefits, occupancy expense, and equipment expense. Other financial impacts could occur though such potential impact is unknown at this time.

As of September 30, 2020, the Bank’s capital ratios were in excess of all regulatory requirements. While management believes that the Company has sufficient capital to withstand an extended economic recession brought about by the COVID-19 pandemic, the Bank’s reported and regulatory capital ratios could be adversely impacted by further credit losses.

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We believe that we have ample liquidity to meet the needs of our customers and to manage through the COVID-19 pandemic through our low cost deposits; our ability to borrow against approved lines of credit (federal funds purchased) from correspondent banks; and our ability to obtain advances secured by certain securities and loans from the Federal Home Loan Bank. 

Beginning in March 2020, we proactively offered payment deferrals for up to 90 days to our loan customers. We continue to consider potential deferrals with respect to certain customers, which we evaluate on a case-by-case basis. At its peak, which occurred during the second quarter of 2020, we granted payment deferments on loans totaling $206.9 million. As a result of payments being resumed at the conclusion of their payment deferral period, loans in which payments have been deferred decreased from the peak of $206.9 million to $175.0 million at June 30, 2020, to $27.3 million at September 30, 2020, to $16.1 million at December 31, 2020, and to $8.7 million at March 5, 2021. Some of these deferments were to businesses that temporarily closed or reduced operations and some were requested as a pre-cautionary measure to conserve cash.  We proactively offered deferrals to our customers regardless of the impact of the pandemic on their business or personal finances. 

The Company has evaluated its exposure to certain industry segments most impacted by the COVID-19 pandemic as of December 31, 2020:

Industry Segments Outstanding  % of Loan  Avg. Loan  Avg. Loan to 
(Dollars in millions) Loan Balance  Portfolio  Size  Value 
Hotels $32.0   3.8% $2.3   70%
Restaurants $19.9   2.4% $0.7   69%
Assisted Living $8.9   1.1% $1.5   47%
Retail $80.8   9.6% $0.7   57%

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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 taxafter-tax basis. Trading securities are carried at estimated fair value with unrealized gains and losses included in non-interest income (See Note 4).

Gains and losses on the sale of available-for-sale securities and trading securities are determined using the specific identification method. Declines in the fair value of individual held-to-maturity and available-for-sale securities below their cost that are judged to be other than temporary are written down to fair value and charged to income in the Consolidated Statement of Income.

Premiums and discounts are recognized in interest income using the interest method over the period to the earliest call date. 

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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.

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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 30December 31 of each year.

 

Other Real Estate Owned

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

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Comprehensive Income (loss)

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

Mortgage Origination Fees

Mortgage origination fees relate to activities comprised of accepting residential mortgage applications, qualifying borrowers to standards established by investors and selling the mortgage loans to the investors under pre-existing commitments. The related fees received by the Company for these services are recognized at the time the loan is closed.

Advertising Expense

Advertising and public relations costs are generally expensed as incurred. External costs incurred in producing media advertising are expensed the first time the advertising takes place. External costs relating to direct mailing costs are expensed in the period in which the direct mailings are sent. Advertising expense totaled $1.0$1.2 million $1.1, $1.0 million and $919 thousand$1.1 million for the years ended December 31, 2021, 2020, 2019, and 2018,2019, respectively.

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Note 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Income Taxes

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

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

Stock Based Compensation Cost

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

The fair value of each grant is estimated on the date of grant using the Black-Sholes option pricing model. No options were granted in 2021, 2020 2019 or 2018.2019.

Earnings Per Common Share

Basic earnings per common share (“EPS”) excludes dilution and is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted EPS is computed by dividing net income available to common shareholders by the weighted average number of shares of common stock and common stock equivalents. Common stock equivalents consist of stock options and warrants and are computed using the treasury stock method.

 

Business Combinations and Method of Accounting for Loans Acquired

The Company accounts for its acquisitions under FASB ASC Topic 805, “Business Combinations,” which requires the use of the acquisition method of accounting. All identifiable assets acquired, including loans, are recorded at fair value. No allowance for loan losses related to the acquired loans is recorded on the acquisition date because the fair value of the loans acquired incorporates assumptions regarding credit risk. Loans acquired are recorded at fair value in accordance with the fair value methodology prescribed in FASB ASC Topic 820, “Fair Value Measurements and Disclosures.”

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Acquired credit-impaired loans are accounted for under the accounting guidance for loans and debt securities acquired with deteriorated credit quality, found in FASB ASC Topic 310-30, “Receivables—Loans and Debt Securities Acquired with Deteriorated Credit Quality,” formerly American Institute of Certified Public Accountants (“AICPA”) Statement of Position (“SOP”) 03-3, “Accounting for Certain Loans or Debt Securities Acquired in a Transfer,” and initially measured at fair value, which includes estimated future credit losses expected to be incurred over the life of the loans. Loans acquired in business combinations with evidence of credit deterioration since origination and for which it is probable that all contractually required payments will not be collected are considered to be credit impaired. Evidence of credit quality deterioration as of purchase dates may include information such as past-due and nonaccrual status, borrower credit scores and recent loan to value percentages. The Company considers expected prepayments and estimates the amount and timing of expected principal, interest and other cash flows for each loan or pool of loans meeting the criteria above, and determines the excess of the loan’s scheduled contractual principal and contractual interest payments over all cash flows expected to be collected at acquisition as an amount that should not be accreted (non-accretable difference). The remaining amount, representing the excess of the loan’s or pool’s cash flows expected to be collected over the fair value for the loan or pool of loans, is accreted into interest income over the remaining life of the loan or pool (accretable difference). Subsequent to the acquisition date, increases in cash flows expected to be received in excess of the Company’s initial estimates are reclassified from non-accretable difference to accretable difference and are accreted into interest income on a level-yield basis over the remaining life of the loan. Decreases in cash flows expected to be collected are recognized as impairment through the provision for loan losses.

Segment Information

ASC Topic 280-10, “Segment Reporting,” requires selected segment information of operating segments based on a management approach. The Company’s 4 reportable segments represent the distinct product lines the Company offers and are viewed separately for strategic planning by management (see Note 24,25, Reportable Segments, for further information).

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Note 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Recently Issued Accounting Standards

In June 2016, the FASB issued guidance to change the accounting for credit losses and modify the impairment model for certain debt securities. The amendments will be effective for the Company for reporting periods beginning after December 15, 2022. Early adoption is permitted for all organizations for periods beginning after December 15, 2018. The Company is currently evaluating the effect that implementation of the new standard will have on its financial position, results of operations, and cash flows.

In November 2019, the FASB issued guidance to defer the effective dates for private companies, not-for-profit organizations, and certain smaller reporting companies applying standards on current expected credit losses (CECL), leases, hedging. The new effective date for CECL will be fiscal years beginning after December 15, 2022 including interim periods within those fiscal years. The Company is evaluating the impact that this will have on its financial statements.

In November 2019, the FASB issued guidance that addresses issues raised by stakeholders during the implementation of ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The amendments affect a variety of topics in the ASC. For entities that have not yet adopted the amendments in ASU 2016-13, the amendments are effective for fiscal years beginning after December 15, 2022 including interim periods within those fiscal years-all other entities. Early adoption is permitted in any interim period as long as an entity has adopted the amendments in ASU 2016-13. The Company is evaluating the impact that this will have on its financial statements.

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In December 2019, the FASB issued guidance to simplify accounting for income taxes by removing specific technical exceptions that often produce information investors have a hard time understanding. The amendments also improve consistent application of and simply GAAP for other areas of Topic 740 by clarifying and amending existing guidance. The amendments became effective for the Company for interim and annual periods beginning after December 15, 2020. The Company does2020 and did not expect these amendments to have a material effectimpact on the itsCompany’s financial statements.

In January 2020, the FASB issued guidance to address accounting for the transition into and out of the equity method and measuring certain purchased options and forward contracts to acquire investments. The amendments became effective for the Company for interim and annual periods beginning after December 15, 2020. The Company does not expect these amendments to have a material effect on its financial statements.

In February 2020 the FASB issued guidance to add and amend SEC paragraphs in the ASC to reflect the issuance of SEC Staff Accounting Bulletin No. 119 related to the new credit losses standard and comments by the SEC staff related to the revised effective date of the new leases .. The amendments were effective upon issuance and did not have a material impact on the Company’s financial statements.

In March 2020, the FASB issued guidance that makes narrow-scope improvements to various aspects of the financial instrument guidance, including the CECL guidance issued in 2016. For public business entities, the amendments were effective upon issuance of the final ASU. For all other entities, the amendments were effective for fiscal years beginning after December 15, 2019, and are effective for interim periods within those fiscal years beginning after December 15, 2020. The effective date of the amendments to ASU 2016-01 were effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. For the amendments related to ASU 2016-13, public business entities that meet the definition of an SEC filer, excluding eligible smaller reporting companies (as defined by the SEC), should adopt the amendments in ASU 2016-13 during 2020. All other entities should adopt the amendments in ASU 2016-13 during 2023. Early adoption is permitted. For entities that have not yet adopted the guidance in ASU 2016-13, the effective dates and the transition requirements for these amendments are the same as the effective date and transition requirements in ASU 2016-13. For entities that have adopted the guidance in ASU 2016-13, the amendments were effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. For those entities, the amendments should be applied on a modified-retrospective basis by means of a cumulative-effect adjustment to opening retained earnings in the statement of financial position as of the date that an entity adopted the amendments in ASU 2016-13. During 2021, the Company established a CECL Team to begin the process of implementing CECL. The Company does not expect these amendmentsselected Valuant’s ValuCast as its CECL solution. In conjunction with Valuant, the Company developed a detailed roadmap and implementation plan; collected and validated data; and selected loss methodologies. Currently, the Company and Valuant are working on the reasonable and supportable forecast and qualitative factors. The Company plans to perform mock runs during 2022. Dixon Hughes Goodman, LLP has been engaged to perform model validation services prior to implementation. The implementation of CECL may have a material effect on itsthe Company’s financial statements.

In March 2020, the FASB issued guidance to provide temporary optional guidance to ease the potential burden in accounting for reference rate reform. The guidance provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. The ASU is intended to help stakeholders during the global market-wide reference rate transition period. The amendments are effective through December 31, 2022. The Company does not expect these amendments to have a material effect on its financial statements.

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Note 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

In August 2020, the FASB issued guidance to improve financial reporting associated with accounting for convertible instruments and contracts in an entity’s own equity. The amendments will be effective the Company for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020. The Company does not expect these amendments to have a material effect on its financial statements.

In October 2020, the FASB issued guidance to clarify the FASB’s intent that an entity should reevaluate whether a callable debt security that has multiple call dates is within the scope of FASB Accounting Standards Codification (FASB ASC) 310-20-35-33 for each reporting period. The amendments will bebecame effective for fiscal years,the Company for interim and interimannual periods within those fiscal years, beginning after December 15, 2020. The Company does not expect these amendments to have a material effect on its financial statements.

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In October 2020 the FASB updated various Topics of the Accounting Standards Codification to align the guidance in various SEC sections of the Codification with the requirements of certain SEC final rules. The amendments were effective upon issuance and did not have a material effectimpact on the Company’s financial statements.

In October 2020, the FASB issued amendments to clarify the Accounting Standards Codification and make minor improvements that are not expected to have a significant effect on current accounting practice or create a significant administrative cost to most entities. The amendments arebecame effective for the Company for annual periods beginning after December 15, 2020.2020 and did not have a material impact on the Company’s financial statements.

In October 2021, the FASB amended the Business Combinations topic in the Accounting Standard Codification to require entities to apply guidance in the Revenue topic to recognize and measure contract assets and contract liabilities acquired in a business combination. The amendments are effective for the fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The amendments are applied prospectively to business combinations occurring on or after the effective date of the amendments. Early applicationadoption of the amendments is permitted, including adoption in an interim period. The Company does not expect these amendments to have a material effect on its financial statements.

In November 2021, the FASB added a topic to the Accounting Standards Codification, Government Assistance, to require certain annual disclosures about transactions with a government that are accounted for any interim periodby applying grant or contribution accounting model by analogy to other accounting guidance. The guidance is effective for which financial statements have not been issued.issued for annual periods beginning after December 15, 2021. The Company does not expect these amendments to have a material effect on its financial statements.

Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

General Risk and Uncertainties

In the normal course of business, the Company encounters two significant types of risks: economic and regulatory. There are three main components of economic risk: interest rate risk, credit risk and market risk. The Company is subject to interest rate risk to the degree that its interest-bearing liabilities mature or reprice at different speeds, or on a different basis, than its interest-earning assets. Credit risk is the risk of default on the Company’s loan and investment portfolios that results from borrowers’ or issuer’s inability or unwillingness to make contractually required payments. Market risk reflects changes in the value of collateral underlying loans and investments and the valuation of real estate held by the Company.

The Company is subject to regulations of various governmental agencies (regulatory risk). These regulations can and do change significantly from period to period. The Company also undergoes periodic examinations by the regulatory agencies, which may subject it to further changes with respect to asset valuations, amounts of required loan loss allowances and operating restrictions from regulators’ judgments based on information available to them at the time of their examination.

Reclassifications

Certain captions and amounts in the 20182019 and 20192020 consolidated financial statements were reclassified to conform to the 20202021 presentation.

79

Note 3—MERGERS AND ACQUISITIONS

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

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

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

(Dollars in thousands, except per share data) As Recorded by
Cornerstone
  Fair Value
Adjustments
  As Recorded by
the Company
 
Assets            
Cash and cash equivalents $30,060  $  $30,060 
Investment securities  44,018   (358)(a)  43,660 
Loans  60,835   (734)(b)  60,101 
Premises and equipment  4,164   573(c)  4,737 
Intangible assets     1,810(d)  1,810 
Bank owned life insurance  2,384      2,384 
Other assets  3,082   (452)(e)  2,630 
Total assets $144,543  $839  $145,382 
             
Liabilities            
Deposits:            
Non-interest bearing $27,296  $  $27,296 
Interest-bearing  99,152   150(f)  99,302 
Total deposits  126,448   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 fair value adjustments

(a)Adjustment reflects marking the securities portfolio to fair value as of the acquisition date.
(b)Adjustment reflects the fair value adjustments based on the Company’s evaluation of the acquired loan portfolio and excludes the allowance for loan losses recorded by Cornerstone.
(c)Adjustment reflects the fair value adjustments based on the Company’s evaluation of the acquired premises and equipment.
(d)Adjustment reflects the recording of the core deposit intangible on the acquired deposit accounts.
(e)Adjustment reflects the deferred tax adjustment related to fair value adjustments at 34%.
(f)Adjustment reflects the fair value adjustment on interest-bearing deposits.
(g)Adjustment reflects the fair value adjustment on post-retirement benefits.

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

The following table discloses the impact of the merger with Cornerstone (excluding the impact of merger-related expenses) since the acquisition on October 20, 2017 through December 31, 2017. The table also presents certain pro forma information as if Cornerstone had been acquired on January 1, 2017 and January 1, 2016. These results combine the historical results of Cornerstone in the Company’s consolidated statement of income and, while certain adjustments were made for the estimated impact of certain fair value adjustments and other acquisition-related activity, they are not indicative of what would have occurred had the acquisition taken place on January 1, 2017 or January 1, 2016.

