UNITED STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form
10-K
(Mark One)
Or
Commission
file number: 000-28344
First Community Corporation
(Exact
name of registrant as specified in its charter)
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 oNox
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
oNox
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. Yesx 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). Yesx 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.
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 oNox
As
of June 30, 2020, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was
$108,906,995 based on the closing price of $15.15 on June 30, 2020, as reported on The NASDAQ Capital Market. 7,526,967 shares
of the registrant’s common stock were issued and outstanding as of March 12, 2021.
Documents
Incorporated by Reference
Portions
of the registrant’s Definitive Proxy Statement for its 2021 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. Business 5
Item 1A. Risk Factors 26
Item 1B. Unresolved Staff Comments 43
Item 2. Properties 43
Item 3. Legal Proceedings 44
Item 4. Mine Safety Disclosures 44
PART II
Item 6. Selected Financial Data 47
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 77
Item 8. Financial Statements and Supplementary Data 77
Consolidated Balance Sheets 81
Consolidated Statements of Income 82
Consolidated Statements of Comprehensive Income 83
Consolidated Statements of Changes in Shareholders’ Equity 84
Consolidated Statements of Cash Flows 85
Notes to Consolidated Financial Statements 86
Item 9A. Controls and Procedures 129
Item 9B. Other Information 129
PART III
Item 10. Directors, Executive Officers and Corporate Governance 130
Item 11. Executive Compensation 130
Item 14. Principal Accountant Fees and Services 130
PART IV
Item 15. Exhibits, Financial Statement Schedules 131
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, 2020 as filed with the U.S. Securities and Exchange Commission (the “SEC”)
and the following:
· restrictions or conditions imposed by our regulators on our operations;
· changes occurring in business conditions and inflation;
· changes in deposit flows;
· changes in technology;
· changes in monetary and tax policies;
· changes in accounting standards, policies, estimates and practices;
· the rate of delinquencies and amounts of loans charged-off;
· our ability to successfully execute our business strategy;
· our ability to attract and retain key personnel;
· 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.
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
· Our business may be adversely affected by economic conditions.
Credit
and Interest Rate Risks
· Our underwriting decisions may materially and adversely affect our business.
· Changes in prevailing interest rates may reduce our profitability.
Capital
and Liquidity Risks
Risks
Related to Our Industry
· We may be adversely affected by the soundness of other financial institutions.
Risks
Related to Our Strategy
Risks
Related to Our Human Capital
Operational
Risks
· We are at risk of increased losses from fraud.
Legal,
Accounting, Regulatory and Compliance Risks
Risks
Related to an Investment In our Common Stock
· An investment in our common stock is not an insured deposit.
General
Risks
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, which includes Aiken County, South Carolina (1 office);
and in Augusta, Georgia, which includes Richmond County (2 offices) and Columbia County (1 office). In addition, we conducted
business from a mortgage loan production office in Richland County, South Carolina until January 24, 2020, after which we consolidated
such operations with other existing Bank offices. At December 31, 2020, we had approximately $1.4 billion in assets, $844.2 million
in loans, $1.2 billion in deposits, and $136.3 million in shareholders’ equity.
On October
20, 2017, we acquired all of the outstanding common stock of Cornerstone Bancorp headquartered in Easley, South Carolina (“Cornerstone”)
the bank holding company for Cornerstone National Bank (“CNB”), in a cash and stock transaction. The total purchase
price was approximately $27.1 million, consisting of $7.8 million in cash and 877,364 shares of our common stock valued at $19.3
million based on a provision in the merger agreement that 30% of the outstanding shares of Cornerstone common stock be exchanged
for cash and 70% of the outstanding shares of Cornerstone common stock be exchanged for shares of our common stock. The value
of our common stock issued was determined based on the closing price of the common stock on October 19, 2017 as reported by NASDAQ,
which was $22.05. Cornerstone common shareholders received 0.54 shares of our common stock in exchange for each share of Cornerstone
common stock, or $11.00 per share, subject to the limitations discussed above.
We offer
a wide-range of traditional banking products and services for professionals and small-to medium-sized businesses, including consumer
and commercial, mortgage, brokerage and investment, and insurance services. We also offer online banking to our customers. We
have grown organically and through acquisitions.
Our stock
trades on The NASDAQ Capital Market under the symbol “FCCO”.
Available
Information
We provide
our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports
filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”)
on our website at www.firstcommunitysc.com/ under the About section, under the Investors link. These filings are made accessible
as soon as reasonably practicable after they have been filed electronically with the Securities and Exchange Commission (the “SEC”).
