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
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 o
Nox
As of June 30, 2021, the aggregate
market value of the registrant’s common stock held by non-affiliates of the registrant was $146,376,573based on the closing price of $20.20 on June 30, 2021, as reported on The NASDAQ Capital
Market. 7,560,596shares
of the registrant’s common stock were issued and outstanding as of March 16, 2022.
Documents
Incorporated by Reference
Portions
of the registrant’s Definitive Proxy Statement for its 2022 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 22
Item 1B. Unresolved Staff Comments 37
Item 2. Properties 37
Item 3. Legal Proceedings 37
Item 4. Mine Safety Disclosures 37
PART II
Item 6. [Reserved] 39
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 67
Item 8. Financial Statements and Supplementary Data 67
Consolidated Balance Sheets 70
Consolidated Statements of Income 71
Consolidated Statements of Comprehensive Income 72
Consolidated Statements of Changes in Shareholders’ Equity 73
Consolidated Statements of Cash Flows 74
Notes to Consolidated Financial Statements 75
Item 9A. Controls and Procedures 110
Item 9B. Other Information 110
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections 110
PART III
Item 10. Directors, Executive Officers and Corporate Governance 111
Item 11. Executive Compensation 111
Item 14. Principal Accountant Fees and Services 111
PART IV
Item 15. Exhibits, Financial Statement Schedules 112
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, 2021 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;
· 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;
1
· 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.
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
· 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.
3
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
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, which includes Aiken County, South Carolina (1 office);
and in Augusta, Georgia, which includes Richmond County (2 offices) and Columbia County (1 office). In addition, we conducted
business from a mortgage loan production office in Richland County, South Carolina until January 24, 2020, after which we consolidated
such operations with other existing Bank offices. At December 31, 2021, we had approximately $1.6 billion in assets, $863.7 million
in loans, $1.4 billion in deposits, and $141.0 million in shareholders’ equity.
We offer
a wide-range of traditional banking products and services for professionals and small-to medium-sized businesses, including consumer
and commercial, mortgage, brokerage and investment, and insurance services. We also offer online banking to our customers. We
have grown organically and through acquisitions.
Our stock
trades on The NASDAQ Capital Market under the symbol “FCCO”.
Available
Information
We provide our
Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed
or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”) on our
website at www.firstcommunitysc.com/ under the About section, under the Investors link. These filings are made accessible
as soon as reasonably practicable after they have been filed electronically with SEC. These filings are also accessible on the
SEC’s website at www.sec.gov. In addition, we make available under our Investor Relations section on our website the following,
among other things: (i) Code of Business Conduct and Ethics, which applies to our directors and all employees and (ii) the charters
of the Audit and Compliance, Human Resources and Compensation, and Nominations and Corporate Governance Committees of our board
of directors. These materials are available to the general public on our website free of charge. Printed copies of these materials
are also available free of charge to shareholders who request them in writing. Please address your request to: Investor Relations,
First Community Corporation, 5455 Sunset Boulevard, Lexington, South Carolina 29072. Statements of beneficial ownership of equity
securities filed by directors, officers, and 10% or greater shareholders under Section 16 of the Exchange Act are also available
through our website. The information on our website is not incorporated by reference into this report.
Location
and Service Area
The Bank
is engaged in a general commercial and retail banking business, emphasizing the needs of small-to-medium sized businesses, professional
concerns and individuals. We have a total of 13 full-service offices located in Richland, Lexington, Kershaw and Newberry Counties
of South Carolina and the surrounding areas. We refer to these counties as the “Midlands” region of South Carolina.
Lexington County is home to six of our branch offices. Richland County, in which we currently have four branches, is the second
largest county in South Carolina. Columbia is located within Richland County and is South Carolina’s capital city and is
geographically positioned in the center of the state between the industrialized Upstate region of South Carolina and the coastal
city of Charleston, South Carolina. Intersected by three major interstate highways (I-20, I-77, and I-26), Columbia’s strategic
location has contributed greatly to its commercial appeal and growth. With the acquisition of Savannah River Banking Company in
2014, we added a branch in Aiken, South Carolina and a branch in Augusta, Georgia (Richmond County). In 2016, we opened a loan
production office in Greenville County, which we converted into a full-service office in February 2019. With the acquisition of
Cornerstone Bancorp in 2017, we added a branch in each of Greenville, Pickens, and Anderson Counties of South Carolina. We refer
to this three-county area as the “Upstate” region of South Carolina. In 2018, we opened a de novo branch in
downtown Augusta, Georgia (Richmond County). In 2019, we opened a de novo branch in Evans, Georgia, a suburb of Augusta
in Columbia County, Georgia. We refer to the three-county area of Aiken County (South Carolina), Richmond County (Georgia) and
Columbia County (Georgia) as the “CSRA” region.