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

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Note 4—INVESTMENT SECURITIES

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

AVAILABLE-FOR-SALE:

(Dollars in thousands) Amortized
Cost
 Gross
Unrealized
Gains
 Gross
Unrealized
Losses
 Fair Value 
December 31, 2021                
US Treasury securities $15,736  $  $300  $15,436 
Government Sponsored Enterprises  2,499   2   0   2,501 
Mortgage-backed securities  398,125   3,596   3,992   397,729 
Small Business Administration pools  30,835   505   67   31,273 
State and local government  105,469   4,918   539   109,848 
Corporate and other securities  8,024   157   129   8,052 
Total $560,688  $9,178  $5,027  $564,839 
                
(Dollars in thousands) Amortized
Cost
 Gross
Unrealized
Gains
 Gross
Unrealized
Losses
 Fair Value  Amortized
Cost
 Gross
Unrealized
Gains
 Gross
Unrealized
Losses
 Fair Value 
December 31, 2020                         
US Treasury securities $1,501  $1  $0  $1,502  $1,501  $1  $0  $1,502 
Government Sponsored Enterprises 996 10 0 1,006   996   10   0   1,006 
Mortgage-backed securities 222,739 7,375 185 229,929   222,739   7,375   185   229,929 
Small Business Administration pools 34,577 928 7 35,498   34,577   928   7   35,498 
State and local government 82,495 6,184 76 88,603   82,495   6,184   76   88,603 
Corporate and other securities  3,272  56  0  3,328   3,272   56   0   3,328 
 $345,580 $14,554 $268 $359,866 
         
(Dollars in thousands) Amortized
Cost
 Gross
Unrealized
Gains
 Gross
Unrealized
Losses
 Fair Value 
December 31, 2019         
US Treasury securities $7,190  $16  $3  $7,203 
Government Sponsored Enterprises  984   17   0   1,001 
Mortgage-backed securities  182,736   1,490   640   183,586 
Small Business Administration pools  45,301   259   217   45,343 
State and local government  47,418   2,371   141   49,648 
Other securities  19   0   0   19 
 $283,648  $4,153  $1,001  $286,800 
Total $345,580  $14,554  $268  $359,866 

At December 31, 2021, corporate and other securities available-for-sale included the following at fair value: corporate fixed-to-float bonds at $8.0 million, mutual funds at $11.6 thousand and foreign debt of $10.0 thousand. At December 31, 2020, corporate and other securities available-for-sale included the following at fair value: corporate fixed-to-float bonds at $3.3 million million,, mutual funds at $8.0 thousand thousand and foreign debt of $10.0 thousand thousand. At December 31, 2019, corporate and other securities available-for-sale included the following at fair value: mutual funds at $8.8 thousand and foreign debt of $10.0 thousand.. Other investments, at cost, include Federal Home Loan Bank (“FHLB”) stock in the amount of $1.1698.4 thousand million and, corporate stock in the amount of $1.0 million million, and a venture capital fund in the amount of $86.7 thousand at December 31, 2020.2021. The Company held $991.41.1 million thousand of FHLB stock and $1.0 million million in corporate stock at December 31, 2019.2020.

During the first quarter of 2019,year ended December 31, 2021, the Company reclassifieddid not receive any proceeds from the portfoliosale of securities listed as held-to-maturity to available-for-sale. At the time of reclassification, the unrealized gain on securities was $124.3 thousand. There were no investment securities listed as held-to-maturity as of December 31, 2020.

95

available-for-sale. During the yearsyear ended December 31, 2020, and 2019, the Company received proceeds of $1.2 million and $44.4 million, respectively,from the sale of investment securities available-for-sale. For the year ended December 31, 2021, there were no gross realized gains or losses from the sale of investment securities available-for-sale. For the year ended December 31, 2020, gross realized gains from the sale of investment securities available-for-sale amounted to $99.1 thousand thousand and there were no gross realized losses. For the year ended December 31, 2019, gross realized gains from the sale of investment securities available-for-sale amounted to $355.6 thousand and gross realized losses amounted to $219.6 thousand. The tax (benefit) provision applicable to the net realized gain (loss) was approximately $0, $21 thousand, 29 thousand, and ($72)$29 thousand for 2021, 2020 2019 and 2018,2019, respectively.

 

The amortized cost and fair value of investment securities at December 31, 2020,2021, by expected maturity, follow. Expected maturities differ from contractual maturities because borrowers may have the right to call or prepay the obligations with or without prepayment penalties. Mortgage-backed securities are included in the year corresponding with the remaining expected life. There were no Held-to-maturity securities as of December 31, 2020.2021.

(Dollars in thousands) Available-for-sale  Available-for-sale 
 Amortized
Cost
 Fair
Value
  Amortized
Cost
 Fair
Value
 
Due in one year or less $11,013  $11,163  $20,036�� $20,176 
Due after one year through five years  139,664   144,358   175,313   177,320 
Due after five years through ten years  139,982   148,563   237,914   241,008 
Due after ten years  54,921   55,782   127,425   126,335 
 $345,580  $359,866  $560,688  $564,839 

Securities with an amortized cost of $155.0128.5 million million and fair value of $161.5130.4 million million at December 31, 20202021 were pledged to secure FHLB advances, public deposits, and securities sold under agreements to repurchase. Securities with an amortized cost of $138.6155.0 million million and fair value of $139.3161.5 million million at December 31, 20192020 were pledged to secure FHLB advances, public deposits, and securities sold under agreements to repurchase.

96

80

Note 3—INVESTMENT SECURITIES (Continued)

The following tables show gross unrealized losses and fair values, aggregated by investment category and length of time that individual securities have been in a continuous loss position at December 31, 20202021 and December 31, 2019.2020. 

                   
  Less than 12 months  12 months or more  Total 
December 31, 2021
(Dollars in thousands)
 Fair
Value
  Unrealized
Loss
  Fair
Value
  Unrealized
Loss
  Fair
Value
  Unrealized
Loss
 
Available-for-sale securities:                        
US Treasury $14,479  $264  $958  $36  $15,437  $300 
Mortgage-Backed Securities  200,238   3,156   48,570   836   248,808   3,992 
Small Business Administration pools  7,232   67         7,232   67 
State and local government  21,261   539         21,261   539 
Corporate and Other Securities  3,621   129         3,621   129 
Total $246,831  $4,155  $49,528  $872  $296,359  $5,027 
          
  Less than 12 months  12 months or more  Total 
December 31, 2020
(Dollars in thousands)
 Fair
Value
  Unrealized
Loss
  Fair
Value
  Unrealized
Loss
  Fair
Value
  Unrealized
Loss
 
Available-for-sale securities:                        
US Treasury $  $  $  $  $  $ 
Mortgage-backed securities  21,298   152   1,414   33   22,712   185 
Small Business Administration pools        1,323   7   1,323   7 
State and local government  4,930   76         4,930   76 
Total $26,228  $228  $2,737  $40  $28,965  $268 

  Less than 12 months  12 months or more  Total 
December 31, 2020
(Dollars in thousands)
 Fair
Value
  Unrealized
Loss
  Fair
Value
  Unrealized
Loss
  Fair
Value
  Unrealized
Loss
 
Available-for-sale securities:                        
Mortgage-Backed Securities $21,298  $152  $1,414  $33  $22,712  $185 
Small Business Administration pools        1,323   7   1,323   7 
State and local government  4,930   76         4,930   76 
Total $26,228  $228  $2,737  $40  $28,965  $268 
          
  Less than 12 months  12 months or more  Total 
December 31, 2019
(Dollars in thousands)
 Fair
Value
  Unrealized
Loss
  Fair
Value
  Unrealized
Loss
  Fair
Value
  Unrealized
Loss
 
Available-for-sale securities:                        
US Treasury $  $  $1,508  $3  $1,508  $3 
Mortgage-backed securities  57,175   485   12,419   155   69,594   640 
Small Business Administration pools  7,891   53   13,502   164   21,393   217 
State and local government  5,695   141         5,695   141 
Total $70,761  $679  $27,429  $322  $98,190  $1,001 
                   

Government Sponsored Enterprise, Mortgage-Backed Securities: The Company owned mortgage-backed securities (“MBSs”), including collateralized mortgage obligations (“CMOs”), issued by government sponsored enterprises (“GSEs”) with an amortized cost of $257.3429.0 million million and $182.7257.3 million million and approximate fair value of $265.4429.0 million million and $183.6265.4 million million at December 31, 20202021 and December 31, 2019,2020, respectively. As of December 31, 2020,2021, and December 31, 2019,2020, all of the MBSs issued by GSEs were classified as “Available for Sale.” Unrealized losses on certain of these investments are not considered to be “other than temporary,” and we have the intent and ability to hold these until they mature or recover the current book value. The contractual cash flows of the investments are guaranteed by the GSE. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost of the Company’s investment. Because the Company does not intend to sell these securities and it is more likely than not the Company will not be required sell these securities before a recovery of its amortized cost, which may be maturity, the Company does not consider the investments to be other-than-temporarily impaired at December 31, 2020.2021.

Non-agency Mortgage Backed Securities: The Company holds private label mortgage-backed securities (“PLMBSs”), including CMOs, at December 31, 20202021 with an amortized cost of $57.448.2 thousand thousand and approximate fair value of $54.746.4 thousand thousand.. The Company held private label mortgage-backed securities (“PLMBSs”), including CMOs, at December 31, 20192020 with an amortized cost of $73.557.4 thousand thousand and approximate fair value of $73.554.7 thousand thousand.. Management monitors each of these securities on a quarterly basis to identify any deterioration in the credit quality, collateral values and credit support underlying the investments. Management evaluates securities for other-than-temporary impairment (“OTTI”) on at least a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. For securities in an unrealized loss position, management considers the extent and duration of the unrealized loss, the financial condition and near term prospects of the issuer and any collateral underlying the relevant security. Management also assesses whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings. For debt securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: (1) OTTI related to credit loss, which must be recognized in the income statement and (2) OTTI related to other factors, which is recognized in other comprehensive income (loss). The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis.

During the years ended December 31, 2020,2021, December 31, 2019,2020, and December 31, 2018,2019, no OTTI charges were recorded in earnings for the PLMBS portfolio.

97

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, 20202021 and December 31, 2019.2020.


Note 5—4—LOANS

Loans summarized by categoryThe following table summarizes the composition of our loan portfolio. Total loans are recorded net of deferred loan fees and costs, which totaled $1.4 million and $2.2 million as follows:of December 31, 2021 and December 31, 2020, respectively.

  December 31, 
(Dollars in thousands) 2020  2019 
Commercial, financial and agricultural $96,688  $51,805 
Real estate:        
Construction  95,282   73,512 
Mortgage-residential  43,928   45,357 
Mortgage-commercial  573,258   527,447 
Consumer:        
Home equity  26,442   28,891 
Other  8,559   10,016 
Total $844,157  $737,028 

Schedule of Loan Portfolio

  December 31, 
(Dollars in thousands) 2021  2020 
Commercial, financial and agricultural $69,952  $96,688 
Real estate:        
Construction  94,969   95,282 
Mortgage-residential  45,498   43,928 
Mortgage-commercial  617,464   573,258 
Consumer:        
Home equity  27,116   26,442 
Other  8,703   8,559 
Total $863,702  $844,157 

Commercial, financial, and agricultural category includes $42.21.5 million and $42.2 million in PPP loans, net of deferred fees and costs, as of December 31, 2020.2021 and December 31, 2020, respectively.

Activity in the allowance for loan losses was as follows:

          
  Years ended December 31, 
(Dollars in thousands) 2021  2020  2019 
Balance at the beginning of year $10,389  $6,627  $6,263 
Provision for loan losses  335   3,663   139 
Charged off loans  (182)  (110)  (145)
Recoveries  637   209   370 
Balance at end of year $11,179  $10,389  $6,627 

             
  Years ended December 31, 
(Dollars in thousands) 2020  2019  2018 
Balance at the beginning of year $6,627  $6,263  $5,797 
Provision for loan losses  3,663   139   346 
Charged off loans  (110)  (145)  (164)
Recoveries  209   370   284 
Balance at end of year $10,389  $6,627  $6,263 

98

The detailed activity in the allowance for loan losses and the recorded investment in loans receivable as of and for the years ended December 31, 2021, December 31, 2020 and December 31, 2019 follows:

Schedule of activity in the allowance for loan losses and December 31, 2018 follows:the recorded investment in loans receivable

(Dollars in thousands) Commercial  Real estate
Construction
  Real estate
Mortgage
Residential
  Real estate
Mortgage
Commercial
  Consumer
Home
equity
  Consumer
Other
  Unallocated  Total 
2021                                
Allowance for loan losses:                                
Beginning balance $778  $145  $541  $7,855  $324  $125  $621  $10,389 
Charge-offs           (110)     (72)     (182)
Recoveries  39      10   473   69   46      637 
Provisions  36   (32)  9   352   (60)  27   3   335 
Ending balance $853  $113  $560  $8,570  $333  $126  $624  $11,179 
                                 
Ending balances:                                
Individually evaluated for impairment $  $  $  $1  $  $  $  $ 
                                 
Collectively evaluated for impairment  853   113   560   8,569   333   126   624   11,179 
                                 
Loans receivable:                                
Ending balance-total $69,952  $94,969  $45,498  $617,464  $27,116  $8,703  $  $863,702 
                                 
Ending balances:                                
Individually evaluated for impairment        133   1,561            1,694 
                                 
Collectively evaluated for impairment  69,952   94,969   45,365   615,903   27,116   8,703      862,008 

82

Note 4—LOANS (Continued)

(Dollars in thousands) Commercial  Real estate
Construction
  Real estate
Mortgage
Residential
  Real estate
Mortgage
Commercial
  Consumer
Home
equity
  Consumer
Other
  Unallocated  Total 
2020                                
Allowance for loan losses:                                
Beginning balance $427  $111  $367  $4,602  $240  $97  $783  $6,627 
Charge-offs     (2)     (1)     (107)     (110)
Recoveries  130   2      23   2   52      209 
Provisions  221   34   174   3,231   82   83   (162)  3,663 
Ending balance $778  $145  $541  $7,855  $324  $125  $621  $10,389 
                                 
Ending balances:                                
Individually evaluated for impairment $  $  $  $2  $  $  $  $2 
                                 
Collectively evaluated for impairment  778   145   541   7,853   324   125   621   10,387 
                                 
Loans receivable:                                
Ending balance-total $96,688  $95,282  $43,928  $573,258  $26,442  $8,559  $  $844,157 
                                 
Ending balances:                                
Individually evaluated for impairment        440   5,631   42         6,113 
                                 
Collectively evaluated for impairment  96,688   95,282   43,488   567,627   26,400   8,559      838,044 

83

99

Note 4—LOANS (Continued)

(Dollars in thousands) Commercial  Real estate
Construction
  Real estate
Mortgage
Residential
  Real estate
Mortgage
Commercial
  Consumer
Home
equity
  Consumer
Other
  Unallocated  Total 
2019                                
Allowance for loan losses:                                
Beginning balance $430  $89  $431  $4,318  $261  $88  $646  $6,263 
Charge-offs  (12)     (12)     (1)  (120)     (145)
Recoveries  3         307   15   45      370 
Provisions  6   22   (52)  (23)  (35)  84   137   139 
Ending balance $427  $111  $367  $4,602  $240  $97  $783  $6,627 
                                 
Ending balances:                                
Individually evaluated for impairment $  $  $  $6  $  $  $  $6 
                                 
Collectively evaluated for impairment  427   111   367   4,596   240   97   783   6,621 
                                 
Loans receivable:                                
Ending balance-total $51,805  $73,512  $45,357  $527,447  $28,891  $10,016  $  $737,028 
                                 
Ending balances:                                
Individually evaluated for impairment  400      392   3,135   70         3,997 
                                 
Collectively evaluated for impairment  51,405   73,512   44,965   524,312   28,821   10,016      733,031 

100

(Dollars in thousands) Commercial  Real estate
Construction
  Real estate
Mortgage
Residential
  Real estate
Mortgage
Commercial
  Consumer
Home
equity
  Consumer
Other
  Unallocated  Total 
2018                                
Allowance for loan losses:                                
Beginning balance $221  $101  $461  $3,077  $308  $35  $1,594  $5,797 
Charge-offs        (1)     (23)  (140)     (164)
Recoveries  3      4   210   6   61      284 
Provisions  206   (12)  (33)  1,031   (30)  132   (948)  346 
Ending balance $430  $89  $431  $4,318  $261  $88  $646  $6,263 
                                 
Ending balances:                                
Individually evaluated for impairment $  $  $  $14  $  $  $  $14 
                                 
Collectively evaluated for impairment  430   89   431   4,304   261   88   646   6,249 
                                 
Loans receivable:                                
Ending balance-total $53,933  $58,440  $52,764  $513,833  $29,583  $9,909  $  $718,462 
                                 
Ending balances:                                
Individually evaluated for impairment        322   4,030   29         4,381 
                                 
Collectively evaluated for impairment  53,933   58,440   52,442   509,803   29,554   9,909      714,081 

 

At December 31, 2020,2021, $16.79.5 million 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 $1.5125.6 thousand million.at December 31, 2021. Loans acquired prior to 2017 have been included in the evaluation of the allowance for loan losses.