These filings are also accessible on the SEC’s website at www.sec.gov. In addition, we make available under our Investor
Relations section on our website the following, among other things: (i) Code of Business Conduct and Ethics, which applies to
our directors and all employees and (ii) the charters of the Audit and Compliance, Human Resources and Compensation, and Nominations
and Corporate Governance Committees of our board of directors. These materials are available to the general public on our website
free of charge. Printed copies of these materials are also available free of charge to shareholders who request them in writing.
Please address your request to: Investor Relations, First Community Corporation, 5455 Sunset Boulevard, Lexington, South Carolina
29072. Statements of beneficial ownership of equity securities filed by directors, officers, and 10% or greater shareholders under
Section 16 of the Exchange Act are also available through our website. The information on our website is not incorporated by reference
into this report.
Location
and Service Area
The Bank
is engaged in a general commercial and retail banking business, emphasizing the needs of small-to-medium sized businesses, professional
concerns and individuals. We have a total of 13 full-service offices located in Richland, Lexington, Kershaw and Newberry Counties
of South Carolina and the surrounding areas. We refer to these counties as the “Midlands” region of South Carolina.
Lexington County is home to six of our Bank’s branch offices. Richland County, in which we currently have four branches,
is the second largest county in South Carolina. Columbia is located within Richland County and is South Carolina’s capital
city and is geographically positioned in the center of the state between the industrialized Upstate region of South Carolina and
the coastal city of Charleston, South Carolina. Intersected by three major interstate highways (I-20, I-77, and I-26), Columbia’s
strategic location has contributed greatly to its commercial appeal and growth. With the acquisition of Savannah River Banking
Company in 2014, we added a branch in Aiken, South Carolina and a branch in Augusta, Georgia (Richmond County). In 2016, we opened
a loan production office in Greenville County, which we converted into a full service office in February 2019. With the acquisition
of CNB in 2017, we added a branch in each of Greenville, Pickens, and Anderson Counties of South Carolina. We refer to this three-county
area as the “Upstate” region of South Carolina. In 2018, we opened a de novo branch in downtown Augusta, Georgia
(Richmond County). In 2019, we opened a de novo branch in Evans, Georgia, a suburb of Augusta in Columbia County, Georgia.
We refer to the three-county area of Aiken County (South Carolina), Richmond County (Georgia) and Columbia County (Georgia) as
the “CSRA” region.
The following
table shows data as to deposits, market share and population for our three market areas (deposits in thousands):
Total Estimated Total Market Deposits(2) Our Market Deposits(2)
We believe that
we serve attractive banking markets with long-term growth potential and a well-educated employment base that helps to support
our diverse and relatively stable local economy. According to U.S. Census Data, median household incomes for each of the counties
in the regions noted above were as follows for 2019:
Richland County, SC $ 54,767
Lexington County, SC $ 61,173
Newberry County, SC $ 44,226
Kershaw County SC $ 51,479
Greenville County, SC $ 60,351
Anderson County, SC $ 50,865
Pickens County SC $ 49,573
Richmond County, GA $ 42,728
Columbia County, GA $ 82,339
The county
estimates noted above compare to 2019 statewide median household income estimates of $53,199 and $58,700 for South Carolina and
Georgia, respectively. The principal components of the economy within our market areas are service industries, government and
education, and wholesale and retail trade. The largest employers in the Midlands market area, each of which employs in excess
of 3,000 people, include the State of South Carolina, Prisma Health, BlueCross BlueShield of SC, the University of South Carolina,
the United States Department of the Army (Fort Jackson Army Base), Richland School District 1, Richland School District 2, and
Lexington Medical Center. The largest employers in our CSRA market area, each of which employs in excess of 3,000 people, include
the U.S. Army Cyber Center of Excellence & Fort Gordon, Augusta University, Richmond County School System, NSA Augusta, University
Hospital, Augusta University Hospitals, and the Department of Energy, Savannah River Site. The Upstate region major employers
include, among others, Prisma Health, Greenville County Schools, BMW Manufacturing Corp., Michelin North America, BI-LO, LLC,
Bon Secours St. Francis Health System, AnMed Health Medical Center, Clemson University, Duke Energy Corp., and GE Power &
Water. We believe that this diversified economic base has reduced, and will likely continue to reduce, economic volatility in
our market areas. Our markets have experienced steady economic and population growth over the past 10 years, and we expect that
the area, as well as the service industry needed to support it, will continue to grow.