5
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 S&P Global Market Intelligence, 2022 median household incomes
for each of the counties in the regions noted above were as follows:
Richland County, SC $ 58,822
Lexington County, SC $ 68,245
Newberry County, SC $ 49,798
Kershaw County SC $ 60,407
Greenville County, SC $ 70,306
Anderson County, SC $ 61,821
Pickens County SC $ 55,821
Richmond County, GA $ 48,465
Columbia County, GA $ 96,346
The county
estimates noted above compare to 2022 statewide median household income estimates of $62,822 and $68,363 for South Carolina and
Georgia, respectively. The principal components of the economy within our market areas are service industries, government and
education, and wholesale and retail trade. The largest employers in the Midlands market area, each of which employs in excess
of 3,000 people, include the State of South Carolina, Prisma Health, BlueCross BlueShield of SC, the University of South Carolina,
the United States Department of the Army (Fort Jackson Army Base), Richland School District 1, Richland School District 2, Lexington
Medical Center, Southern Freight Lines, Lexington County School District One, and Medical Services of America. The largest employers
in our CSRA market area, each of which employs in excess of 3,000 people, include the U.S. Army Cyber Center of Excellence &
Fort Gordon, Augusta University, NSA Augusta, Augusta University Hospitals, Richmond County School System, University Hospital,
and the Department of Energy, Savannah River Site. The Upstate region major employers include, among others, Prisma Health, Greenville
County Schools, BMW Manufacturing Corp., Michelin North America, Bon Secours St. Francis Health System, AnMed Health Medical Center,
Clemson University, Duke Energy Corp., GE Power & Water, and the Greenville County Government. We believe that this diversified
economic base has reduced, and will likely continue to reduce, economic volatility in our market areas. Our markets have experienced
steady economic and population growth over the past 10 years, and we expect that the area, as well as the service industry needed
to support it, will continue to grow.
6
Banking
Services
We offer
a full range of deposit services that are typically available in most banks and thrift institutions, including checking accounts,
NOW accounts, savings accounts and other time deposits of various types, ranging from daily money market accounts to longer-term
certificates of deposit. The transaction accounts and time certificates are tailored to our principal market area at rates competitive
to those offered in the area. In addition, we offer certain retirement account services, such as individual retirement accounts
(“IRAs”). All deposit accounts are insured by the FDIC up to the maximum amount allowed by law (currently, $250,000,
subject to aggregation rules).
We also offer
a full range of commercial and personal loans. Commercial loans include both secured and unsecured loans for working capital (including
inventory and receivables), business expansion (including acquisition of real estate and improvements), and the purchase of equipment
and machinery. Consumer loans include secured and unsecured loans for financing automobiles, home improvements, education, and
personal investments. We also make real estate construction and acquisition loans. We originate fixed and variable rate mortgage
loans, substantially all of which are sold into the secondary market. Our lending activities are subject to a variety of lending
limits imposed by federal law. While differing limits apply in certain circumstances based on the type of loan or the nature of
the borrower (including the borrower’s relationship to the bank), in general, we are subject to a loans-to-one-borrower
limit of an amount equal to 15% of the Bank’s unimpaired capital and surplus, or 25% of the unimpaired capital and surplus
if the excess over 15% is approved by the board of directors of the Bank and is fully secured by readily marketable collateral.
As a result, our lending limit will increase or decrease in response to increases or decreases in the Bank’s level of capital.
Based upon the capitalization of the Bank at December 31, 2021, the maximum amount we could lend to one borrower is $21.6 million.
In addition, we may not make any loans to any director, officer, employee, or 10% shareholder of the Company or the Bank unless
the loan is approved by our board of directors and is made on terms not more favorable to such person than would be available
to a person not affiliated with the Bank.
Other
bank services include internet banking, cash management services, safe deposit boxes, travelers checks, direct deposit of payroll
and social security checks, and automatic drafts for various accounts. We offer non-deposit investment products and other investment
brokerage services through a registered representative with an affiliation through LPL Financial. We are associated with Nyce
and Plus networks of automated teller machines and MasterCard debit cards that may be used by our customers throughout South Carolina
and other regions. In November 2019, we deconverted from the Star network of automated teller machines. We also offer VISA and
MasterCard credit card services through a correspondent bank as our agent.
We currently
do not exercise trust powers, but we can begin to do so with the prior approval of our primary banking regulators, the FDIC and
the S.C. Board.