84

The following table presents at December 31, 2020, 2019 and 2018, loans individually evaluated and considered impairedNote 4—LOANS (Continued) under FASB ASC 310 “Accounting by Creditors for Impairment of a Loan.” Impairment includes performing troubled debt restructurings.

  December 31, 
(Dollars in thousands) 2020  2019  2018 
Total loans considered impaired at year end $6,113  $3,997  $4,381 
Loans considered impaired for which there is a related allowance for loan loss:            
Outstanding loan balance $123  $256  $453 
Related allowance $2  $6  $14 
Average impaired loans $6,375  $4,431  $4,128 
Amount of interest earned during period of impairment $403  $263  $160 

101

The following tables are by loan category and present at December 31, 2020,2021, December 31, 20192020 and December 31, 20182019 loans individually evaluated and considered impaired under FASB ASC 310, “Accounting by Creditors for Impairment of a Loan.” Impairment includes performing troubled debt restructurings.


Schedule of loan category and loans individually evaluated and considered impaired

(Dollars in thousands)                      
December 31, 2020 Recorded
Investment
 Unpaid
Principal
Balance
 Related
Allowance
 Average
Recorded
Investment
 Interest
Income
Recognized
 
December 31, 2021 Recorded
Investment
 Unpaid
Principal
Balance
 Related
Allowance
 Average
Recorded
Investment
 Interest
Income
Recognized
 
With no allowance recorded:                               
Commercial $  $  $  $  $  $  $  $  $  $ 
Real estate:                               
Construction                     
Mortgage-residential 440 499  440 1   133   151      131   6 
Mortgage-commercial 5,508 7,980  5,770 388   1,521   3,514      1,748   223 
Consumer:                               
Home Equity 42 47  42 3                
Other                     
                               
With an allowance recorded:                               
Commercial                     
Real estate:                               
Construction                     
Mortgage-residential                     
Mortgage-commercial 123 123 2 123 11   40   40   1   39   5 
Consumer:                               
Home Equity                     
Other                     
                               
Total:                               
Commercial                     
Real estate:                               
Construction                     
Mortgage-residential 440 499  440 1   133   151      131   6 
Mortgage-commercial 5,631 8,103 2 5,893 399   1,561   3,554   1   1,787   228 
Consumer:                               
Home Equity 42 47  42 3                
Other                      
 $6,113 $8,649 $2 $6,375 $403  $1,694  $3,705  $1  $1,918  $234 

85

102

Note 4—LOANS (Continued)

(Dollars in thousands)               
December 31, 2020 Recorded
Investment
  Unpaid
Principal
Balance
  Related
Allowance
  Average
Recorded
Investment
  Interest
Income
Recognized
 
With no allowance recorded:                    
Commercial $  $  $  $  $ 
Real estate:                    
Construction               
Mortgage-residential  440   499      440   1 
Mortgage-commercial  5,508   7,980      5,770   388 
Consumer:                    
Home Equity  42   47      42   3 
Other               
                     
With an allowance recorded:                    
Commercial               
Real estate:                    
Construction               
Mortgage-residential               
Mortgage-commercial  123   123   2   123   11 
Consumer:                    
Home Equity               
Other               
                     
Total:                    
Commercial               
Real estate:                    
Construction               
Mortgage-residential  440   499      440   1 
Mortgage-commercial  5,631   8,103   2   5,893   399 
Consumer:                    
Home Equity  42   47      42   3 
Other               
  $6,113  $8,649  $2  $6,375  $403 

86

Note 4—LOANS (Continued)

(Dollars in thousands)               
December 31, 2019 Recorded
Investment
  Unpaid
Principal
Balance
  Related
Allowance
  Average
Recorded
Investment
  Interest
Income
Recognized
 
With no allowance recorded:                    
Commercial $400  $400  $  $600  $49 
Real estate:                    
Construction               
Mortgage-residential  392   460      439   19 
Mortgage-commercial  2,879   5,539      2,961   170 
Consumer:                    
Home Equity  70   73      76   2 
Other               
                     
With an allowance recorded:                    
Commercial               
Real estate:                    
Construction               
Mortgage-residential               
Mortgage-commercial  256   256   6   355   23 
Consumer:                    
Home Equity               
Other               
                     
Total:                    
Commercial  400   400      600   49 
Real estate:                    
Construction               
Mortgage-residential  392   460      439   19 
Mortgage-commercial  3,135   5,795   6   3,316   193 
Consumer:                    
Home Equity  70   73      76   2 
Other               
  $3,997  $6,728  $6  $4,431  $263 

103

(Dollars in thousands)               
December 31, 2018 Recorded
Investment
  Unpaid
Principal
Balance
  Related
Allowance
  Average
Recorded
Investment
  Interest
Income
Recognized
 
With no allowance recorded:                    
Commercial $  $  $  $  $ 
Real estate:                    
Construction               
Mortgage-residential  322   371      483   9 
Mortgage-commercial  3,577   6,173      3,232   128 
Consumer:                    
Home Equity  29   30      33   2 
Other               
                     
With an allowance recorded:                    
Commercial               
Real estate:                    
Construction               
Mortgage-residential               
Mortgage-commercial  453   453   14   380   21 
Consumer:                    
Home Equity               
Other               
                     
Total:                    
Commercial               
Real estate:                    
Construction               
Mortgage-residential  322   371      483   9 
Mortgage-commercial  4,030   6,626   14   3,612   149 
Consumer:                    
Home Equity  29   30      33   2 
Other               
  $4,381  $7,027  $14  $4,128  $160 

 

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. 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.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.

104

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.

87

Note 4—LOANS (Continued)

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be “Pass” rated loans. As of December 31, 20202021 and December 31, 2019,2020, and based on the most recent analysis performed, the risk category of loans by class of loans is shown in the table below. As of December 31, 20202021 and December 31, 2019,2020, no loans were classified as doubtful.

(Dollars in thousands)               
December 31, 2020 Pass  Special
Mention
  Substandard  Doubtful  Total 
Commercial, financial & agricultural $96,507  $181  $  $  $96,688 
Real estate:                    
Construction  95,282            95,282 
Mortgage – residential  43,240   190   498      43,928 
Mortgage – commercial  559,982   7,270   6,006      573,258 
Consumer:                    
Home Equity  25,041   95   1,306      26,442 
Other  8,538   21         8,559 
Total $828,590  $7,757  $7,810  $  $844,157 
                
(Dollars in thousands)               
     Special          
December 31, 2019 Pass  Mention  Substandard  Doubtful  Total 
Commercial, financial & agricultural $51,166  $239  $400  $  $51,805 
Real estate:                    
Construction  73,512            73,512 
Mortgage – residential  44,221   509   627      45,357 
Mortgage – commercial  521,072   2,996   3,379      527,447 
Consumer:                    
Home Equity  27,450   1,157   284      28,891 
Other  9,981   35         10,016 
Total $727,402  $4,936  $4,690  $  $737,028 

Schedule of loan category and loan by risk categories

(Dollars in thousands)               
December 31, 2021 Pass  Special
Mention
  Substandard  Doubtful  Total 
Commercial, financial & agricultural $69,833  $119  $  $  $69,952 
Real estate:                 
Construction  94,966      3      94,969 
Mortgage – residential  45,049   305   144      45,498 
Mortgage – commercial  610,001   1,009   6,454      617,464 
Consumer:                 
Home Equity  25,751   171   1,194      27,116 
Other  8,604   22   77      8,703 
Total $854,204  $1,626  $7,872  $  $863,702 
                
(Dollars in thousands)               
     Special          
December 31, 2020 Pass  Mention  Substandard  Doubtful  Total 
Commercial, financial & agricultural $96,507  $181  $  $  $96,688 
Real estate:                    
Construction  95,282            95,282 
Mortgage – residential  43,240   190   498      43,928 
Mortgage – commercial  559,982   7,270   6,006      573,258 
Consumer:                    
Home Equity  25,041   95   1,306      26,442 
Other  8,538   21         8,559 
Total $828,590  $7,757  $7,810  $  $844,157 

 

At December 31, 20202021 and 2019,December 31, 2020, non-accrual loans totaled $4.6 million$250 thousand and $2.3$4.7 million, respectively. The gross interest income which would have been recorded under the original terms of the non-accrual loans amounted to $150.533.0 thousand thousand and $148150.5 thousand thousand in 20202021 and 2019,2020, respectively. Interest recorded on non-accrual loans in 20202021 and 20192020 amounted to $447.5453.3 thousand thousand and $66447.5 thousand thousand,, respectively.

Troubled debt restructurings (“TDRs”)TDRs that are still accruing areand included in impaired loans at December 31, 20202021 and 2019at December 31, 2020 amounted to $1.61.4 million million and $1.71.6 million million,, respectively. Interest earned during 20202021 and 20192020 on these loans amounted to $130.1120.4 thousand thousand and $144 130.1 thousandthousand,, respectively.

There were loans of $1.3 million and $0.3 thousand that wereLoans greater than 90 days delinquent and still accruing interest as ofwere $0 and $1.3 million at December 31, 2021 and December 31, 2020, and December 31, 2019, respectively. 

105

The following tables are by loan category and present loans past due and on non-accrual status as of December 31, 2021 and December 31, 2020:

Schedule of loan category and present loans past due and on non-accrual status as of December 31, 2020 and December 31, 2019:

(Dollars in thousands)
December 31, 2020
 30-59
Days
Past Due
 60-89
Days
Past Due
 Greater than
90 Days and
Accruing
 Nonaccrual Total Past
Due
 Current Total
Loans
 
(Dollars in thousands)
December 31, 2021
 30-59
Days
Past Due
 60-89
Days
Past Due
 Greater than
90 Days and
Accruing
 Nonaccrual Total Past
Due
 Current Total
Loans
 
Commercial $165  $27  $  $4,080  $4,272  $92,416  $96,688  $125  $35  $  $118  $278  $69,674  $69,952 
Real estate:                                           
Construction 424  1,260  1,684 93,598 95,282                  94,969   94,969 
Mortgage-residential 7   440 447 43,481 43,928   8   4      132   144   45,354   45,498 
Mortgage-commercial      573,258 573,258                  617,464   617,464 
Consumer:                                           
Home equity    42 42 26,400 26,442      62         62   27,054   27,116 
Other  21 21   42 8,517 8,559      1         1   8,702   8,703 
Total $617 $48 $1,260 $4,562 $6,487 $837,670 $844,157  $133  $102  $  $250  $485  $863,217  $863,702 
               
(Dollars in thousands)
December 31, 2019
 30-59
Days
Past Due
 60-89
Days
Past Due
 Greater than
90 Days and
Accruing
 Nonaccrual Total Past
Due
 Current Total
Loans
 
Commercial $  $99  $  $400  $499  $51,306  $51,805 
Real estate:                            
Construction  113            113   73,399   73,512 
Mortgage-residential  151         392   543   44,814   45,357 
Mortgage-commercial  39         1,467   1,506   525,941   527,447 
Consumer:                            
Home equity  2   9      70   81   28,810   28,891 
Other  40   23         63   9,953   10,016 
 $345  $131  $  $2,329  $2,805  $734,223  $737,028 

88

Note 4—LOANS (Continued)

(Dollars in thousands)
December 31, 2020
 30-59
Days
Past Due
  60-89
Days
Past Due
  Greater than
90 Days and
Accruing
  Nonaccrual  Total Past
Due
  Current  Total
Loans
 
Commercial $165  $27  $  $4,080  $4,272  $92,416  $96,688 
Real estate:                            
Construction  424      1,260      1,684   93,598   95,282 
Mortgage-residential  7         440   447   43,481   43,928 
Mortgage-commercial                 573,258   573,258 
Consumer:                            
Home equity           42   42   26,400   26,442 
Other  21   21         42   8,517   8,559 
Total $617  $48  $1,260  $4,562  $6,487  $837,670  $844,157 

The CARES Act and Initiatives Related to COVID-19COVID-19.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act, was signed into law. The CARES Act provided for approximately $2.2 trillion in direct economic relief in response to the public health and economic impacts of COVID-19. Many of the CARES Act’s programs are, and remain,were dependent upon the direct involvement of financial institutions like the Bank. These programs have beenwere implemented through rules and guidance adopted by federal departments and agencies, including the U.S. Department of Treasury, the Federal Reserve and other federal bank regulatory authorities, including those with direct supervisory jurisdiction over the Company and the Bank. Furthermore, as the COVID-19 pandemic evolves, federal regulatory authorities continue to issue additional guidance with respect to the implementation, life cycle, and eligibility requirements for the various CARES Act programs, as well as industry-specific recovery procedures for COVID-19. In addition, it is possible that Congress will enact supplementary COVID-19 response legislation, including amendments toThe relief period provided in the CARES Act or new bills comparable in scope to the CARES Act. We continue to assess the impact of the CARES Act and other statutes, regulations and supervisory guidance related to the COVID-19 pandemic.expired on January 1, 2022.

 

COVID-19 Related Troubled Debt Restructurings and Loan Modifications for Affected Borrowers. The CARES Act, as extended by certain provisions of the Consolidated Appropriations Act, 2021, permitspermitted banks to suspend requirements under GAAPgenerally accepted accounting principles (“GAAP”) for loan modifications to borrowers affected by COVID-19 that may otherwise be characterized as troubled debt restructurings, or TDRs, and suspend any determination related thereto if (i) the borrower was not more than 30 days past due as of December 31, 2019, (ii) the modifications arewere related to COVID-19, and (iii) the modification occursoccurred between March 1, 2020 and the earlier of 60 days after the date of termination of the national emergency or January 1, 2022. Federal bank regulatory authorities also issued guidance to encourage banks to make loan modifications for borrowers affected by COVID-19.

106

We are focused on servicing the financial needs of our commercial and consumer customers with flexible loan payment arrangements, including short-term loan modifications or forbearance payments and reducing or waiving certain fees on deposit accounts. Future governmental actions may require these and other types of customer-related responses.

Beginning in March 2020, wethe Company proactively offered payment deferrals for up to 90 days to ourits loan customers. We continue to consider potential deferrals with respect to certain customers which we evaluateregardless of the impact of the pandemic on a case-by-case basis. At its peak, which occurred during the second quarter of 2020, we granted payment deferments on loans totaling $206.9 million.their business or personal finances.  As a result of payments being resumed at the conclusion of their payment deferral period, loans in which payments have beenwere being deferred decreased from the peak of $206.9 million to $175.0 million at June 30, 2020, to $27.3 million at September 30, 2020, to $16.1 million at December 31, 2020, and to $8.7 million at March 5, 2021. We had no loans on which payments were deferred related to the COVID-19 pandemic31, 2021, $4.5 million at June 30, 2021, $4.1 million at September 30, 2021, and $0 at December 31, 2019. We had no loans remaining on initial deferral status2021.

Troubled Debt Restructurings. The Company identifies TDRs as impaired under the guidance in which both principal and interest were deferred at December 31, 2020 and March 5, 2021. The $16.1 million in deferrals at December 31, 2020 consist of seven loans on which only principal is being deferred. We had three loans totaling $8.7 million in continuing deferral status in which only principal is being deferred at March 5, 2021. Two of the continuing deferrals at March 5, 2021 totaling $4.5 million are in the retail industry segment identified by us as one of the industry segments most impacted by the COVID-19 pandemic; the other continuing deferral totaling $4.2 million is a mixed use office space that we do not consider to be in an industry segment most impacted by the COVID-19 pandemic. Some of these deferments were to businesses that temporarily closed or reduced operations and some were requested as a pre-cautionary measure to conserve cash.  We proactively offered deferrals to our customers regardless of the impact of the pandemic on their business or personal finances. 