Banking
Services
We offer
a full range of deposit services that are typically available in most banks and thrift institutions, including checking accounts,
NOW accounts, savings accounts and other time deposits of various types, ranging from daily money market accounts to longer-term
certificates of deposit. The transaction accounts and time certificates are tailored to our principal market area at rates competitive
to those offered in the area. In addition, we offer certain retirement account services, such as individual retirement accounts
(“IRAs”). All deposit accounts are insured by the FDIC up to the maximum amount allowed by law (currently, $250,000,
subject to aggregation rules).
We also offer
a full range of commercial and personal loans. Commercial loans include both secured and unsecured loans for working capital (including
inventory and receivables), business expansion (including acquisition of real estate and improvements), and the purchase of equipment
and machinery. Consumer loans include secured and unsecured loans for financing automobiles, home improvements, education, and
personal investments. We also make real estate construction and acquisition loans. We originate fixed and variable rate mortgage
loans, substantially all of which are sold into the secondary market. Our lending activities are subject to a variety of lending
limits imposed by federal law. While differing limits apply in certain circumstances based on the type of loan or the nature of
the borrower (including the borrower’s relationship to the bank), in general, we are subject to a loans-to-one-borrower
limit of an amount equal to 15% of the Bank’s unimpaired capital and surplus, or 25% of the unimpaired capital and surplus
if the excess over 15% is approved by the board of directors of the Bank and is fully secured by readily marketable collateral.
As a result, our lending limit will increase or decrease in response to increases or decreases in the Bank’s level of capital.
Based upon the capitalization of the Bank at December 31, 2020, the maximum amount we could lend to one borrower is $19.6 million.
In addition, we may not make any loans to any director, officer, employee, or 10% shareholder of the Company or the Bank unless
the loan is approved by our board of directors and is made on terms not more favorable to such person than would be available
to a person not affiliated with the Bank.
Other
bank services include internet banking, cash management services, safe deposit boxes, travelers checks, direct deposit of payroll
and social security checks, and automatic drafts for various accounts. We offer non-deposit investment products and other investment
brokerage services through a registered representative with an affiliation through LPL Financial. We are associated with Nyce
and Plus networks of automated teller machines and MasterCard debit cards that may be used by our customers throughout South Carolina
and other regions. In November 2019, we deconverted from the Star network of automated teller machines. We also offer VISA and
MasterCard credit card services through a correspondent bank as our agent.
We currently
do not exercise trust powers, but we can begin to do so with the prior approval of our primary banking regulators, the FDIC and
the S.C. Board.
Competition
The banking
business is highly competitive. We compete as a financial intermediary with other commercial banks, savings and loan associations,
credit unions and money market mutual funds operating in our market areas. As of June 30, 2020, there were 24 financial institutions
operating approximately 167 offices in the Midlands market, 19 financial institutions operating 97 branches in the CSRA market,
and 35 financial institutions operating 227 branches in the Upstate market. The competition among the various financial institutions
is based upon a variety of factors, including interest rates offered on deposit accounts, interest rates charged on loans, credit
and service charges, the quality of services rendered, the convenience of banking facilities and, in the case of loans to large
commercial borrowers, relative lending limits. Size gives larger banks certain advantages in competing for business from large
corporations. These advantages include higher lending limits and the ability to offer services in other areas of South Carolina
and Georgia. As a result, we do not generally attempt to compete for the banking relationships of large corporations, but concentrate
our efforts on small-to-medium sized businesses and individuals. We believe we have competed effectively in this market by offering
quality and personal service. In addition, many of our non-bank competitors are not subject to the same extensive federal regulations
that govern bank holding companies and federally insured banks.
Employees
As
of December 31, 2020, the company had 244 full-time employees. We believe that we have good relations with our employees and our
employees are not represented by any collective bargaining group or agreement. We believe our ability to attract and retain employees
is a key to our success and one of our core values is mutual respect for our colleagues and their role in our success. Our employees
embody and consistently demonstrate our five cultural beliefs of honesty and integrity, everyone matters, spirit of service, strong
work ethic and excellence with humility. Accordingly, we strive to offer competitive salaries, insurance and retirement benefits,
a generous paid time off plan including paid holidays, and a stable and friendly working environment to all employees. We believe
the development of our staff is important to the success of our company and we encourage employees to continue on a lifelong trajectory
of learning. As such, we provide a number of opportunities for employee development through both internal and external sources.
