UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form
10-K
(Mark One)
x Annual Report under Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2022
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
If
securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant
included in the filing reflect the correction of an error to previously issued financial statements. o
Indicate
by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation
received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). 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, 2022, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $139,330,033
based on the closing price of $19.17 on June 30, 2022, as reported on The NASDAQ Capital Market. 7,591,095 shares of the registrant’s common stock were issued and outstanding as of March 22, 2023.
Documents
Incorporated by Reference
Portions of the
registrant’s Definitive Proxy Statement for its 2023 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 7
Item 1. Business 7
Item 1A. Risk Factors 26
Item 1B. Unresolved Staff Comments 41
Item 2. Properties 41
Item 3. Legal Proceedings 41
Item 4. Mine Safety Disclosures 41
Item 6. [Reserved] 43
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 74
Item 8. Financial Statements and Supplementary Data 74
Consolidated Balance Sheets 78
Consolidated Statements of Income 79
Consolidated Statements of Comprehensive Income (Loss) 80
Consolidated Statements of Changes in Shareholders’ Equity 81
Consolidated Statements of Cash Flows 82
Notes to Consolidated Financial Statements 83
Item 9A. Controls and Procedures 122
Item 9B. Other Information 122
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections 122
Item 10. Directors, Executive Officers and Corporate Governance 123
Item 11. Executive Compensation 123
Item 14. Principal Accountant Fees and Services 123
Item 15. Exhibits, Financial Statement Schedules 124
2
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 the 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, 2022 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 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;
3
· 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.
4
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.
5
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
· Climate change could have a material adverse impact on us and our customers.
6
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 22 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); the Piedmont Region of South Carolina, which includes York County, South Carolina (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, 2022, we had approximately
$1.7 billion in assets, $980.9 million in loans, $1.4 billion in deposits, and $118.4 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, professionals 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. On March 14, 2022,
we opened a loan production office in York County, South Carolina. We converted this loan production office into a full-service banking
office on October 20, 2022. We refer to York County, South Carlina and the surrounding area as the “Piedmont Region”.
7
The following table
shows data as to deposits, market share and population for our four 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, 2023 median household incomes for each of the counties
in the regions noted above were as follows:
Richland County, SC $ 62,424
Lexington County, SC $ 70,718
Newberry County, SC $ 55,766
Kershaw County SC $ 60,911
Greenville County, SC $ 72,007
Anderson County, SC $ 61,342
Pickens County SC $ 55,988
Richmond County, GA $ 50,229
The county estimates
noted above compare to 2023 statewide median household income estimates of $64,242 and $70,349 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, Southeastern 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. The Piedmont region major employers include, among others, Ross Stores, Inc. – Distribution,
LPL Financial, Lash Group, Piedmont Medical Center, Comporium, Inc., and Schaeffler Group USA, Inc. 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
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.
8
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, 2022, the maximum
amount we could lend to one borrower is $23.5 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, Georgia and other regions. We also offer
VISA and MasterCard credit card services through a correspondent bank as our agent.
We currently
do not exercise trust powers, but we can begin to do so with the prior approval of our primary banking regulators, the FDIC and the S.C.
Board.
Competition
The banking business
is highly competitive. We compete as a financial intermediary with other commercial banks, savings and loan associations, credit unions
and money market mutual funds operating in our market areas. As of June 30, 2022, there were 25 financial institutions operating approximately
160 offices in the Midlands market, 20 financial institutions operating 93 branches in the CSRA market, 37 financial institutions operating
219 branches in the Upstate market, and 15 financial institutions operating 46 branches in the Piedmont 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.
Human Capital
At December 31,
2022, the company had 254 full-time, 7 part-time, and 8 seasonal/on-call employees.
We believe that
our relationships with our employees are good and our employees are not represented by any collective bargaining group or agreement.
Our company’s “Why”, which is “Impacting Lives for Success and Significance”, guides our approach to our
relationships with employees. The foundations of these interactions are embedded in our cultural beliefs:
Everyone Matters - We value
each of our employees for the unique contribution they make to the success of our company. While there are a variety of different positions
in our company, each is an important and integral part of the work that we do. Every employee brings their own unique and diverse talents
and experiences that enhance the culture of our bank and our work.