ASC 310-10-35. There were no loans determined to be TDR’sTDRs that were restructured during the twelve month period ended December 31, 2020 and2021 December 31, 2019.2020. Additionally, there were no loans determined to be TDRs in the previous twelve months ended December 31, 2020 and December 31, 2019 that had subsequent payment defaults. Defaulted loans are those loans that are greater than 90 days past due.

In the determination of the allowance for loan losses, all TDRs are reviewed to ensure that one of the three proper valuation methods (fair market value of the collateral, present value of cash flows, or observable market price) is adhered to. All non-accrual loans are written down to its corresponding collateral value. All TDR accruing loans where the loan balance exceeds the present value of cash flow will have a specific allocation. All nonaccrual loans are considered impaired. Under ASC 310-10, a loan is impaired when it is probable that the Bank will be unable to collect all amounts due including both principal and interest according to the contractual terms of the loan agreement.

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

107

89

Note 4—LOANS (Continued)

A summary of changes in the accretable yield for PCI loans for the years ended December 31, 2021, 2020, and 2019 follows:

Schedule for changes in the accretable yield for PCI loans for the years ended December 31, 2020, 2019, and 2018 follows:

(Dollars in thousands) Year
Ended
December 31,
2020
 Year
Ended
December 31,
2019
 Year
Ended
December 31,
2018
  Year
Ended
December 31,
2021
 Year
Ended
December 31,
2020
 Year
Ended
December 31,
2019
 
Accretable yield, beginning of period $123  $153  $21  $93  $123  $153 
Additions             
Accretion (30) (30) (256)  (29)  (30)  (30)
Reclassification of non-accretable difference due to improvement in expected cash flows   284          
Other changes, net      104          
Accretable yield, end of period $93 $123 $153  $64  $93  $123 

 

At December 31, 20202021 and December 31, 2019,2020, the recorded investment in purchased impaired loans was $110109 thousand thousand and $112110 thousand thousand,, respectively. The unpaid principal balance was $171152 thousand thousand and $190171 thousand thousand at December 31, 20202021 and December 31, 2019,2020, respectively. At December 31, 20202021 and December 31, 2019,2020, these loans were all secured by commercial real estate.

Related party loans are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated persons and generally do not involve more than the normal risk of collectability. The following table presents related party loan transactions for the years ended December 31, 20202021 and December 31, 2019.2020.

(Dollars in thousands) For the years ended
December 31,
 
  2020  2019 
Balance, beginning of year $4,108  $5,937 
New Loans  188   129 
Less loan repayments  999   1,958 
Balance, end of year $3,297  $4,108 

Schedule of Related Party Loans

       
(Dollars in thousands) For the years ended
December 31,
 
  2021  2020 
Balance, beginning of year $3,297  $4,108 
New Loans  4   188 
Less loan repayments  492   999 
Balance, end of year $2,809  $3,297 

 

Note 6—5—FAIR VALUE MEASUREMENT

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

Level lQuoted prices in active markets for identical assets or liabilities.

Level 2Observable 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.

108

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.

90

Note 5—FAIR VALUE MEASUREMENT (Continued)

Other investments, at cost—The carrying value of other investments, such as FHLB stock, approximates fair value based on redemption provisions.

Loans Held for Sale—The Company originates fixed rate residential loans on a servicing released basis in the secondary market. Loans closed but not yet settled with an investor, are carried in the Company’s loans held for sale portfolio. These loans are fixed rate residential loans that have been originated in the Company’s name and have closed. Virtually all of these loans have commitments to be purchased by investors at a locked in price with the investors on the same day that the loan was locked in with the Company’s customers. Therefore, these loans present very little market risk for the Company and are classified as Level 2. The carrying amount of these loans approximates fair value.

Loans— The valuation of loans receivable is estimated using the exit price notion which incorporates factors, such as enhanced credit risk, illiquidity risk and market factors that sometimes exist in exit prices in dislocated markets. This credit risk assumption is intended to approximate the fair value that a market participant would realize in a hypothetical orderly transaction. The Company’s loan portfolio is initially fair valued using a segmented approach. The Company divides its loan portfolio into the following categories: variable rate loans, impaired loans and all other loans. The results are then adjusted to account for credit risk as described above.

 

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

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

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

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

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

Junior Subordinated Debentures—The fair values of junior subordinated debentures isare 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.

109

91

Note 5—FAIR VALUE MEASUREMENT (Continued)

The carrying amount and estimated fair value by classification Level of the Company’s financial instruments as of December 31, 20202021 and December 31, 20192020 are as follows:

Fair Value, by Balance Sheet Grouping

           
 December 31, 2020  December 31, 2021 
 Carrying Fair Value  Carrying  Fair Value 
(Dollars in thousands) Amount Total Level 1 Level 2 Level 3  Amount Total Level 1 Level 2 Level 3 
Financial Assets:                                    
Cash and short term investments $64,992 $64,992 $64,992 $ $  $69,022  $69,022  $69,022  $  $ 
Available-for-sale securities 359,866 359,866 20,564 339,302    564,839   564,839   39,829   525,010    
Other investments, at cost 2,053 2,053   2,053   1,785   1,785         1,785 
Loans held for sale 45,020 45,020  45,020    7,120   7,120      7,120    
Net loans receivable 833,768 829,685   829,685   852,523   851,822         851,822 
Accrued interest 4,167 4,167 4,167     3,927   3,927   3,927       
Financial liabilities:                               
Non-interest bearing demand $385,511 $385,511 $ $385,511 $  $444,688  $444,688  $  $444,688  $ 
Interest bearing demand deposits and money market accounts 520,205 520,205  520,205    619,057   619,057      619,057    
Savings 123,032 123,032  123,032    143,765   143,765      143,765    
Time deposits  160,665 161,505  61,505    153,781   154,030      154,030    
Total deposits 1,189,413 1,190,253  1,190,253    1,361,291   1,361,540      1,361,540    
Federal Home Loan Bank Advances                     
Short term borrowings 40,914 40,914  40,914    54,216   54,216      54,216    
Junior subordinated debentures 14,964 11,748  11,748    14,964   15,015      15,015    
Accrued interest payable 667 667 667     404   404   404       
                       
 December 31, 2019  December 31, 2020 
 Carrying Fair Value  Carrying  Fair Value 
(Dollars in thousands) Amount Total Level 1 Level 2 Level 3  Amount Total Level 1 Level 2 Level 3 
Financial Assets:                                    
Cash and short term investments $47,692 $47,692 $47,692 $ $  $64,992  $64,992  $64,992  $  $ 
Available-for-sale securities 286,800 286,800 23,632 263,168    359,866   359,866   20,564   339,302    
Other investments, at cost 1,992 1,992   1,992   2,053   2,053         2,053 
Loans held for sale 11,155 11,155  11,155    45,020   45,020      45,020    
Net loans receivable 730,401 728,745   728,745   833,768   829,685         829,685 
Accrued interest 3,481 3,481 3,481     4,167   4,167   4,167       
Financial liabilities:                               
Non-interest bearing demand $289,829 $289,829 $ $289,829 $  $385,511  $385,511  $  $385,511  $ 
NOW and money market accounts 423,257 423,257  423,257    520,205   520,205      520,205    
Savings 104,456 104,456  104,456    123,032   123,032      123,032    
Time deposits  170,660 171,558  171,558    160,665   161,505      161,505    
Total deposits 988,201 989,099  989,099    1,189,413   1,190,253      1,190,253    
Federal Home Loan Bank Advances                     
Short term borrowings 33,296 33,296  33,296    40,914   40,914      40,914    
Junior subordinated debentures 14,964 13,161  13,161    14,964   11,748      11,748    
Accrued interest payable 1,033 1,033 1,033     667   667   667       

110

92

Note 5—FAIR VALUE MEASUREMENT (Continued)

The following table summarizes quantitative disclosures about the fair value for each category of assets carried at fair value as of December 31, 20202021 and December 31, 20192020 that are measured on a recurring basis. There were no liabilities carried at fair value as of December 31, 20202021 or December 31, 20192020 that are measured on a recurring basis. 

Fair Value, Assets Measured on Recurring Basis

(Dollars in thousands)

Description December 31,
2020
  (Level 1)  (Level 2)  (Level 3)  December 31,
2021
  (Level 1)  (Level 2)  (Level 3) 
Available- for-sale securities                                
US Treasury Securities $1,502  $  $1,502  $  $15,436  $  $15,436  $ 
Government Sponsored Enterprises  1,006      1,006      2,501      2,501    
Mortgage-backed securities  229,929   17,029   212,900      397,729   25,934   371,796    
Small Business Administration pools  35,498      35,498      31,273      31,273    
State and local government  88,603   3,535   85,068      109,848   12,896   96,952    
Corporate and other securities  3,328      3,328      8,052   1,000   7,052    
  359,866   20,564   339,302    
Total Available-for-sale securities  564,839   39,830   525,010    
Loans held for sale  45,020      45,020      7,120      7,120    
Total $404,886  $20,564  $384,322  $  $571,959  $39,830  $532,130  $ 

 

(Dollars in thousands)

Description December 31,
2019
  (Level 1) (Level 2) (Level 3)  December 31,
2020
  (Level 1)  (Level 2)  (Level 3) 
Available-for-sale securities                                
US treasury securities $7,203  $  $7,203  $  $1,502  $  $1,502  $ 
Government sponsored enterprises  1,001      1,001      1,006      1,006    
Mortgage-backed securities  183,586   18,435   163,344   1,807   229,929   17,029   212,900    
Small Business Administration securities  45,343      45,343      35,498      35,498    
State and local government  49,648   5,188   44,460      88,603   3,535   85,068    
Corporate and other securities  19   9   10      3,328      3,328    
  286,800   23,632   261,361   1,807 
Total Available-for-sale securities  359,866   20,564   339,302    
Loans held-for-sale  11,155      11,155      45,020      45,020    
Total $297,955  $23,632  $272,516  $1,807  $404,886  $20,564  $384,322  $ 

111

The following tables summarize quantitative disclosures about the fair value for each category of assets carried at fair value as of December 31, 20202021 and December 31, 20192020 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, 20202021 and 2019.2020. 

(Dollars in thousands)            
Description December 31,
2020
  
(Level 1)
  
(Level 2)
  
(Level 3)
 
Impaired loans:                
Commercial & Industrial $  $  $  $ 
Real estate:                
Mortgage-residential  440         440 
Mortgage-commercial  5,629         5,629 
Consumer:                
Home equity  42         42 
Other            
Total impaired  6,111         6,111 
Other real estate owned:                
Construction  600         600 
Mortgage-commercial  594         594 
Total other real estate owned  1,194         1,194 
Total $7,305  $  $  $7,305 
                 
(Dollars in thousands)            
Description December 31,
2019
  (Level 1)  (Level 2)  (Level 3) 
Impaired loans:                
Commercial & Industrial $400  $  $  $400 
Real estate:                
Mortgage-residential  392         392 
Mortgage-commercial  3,129         3,129 
Consumer:                
Home equity  70         70 
Other            
Total impaired  3,991         3,991 
Other real estate owned:                
Construction  826         826 
Mortgage-residential  584         584 
Total other real estate owned  1,410         1,410 
Total $5,401  $  $  $5,401 

Fair Value, Assets Measured on Non-Recurring Basis

(Dollars in thousands)            
Description December 31,
2021
  (Level 1)  (Level 2)  (Level 3) 
Impaired loans:                
Commercial & Industrial $  $  $  $ 
Real estate:                
Mortgage-residential  133         133 
Mortgage-commercial  1,560         1,560 
Consumer:                
Home equity            
Other            
Total impaired  1,693         1,694 
Other real estate owned:                
Construction  624         624 
Mortgage-commercial  541         541 
Total other real estate owned  1,165         1,165 
Total $2,859  $  $  $2,859 

93

Note 5—FAIR VALUE MEASUREMENT (Continued)

(Dollars in thousands)            
Description December 31,
2020
  (Level 1)  (Level 2)  (Level 3) 
Impaired loans:                
Commercial & Industrial $  $  $  $ 
Real estate:                
Mortgage-residential  440         440 
Mortgage-commercial  5,629         5,629 
Consumer:                
Home equity  42         42 
Other            
Total impaired  6,111         6,111 
Other real estate owned:                
Construction  600         600 
Mortgage-commercial  594         594 
Total other real estate owned  1,194         1,194 
Total $7,305  $  $  $7,305 

The Company has a large percentage of loans with real estate serving as collateral. Loans which are deemed to be impaired are primarily valued on a nonrecurring basis at the fair value of the underlying real estate collateral. Such fair values are obtained using independent appraisals, which the Company considers to be Level 3 inputs. Third party appraisals are generally obtained when a loan is identified as being impaired or at the time it is transferred to OREO. This internal process would consist of evaluating the underlying collateral to independently obtained comparable properties. With respect to less complex or smaller credits, an internal evaluation may be performed. Generally, the independent and internal evaluations are updated annually. Factors considered in determining the fair value include geographic sales trends, the value of comparable surrounding properties as well as the condition of the property. The aggregate amount of impaired loans was $6.1$1.2 million and $4.0$6.1 million for the year ended December 31, 20202021, and year ended December 31, 2019,2020, respectively.

112

For Level 3 assets and liabilities measured at fair value on a non-recurring basis as of December 31, 20202021 and December 31, 2019,2020, the significant unobservable inputs used in the fair value measurements were as follows:

(Dollars in thousands) Fair Value as
of December 31,
2020
 Valuation Technique Significant
Observable
Inputs
 Significant
Unobservable
Inputs
 
OREO $1,194 Appraisal Value/Comparison Sales/Other estimates Appraisals and or sales of comparable properties Appraisals discounted 6% to 16% for sales commissions and other holding cost 
Impaired loans $6,111 Appraisal Value Appraisals and or sales of comparable properties Appraisals discounted 6% to 16% for sales commissions and other holding cost 
           
(Dollars in thousands) Fair Value as
of December 31,
2019
 Valuation Technique Significant
Observable
Inputs
 Significant
Unobservable
Inputs
 
OREO $1,410 Appraisal Value/Comparison Sales/Other estimates Appraisals and or sales of comparable properties Appraisals discounted 6% to 16% for sales commissions and other holding cost 
Impaired loans $3,991 Appraisal Value Appraisals and or sales of comparable properties Appraisals discounted 6% to 16% for sales commissions and other holding cost 

Fair Value Measurement Inputs and Valuation Techniques

(Dollars in thousands) Fair Value as
of December 31,
2021
 Valuation Technique Significant
Observable
Inputs
 Significant
Unobservable
Inputs
OREO $1,165 Appraisal Value/Comparison
Sales/Other estimates
 Appraisals and or sales of comparable properties Appraisals discounted 6% to 16% for sales commissions and other holding cost
Impaired loans $1,694 Appraisal Value Appraisals and or sales of comparable properties Appraisals discounted 6% to 16% for sales commissions and other holding cost
          
(Dollars in thousands) Fair Value as
of December 31,
2020
 Valuation Technique Significant
Observable
Inputs
 Significant
Unobservable
Inputs
OREO $1,194 Appraisal Value/Comparison
Sales/Other estimates
 Appraisals and or sales of comparable properties Appraisals discounted 6% to 16% for sales commissions and other holding cost
Impaired loans $6,111 Appraisal Value Appraisals and or sales of comparable properties Appraisals discounted 6% to 16% for sales commissions and other holding cost

94

Note 7—6—PROPERTY AND EQUIPMENT

Property and equipment consisted of the following:

     
 December 31,  December 31, 
(Dollars in thousands) 2020 2019  2021  2020 
Land $11,166  $11,166  $10,454  $11,166 
Premises 29,342 28,995   29,415   29,342 
Equipment 7,050 6,284   6,855   7,050 
Fixed assets in progress  62  88   (4)  62 
Property and equipment, gross 47,620 46,533   46,720   47,620 
Accumulated depreciation  13,162  11,525   13,889   13,162 
Property and Equipment Net $34,458 $35,008  $32,831  $34,458 

Provision for depreciation included in operating expenses for the years ended December 31, 2021, 2020 2019 and 20182019 amounted to $1.6$1.7 million, $1.6 million, and $1.5$1.6 million, respectively.