To develop our current and future leaders, the Bank created the First Community Bank Leadership Institute (FCBLI), an eighteen-month
leadership development program that provides academic and experiential learning to teach and nurture leadership skills across
the organization to prepare to support the Bank now and in the future. The Bank also supports the development of employees through
external educational opportunities such as various bankers’ schools that offer multi-year development programs as well as
short term training classes and industry conferences. In addition to these, the Bank encourages employees to continue with career
development specific to their role to insure employees stay current with the most up-to-date information and best practices.
The
health, safety and well-being of our employees, customers, vendors and communities has been and continues to be our top priority.
The COVID-19 pandemic presented challenges as we worked to continue to serve our customers and the community. Throughout the pandemic,
we followed guidance from the Centers for Disease Control and the South Carolina Department of Health and Environmental Control
and made the necessary adjustments as guidance and recommendations changed. We implemented a number of safety protocols to help
provide a safe workplace for our employees, customers and vendors. This included limiting access to facilities, including at times
our banking offices (except by appointment), encouraging the use of drive thru facilities and online, electronic and other technology
products and services, implementing remote working and rotating work schedules, enhanced and more frequent cleaning of facilities,
written communication to employees as updates were available, and reminders on safety protocols including social distancing, monitoring
symptoms and quarantining with exposure or potential exposure to the virus, and hand washing/sanitizing. We provided supplies
including masks, gloves, and hand sanitizer to employees and customers. With recent positive news on pandemic conditions, we are
beginning a transition to a more normal operating environment.
Executive
Officers of First Community Corporation
Executive officers
of First Community Corporation are elected by the board of directors annually and serve at the pleasure of the board of directors.
The current executive officers, and persons chosen to become executive officers, and their ages, positions with us over the past
five years, and terms of office as of March 12, 2021, are as follows:
Name (age) Position and Five Year History with Company With the Company Since
Michael C. Crapps (62) Chief Executive Officer and President, Director 1994
Robin D. Brown (53) Chief Human Resources and Marketing Officer 1994
Tanya A. Butts (62) Chief Operations Officer/Chief Risk Officer 2016
None of the above
officers are related and there are no arrangements or understandings between them and any other person pursuant to which any of
them was elected as an officer, other than arrangements or understandings with the directors or officers of the Company acting
solely in their capacities as such.
SUPERVISION
AND REGULATION
Both
the Company and the Bank are subject to extensive state and federal banking laws and regulations that impose specific requirements
or restrictions on and provide for general regulatory oversight of virtually all aspects of our operations. These laws generally
are intended primarily for the protection of customers, depositors and other consumers, the FDIC’s Deposit Insurance Fund
(the “DIF”), and the banking system as a whole; not for the protection of our other creditors and shareholders.
The
following discussion is not intended to be a complete list of all the activities regulated by the banking laws or of the impact
of those laws and regulations on our operations. The following summary is qualified by reference to the statutory and regulatory
provisions discussed. Changes in applicable laws or regulations may have a material effect on our business and prospects. Our
operations may be affected by legislative changes and the policies of various regulatory authorities. We cannot predict the effect
that fiscal or monetary policies, economic control, or new federal or state legislation may have on our business and earnings
in the future.
Legislative
and Regulatory Developments.
An
older legislative and regulatory development implemented in response to the 2008 financial crisis—the Dodd-Frank Wall Street
Reform and Consumer Protection Act (the “Dodd-Frank Act”)—and the newer regulatory developments implemented
in response to the COVID-19 pandemic, including the CARES Act and the Consolidated Appropriations Act, 2021, which enhanced and
expanded certain provisions of the CARES Act—have had and will continue to have an impact on our operations.
The Dodd-Frank
Wall Street Reform and Consumer Protection Act
The
Dodd-Frank Act was signed into law in July 2010 and impacts financial institutions in numerous ways, including:
· Granting new authority to the FDIC as liquidator and receiver;
· Changing the manner in which deposit insurance assessments are made;
· Requiring regulators to modify capital standards;
· Establishing the Consumer Financial Protection Bureau (the “CFPB”);
· Imposing more stringent requirements on mortgage lenders; and
· Limiting banks’ proprietary trading activities.
There
are many provisions in the Dodd-Frank Act mandating regulators to adopt new regulations and conduct studies upon which future
regulation may be based. While some have been issued, many remain to be issued. Governmental intervention and new regulations
could materially and adversely affect our business, financial condition and results of operations.