Competition
The banking
business is highly competitive. We compete as a financial intermediary with other commercial banks, savings and loan associations,
credit unions and money market mutual funds operating in our market areas. As of June 30, 2021, there were 24 financial institutions
operating approximately 159 offices in the Midlands market, 20 financial institutions operating 96 branches in the CSRA market,
and 35 financial institutions operating 224 branches in the Upstate market. The competition among the various financial institutions
is based upon a variety of factors, including interest rates offered on deposit accounts, interest rates charged on loans, credit
and service charges, the quality of services rendered, the convenience of banking facilities and, in the case of loans to large
commercial borrowers, relative lending limits. Size gives larger banks certain advantages in competing for business from large
corporations. These advantages include higher lending limits and the ability to offer services in other areas of South Carolina
and Georgia. As a result, we do not generally attempt to compete for the banking relationships of large corporations, but concentrate
our efforts on small-to-medium sized businesses and individuals. We believe we have competed effectively in this market by offering
quality and personal service. In addition, many of our non-bank competitors are not subject to the same extensive federal regulations
that govern bank holding companies and federally insured banks.
Employees
As
of December 31, 2021, the company had 247 full-time employees and three part-time employees. We believe that we have good relations
with our employees and our employees are not represented by any collective bargaining group or agreement. We believe our ability
to attract and retain employees is a key to our success and one of our core values is mutual respect for our colleagues and their
role in our success. Our employees embody and consistently demonstrate our five cultural beliefs of honesty and integrity, everyone
matters, spirit of service, strong work ethic and excellence with humility. Accordingly, we strive to offer competitive salaries,
insurance and retirement benefits, a generous paid time off plan including paid holidays, and a stable and friendly working environment
to all employees. We believe the development of our staff is important to the success of our company and we encourage employees
to continue on a lifelong trajectory of learning. As such, we provide a number of opportunities for employee development through
both internal and external sources. To develop our current and future leaders, the Bank created the First Community Bank Leadership
Institute (FCBLI), an eighteen-month leadership development program that provides academic and experiential learning to teach
and nurture leadership skills across the organization to prepare to support the Bank now and in the future. The Bank also supports
the development of employees through external educational opportunities such as various bankers’ schools that offer multi-year
development programs as well as short term training classes and industry conferences. In addition to these, the Bank encourages
employees to continue with career development specific to their role to insure employees stay current with the most up-to-date
information and best practices.
7
The
health, safety and well-being of our employees, customers, vendors and communities has been and continues to be a top priority.
The COVID-19 pandemic presented challenges as we worked to continue to serve our customers and the community. Throughout the pandemic,
we followed guidance from the Centers for Disease Control and the South Carolina Department of Health and Environmental Control
and made the necessary adjustments as guidance and recommendations changed. We implemented a number of safety protocols to help
provide a safe workplace for our employees, customers and vendors. This included limiting access to facilities, including at times
our banking offices (except by appointment), encouraging the use of drive thru facilities and online, electronic and other technology
products and services, implementing remote working and rotating work schedules, enhanced and more frequent cleaning of facilities,
written communication to employees as updates were available, and reminders on safety protocols including social distancing, monitoring
symptoms and quarantining with exposure or potential exposure to the virus, and hand washing/sanitizing. We provided supplies
including masks, gloves, and hand sanitizer to employees and customers. During 2021, we transitioned back to a more normal operating
environment with the flexibility to make adjustments as needed.
Information
about the Executive Officers of First Community Corporation
Executive officers
of First Community Corporation are elected by the board of directors annually and serve at the pleasure of the board of directors.
The current executive officers, and persons chosen to become executive officers, and their ages, positions with us over the past
five years, and terms of office as of March 16, 2022, are as follows:
Name (age) Position and Five Year History with Company With the Company Since
Michael C. Crapps (63) Chief Executive Officer and President, Director 1994
Robin D. Brown (54) Chief Human Resources and Marketing Officer 1994
Tanya A. Butts (63) 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.
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.
8
Legislative
and Regulatory Responses to the COVID-19 Pandemic
The
COVID-19 pandemic has continued to cause extensive disruptions to the global economy, to businesses, and to the lives of individuals
throughout the world. On March 27, 2020, the CARES Act was signed into law. The CARES Act was a $2.2 trillion economic stimulus
bill that was intended to provide relief in the wake of the COVID-19 pandemic. There have also been a number of regulatory actions
intended to help mitigate the adverse economic impact of the COVID-19 pandemic on borrowers, including several mandates from the
bank regulatory agencies, requiring financial institutions to work constructively with borrowers affected by the COVID-19 pandemic.