 

Premises held-for-sale was $591$0 and $591 thousand at December 31, 2020. It increased to $5912021, and December 31, 2020, respectively. Gain on premises held-for-sale was $103 thousandand $0 at December 31, 2019 from $02021, and December 31, 2020, respectively. Gain on sale of fixed assets was $14 thousand and $0 at December 31, 2018 due to our consolidation of our mortgage loan production office in Richland County, South Carolina to other existing Bank offices that resulted in a write-down of the real estate of $282 thousand during the fourth quarter of 2019 based on the appraised value of the real estate less estimated selling costs.2021, and December 31, 2020, respectively.

113

Note 8—7—GOODWILL, CORE DEPOSIT INTANGIBLE AND OTHER ASSETS

Intangible assets (excluding goodwill) consisted of the following:

       
 December 31, December 31, 
(Dollars in thousands) 2020 2019  2018  2021  2020  2019 
Core deposit premiums, gross carrying amount $3,358  $3,358  $

3,358

  $3,358  $3,358  $3,358 
Other intangibles  538  538   538   538   538   538 
Gross carrying amount 3,896 3,896  

3,896

   3,896   3,896   3,896 
Accumulated amortization  (2,776)  (2,413)  

(1,890

)  (2,977)  (2,776)  (2,413)
Net $1,120 $1,483  $

2,006

  $919  $1,120  $1,483 

Based on the core deposit and other intangibles as of December 31, 2020,2021, the following table presents the aggregate amortization expense for each of the succeeding years ending December 31:

(Dollars in thousands)(Dollars in thousands) Amount Amount 
2021  $201 
2022   158  $158 
2023   158   157 
2024   158   158 
2025 and thereafter   445 
2025  157 
2026 and thereafter  289 
Total  $1,120  $919 

 

Amortization of the intangibles amounted to $363$201 thousand $523, $363 thousand and $563$523 thousand for the years ended December 31, 2021, 2020 and 2019, and 2018, respectively.

On October 20, 2017, we completed our acquisition of Cornerstone and its wholly-owned subsidiary, Cornerstone National Bank. Under the terms of the merger agreement, Cornerstone shareholders received either $11.00 in cash or 0.54 shares of the Company’s common stock, or a combination thereof, for each Cornerstone share they owned immediately prior to the merger, subject to the limitation that 70% of the outstanding shares of Cornerstone common stock were exchanged for shares of the Company’s common stock and 30% of the outstanding shares of Cornerstone were exchanged for cash. The Company issued 877,384 shares of common stock in the merger. Total intangibles, including goodwill of $9.5 million and a core deposit premium of $1.8 million, were recorded in conjunction with the acquisition.

On February 1, 2014, we completed our acquisition of Savannah River Financial Corp. (“Savannah River”) and its wholly-owned subsidiary, Savannah River Banking Company. Under the terms of the merger agreement, Savannah River shareholders received either $11.00 in cash or 1.0618 shares of the Company’s common stock, or a combination thereof, for each Savannah River share they owned immediately prior to the merger, subject to the limitation that 60% of the outstanding shares of Savannah River common stock were exchanged for cash and 40% of the outstanding shares of Savannah River common stock were exchanged for shares of the Company’s common stock. The Company issued 1,274,200 shares of common stock in connection with the merger. Total intangibles, including goodwill of $4.5 million and a core deposit premium of $1.2 million, were recorded in conjunction with the acquisition.

95

Note 7—GOODWILL, CORE DEPOSIT INTANGIBLE AND OTHER ASSETS (Continued)

On September 26, 2014, the Bank completed its acquisition and assumption of approximately $40 million in deposits and $8.7 million in loans from First South Bank. This represented all of the deposits and a portion of the loans at First South Bank’s Columbia, South Carolina banking office located at 1333 Main Street. The Bank paid a premium of $714 thousand for the deposits and loans acquired. The deposits and loans from First South Bank have been consolidated into the Bank’s branch located at 1213 Lady Street, Columbia, South Carolina. The premium paid of $714 thousand plus fair value adjustments recorded on loans and deposits acquired resulted in a core deposit intangible of $365.9 thousand and other identifiable intangible assets in the amount of $538.6 thousand being recorded related to this transaction.

114

As a result of the acquisition of Palmetto South Mortgage Corp. on July 31, 2011, we have recorded goodwill in the amount of $571$571 thousand.

Total goodwill from acquisitions at December 31, 20202021 and 20192020 totaled $14.6 million. This amount is made up of the Cornerstone, Savannah River, and Palmetto South Mortgage Corporation acquisitions. The goodwill is tested for impairment annually having identified none as of December 31, 20202021 or 2019.2020.

Bank-owned life insurance provides benefits to various bank officers. The carrying value of all existing policies at December 31, 2021 and 2020 was $29.2 million and 2019 was $27.7 million, and $28.0 million, respectively. During 2021, an additional $850 thousand in Bank-owned life insurance was purchased.

 

Note 9—8—OTHER REAL ESTATE OWNED

The following summarizes the activity in the other real estate owned for the years ended December 31, 20202021 and 2019.2020.

     
 December 31,  December 31, 
(In thousands) 2020 2019  2021  2020 
Balance—beginning of year $1,410  $1,460  $1,194  $1,410 
Additions—foreclosures 114    145   114 
Write-downs (128)    (50)  (128)
Sales  (202)  (50  (124)  (202)
Balance, end of year $1,194 $1,410  $1,165  $1,194 

Note 10—9—DEPOSITS

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

 December 31, December 31,  December 31, December 31, 
(Dollars in thousands) 2020 2019  2021 2020 
Non-interest bearing deposits $385,511  $289,829  $444,688  $385,511 
Interest bearing demand deposits and money market accounts 520,205 423,256   619,057   520,205 
Savings 123,032 104,456   143,765   123,032 
Time deposits  160,665  170,660   153,781   160,665 
Total deposits $1,189,413 $988,201  $1,361,291  $1,189,413 

At December 31, 2020,2021, the scheduled maturities of time deposits are as follows:

(Dollars in thousands)       
2021 $113,819 
2022 30,413   $117,612 
2023 9,924    19,950 
2024 3,018    8,409 
2025  3,491    3,673 
2026   4,037 
2027   100 
Time Deposits $160,665   $153,781 

96

 

Note 9—DEPOSITS (Continued)

Interest paid on time deposits of $100 thousand or more totaled $538 thousand, $993 thousand thousand,, and $1.1 million million,in 2021, 2020, and $717 thousand in 2020, 2019, and 2018, respectively.

Time deposits that meet or exceed the FDIC insurance limit of $250 thousand at year end 20202021 and 20192020 were $28.627.9 million million and $32.228.6 million million,, respectively.

115

Deposits from directors and executive officers and their related interests at December 31, 20202021 and 20192020 amounted to approximately $36.331.9 million million and $5.436.3 million million,, respectively.

The amount of overdrafts classified as loans at December 31, 20202021 and 20192020 were $6158 thousand and $14361 thousand thousand,, respectively.

 

Note 11—10—SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND OTHER BORROWED MONEY

Securities sold under agreements to repurchase generally mature within one day to four days from the transaction date. The weighted average interest rate at December 31, 20202021 and 20192020 was 0.20%0.12% and 0.84%0.20%, respectively. The maximum month-end balance during 20202021 and 20192020 was $73.072.4 million million and $36.773.0 million million,, respectively. The average outstanding balance during the years ended December 31, 20202021 and 20192020 amounted to $49.562.2 million million and $34.249.5 million million,, respectively, with an average rate paid of 0.38%0.14% and 1.12%0.38%, respectively. Securities sold under agreements to repurchase are collateralized by securities with fair market values exceeding the total balance of the agreement.

At December 31, 20202021 and 2019,2020, the Company had unused short-term lines of credit totaling $70.0 million million and $30.070.0 million million respectively.

Note 12—11—ADVANCES FROM FEDERAL HOME LOAN BANK

Advances from the FHLB at December 31, 2020 and 2019, consisted of the following:

  December 31, 
(In thousands) 2020 2019 
Maturing Amount Rate Amount Rate 
2020    0%  211  1.00% 

As collateral for its advances, the Company has pledged in the form of blanket liens, eligible loans, in the amount of $22.122.8 million at December 31, 2021. Securities have been pledged as collateral for advances in the amount of $2.7 million as of December 31, 2021. As collateral for its advances, the Company has pledged in the form of blanket liens, eligible loans, in the amount of $22.1 million at December 31, 2020. Securities have been pledged as collateral for advances in the amount of $3.9 million as of December 31, 2020. As collateral for its advances, the Company has pledged in the form of blanket liens, eligible loans, in the amount of $25.9 million at December 31, 2019. Securities have been pledged as collateral for advances in the amount of $5.1 million as of December 31, 2019. Advances are subject to prepayment penalties. The average advances during 20202021 and 20192020 were $2.05.0 million million and $3.22.0 million million,, respectively. The average interest rate for 20202021 and 20192020 was 0.39%0.18% and 2.39%0.39%, respectively. The maximum outstanding amount at any month end was $15.00 million and $17.215.0 million million for 20202021 and 2019,2020, respectively.

During the years ended December 31, 20202021 and December 31, 20192020 there were no advances that were prepaid. Accordingly, no losses were realized on early extinguishment.

Note 13—12—JUNIOR SUBORDINATED DEBT

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

97

116

Note 14—13—LEASES

Effective January 1, 2019, the Company adopted ASC 842 “Leases”. Currently, theThe Company has operating leases on three of its facilities that are accounted for under this standard. As a resultfacilities. The leases have maturities ranging from September 2024 to December 2028 some of this standard, the Company recognized awhich include extensions of multiple five-year terms. The right-of-use asset and a lease liability of $3.1were $2.8 and $3.0 million, respectively.respectively, at December 31, 2021. During the twelve-month period ended December 31, 2020,2021, the Company made cash payments in the amount of $292.2$297.6 thousand for operating leases and the lease liability was reduced by $152.1 thousand.$164.6 thousand. The lease expense recognized during the twelve-month period ended December 31, 20202021, amounted to $323.0 thousand.$323.0 thousand . The weighted average remaining lease term as of December 31, 20202021, is 15.7815.08 years and the weighted average discount rate used is 4.21%4.42%. The following table shows future undiscounted lease payments for operating leases with initial terms of one year or more as of December 31, 20202021 are as follow:

 

(Dollars in thousands)    
2021 $298 
2022  303 
2023  309 
2024  282 
2025  222 
Theraeafter  2,978 
Total undiscounted lease payments $4,392 
Less effect of discounting  (1,278)
Present value of estimated lease payments (lease liability)  3,114 

(Dollars in thousands)   
2022 $303 
2023  309 
2024  282 
2025  222 
2026  226 
Thereafter  2,751 
Total undiscounted lease payments $4,093 
Less effect of discounting  (1,143)
Present value of estimated lease payments (lease liability)  2,950 

 

Note 15—14—INCOME TAXES

Income tax expense for the years ended December 31, 2021, 2020 2019 and 20182019 consists of the following:

       
 Year ended December 31  Year ended December 31 
(Dollars in thousands) 2020 2019 2018  2021  2020  2019 
Current              
Federal $2,724  $2,299  $2,244  $3,653  $2,724  $2,299 
State  523  541  351   749   523   541 
Total  3,247  2,840  2,595 
  4,402   3,247   2,840 
Deferred                   
Federal 

(751

)  18 99   (167)  (751)  18 
State  

(34

)        (53)  (34)   
Total  

(785

)   18  99 
  (220)  (785)  18 
Income tax expense $2,496 $2,858 $2,694  $4,182  $2,496  $2,858 

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

          
  Year ended December 31 
(Dollars in thousands) 2021  2020  2019 
Expected federal income tax expense $4,126  $2,645  $2,904 
State income tax net of federal benefit  550   386   427 
Tax exempt interest  (396)  (316)  (293)
Increase in cash surrender value life insurance  (146)  (153)  (144)
Valuation allowance  32   32   52 
Life Insurance Proceeds     (65)   
Excess tax benefit of stock compensation  (11)  (1)  (56)
Other  27   (32)  (32)
Income tax expense $4,182  $2,496  $2,858 

98

Note 14—INCOME TAXES (Continued)

  Year ended December 31 
(Dollars in thousands) 2020  2019  2018 
Expected federal income tax expense $2,645  $2,904  $2,924 
State income tax net of federal benefit  

386

   427   277 
Tax exempt interest  (316)  (293)  (353)
Increase in cash surrender value life insurance  (153)  (144)  (152)
Valuation allowance  

32

   52   68 
Life Insurance Proceeds  

(65

      
Excess tax benefit of stock compensation  (1)  (56)  (12)
Other  (32)  (32)  (58)
Income tax expense $2,496  $2,858  $2,694 

117

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 liabilitiesliabilities::

     
 December 31,  December 31, 
(Dollars in thousands) 2020 2019  2021  2020 
Assets:          
Allowance for loan losses $

2,235

  $1,426  $2,415  $2,235 
Excess tax basis of deductible intangible assets 

130

 261   98   130 
Excess tax basis of assets acquired 

57

    28   57 
Net operating loss carry forward 

757

 794   792   757 
Compensation expense deferred for tax purposes 1,125 1,054   1,221   1,125 
Deferred loss on other-than-temporary-impairment charges 5 5   5   5 
FASB 91 - Origination Income & Costs  296   253 
Tax credit carry-forwards 

33

 74   33   33 
Other Real Estate Owned  230   229 
Other  

645

  397   183   163 
Total deferred tax asset 4,987 4,011   5,301   4,987 
Valuation reserve  

857

  825   889   857 
Total deferred tax asset net of valuation reserve  4,130  3,186   4,412   4,130 
Liabilities:             
Tax depreciation in excess of book depreciation 

514

 303   612   514 
Excess financial reporting basis of assets acquired 1,005 1,057   969   1,005 
Unrealized gain on available-for-sale securities  

3,149

  811   1,021   3,149 
Total deferred tax liabilities  

4,668

  2,171   2,602   4,668 
Net deferred tax asset / (liability) recognized $

(538

 $1,015  $1,810  $(538)

At December 31, 20202021 the Company has approximately $19.220.1 million million in State net operating losses. A valuation allowance is established to fully offset the deferred tax asset related to these net operating losses of the holding company. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which the temporary differences become deductible. Management considers the scheduled reversal of deferred income tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Additional amounts of these deferred tax assets considered to be realizable could be reduced in the near term if estimates of future taxable income during the carry forward period are reduced. The net deferred asset is included in other assets on the consolidated balance sheets.

 

A portion of the change in the net deferred tax asset relates to unrealized gains and losses on securities available-for-sale. The change in the tax expensebenefit related to the change in unrealized gainsgain on these securities of $2.3$2.1 million has been recorded directly to shareholders’ equity. The balance in the change in net deferred tax asset results from the current period deferred tax benefit of $785$220 thousand. At December 31, 2020,2021, the Company had no federal net operating loss carryforward.

Tax returns for 20172018 and subsequent years are subject to examination by taxing authorities.

As of December 31, 2020,2021, the Company had no material unrecognized tax benefits or accrued interest and penalties. It is the Company’s policy to account for interest and penalties accrued relative to unrecognized tax benefits as a component of income tax expense.

118

Note 16—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, 20202021 and 2019,2020, the Bank had commitments to extend credit including lines of credit of $142.6137.4 million million and $135.7142.6 million 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.