2018 Regulatory
Reform.
In
May 2018, the Economic Growth, Regulatory Reform and Consumer Protection Act (“Regulatory Relief Act”), was enacted
to modify or remove certain financial reform rules and regulations, including some of those implemented under the Dodd-Frank Act.
While the Regulatory Relief Act maintains most of the regulatory structure established by the Dodd-Frank Act, it amends certain
aspects of the regulatory framework for small depository institutions with assets of less than $10 billion and for large banks
with assets of more than $50 billion.
The
Regulatory Relief Act, among other things, expanded the definition of qualified mortgages a financial institution may hold and
simplified the regulatory capital rules for financial institutions and their holding companies with total consolidated assets
of less than $10 billion by instructing the federal banking regulators to establish a single “community bank leverage ratio”
between 8% and 10%. As such, in November 2019, the federal banking regulators published final rules implementing a simplified
measure of capital adequacy for certain banking organizations that have less than $10 billion in total consolidated assets. Under
the final rules, which went into effect on January 1, 2020, depository institutions and depository institution holding companies
that have less than $10 billion in total consolidated assets and meet other qualifying criteria, including a leverage ratio of
greater than 9%, off-balance-sheet exposures of 25% or less of total consolidated assets and trading assets plus trading liabilities
of 5% or less of total consolidated assets, are deemed “qualifying community banking organizations” and are eligible
to opt into the “community bank leverage ratio framework.” A qualifying community banking organization that elects
to use the community bank leverage ratio framework and that maintains a leverage ratio of greater than 9% is considered to have
satisfied the generally applicable risk-based and leverage capital requirements under the Basel III rules, discussed below, and,
if applicable, is considered to have met the “well capitalized” capital ratio requirements for purposes of its primary
federal regulator’s prompt corrective action rules, discussed below. The final rules include a two-quarter grace period
during which a qualifying community banking organization that temporarily fails to meet any of the qualifying criteria, including
the greater-than-9% leverage capital ratio requirement, is generally still deemed “well capitalized” so long as the
banking organization maintains a leverage capital ratio greater than 8%. A banking organization that fails to maintain a leverage
capital ratio greater than 8% is not permitted to use the grace period and must comply with the generally applicable requirements
under the Basel III rules and file the appropriate regulatory reports. We do not have any immediate plans to elect to use the
community bank leverage ratio framework but may make such an election in the future.
The
Regulatory Relief Act also expanded the category of holding companies that may rely on the “Small Bank Holding Company and
Savings and Loan Holding Company Policy Statement” by raising the maximum amount of assets a qualifying holding company
may have from $1.0 billion to $3.0 billion. This expansion also excluded such holding companies from the minimum capital requirements
of the Dodd-Frank Act. In addition, the Regulatory Relief Act included regulatory relief for community banks regarding regulatory
examination cycles, call reports, the proprietary trading prohibitions in the Volcker Rule, mortgage disclosures, and risk weights
for certain high-risk commercial real estate loans.
We
believe these reforms are favorable to our operations, but the ultimate impacts remain difficult to predict until rulemaking is
complete and the reforms are fully implemented.
The CARES Act and Initiatives Related to COVID-19
On
March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act, was signed into law. The CARES Act provided
for approximately $2.2 trillion in direct economic relief in response to the public health and economic impacts of COVID-19. Many
of the CARES Act’s programs are, and remain, dependent upon the direct involvement of financial institutions like the Bank.
These programs have been implemented through rules and guidance adopted by federal departments and agencies, including the U.S.
Department of Treasury, the Federal Reserve and other federal bank regulatory authorities, including those with direct supervisory
jurisdiction over the Company and the Bank. Furthermore, as the COVID-19 pandemic evolves, federal regulatory authorities continue
to issue additional guidance with respect to the implementation, life cycle, and eligibility requirements for the various CARES
Act programs, as well as industry-specific recovery procedures for COVID-19. In addition, it is possible that Congress will enact
supplementary COVID-19 response legislation, including amendments to the CARES Act or new bills comparable in scope to the CARES
Act. We continue to assess the impact of the CARES Act and other statutes, regulations and supervisory guidance related to the
COVID-19 pandemic.