Spirit of Service - The energy
and enthusiasm that our employees bring to their work creates a supportive work environment in which employees are available as a resource
to one another. In addition to serving our fellow co-workers, we encourage our employees to serve our local communities. We offer company
sponsored volunteer activities, as well as provide Volunteer PTO to allow employees to support causes that are close to their heart.
9
Honor and Integrity - Trust
is at the foundation of all that we do. We have a Code of Conduct and Business Ethics that all employees and board members read and follow
that sets clear expectations with regard to personal and professional behavior.
Strong Work Ethic - Our employees
take pride in the quality of the work that they do. This commitment to excellence can be seen in the work that is completed and their
interactions with their co-workers and customers. While we work hard, we also make time for some fun with employee events designed to
offer the opportunity for relaxation and social interactions among co-workers.
Excellence with Humility - Our
company is blessed with dedicated and talented employees, loyal customers, supportive communities and shareholders who invest in and
believe in our vision. We are humbled by the success we have experienced and are grateful for all that we have accomplished. We approach
our work with a sincere appreciation for the opportunity to serve all of our stakeholder groups and we recognize it is through our collective
efforts that we have been successful.
Our ability to
attract, develop and retain our strong employee base is integral to our ongoing success. We believe that a good “quality of life”
at work is an important part of the overall employee experience and we are very intentional about nurturing a culture that allows employees
to reach their potential and enjoy professional success while also enjoying the work that they do in a positive and supportive work environment
grounded in our cultural beliefs.
While we believe
that our corporate culture and work environment is a competitive advantage for our company, we also recognize that employees value and
deserve competitive compensation packages. Our company offers competitive wages and benefits for our employees and we regularly benchmark
our compensation to market. Our benefits package includes medical, dental, life, disability, vision and supplemental insurance options.
We also offer retirement benefits with a 401(k) plan with matching and profit sharing. In addition, we offer a generous paid time off
plan that includes paid holidays.
Our company encourages
employees to continue on a lifelong trajectory of learning and we offer ongoing training to all employees through internal and external
resources and encourage employees to continue with career development specific to their role to insure they stay current with the most
up-to-date information and best practices. To develop our current and future leaders, our company created the First Community Bank Leadership
Institute (FCBLI), an 18-month program that provides academic and experiential learning to teach and nurture leadership skills across
our organization 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.
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 22, 2023, are as follows:
Name (age) Position and Five Year History with Company With the Company Since
Michael C. Crapps (64) Chief Executive Officer and President, Director 1994
Robin D. Brown (55) Chief Human Resources and Marketing Officer 1994
Tanya A. Butts (64) 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.
10
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
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 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 were 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 any resurgence of COVID-19 on borrowers and tenants.
The CARES Act, as extended
by certain provisions of the Consolidated Appropriations Act of 2021, also 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 or $10 billion or more in total foreign exposures.
Based on the
foregoing, as a small bank holding company, we are generally not subject to the capital requirements 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.
11
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.
As part of its response
to the impact of the COVID-19 pandemic, in the first quarter of 2020, U.S. federal regulatory authorities issued an interim final rule
that provided banking organizations that adopted the credit impairment model, the Current Expected Credit Loss, or CECL, during the 2020
calendar year with the option to delay for two years the estimated impact of CECL on regulatory capital relative to regulatory capital
determined under the prior incurred loss methodology, followed by a three-year transition period to phase out the aggregate amount of
the capital benefit provided during the initial two-year delay (i.e., a five-year transition in total). In connection with our adoption
of CECL on January 1, 2023, we did not elect to utilize the five-year CECL transition.
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.
Acquisition
Activities.
The primary purpose
of a bank holding company is to control and manage banks. The BHCA generally requires the prior approval of the Federal Reserve
for any merger involving a bank holding company or any acquisition by a bank holding company of another bank or bank holding company.