99

Note 15—COMMITMENTS, CONCENTRATIONS OF CREDIT RISK AND CONTINGENCIES (Continued)

The primary market areas served by the Bank include the Midlands Region of South Carolina to include Lexington, Richland, Newberry and Kershaw Counties; the Central Savannah River Region include Aiken County, South Carolina and Richmond and Columbia Counties in Georgia. With the acquisition of Cornerstone, we also serve Greenville, Anderson and Pickens Counties in South Carolina which we refer to as the Upstate Region. Management closely monitors its credit concentrations and attempts to diversify the portfolio within its primary market area. The Company considers concentrations of credit risk to exist when pursuant to regulatory guidelines, the amounts loaned to multiple borrowers engaged in similar business activities represent 25% or more of the Bank’s risk based capital, or approximately $32.736.0 million million. .

Based on this criteria, the Bank had 5 such concentrations at December 31, 2020,2021, including $246.7259.0 million million (29.2%30.0% of total loans) to lessors of non-residential property, $113.6120.8 million million (13.5%14.0% of total loans) to lessors of residential properties, $56.857.7 million million (6.7% of total loans) to private households, $45.538.2 million million (5.4%4.4% of total loans) to other activities related to real estate and $45.347.2 million million to religious organizations (5.4%5.5% of total loans). As reflected above, lessors of non-residential properties and lessors of residential buildings equate to approximately 188.6%179.8% and 86.9%83.8% of total regulatory capital, respectively. The risk in these portfolios is diversified over a large number of loans approximately 451455 for lessors of non-residential properties and 436420 loans for lessors of residential buildings. Commercial real estate loans and commercial construction loans represent $656.6703.2 million million,, or 77.8%81.4%, of the portfolio. Approximately $241.8243.7 million million,, or 36.8%34.7%, of the total commercial real estate loans are owner occupied, which can tend to reduce the risk associated with these credits. Although the Bank’s loan portfolio, as well as existing commitments, reflects the diversity of its market areas, a substantial portion of its debtor’s ability to honor their contracts is dependent upon the economic stability of these areas.

 

The nature of the business of the Company and Bank may at times result in a certain amount of litigation. The Bank is involved in certain litigation that is considered incidental to the normal conduct of business. Management believes that the liabilities, if any, resulting from the proceedings will not have a material adverse effect on the consolidated financial position, consolidated results of operations or consolidated cash flows of the Company.

 

Note 17—16—REVENUE RECOGNITION

In accordance with Topic 606, revenues are recognized when control of promised goods or services is transferred to customers in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of Topic 606, the Company performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the Company satisfies a performance obligation.

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The Company only applies the five-step model to contracts when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, once the contract is determined to be within the scope of Topic 606, the Company assesses the goods or services that are promised within each contract and identifies those that contain performance obligations, and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.

 

Deposit Service Charges: The Bank earns fees from its deposit customers for account maintenance, transaction-based and overdraft services. Account maintenance fees consist primarily of account fees and analyzed account fees charged on deposit accounts on a monthly basis. The performance obligation is satisfied and the fees are recognized on a monthly basis as the service period is completed. Transaction-based fees on deposits accounts are charged to deposit customers for specific services provided to the customer, such as non-sufficient funds fees, overdraft fees, and wire fees. The performance obligation is completed as the transaction occurs and the fees are recognized at the time each specific service is provided to the customer.

 

Check Card Fee Income: Check card fee income represents fees earned when a debit card issued by the Bank is used. The Bank earns interchange fees from debit cardholder transactions through the Mastercard payment network. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided to the cardholder. The performance obligation is satisfied and the fees are earned when the cost of the transaction is charged to the card. Certain expenses directly associated with the debit card are recorded on a net basis with the fee income. This income is recognized within “Other” below.

 

Gains/Losses on OREO Sales: Gains/losses on the sale of OREO are included in non-interest income and are generally recognized when the performance obligation is complete. This is typically at delivery of control over the property to the buyer at the time of each real estate closing.

100

Note 16—REVENUE RECOGNITION (Continued)

(Dollars in thousands) December 31,  December 31, 
Non-Interest Income 2021  2020 
Deposit service charges $977  $1,121 
Mortgage banking income (1)  4,319   5,557 
Investment advisory fees and non-deposit commissions (1)  3,995   2,720 
Gain (loss) on sale of securities (1)     99 
Gain on sale of other real estate owned  77   147 
Gain (loss) on sale of other assets  117    
Non-recurring BOLI income  171   311 
Other (2)  4,248   3,814 
Total non-interest income  13,904   13,769 

 

(Dollars in thousands) December 31,  December 31, 
Non-Interest Income 2020  2019 
Deposit service charges $1,121  $1,649 
Mortgage banking income(1)  5,557   4,555 
Investment advisory fees and non-deposit commissions(1)  2,720   2,021 
Gain (loss) on sale of securities(1)  99   136 
Gain (loss) on sale of other assets  147   (3)
Write-down of premises held for sale(1)     (282)
Non-recurring BOLI income  

311

    
Other(2)  

3,814

   3,660 
Total non-interest income  13,769   11,736 

(1)Not within the scope of ASC 606

(2)Includes Check Card Fee income discussed above.  No other items are within the scope of ASC 606.

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Note 18—17—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) 2020 2019 2018  2021  2020  2019 
ATM/debit card, bill payment and data processing $3,123  $2,834  $2,300  $3,823  $3,123  $2,834 
Supplies 138 151 142   116   138   151 
Telephone 350 413 422   365   350   413 
Courier 176 152 149   181   176   152 
Correspondent services 272 248 270   280   272   248 
Insurance 316 263 254   325   316   263 
Postage 36 47 56   50   36   47 
Loss on limited partnership interest  88 60         88 
Director fees 336 348 366   360   336   348 
Legal and Professional fees 1,058 959 864   878   1,058   959 
Shareholder expense 192 171 173   212   192   171 
Other  1,554  1,718  1,704   1,777   1,554   1,718 
Total $7,551 $7,392 $6,760  $8,367  $7,551  $7,392 

Note 19—18—STOCK OPTIONS, RESTRICTED STOCK, AND DEFERRED COMPENSATION

The Company has adopted a stock option plan whereby shares have been reserved for issuance by the Company upon the grant of stock options or restricted stock awards. At December 31, 20202021 and 2019,2020, the Company had 94,91071,768 and 111,04994,910 shares, respectively, reserved for future grants. The 350,000 shares reserved were approved by shareholders at the 2011 annual meeting. The plan provides for the grant of options to key employees and directors as determined by a stock option committee made up of at least two members of the board of directors. Options are exercisable for a period of ten years from date of grant.

There were no stock options outstanding and exercisable as of December 31, 2020,2021, December 31, 20192020 and December 31, 2018.2019.

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Note 18—STOCK OPTIONS, RESTRICTED STOCK, AND DEFERRED COMPENSATION (Continued)

First Community Corporation 2011 Stock Incentive Plan

In 2011, the Company and its shareholders adopted a stock incentive plan whereby 350,000 shares were reserved for issuance by the Company upon the grant of stock options or restricted stock awards under the plan (the “2011 Plan”). The 2011 Plan provided for the grant of options to key employees and directors as determined by a stock option committee made up of at least two members of the board of directors. Options are exercisable for a period of ten years from the date of grant. There were no stock options outstanding and exercisable at December 31, 2021, December 31, 2020 and December 31, 2019. At December 31, 2020, the Company had 94,910 shares reserved for future grants under the 2011 Plan. The 2011 Plan expired on March 15, 2021 and no new awards may be granted under the 2011 Plan. However, any awards outstanding under the 2011 Plan will continue to be outstanding and governed by the provisions of the 2011 Plan.

Under the 2011 Plan, the employee restricted shares and units cliff vest over a three-year period and the non-employee director shares vest approximately one year after issuance. The unrecognized compensation cost at December 31, 2021 and December 31, 2020 for non-vested shares amounts to $293.9 thousand and $283.1 thousand , respectively. Each unit is convertible into one share of common stock at the time the unit vests. The related compensation cost for time-based units is accrued over the vesting period and was $79.0 thousand and $107.4 thousand at December 31, 2021 and December 31, 2020, respectively.

Historically, the Company granted time-based equity awards that vested based on continued service. Beginning in 2021 and in addition to time-based equity awards, the Company began granting performance-based equity awards in the form of performance-based restricted stock units, with the target number of performance-based restricted stock units for the Company’s Chief Executive Officer and other executive officers representing 50% of total target equity awards. These performance-based restricted stock units cliff vest over three years and include conditions based on the following performance measures: total shareholder return, return on average equity, and non-performing assets. The Company granted 13,302 performance-based restricted stock units with a fair value of $234.0 thousand during 2021. The Company granted no performance-based restricted stock units in 2020. The related compensation cost for the performance-based restricted stock units is accrued over the vesting period and was $65.0 thousand during the year ended December 31, 2021. The total related compensation cost for restricted stock units was $144.0 thousand and $107.4 thousand at December 31, 2021, and December 31, 2020, respectively, including both time-based and performance-based restricted stock units.

First Community Corporation 2021 Omnibus Equity Incentive Plan

In 2021, the Company and its shareholders adopted an omnibus equity incentive plan whereby 225,000 shares were reserved for issuance by the Company to help the company attract, retain and motivate directors, officers, employees, consultants and advisors of the Company and its subsidiaries (the “2021 Plan”). The 2021 Plan replaced the 2011 Plan. No awards have been granted under the 2021 Plan as of December 31, 2021.

Non-Employee Director Deferred Compensation Plan

Under the Company’s Non-Employee Director Deferred Compensation Plan, as amended and restated effective as of January 1, 2021, a director may elect to defer all or any part of annual retainer and monthly meeting fees payable with respect to service on the board of directors or a committee of the board. Units of common stock are credited to the director’s account as of the last day of such calendar quarter during which the compensation is earned and are included in dilutive securities in the table below. The non-employee director’s account balance is distributed by issuance of common stock within 30 days following such director’s separation from service from the board of directors. At December 31, 2021 and 2020, there were 85,765 and 88,412 units in the plan, respectively. The accrued liability related to the plan at December 31, 2021 and 2020 amounted to $1.1 million and $1.1 million, respectively, and is included in “Other liabilities” on the balance sheet.

The table below summarizes the common shares of restricted stock granted to each non-employee director in connection with their overall compensation plan in 2021, 2020 2019 and 2018.2019.

         
 Restricted shares granted       Restricted shares granted      
Year Total per Director Value
per share
 Date shares
vest
   Total  per Director  Value
per share
  Date shares
vest
 
2021   7,959   796  $17.59   1/1/22 
2020  2,662  242 $20.64  1/1/21    2,662   242  $20.64   1/1/21 
2019 2,976 248 $20.18 1/1/20    2,976   248  $20.18   1/1/20 
2018 2,990 230 $21.72 1/1/19 

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Note 18—STOCK OPTIONS, RESTRICTED STOCK, AND DEFERRED COMPENSATION (Continued)

In 2021, 2020 and 2019, and 2018, 11,44813,302, 8,41817,175 and 11,4478,418 restricted shares, respectively, were issued to executive officers in connection with the Bank’s incentive compensation plan. The related compensation expense was $257.2329.3 thousand , $143.9312.2 thousand thousand,, and $161.0143.9 thousand for the years ended December 31, 2021, 2020, 2019, and 20182019 respectively. The shares were valued at $20.6417.59, $20.1820.64 and $21.7220.18 per share/unit, respectively. Restricted shares/units granted to executive officers under the incentive compensation plan cliff vest over a three-year period from the date of grant. The assumptions used in the calculation of these amounts for the awards granted in 2021, 2020 2019 and 20182019 are based on the price of the Company’s common stock on the grant date.

 

In 2014, 29,228 restricted shares were issued to senior officers of Savannah River and retained by the Company in connection with the merger. The shares were valued at $10.55 per share. Restricted shares granted to these officers vested in three equal annual installments beginning on January 31, 2015.

121

Warrants to purchase 37,130 shares at $5.90 per share were issued in connection with the issuing of subordinated debt on November 15, 2011 with an expiration date of December 16, 2019. All warrants were exercised by the expiration date. The related subordinated debt was paid off in November 2012.

In 2006, the Company established a Non-Employee Director Deferred Compensation Plan, whereby a director may elect to defer all or any part of annual retainer and monthly meeting fees payable with respect to service on the board of directors or a committee of the board. Units of common stock are credited to the director’s account at the time compensation is earned. The non-employee director’s account balance is distributed by issuance of common stock at the time of retirement or resignation from the board of directors. At December 31, 2020 and 2019, there were 88,412 and 97,104 units in the plan, respectively. The accrued liability related to the plan at December 31, 2020 and 2019 amounted to $1.1 million and $1.1 million, respectively, and is included in “Other liabilities” on the balance sheet.

Note 20—19—EMPLOYEE BENEFIT PLANS

The Company maintains a 401(k) plan, which covers substantially all employees. Participants may contribute up to the maximum allowed by the regulations. During the years ended December 31, 2021, 2020 2019 and 2018,2019, the plan expense amounted to $552581 thousand , $528552 thousand thousand, and $484528 thousand 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 BanksharesBancshares that are used to indirectly fund fringe benefits to certain employees and officers. A salary continuation plan was established payable for 2two key individuals upon attainment of age 63. The plan provides for monthly benefits of $2,500 each for seventeen years for suchtwo individuals.

Other plans acquired were supplemental life insurance covering certain key employees. In 2006, the Company established a salary continuation plan which covers 6 additional key officers. In 2015, the Company established a salary continuation plan to cover additional key employees. In 2017, 2019, and 20192021, the Company established salary continuation plans for 23 additional key officers. The plans provide for monthly benefits upon normal retirement age of varying amounts for a period of fifteen years.years. Single premium life insurance policies were purchased in 2006, 2015, 2017, 2019, and 20192021, in the amount of $3.5 million million,, $5.2 million million,, $1.5 million, $1.6 million, and $1.6850 thousand million,, respectively. These policies are designed to offset the funding of these benefits. No new policies were issued in 2020.

The cash surrender value at December 31, 20202021 and 20192020 of all bank owned life insurance was $27.7$29.2 million and $28.0$27.7 million, respectively. Expenses accrued for the anticipated benefits under the salary continuation plans for the year ended December 31, 2021, 2020 2019 and 20182019 amounted to $470$516 thousand, $472$514 thousand, and $460$437 thousand, respectively.

103

Note 21—20—EARNINGS PER COMMON SHARE

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

  Year ended December 31, 
(Amounts in thousands) 2020  2019  2018 
Numerator (Included in basic and diluted earnings per share) $10,099  $10,971  $11,229 
Denominator            
Weighted average common shares outstanding for:            
Basic earnings per common share  7,446   7,510   7,581 
Dilutive securities:            
Deferred compensation  36   58   84 
Warrants—Treasury stock method     20   65 
Diluted common shares outstanding  7,482   7,588   7,730 
Basic earnings per common share $1.36  $1.46  $1.48 
Diluted earnings per common share $1.35  $1.45  $1.45 
The average market price used in calculating assumed number of shares $15.89  $19.32  $23.26 

Schedule of Earning Per Common Share

122
          
  Year ended December 31, 
(Amounts in thousands) 2021  2020  2019 
Numerator (Included in basic and diluted earnings per share) $15,465  $10,099  $10,971 
Denominator            
Weighted average common shares outstanding for:            
Basic earnings per common share  7,491   7,446   7,510 
Dilutive securities:            
Deferred compensation  58   36   58 
Warrants—Treasury stock method        20 
Diluted common shares outstanding  7,549   7,482   7,588 
Basic earnings per common share $2.06  $1.36  $1.46 
Diluted earnings per common share $2.05  $1.35  $1.45 
The average market price used in calculating assumed number of shares $19.68  $15.89  $19.32 

On December 16, 2011 there were 107,500 warrants issued in connection with the issuance of $2.5 million million in subordinated debt (See Note 17)18). As shown above, the warrants were dilutive for the periodsperiod ended December 31, 2020,2019. As of December 31, 20192021 and December 31, 2018. As of December 31, 2020 there were no warrants outstanding.