Paycheck
Protection Program. A principal provision of the CARES Act amended the SBA’s loan program to create a guaranteed, unsecured
loan program, the Paycheck Protection Program, or PPP, to fund operational costs of eligible businesses, organizations and self-employed
persons impacted by COVID-19. These loans are eligible to be forgiven if certain conditions are satisfied and are fully guaranteed
by the SBA. Additionally, loan payments will also be deferred for the first six months of the loan term. The PPP commenced on
April 3, 2020 and was available to qualified borrowers through August 8, 2020. No collateral or personal guarantees were required.
On December 27, 2020, the President signed into law omnibus federal spending and economic stimulus legislation titled the “Consolidated
Appropriations Act, 2021” that included the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (the “HHSB
Act”). Among other things, the HHSB Act renewed the PPP, allocating $284.45 billion for both new first time PPP loans under
the existing PPP and the expansion of existing PPP loans for certain qualified, existing PPP borrowers. In addition to extending
and amending the PPP, the HHSB Act also creates a new grant program for “shuttered venue operators.” As a participating
lender in the PPP, we continue to monitor legislative, regulatory, and supervisory developments related thereto, including the
most recent changes implemented by the HHSB Act.
Troubled
Debt Restructurings and Loan Modifications for Affected Borrowers. The CARES Act, as extended by certain provisions of the
Consolidated Appropriations Act, 2021, permits banks to suspend requirements under GAAP for loan modifications to borrowers affected
by COVID-19 that may otherwise be characterized as troubled debt restructurings and suspend any determination related thereto
if (i) the borrower was not more than 30 days past due as of December 31, 2019, (ii) the modifications are related to COVID-19,
and (iii) the modification occurs between March 1, 2020 and the earlier of 60 days after the date of termination of the national
emergency or January 1, 2022. Federal bank regulatory authorities also issued guidance to encourage banks to make loan modifications
for borrowers affected by COVID-19.
Main
Street Lending Program. The CARES Act encouraged the Federal Reserve, in coordination with the Secretary of the Treasury,
to establish or implement various programs to help mid-size businesses, nonprofit organizations, and municipalities. On April
9, 2020, the Federal Reserve proposed the creation of the Main Street Lending Program (the “MSLP”) to implement certain
of these recommendations. The MSLP supported lending to small- and medium-sized businesses that were in sound financial condition
before the onset of the COVID-19 pandemic. The MSLP, which expired on January 8, 2021, operated through three facilities: the
Main Street New Loan Facility, the Main Street Priority Loan Facility, and the Main Street Expanded Loan Facility. The Bank registered
as a lender under the MSLP, but as of December 31, 2020, originated no loans under the MSLP.
Proposed
Legislation and Regulatory Action.From time to time, various legislative and regulatory initiatives are introduced
in Congress and state legislatures, as well as by regulatory agencies. Such initiatives may include proposals to expand or contract
the powers of bank holding companies and depository institutions or proposals to substantially change the financial institution
regulatory system. Such legislation could change banking statutes and our operating environment in substantial and unpredictable
ways. If enacted, such legislation could increase or decrease the cost of doing business, limit or expand permissible activities
or affect the competitive balance among banks, savings associations, credit unions, and other financial institutions. We cannot
predict whether any such legislation will be enacted, and, if enacted, the effect that it, or any implementing regulations, would
have on our financial condition or results of operations. A change in statutes, regulations or regulatory policies applicable
to the Company or the Bank could have a material effect on our business.
Temporary
Community Bank Leverage Ratio Relief. Pursuant to the CARES Act, the federal banking agencies authorities adopted an interim
rule, effective until the earlier of the termination of the COVID-19 emergency declaration and December 31, 2020, to (i) reduce
the minimum community bank leverage ratio from 9% to 8% percent and (ii) give community banks two-quarter grace period to satisfy
such ratio if such ratio falls out of compliance by no more than 1%.
Capital
and Related Requirements.
In
July of 2013 (and fully-phased in as of January 1, 2019), the U.S. federal banking agencies approved the implementation of the
Basel III regulatory capital reforms in pertinent part, and, at the same time, promulgated rules effecting certain changes required
by the Dodd-Frank Act ( “Basel III”). Basel III was released in the form of enforceable regulations by each of the
applicable federal bank regulatory agencies. Basel III is applicable to all banking organizations that are subject to minimum
capital requirements, including federal and state banks and savings and loan associations, as well as to bank and savings and
loan holding companies, other than “small bank holding companies.” A small bank holding company is generally a qualifying
bank holding company or savings and loan holding company with less than $3.0 billion in consolidated assets. More stringent requirements
are imposed on “advanced approaches” banking organizations—generally those organizations with $250 billion or
more in total consolidated assets, $10 billion or more in total foreign exposures applicable to advanced approaches banking organizations.