Although these programs generally have expired, governmental authorities may take additional actions in the future to limit the
adverse impact of COVID-19 on borrowers and tenants.
The
Paycheck Protection Program (“PPP”), originally established under the CARES Act and extended under the Coronavirus
Response and Relief Supplemental Appropriations Act of 2021, authorized financial institutions to make federally-guaranteed loans
to qualifying small businesses and non-profit organizations. These loans carry an interest rate of 1% per annum and a maturity
of two years for loans originated prior to June 5, 2020 and five years for loans originated on or after June 5, 2020. The PPP
provides that such loans may be forgiven if the borrowers meet certain requirements with respect to maintaining employee headcount
and payroll and the use of the loan proceeds after the loan is originated. The initial phase of the PPP, after being extended
multiple times by Congress, expired on August 8, 2020. However, on January 11, 2021, the SBA reopened the PPP for First Draw PPP
loans to small businesses and non-profit organizations that did not receive a loan through the initial PPP phase. Further, on
January 13, 2021, the SBA reopened the PPP for Second Draw PPP loans to small businesses and non-profit organizations that did
receive a loan through the initial PPP phase. Maximum loan amounts were also increased for accommodation and food service businesses.
Although the PPP ended in accordance with its terms on May 31, 2021, outstanding PPP loans continue to go through the process
of either obtaining forgiveness from the SBA or pursuing claims under the SBA guaranty.
The
CARES Act, as extended by certain provisions of the Consolidated Appropriations Act of 2021, also initially permitted banks to
suspend requirements under GAAP for loan modifications to borrowers affected by COVID-19 that would otherwise had been characterized
as troubled debt restructurings and suspended any determination related thereto if (i) the borrower was not more than 30 days
past due as of December 31, 2019, (ii) the modifications were related to COVID-19, and (iii) the modification occurred between
March 1, 2020 and the earlier of 60 days after the date of termination of the national emergency or January 1, 2022. Federal bank
regulatory authorities also issued guidance to encourage banks to make loan modifications for borrowers affected by COVID-19.
Capital
and Related Requirements.
Regulatory
capital rules known as the Basel III rules or Basel III, impose minimum capital requirements for bank holding companies and banks.
Basel III was released in the form of enforceable regulations by each of the applicable federal bank regulatory agencies. Basel
III is applicable to all banking organizations that are subject to minimum capital requirements, including federal and state banks
and savings and loan associations, as well as to bank and savings and loan holding companies, other than “small bank holding
companies.” A small bank holding company is generally a qualifying bank holding company or savings and loan holding company
with less than $3.0 billion in consolidated assets. More stringent requirements are imposed on “advanced approaches”
banking organizations—generally those organizations with $250 billion or more in total consolidated assets, $10 billion
or more in total foreign exposures applicable to advanced approaches banking organizations.
Based
on the foregoing, as a small bank holding company, we are generally not subject to the capital requirements at the holding company
level unless otherwise advised by the Federal Reserve; however, our Bank remains subject to the capital requirements. Accordingly,
the Bank is required to maintain the following capital levels:
· a Common Equity Tier 1 risk-based capital ratio of 4.5%;
· a Tier 1 risk-based capital ratio of 6%;
· a total risk-based capital ratio of 8%; and
· a leverage ratio of 4%.
Basel
III also established a “capital conservation buffer” above the regulatory minimum capital requirements, which must
consist entirely of Common Equity Tier 1 capital, which was phased in over several years. The fully phased-in capital conservation
buffer of 2.500%, which became effective on January 1, 2019, resulted in the following effective minimum capital ratios for the
Bank beginning in 2019: (i) a Common Equity Tier 1 capital ratio of 7.0%, (ii) a Tier 1 capital ratio of 8.5%, and (iii) a total
capital ratio of 10.5%. Under Basel III, institutions are subject to limitations on paying dividends, engaging in share repurchases,
and paying discretionary bonuses if their capital levels fall below the buffer amount. These limitations establish a maximum percentage
of eligible retained income that could be utilized for such actions.