Note 22—21—SHAREHOLDERS’ EQUITY, CAPITAL REQUIREMENTS AND DIVIDEND RESTRICTIONS

The Company and Bank are subject to various federal and state regulatory requirements, including regulatory capital requirements. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary, actions that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and Bank must meet specific guidelines that involve quantitative measures of the Company’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Company and Bank capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weighting, and other factors. The Bank is required to maintain minimum Tier 1 capital, Common Equity Tier I (CET1) capital, total risked based capital and Tier 1 leverage ratios of 6%, 4.5%, 8% and 4%, respectively.

Regulatory capital rules adopted in July 2013 and fully-phased in as of January 1, 2019, which we refer to Basel III, impose minimum capital requirements for bank holding companies and banks. The Basel III rules apply to all national and state banks and savings associations regardless of size and bank holding companies and savings and loan holding companies other than “small bank holding companies,” generally holding companies with consolidated assets of less than $3 billion (such as the Company). In order to avoid restrictions on capital distributions or discretionary bonus payments to executives, a covered banking organization must maintain a “capital conservation buffer” on top of our minimum risk-based capital requirements. This buffer must consist solely of common equity Tier 1, but the buffer applies to all three measurements (common equity Tier 1, Tier 1 capital and total capital). The capital conservation buffer consists of an additional amount of CET1 equal to 2.5% of risk-weighted assets.

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

 

On October 20, 2017, we completed our acquisition of Cornerstone and its wholly-owned subsidiary, Cornerstone National Bank. Under the terms of the merger agreement, Cornerstone shareholders received either $11.00 in cash or 0.54 shares of the Company’s common stock, or a combination thereof, for each Cornerstone share they owned immediately prior to the merger, subject to the limitation that 70% of the outstanding shares of Cornerstone common stock were exchanged for shares of the Company’s common stock and 30% of the outstanding shares of Cornerstone were exchanged for cash. The Company issued 877,384 shares of common stock in the merger.

123

104

Note 21—SHAREHOLDERS’ EQUITY, CAPITAL REQUIREMENTS AND DIVIDEND RESTRICTIONS (Continued)

The Bank exceeded the minimum regulatory capital ratios at December 31, 20202021 and 2019,2020, as set forth in the following table:

Schedule of actual capital amounts and ratios as well as minimum amounts for each regulatory defined category for the bank and the company

(In thousands) Minimum
Required
Amount
  %  Actual
Amount
  %  Excess
Amount
  % 
The Bank(1)(2):                        
December 31, 2020                        
Risk Based Capital                        
Tier 1 $56,288   6.0%  $120,385   12.8%  $64,097   6.8% 
Total Capital $75,051   8.0%  130,774   13.9%  55,723   5.9% 
CET1 $42,216   4.5%  $120,385   12.8%  78,169   8.3% 
Tier 1 Leverage $54,492   4.0%  $120,385   8.8%  65,893   4.8% 
December 31, 2019                        
Risk Based Capital                        
Tier 1 $50,224   6.0%  $112,754   13.5%  $62,530   7.5% 
Total Capital $66,965   8.0%  119,381   14.3%  $52,416   6.3% 
CET1 $37,668   4.5%  112,754   13.5%  $75,086   9.0% 
Tier 1 Leverage $45,246   4.0%  112,754   10.0%  $67,508   6.0% 

(In thousands) Minimum
Required
Amount
  %  Actual
Amount
  %  Excess
Amount
  % 
The Bank(1)(2):                        
December 31, 2021                        
Risk Based Capital                        
Tier 1 $57,075   6.0% $132,918   14.0% $75,843   8.0%
Total Capital $76,101   8.0% $144,097   15.2% $67,996   7.1%
CET1 $42,807   4.5% $132,918   14.0% $90,111   9.5%
Tier 1 Leverage $62,897   4.0% $132,918   8.5% $70,021   4.5%
December 31, 2020                        
Risk Based Capital                        
Tier 1 $56,288   6.0% $120,385   12.8% $64,097   6.8%
Total Capital $75,051   8.0% $130,774   13.9% $55,723   5.9%
CET1 $42,216   4.5% $120,385   12.8% $78,169   8.3%
Tier 1 Leverage $54,492   4.0% $120,385   8.8% $65,893   4.8%

 

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

(2)Ratios do not include the capital conservation buffer of 2.5%.

The Federal Reserve has issued a policy statement regarding the payment of dividends by bank holding companies. In general, the Federal Reserve’s policies provide that dividends should be paid only out of current earnings and only if the prospective rate of earnings retention by the bank holding company appears consistent with the organization’s capital needs asset quality and overall financial condition. The Federal Reserve’s policies also require that a bank holding company serve as a source of financial strength to its subsidiary banks by standing ready to use available resources to provide adequate capital funds to those banks during periods of financial stress or adversity and by maintaining the financial flexibility and capital-raising capacity to obtain additional resources for assisting its subsidiary banks where necessary. In addition, under the prompt corrective action regulations, the ability of a bank holding company to pay dividends may be restricted if a subsidiary bank becomes undercapitalized. These regulatory policies could affect the ability of the Company to pay dividends or otherwise engage in capital distributions.

The Company’s principal source of cash flow, including cash flow to pay dividends to its shareholders, is dividends it receives from the Bank. Statutory and regulatory limitations apply to the Bank’s payment of dividends to the Company. As a South Carolina chartered bank, the Bank is subject to limitations on the amount of dividends that it is permitted to pay. Unless otherwise instructed by the S.C. Board, the Bank is generally permitted under South Carolina State banking regulations to pay cash dividends of up to 100% of net income in any calendar year without obtaining the prior approval of the S.C. Board. The FDIC also has the authority under federal law to enjoin a bank from engaging in what in its opinion constitutes an unsafe or unsound practice in conducting its business, including the payment of a dividend under certain circumstances.

 

If the Bank is not permitted to pay cash dividends to the Company, it is unlikely that we would be able to pay cash dividends on our common stock. Moreover, holders of the Company’s common stock are entitled to receive dividends only when, and if declared by the board of directors. Although the Company has historically paid cash dividends on its common stock, the Company is not required to do so and the board of directors could reduce or eliminate our common stock dividend in the future.

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105

Note 23—22—PARENT COMPANY FINANCIAL INFORMATION

The balance sheets, statements of operations and cash flows for First Community Corporation (Parent Only) follow:

Condensed Balance Sheets

     
 At December 31,  At December 31, 
(Dollars in thousands) 2020 2019  2021  2020 
Assets:          
Cash on deposit $3,357  $2,987  $3,335  $3,357 
Interest bearing deposits         
Securities purchased under agreement to resell         
Investment in bank subsidiary 147,140 131,584   151,519   147,140 
Other  1,046  809   1,353   1,046 
Total assets $151,543 $135,380  $156,207  $151,543 
Liabilities:             
Junior subordinated debentures $14,964 $14,964  $14,964  $14,964 
Other  242  222   245   242 
Total liabilities  15,206  15,186   15,209   15,206 
Shareholders’ equity  136,337  120,194   140,998   136,337 
Total liabilities and shareholders’ equity $151,543 $135,380  $156,207  $151,543 

106

 

Note 22—PARENT COMPANY FINANCIAL INFORMATION (Continued)

Condensed Statements of Operations

       
 Year ended December 31,  Year ended December 31, 
(Dollars in thousands) 2020 2019 2018  2021  2020  2019 
Income:                   
Interest and dividend income $17  $24  $23  $13  $17  $24 
Equity in undistributed earnings of subsidiary 6,759 4,776 8,348   12,386   6,759   4,776 
Dividend income from bank subsidiary  4,158  7,057  3,721   4,019   4,158   7,057 
Total income  10,934  11,857  12,092   16,418   10,934   11,857 
Expenses:                   
Interest expense 536 760 718   416   536   760 
Other  518  381  386   772   518   381 
Total expense  1,055  1,141  1,104   1,188   1,055   1,141 
Income before taxes 9,879 10,716 10,988   15,230   9,879   10,716 
Income tax benefit  (219)  (255)  (241)  (235)  (219)  (255)
Net income $10,099 $10,971 $11,229  $15,465  $10,099  $10,971 

125

Condensed Statements of Cash Flows

       
 Year ended December 31,  Year ended December 31, 
(Dollars in thousands) 2020 2019 2018  2021  2020  2019 
Cash flows from operating activities:                   
Net income $10,099  $10,971  $11,229  $15,465  $10,099  $10,971 
Adjustments to reconcile net income to net cash provided by operating activities                   
Equity in undistributed earnings of subsidiary (6,759) (4,776) (8,348)  (12,386)  (6,759)  (4,776)
Other-net  42  322  12   145   42   322 
Net cash provided by operating activities  3,382  6,517  2,893   3,224   3,382   6,517 
Cash flows from investing activities:                   
Proceeds from sale of federal funds      129 
Purchase of investments at cost  (87)      
Net cash provided by investing activities      129   (87)      
Cash flows from financing activities:                   
Dividends paid: common stock (3,573) (3,306) (3,033)  (3,593)  (3,573)  (3,306)
Repurchase of common stock  (5,636)          (5,636)
Proceeds from issuance of common stock 4     46   4    
Dividend Reinvestment Plan 372 570 362   368   372   570 
Issuance of restricted stock  (75)          (75)
Restricted shares surrendered (15) (159) (57)  (70)  (15)  (159)
Deferred compensation shares  200  265  19   90   200   265 
Net cash used in financing activities  (3,012)  (8,341)  (2,709)  (3,159)  (3,012)  (8,341)
Increase (decrease) in cash and cash equivalents 370 (1,824) 313   (22)  370   (1,824)
Cash and cash equivalents at beginning of year  2,987  4,811  4,498   3,357   2,987   4,811 
Cash and cash equivalents at end of year $3,357 $2,987 $4,811  $3,335  $3,357  $2,987 

Note 24—23—SUBSEQUENT EVENTS

 

Subsequent events are events or transactions that occur after the balance sheet date but before financial statements are issued. Recognized subsequent events are events or transactions that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements. Non-recognized subsequent events are events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after that date. Management has reviewed events occurring through the date the financial statements were available to be issued and no subsequent events occurred requiring accrual or disclosure.

126

107

Note 25—24—QUARTERLY FINANCIAL DATA (UNAUDITED)

The following provides quarterly financial data for 2021, 2020 2019 and 20182019 (dollars in thousands, except per share amounts).

2020 Fourth
Quarter
  Third
Quarter
  Second
Quarter
  First
Quarter
 
Interest income $11,426  $10,976  $10,666  $10,710 
Net interest income  10,687   10,176   9,743   9,417 
Provision for loan losses  276   1,062   1,250   1,075 
Gain on sale of securities     99       
Income before income taxes  4,364   3,250   2,749   2,232 
Net income  3,436   2,652   2,217   1,794 
Net income available to common shareholders  3,436   2,652   2,217   1,794 
Net income per share, basic $0.46  $0.36  $0.30  $0.24 
Net income per share, diluted $0.46  $0.35  $0.30  $0.24 
                 
2019 Fourth
Quarter
  Third
Quarter
  Second
Quarter
  First
Quarter
 
Interest income $10,786  $10,864  $10,606  $10,374 
Net interest income  9,360   9,353   9,116   9,020 
Provision for loan losses     25   9   105 
Gain on sale of securities  1      164   (29)
Income before income taxes  3,425   3,651   3,653   3,101 
Net income  2,697   2,898   2,881   2,495 
Net income available to common shareholders  2,698   2,898   2,881   2,495 
Net income per share, basic $0.36  $0.39  $0.38  $0.33 
Net income per share, diluted $0.36  $0.39  $0.37  $0.33 
                 
2018 Fourth
Quarter
  Third
Quarter
  Second
Quarter
  First
Quarter
 
Interest income $10,595  $9,984  $9,819  $9,331 
Net interest income  9,392   8,882   8,940   8,534 
Provision for loan losses  94   20   30   202 
Gain on sale of securities  (332)     94   (104)
Income before income taxes  3,389   3,569   3,596   3,369 
Net income  2,686   2,833   3,001   2,709 
Net income available to common shareholders  2,686   2,833   3,001   2,709 
Net income per share, basic $0.35  $0.37  $0.40  $0.36 
Net income per share, diluted $0.35  $0.37  $0.39  $0.35 

Schedule of Unaudited Quarterly Financial Data

2021 Fourth
Quarter
  Third
Quarter
  Second
Quarter
  First
Quarter
 
Interest income $11,656  $12,982  $11,664  $11,218 
Net interest income  11,164   12,456   11,092   10,567 
Provision for loan losses  (59)  49   168   177 
Gain on sale of securities            
Income before income taxes  4,971   6,066   4,464   4,146 
Net income  3,919   4,748   3,543   3,255 
Net income available to common shareholders  3,919   4,748   3,543   3,255 
Net income per share, basic $0.52  $0.63  $0.47  $0.44 
Net income per share, diluted $0.52  $0.63  $0.47  $0.43 
                 
2020 Fourth
Quarter
  Third
Quarter
  Second
Quarter
  First
Quarter
 
Interest income $11,426  $10,976  $10,666  $10,710 
Net interest income  10,687   10,176   9,743   9,417 
Provision for loan losses  276   1,062   1,250   1,075 
Gain on sale of securities     99       
Income before income taxes  4,364   3,250   2,749   2,232 
Net income  3,436   2,652   2,217   1,794 
Net income available to common shareholders  3,436   2,652   2,217   1,794 
Net income per share, basic $0.46  $0.36  $0.30  $0.24 
Net income per share, diluted $0.46  $0.35  $0.30  $0.24 
                 
2019 Fourth
Quarter
  Third
Quarter
  Second
Quarter
  First
Quarter
 
Interest income $10,786  $10,864  $10,606  $10,374 
Net interest income  9,360   9,353   9,116   9,020 
Provision for loan losses     25   9   105 
Gain on sale of securities  1      164   (29)
Income before income taxes  3,425   3,651   3,653   3,101 
Net income  2,697   2,898   2,881   2,495 
Net income available to common shareholders  2,698   2,898   2,881   2,495 
Net income per share, basic $0.36  $0.39  $0.38  $0.33 
Net income per share, diluted $0.36  $0.39  $0.37  $0.33 

127

Note 26—25—REPORTABLE SEGMENTS

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

 

 ·Commercial and retail banking: The Company’s primary business is to provide deposit and lending products and services to its commercial and retail customers.

 ·Mortgage banking: This segment provides mortgage origination services for loans that will be sold to investors in the secondary market.

 ·Investment advisory and non-deposit: This segment provides investment advisory services and non-deposit products.

 ·Corporate: This segment includes the parent company financial information, including interest on parent company debt and dividend income received from First Community Bank (the “Bank”).

108

 

Note 25—REPORTABLE SEGMENTS (Continued)

The following tables present selected financial information for the Company’s reportable business segments for the years ended December 31, 2020,2021, December 31, 20192020 and December 31, 2018.2019.