Based
on the foregoing, as a small bank holding company, we are generally not subject to the capital requirements at the holding company
level unless otherwise advised by the Federal Reserve; however, our Bank remains subject to the capital requirements. Accordingly,
the Bank is required to maintain the following capital levels:
· a Common Equity Tier 1 risk-based capital ratio of 4.5%;
· a Tier 1 risk-based capital ratio of 6%;
· a total risk-based capital ratio of 8%; and
· a leverage ratio of 4%.
Basel
III also established a “capital conservation buffer” above the new regulatory minimum capital requirements, which
must consist entirely of Common Equity Tier 1 capital, which was phased in over several years. The phase-in of the capital conservation
buffer began on January 1, 2016, at a level of 0.625% of risk-weighted assets for 2016 and increased to 1.250% for 2017, and 1.875%
for 2018. The fully phased-in capital conservation buffer of 2.500%, which became effective on January 1, 2019, resulted in the
following effective minimum capital ratios for the Bank beginning in 2019: (i) a Common Equity Tier 1 capital ratio of 7.0%, (ii)
a Tier 1 capital ratio of 8.5%, and (iii) a total capital ratio of 10.5%. Under the final rules, institutions are subject to limitations
on paying dividends, engaging in share repurchases, and paying discretionary bonuses if their capital levels fall below the buffer
amount. These limitations establish a maximum percentage of eligible retained income that could be utilized for such actions.
Under
Basel III, Tier 1 capital includes two components: Common Equity Tier 1 capital and additional Tier 1 capital. The highest form
of capital, Common Equity Tier 1 capital, consists solely of common stock (plus related surplus), retained earnings, accumulated
other comprehensive income, otherwise referred to as AOCI, and limited amounts of minority interests that are in the form of common
stock. Additional Tier 1 capital is primarily comprised of noncumulative perpetual preferred stock, Tier 1 minority interests
and grandfathered trust preferred securities. Tier 2 capital generally includes the allowance for loan losses up to 1.25% of risk-weighted
assets, qualifying preferred stock, subordinated debt and qualifying Tier 2 minority interests, less any deductions in Tier 2
instruments of an unconsolidated financial institution. AOCI is presumptively included in Common Equity Tier 1 capital and often
would operate to reduce this category of capital. When implemented, Basel III provided a one-time opportunity at the end of the
first quarter of 2015 for covered banking organizations to opt out of a large part of this treatment of AOCI. We made this opt-out
election and, as a result, retained our pre-existing treatment for AOCI.
In
addition, in order to avoid restrictions on capital distributions or discretionary bonus payments to executives, under Basel III,
a banking organization must maintain a “capital conservation buffer” on top of its minimum risk-based capital requirements.
This buffer must consist solely of Tier 1 Common Equity, but the buffer applies to all three risk-based measurements (Common Equity
Tier 1, Tier 1 capital and total capital). The 2.5% capital conservation buffer was phased in incrementally over time, and became
fully effective for us on January 1, 2019, resulting in the following effective minimum capital plus capital conservation buffer
ratios: (i) a Common Equity Tier 1 capital ratio of 7.0%, (ii) a Tier 1 risk-based capital ratio of 8.5%, and (iii) a total risk-based
capital ratio of 10.5%.
On
December 21, 2018, the federal banking agencies issued a joint final rule to revise their regulatory capital rules to (i) address
the upcoming implementation of a new credit impairment model, the Current Expected Credit Loss, or CECL model, an accounting standard
under GAAP; (ii) provide an optional three-year phase-in period for the day-one adverse regulatory capital effects that banking
organizations are expected to experience upon adopting CECL; and (iii) require the use of CECL in stress tests beginning
with the 2023 capital planning and stress testing cycle for certain banking organizations that are subject to stress testing.
We are currently evaluating the impact the CECL model will have on our accounting, and expect to recognize a one-time cumulative-effect
adjustment to our allowance for loan losses as of the beginning of the first quarter of 2023, the first reporting period in which
the new standard is effective. At this time, we cannot yet reasonably determine the magnitude of such one-time cumulative adjustment,
if any, or of the overall impact of the new standard on our business, financial condition or results of operations.
Change
in Control.