9
Under
Basel III, Tier 1 capital includes two components: Common Equity Tier 1 capital and additional Tier 1 capital. The highest form
of capital, Common Equity Tier 1 capital, consists solely of common stock (plus related surplus), retained earnings, accumulated
other comprehensive income, otherwise referred to as AOCI, and limited amounts of minority interests that are in the form of common
stock. Additional Tier 1 capital is primarily comprised of noncumulative perpetual preferred stock, Tier 1 minority interests
and grandfathered trust preferred securities. Tier 2 capital generally includes the allowance for loan losses up to 1.25% of risk-weighted
assets, qualifying preferred stock, subordinated debt and qualifying Tier 2 minority interests, less any deductions in Tier 2
instruments of an unconsolidated financial institution. AOCI is presumptively included in Common Equity Tier 1 capital and often
would operate to reduce this category of capital. When implemented, Basel III provided a one-time opportunity at the end of the
first quarter of 2015 for covered banking organizations to opt out of a large part of this treatment of AOCI. We made this opt-out
election and, as a result, retained our pre-existing treatment for AOCI.
On
December 21, 2018, the federal banking agencies issued a joint final rule to revise their regulatory capital rules to (i) address
the upcoming implementation of a new credit impairment model, the Current Expected Credit Loss, or CECL model, an accounting standard
under GAAP; (ii) provide an optional three-year phase-in period for the day-one adverse regulatory capital effects that banking
organizations are expected to experience upon adopting CECL; and (iii) require the use of CECL in stress tests beginning
with the 2023 capital planning and stress testing cycle for certain banking organizations that are subject to stress testing.
We are currently evaluating the impact the CECL model will have on our accounting, and expect to recognize a one-time cumulative-effect
adjustment to our allowance for loan losses as of the beginning of the first quarter of 2023, the first reporting period in which
the new standard is effective. At this time, we cannot yet reasonably determine the magnitude of such one-time cumulative adjustment,
if any, or of the overall impact of the new standard on our business, financial condition or results of operations.
In
November 2019, the federal banking regulators published final rules implementing a simplified measure of capital adequacy for
certain banking organizations that have less than $10 billion in total consolidated assets. Under the final rules, which went
into effect on January 1, 2020, depository institutions and depository institution holding companies that have less than $10 billion
in total consolidated assets and meet other qualifying criteria, including a leverage ratio of greater than 9%, off-balance-sheet
exposures of 25% or less of total consolidated assets, and trading assets plus trading liabilities of 5% or less of total consolidated
assets, are deemed “qualifying community banking organizations” and are eligible to opt into the “community
bank leverage ratio framework.” A qualifying community banking organization that elects to use the community bank leverage
ratio framework and that maintains a leverage ratio of greater than 9% is considered to have satisfied the generally applicable
risk-based and leverage capital requirements under the Basel III rules and, if applicable, is considered to have met the “well
capitalized” ratio requirements for purposes of its primary federal regulator’s prompt corrective action rules, discussed
below. We do not have any immediate plans to elect to use the community bank leverage ratio framework but may make such an election
in the future.
Change
in Control.
Two
statutes, the Change in Bank Control Act and the Bank Holding Company Act, together with regulations promulgated under them, require
some form of regulatory review before any company may acquire “control” of a bank or a bank holding company. Under
the Change in Bank Control Act, a person or company is required to file a notice with the Federal Reserve if it will, as a result
of the transaction, own or control 10% or more of any class of voting securities or direct the management or policies of a bank
or bank holding company and either if the bank or bank holding company has registered securities or if the acquirer would be the
largest holder of that class of voting securities after the acquisition. For a change in control at the holding company level,
both the Federal Reserve and the subsidiary bank’s primary federal regulator must approve the change in control; at the
bank level, only the bank’s primary federal regulator is involved.
In
addition, the Bank Holding Company Act prohibits any entity from acquiring 25% (5% if the acquirer is a bank holding company)
or more of a bank holding company’s voting securities, or otherwise obtaining control or a controlling influence over the
management or policies of a bank or bank holding company without regulatory approval. On January 30, 2020, the Federal Reserve
issued a final rule (which became effective September 30, 2020) that clarified and codified the Federal Reserve’s standards
for determining whether one company has control over another. The final rule established four categories of tiered presumptions
of noncontrol that are based on the percentage of voting shares held by the investor (less than 5%, 5-9.9%, 10-14.9% and 15-24.9%)
and the presence of other indicia of control. As the percentage of ownership increases, fewer indicia of control are permitted
without falling outside of the presumption of noncontrol. These indicia of control include nonvoting equity ownership, director
representation, management interlocks, business relationship and restrictive contractual covenants. Under the final rule, investors
can hold up to 24.9% of the voting securities and up to 33% of the total equity of a company without necessarily having a controlling
influence.
Transactions
subject to the Bank Holding Company Act are exempt from Change in Control Act requirements. For state banks, state laws, including
those of South Carolina, typically require approval by the state bank regulator as well.
10
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
11
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;
· providing specified management consulting and counseling activities;
· performing selected data processing services and support services;
· 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