Year ended December 31, 2020
(Dollars in thousands)
 Commercial
and Retail
Banking
  Mortgage
Banking
  Investment
advisory and
non-deposit
  Corporate  Eliminations  Consolidated 
                         
Dividend and Interest Income $42,024  $1,737  $  $4,175  $(4,158) $43,778 
Interest expense  3,219         536      3,755 
Net interest income $38,805  $1,737  $  $3,639  $(4,158) $40,023 
Provision for loan losses  3,663               3,663 
Noninterest income  5,492   5,557   2,720         13,769 
Noninterest expense  30,113   4,993   1,911   518      37,534 
Net income before taxes $10,521  $2,301  $809  $3,121  $(4,158) $12,595 
Income tax expense (benefit)  2,715         (219)     2,496 
Net income $7,806  $2,301  $809  $3,340  $(4,158) $10,099 
                         
Year ended December 31, 2019
(Dollars in thousands)
 Commercial
and Retail
Banking
  Mortgage
Banking
  Investment
advisory and
non-deposit
  Corporate  Eliminations  Consolidated 
Dividend and Interest Income $41,545  $1,061  $  $7,081  $(7,057) $42,630 
Interest expense  5,021         760      5,781 
Net interest income $36,524  $1,061  $  $6,321  $(7,057) $36,849 
Provision for loan losses  139               139 
Noninterest income  5,160   4,555   2,021         11,736 
Noninterest expense  28,732   3,771   1,733   381      34,617 
Net income before taxes $12,813  $1,845  $288  $5,940  $(7,057) $13,829 
Income tax expense (benefit)  3,114         (256)     2,858 
Net income $9,699  $1,845  $288  $6,196  $(7,057) $10,971 

128

Year ended December 31, 2018
(Dollars in thousands)
 Commercial
and Retail
Banking
  Mortgage
Banking
  Investment
advisory and
non-deposit
  Corporate  Eliminations  Consolidated 
Dividend and Interest Income $38,875  $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 expense (benefit)  2,935         (241)     2,694 
Net income $10,302  $1,483  $283  $2,882  $(3,721) $11,229 
                         
(Dollars in thousands) Commercial
and Retail
Banking
  Mortgage
Banking
  Investment
advisory and
non-deposit
  Corporate  Eliminations  Consolidated 
Total Assets as of
December 31, 2020
 $1,335,320  $59,372  $2  $140,256  $(139,568) $1,395,382 
                         
Total Assets as of
December 31, 2019
 $1,143,934  $25,673  $2  $132,890  $(132,220) $1,170,279 

 

Schedule of Company’s Reportable Segment

Year ended December 31, 2021
(Dollars in thousands)
 Commercial
and Retail
Banking
  Mortgage
Banking
  Investment
advisory and
non-deposit
  Corporate  Eliminations  Consolidated 
                   
Dividend and Interest Income $46,499  $1,008  $  $4,032  $(4,019) $47,520 
Interest expense  1,825         416      2,241 
Net interest income $44,674  $1,008  $  $3,616  $(4,019) $45,279 
Provision for loan losses  335               335 
Noninterest income  5,590   4,319   3,995         13,904 
Noninterest expense  31,275   4,694   2,460   772      39,201 
Net income before taxes $18,654  $633  $1,535  $2,844  $(4,019) $19,647 
Income tax expense (benefit)  4,417         (235)     4,182 
Net income $14,237  $633  $1,535  $3,079  $(4,019) $15,465 
                         
Year ended December 31, 2020
(Dollars in thousands)
 Commercial
and Retail
Banking
  Mortgage
Banking
  Investment
advisory and
non-deposit
  Corporate  Eliminations  Consolidated 
Dividend and Interest Income $42,024  $1,737  $  $4,175  $(4,158) $43,778 
Interest expense  3,219         536      3,755 
Net interest income $38,805  $1,737  $  $3,639  $(4,158) $40,023 
Provision for loan losses  3,663               3,663 
Noninterest income  5,492   5,557   2,720         13,769 
Noninterest expense  30,111   4,993   1,912   518      37,534 
Net income before taxes $10,523  $2,301  $808  $3,121  $(4,158) $12,595 
Income tax expense (benefit)  2,715         (219)     2,496 
Net income $7,808  $2,301  $808  $3,340  $(4,158) $10,099 
                   
Year ended December 31, 2019
(Dollars in thousands)
 Commercial
and Retail
Banking
  Mortgage
Banking
  Investment
advisory and
non-deposit
  Corporate  Eliminations  Consolidated 
Dividend and Interest Income $41,545  $1,061  $  $7,081  $(7,057) $42,630 
Interest expense  5,021         760      5,781 
Net interest income $36,524  $1,061  $  $6,321  $(7,057) $36,849 
Provision for loan losses  139               139 
Noninterest income  5,160   4,555   2,021         11,736 
Noninterest expense  28,732   3,771   1,733   381      34,617 
Net income before taxes $12,813  $1,845  $288  $5,940  $(7,057) $13,829 
Income tax expense (benefit)  3,114         (256)     2,858 
Net income $9,699  $1,845  $288  $6,196  $(7,057) $10,971 
                         
(Dollars in thousands) Commercial
and Retail
Banking
  Mortgage
Banking
  Investment
advisory and
non-deposit
  Corporate  Eliminations  Consolidated 
Total Assets as of
December 31, 2021
 $1,566,949  $16,798  $2  $152,928  $(152,169) $1,584,508 
                         
Total Assets as of
December 31, 2020
 $1,335,320  $59,372  $2  $140,256  $(139,568) $1,395,382 

109

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

None.

Item 9A. Controls and Procedures.

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2020,2021, in accordance with Rule 13a-15 of the Exchange Act. We applied our judgment in the process of reviewing these controls and procedures, which, by their nature, can provide only reasonable assurance regarding our control objectives. Based upon that evaluation, our Chief Executive Officer and the Chief Financial Officer concluded that our disclosure controls and procedures as of December 31, 2020,2021, were effective to provide reasonable assurance regarding our control objectives.

Management’s Report on Internal Controls over Financial Reporting

We are responsible for establishing and maintaining adequate internal controls over financial reporting. Management’s assessment of the effectiveness of our internal control over financial reporting as of December 31, 2020.2021.

Changes in Internal Controls

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

Item 9B. Other Information.

None.

129

Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections. 

Not applicable. 

110

PART III

Item 10. Directors, Executive Officers and Corporate Governance.

The information required to be disclosed by this item will be disclosed in our definitive proxy statement to be filed no later than 120 days after December 31, 20202021 in connection with our 20212022 annual meeting of shareholders. The information required by Item 10 is hereby incorporated by reference from our proxy statement for our 20212022 annual meeting of shareholders to be held on May 19, 2021.18, 2022.

We have adopted a Code of Ethics that applies to our directors, executive officers (including our principal executive officer and principal financial officer) and employees in accordance with the Sarbanes-Oxley Corporate Responsibility Act of 2002. The Code of Ethics is available on our web site at www.firstcommunitysc.com. We will disclose any future amendments to, or waivers from, provisions of these ethics policies and standards on our website as promptly as practicable, as and to the extent required under NASDAQ Stock Market listing standards and applicable SEC rules.

Item 11. Executive Compensation.

The information required to be disclosed by this item will be disclosed in our definitive proxy statement to be filed no later than 120 days after December 31, 20202021 in connection with our 20212022 annual meeting of shareholders. The information required by Item 11 is hereby incorporated by reference from our proxy statement for our 20212022 annual meeting of shareholders to be held on May 19, 2021.18, 2022.

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

There are no outstanding options as of December 31, 2020.2021.

The additional information required to be disclosed by this item will be disclosed in our definitive proxy statement to be filed no later than 120 days after December 31, 20202021 in connection with our 20212022 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 20212022 annual meeting of shareholders to be held on May 19, 2021.18, 2022.

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

The information required to be disclosed by this item will be disclosed in our definitive proxy statement to be filed no later than 120 days after December 31, 20202021 in connection with our 20212022 annual meeting of shareholders. The information required by Item 13 is hereby incorporated by reference from our proxy statement for our 20212022 annual meeting of shareholders to be held on May 19, 2021.18, 2022.

Item 14. Principal Accountant Fees and Services.

The information required to be disclosed by this item will be disclosed in our definitive proxy statement to be filed no later than 120 days after December 31, 2020,2021, in connection with our 20212022 annual meeting of shareholders. The information required by Item 14 is hereby incorporated by reference from our proxy statement for our 20212022 annual meeting of shareholders to be held on May 19, 2021.18, 2022.

130

111

PART IV

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, 20202021 and 20192020

 ·Consolidated Statements of Income for the years ended December 31, 2021, 2020 2019 and 20182019

 ·Consolidated Statements of Comprehensive Income for the years ended December 31, 2021, 2020 2019 and 20182019

 ·Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2021, 2020 2019 and 20182019

 ·Consolidated Statements of Cash Flows for the years ended December 31 for 2021, 2020 2019 and 20182019

 ·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.

131

Exhibit Index

Exhibit  No. Description of Exhibit
2.1 Agreement and Plan of Merger, dated as of April 11, 2017, by and between First Community Corporation and Cornerstone Bancorp (incorporated by reference to Exhibit 2.1 to the Company’s Form 8-K filed with the SEC on April 12, 2017).
3.1 Restated Articles of Incorporation (incorporated by reference to Exhibit 3.1 to the Company’s Form 8-K filed with the SEC on June 27, 2011).
3.2 Articles of Amendment (incorporated by reference to Exhibit 3.1 to the Company’s Form 8-K filed with the SEC on May 23, 2019).
3.3 Amended and Restated Bylaws dated May 21, 2019 (incorporated by reference to Exhibit 3.1 to the Company’s Form 8-K filed with the SEC on May 22, 2019).
4.1 Description of the Company’s Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1934 (incorporated by reference to Exhibit 4.1 of the Company’s Form 10-K for the period ended December 31, 2019).
10.4 Dividend Reinvestment Plan dated July 7, 2003 (incorporated by reference to Form S-3/D filed with the SEC on July 14, 2003,, File No. 333-107009, April 20, 2011,, File No. 333-173612, and January 31, 2019,, File No. 333-229442)333-229442).**
10.5 Form of Salary Continuation Agreement dated August 2, 2006 (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed with the SEC on August 3, 2006).**
10.6 Non-Employee Director Deferred Compensation Plan approved September 30, 2006 and Form of Deferred Compensation Agreement (incorporated by reference to Exhibits 10.1 and 10.2 to the Company’s Form 8-K filed with the SEC on October 4, 2006).
10.7First Community Corporation Non-Employee Director Deferred Compensation Plan, as amended and restated effective as of January 1, 2021 (incorporated by reference to Exhibit 10.1 to the Company’s Form 10-Q for the period ended June 30, 2021).
10.7 Employment Agreement by and between Michael C. Crapps and First Community Corporation dated December 8, 2015 (incorporated by reference to Exhibit 10.7 of the Company’s Form 10-K for the period ended December 31, 2015).**
10.8 Employment Agreement by and between Joseph G. Sawyer and First Community Corporation dated December 8, 2015 (incorporated by reference to Exhibit 10.8 of the Company’s Form 10-K for the period ended December 31, 2015).**
10.9 Employment Agreement by and between David K. Proctor and First Community Corporation dated December 8, 2015 (incorporated by reference to Exhibit 10.9 of the Company’s Form 10-K for the period ended December 31, 2015).**

112

10.10 Employment Agreement by and between Robin D. Brown and First Community Corporation dated December 8, 2015 (incorporated by reference to Exhibit 10.10 of the Company’s Form 10-K for the period ended December 31, 2015).**
10.11 Employment Agreement by and between J. Ted Nissen and First Community Corporation dated December 8, 2015 (incorporated by reference to Exhibit 10.11 of the Company’s Form 10-K for the period ended December 31, 2015).**
10.12 Employment Agreement by and between Tanya A. Butts and First Community Corporation dated April 22, 2019 (incorporated by reference to Exhibit 10.12 of the Company’s Form 10-K for the period ended December 31, 2019).**
10.13 Employment Agreement by and between Donald Shawn Jordan and First Community Corporation dated November 12, 2019 (incorporated by reference to Exhibit 10.13 of the Company’s Form 10-K for the period ended December 31, 2019).**
10.14 First Community Corporation 2011 Stock Incentive Plan and Form of Stock Option Agreement and Form of Restricted Stock Agreement (incorporated by reference to Appendix A to the Company’s Proxy Statement filed onwith April 7, 2011).**
10.15 Amendment No. 1 to the First Community Corporation 2011 Stock Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed with the SEC on April 22, 2016).**
10.16 Form of Restricted Stock Unit Agreement (incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K filed with the SEC on April 22, 2016).**
10.17 First Community Corporation Annual Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed with the SEC on December 16, 2019).**

10.20Form of Performance-based Restricted Stock Unit Agreement under the First Community Corporation 2021 Omnibus Equity Incentive Plan (incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K filed with the SEC on February 16, 2022)**
10.21Form of Restricted Stock Agreement for Directors under the First Community Corporation 2021 Omnibus Equity Incentive Plan (incorporated by reference to Exhibit 10.3 to the Company’s Form 8-K filed with the SEC on February 16, 2022)**
10.22Form of Restricted Stock Agreement for Employees under the First Community Corporation 2021 Omnibus Equity Incentive Plan (incorporated by reference to Exhibit 10.4 to the Company’s Form 8-K filed with the SEC on February 16, 2022)**
21.1 Subsidiaries of the Company.*
23.1 Consent of Independent Registered Public Accounting Firm—Elliott Davis, LLC.*
24.1 Power of Attorney (contained on the signature page hereto).*
31.1 Rule 13a-14(a) Certification of the Chief Executive Officer.*
31.2 Rule 13a-14(a) Certification of the Chief Financial Officer.*
32 Section 1350 Certifications.*
101 The following materials from the Company’s Annual Report on Form 10-K for the year ended December 31, 2020,2021, formatted in eXtensible Business Reporting Language (XBRL): (i) the Consolidated Balance Sheets as December 31, 20202021 and December 31, 2019;2020; (ii) Consolidated Statements of Income for the years ended December 31, 2021, 2020 2019 and 2018;2019; (iii) Consolidated Statements of Comprehensive Income for the years ended December 31, 2021, 2020 2019 and 2018;2019; (iv) Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2020, 20192021, 20120 and 2018;2019; (v) Consolidated Statements of Cash Flows for the years ended December 31, 2021, 2020 2019 and 2018;2019; and (vi) Notes to the Consolidated Financial Statements.*
104 

Cover Page Interactive Data File (embedded within the Inline XBRL document)*

 

The Exhibits listed above will be furnished to any security holder free of charge upon written request to the Corporate Secretary, First Community Corporation, 5455 Sunset Blvd., Lexington, South Carolina 29072.

 

*Filed herewith.

 

**Management contract or compensatory plan or arrangement required to be filed as an Exhibit to this Annual Report on Form 10-K.

 

(b)See listing of Exhibits above for an indication of exhibits filed herewith.

 

(c)Not applicable.
133

113

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 12, 202116, 2022FIRST 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/ Thomas C. Brown Director March 12, 202116, 2022
Thomas C. Brown    
     
/s/ Chimin J. Chao Director and Vice Chairman of the Board March 12, 202116, 2022
Chimin J. Chao    
     
/s/ Michael C. Crapps Director, President, & Chief Executive Officer March 12, 202116, 2022
Michael C. Crapps (Principal Executive Officer)  
     
/s/ J. Thomas JohnsonW. JAMES KITCHENS, JR. Director and Vice Chairman of the Board March 12, 202116, 2022
J. Thomas JohnsonW. James Kitchens, Jr.    
     
/s/ Ray E. Jones Director March 12, 202116, 2022
Ray E. Jones    
     
/s/ W. James Kitchens, Jr.Jan H. Hollar Director March 12, 202116, 2022
W. James Kitchens, Jr.Jan H. Hollar    
     
/s/ Mickey Layden Director March 12, 202116, 2022
Mickey Layden    
     
/s/ E. Leland Reynolds Director March 12, 202116, 2022
E. Leland Reynolds    
     
/s/ Alexander Snipe, Jr. Director March 12, 202116, 2022
Alexander Snipe, Jr.    
     
/s/ Jane Sosebee Director March 12, 202116, 2022
Jane Sosebee    
     
/s/ Edward J. Tarver Director March 12, 202116, 2022
Edward J. Tarver    
     
/s/ Roderick M. Todd, Jr. Director March 12, 202116, 2022
Roderick M. Todd, Jr.    
     
/s/ D. Shawn Jordan Chief Financial Officer March 12, 202116, 2022
D. Shawn Jordan (Principal Financial and Accounting Officer)  
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