Two
statutes, the Change in Bank Control Act and the Bank Holding Company Act, together with regulations promulgated under them, require
some form of regulatory review before any company may acquire “control” of a bank or a bank holding company. Under
the Change in Bank Control Act, a person or company is required to file a notice with the Federal Reserve if it will, as a result
of the transaction, own or control 10% or more of any class of voting securities or direct the management or policies of a bank
or bank holding company and either if the bank or bank holding company has registered securities or if the acquirer would be the
largest holder of that class of voting securities after the acquisition. For a change in control at the holding company level,
both the Federal Reserve and the subsidiary bank’s primary federal regulator must approve the change in control; at the
bank level, only the bank’s primary federal regulator is involved.
In
addition, the Bank Holding Company Act prohibits any entity from acquiring 25% (5% if the acquirer is a bank holding company)
or more of a bank holding company’s voting securities, or otherwise obtaining control or a controlling influence over the
management or policies of a bank or bank holding company without regulatory approval. On January 30, 2020, the Federal Reserve
issued a final rule (which became effective September 30, 2020) that clarified and codified the Federal Reserve’s standards
for determining whether one company has control over another. The final rule established four categories of tiered presumptions
of noncontrol that are based on the percentage of voting shares held by the investor (less than 5%, 5-9.9%, 10-14.9% and 15-24.9%)
and the presence of other indicia of control. As the percentage of ownership increases, fewer indicia of control are permitted
without falling outside of the presumption of noncontrol. These indicia of control include nonvoting equity ownership, director
representation, management interlocks, business relationship and restrictive contractual covenants. Under the final rule, investors
can hold up to 24.9% of the voting securities and up to 33% of the total equity of a company without necessarily having a controlling
influence.
Transactions
subject to the Bank Holding Company Act are exempt from Change in Control Act requirements. For state banks, state laws, including
those of South Carolina, typically require approval by the state bank regulator as well.
Transactions
with Affiliates and Insiders.
The
Company is a legal entity separate and distinct from the Bank and its other subsidiaries. Various legal limitations restrict the
Bank from lending or otherwise supplying funds to the Company or its non-bank subsidiaries. The Company and the Bank are subject
to Sections 23A and 23B of the Federal Reserve Act and Federal Reserve Regulation W.
Section
23A of the Federal Reserve Act places limits on the amount of loans or extensions of credit by a bank to any affiliate, including
its holding company, and on a bank’s investments in, or certain other transactions with, affiliates and on the amount of
advances to third parties collateralized by the securities or obligations of any affiliates of the bank. Section 23A also applies
to derivative transactions, repurchase agreements and securities lending and borrowing transactions that cause a bank to have
credit exposure to an affiliate. The aggregate of all covered transactions is limited in amount, as to any one affiliate, to 10%
of the Bank’s capital and surplus and, as to all affiliates combined, to 20% of the Bank’s capital and surplus. Furthermore,
within the foregoing limitations as to amount, each covered transaction must meet specified collateral requirements. The Bank
is forbidden to purchase low quality assets from an affiliate.
Section
23B of the Federal Reserve Act, among other things, prohibits an institution from engaging in certain transactions with certain
affiliates unless the transactions are on terms substantially the same, or at least as favorable to such institution or its subsidiaries,
as those prevailing at the time for comparable transactions with nonaffiliated companies. If there are no comparable transactions,
a bank’s (or one of its subsidiaries’) affiliate transaction must be on terms and under circumstances, including credit
standards, that in good faith would be offered to, or would apply to, nonaffiliated companies. These requirements apply to all
transactions subject to Section 23A as well as to certain other transactions.
The
affiliates of a bank include any holding company of the bank, any other company under common control with the bank (including
any company controlled by the same shareholders who control the bank), any subsidiary of the bank that is itself a bank, any company
in which the majority of the directors or trustees also constitute a majority of the directors or trustees of the bank or holding
company of the bank, any company sponsored and advised on a contractual basis by the bank or an affiliate, and any mutual fund
advised by a bank or any of the bank’s affiliates. Regulation W generally excludes all non-bank and non-savings association
subsidiaries of banks from treatment as affiliates, except to the extent that the Federal Reserve decides to treat these subsidiaries
as affiliates.
The
Bank is also subject to certain restrictions on extensions of credit to executive officers, directors, certain principal shareholders,
and their related interests. Extensions of credit include derivative transactions, repurchase and reverse repurchase agreements,
and securities borrowing and lending transactions to the extent that such transactions cause a bank to have credit exposure to
an insider. Any extension of credit to an insider (i) must be made on substantially the same terms, including interest rates and