In addition, the prior approval of the FDIC is required for a bank to merge with another bank or purchase the assets or assume the deposits
of another bank. In determining whether to approve a proposed bank acquisition, federal bank regulators will consider, among other factors,
the effect of the acquisition on competition, the public benefits expected to be received from the acquisition, the projected capital
ratios and levels on a post-acquisition basis, and the acquiring institution’s record of addressing the credit needs of the communities
it serves, including the needs of low and moderate income neighborhoods, consistent with the safe and sound operation of the bank, under
the CRA.
On
July 9, 2021, President Biden issued an Executive Order on Promoting Competition in the American Economy. Among other initiatives, the
Executive Order encouraged the federal banking agencies to review their current merger oversight practices under the BHCA and the Bank
Merger Act and adopt a plan for revitalization of such practices. In December 2021, the U.S. Department of Justice (“DOJ”)
(in consultation with the Federal Reserve, the OCC, and FDIC announced that it was seeking additional public comments on whether and
how the DOJ should revise the 1995 Bank Merger Competitive Review Guidelines. The comment period closed on February 15, 2022. In March
2022, the FDIC published a Request for Information seeking information and comments regarding the laws, practices, rules, regulations,
guidance, and statements of policy that apply to merger transactions involving one or more insured depository institutions, including
the merger between an insured depository institution and a noninsured institution. In a May 2022 speech, the acting head of the OCC announced
that he had asked his staff to work with DOJ and other federal banking agencies to review the agency’s frameworks to analyze bank
mergers. In May 2022, the CFPB announced the establishment of an Office of Competition and Innovation.
There
are many steps that must be taken by the agencies before any final changes to the framework for evaluating bank mergers can be implemented
and the prospects for such action continue to be uncertain at this time; however, the adoption of more expansive or prescriptive
standards may have an impact on our acquisition activities.
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Change
in Control.
Two statutes,
the Change in Bank Control Act and the Bank Holding Company Act, together with regulations promulgated under them, require some form
of regulatory review before any company may acquire “control” of a bank or a bank holding company. Under the Change in Bank
Control Act, a person or company is required to file a notice with the Federal Reserve if it will, as a result of the transaction, own
or control 10% or more of any class of voting securities or direct the management or policies of a bank or bank holding company and either
if the bank or bank holding company has registered securities or if the acquirer would be the largest holder of that class of voting
securities after the acquisition. For a change in control at the holding company level, both the Federal Reserve and the subsidiary bank’s
primary federal regulator must approve the change in control; at the bank level, only the bank’s primary federal regulator is involved.
In addition,
the Bank Holding Company Act prohibits any entity from acquiring 25% (5% if the acquirer is a bank holding company) or more of a bank
holding company’s voting securities, or otherwise obtaining control or a controlling influence over the management or policies
of a bank or bank holding company without regulatory approval. On January 30, 2020, the Federal Reserve issued a final rule (which became
effective September 30, 2020) that clarified and codified the Federal Reserve’s standards for determining whether one company has
control over another. The final rule established four categories of tiered presumptions of noncontrol that are based on the percentage
of voting shares held by the investor (less than 5%, 5-9.9%, 10-14.9% and 15-24.9%) and the presence of other indicia of control. As
the percentage of ownership increases, fewer indicia of control are permitted without falling outside of the presumption of noncontrol.
These indicia of control include nonvoting equity ownership, director representation, management interlocks, business relationship and
restrictive contractual covenants. Under the final rule, investors can hold up to 24.9% of the voting securities and up to 33% of the
total equity of a company without necessarily having a controlling influence.
Transactions subject
to the Bank Holding Company Act are exempt from Change in Control Act requirements. For state banks, state laws, including those of South
Carolina, typically require approval by the state bank regulator as well.
Transactions
with Affiliates and Insiders.
The Company is
a legal entity separate and distinct from the Bank and 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.
13
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.. On December 22, 2022, the federal banking agencies issued a revised interagency statement
extending the temporary relief from such enforcement, which will expire on the sooner of January 1, 2024, 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
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).
14
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