FCCO 10-K
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, 2024
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. YesxNo 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 28, 2024, the aggregate
market value of the registrant’s common stock held by non-affiliates of the registrant was $126,159,566 based on the closing
price of $17.25 on June 28, 2024, as reported on The NASDAQ Capital Market. 7,671,056
shares of the registrant’s common stock were issued and outstanding as of March 14, 2025.
Documents
Incorporated by Reference
Portions of
the registrant’s Definitive Proxy Statement for its 2025 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 5
Item 1. Business 5
Item 1A. Risk Factors 24
Item 1B. Unresolved Staff Comments 38
Item 1C. Cybersecurity 39
Item 2. Properties 40
Item 3. Legal Proceedings 40
Item 4. Mine Safety Disclosures 40
Item 6. [Reserved] 42
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 121
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
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, 2024 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;
· 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;
· 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 that these expectations will be achieved.
We undertake no obligation to publicly update or otherwise revise any forward-looking statements, whether as a result of new information,
future events, or otherwise, except as required by applicable law.
Summary
of Material Risks
An investment in our securities involves
risks, including those summarized below. For a more complete discussion of the material risks facing our business, see Item 1A—Risk
Factors.
Economic and Geographic-Related
Risks
· Our business may be adversely affected by economic conditions.
Credit
and Interest Rate Risks
· Our underwriting decisions may materially and adversely affect our business.
· Changes in prevailing interest rates may reduce our profitability.
Capital and Liquidity Risks
Risks Related to Our Industry
· We may be adversely affected by the soundness of other financial institutions.
Risks Related to Our Strategy
Risks Related to Our Human
Capital
Operational Risks
· Increased fraud risk could adversely impact our business.
· If we fail to maintain our reputation, our performance may be harmed.
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.
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); 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 (1 office) and Columbia County (1 office).
At December
31, 2024, we had approximately $2.0 billion in assets, $1.2 billion in loans, $1.7 billion in deposits, and $144.5 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 third 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. Greenville County is the largest
county in South Carolina. We refer to this three-county area as the “Upstate” region of South Carolina. In 2019, we
opened a de novo branch in Evans, Georgia, a suburb of Augusta in Columbia County, Georgia. On June 27, 2024, we closed
our downtown Augusta, Georgia banking office, which we opened as a de novo branch in 2018. 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, which has the second highest county median
household income in South Carolina. We converted this loan production office into a full-service banking office on October 20,
2022. We refer to York County, South Carolina and the surrounding area as the “Piedmont Region”.
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, 2025 median household incomes
for each of the counties in the regions noted above were as follows:
Richland County, SC $ 64,520
Lexington County, SC $ 74,805
Newberry County, SC $ 62,392
Kershaw County, SC $ 62,464
Greenville County, SC $ 73,698
Anderson County, SC $ 63,945
Pickens County, SC $ 58,326
Richmond County, GA $ 51,339
Columbia County, GA $ 95,838
The county estimates
noted above compare to 2025 statewide median household income estimates of $67,758 and $75,118 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 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 County School District 1, Richland County School District 2, Lexington Medical Center, Lexington County School
District One, Southeastern Freight Lines, and Michelin North America. The largest employers in our CSRA market area include the
U.S. Army Cyber Center of Excellence & Fort Gordon, Augusta University, NSA Augusta, Wellstar MCG Health, Columbia County
Board of Education, Richmond County School System, Piedmont Hospital, Amazon, Carlisle Tire & Wheel, CB&I AREVA MOX Services,
Aiken Regional Medical Center, 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, Milliken & Company,
Bon Secours St. Francis Health System, AnMed Health Medical Center, Clemson University, Duke Energy Corp., GE Vernova, and the
Greenville County Government. The Piedmont Region major employers include, among others, Ross Stores, Inc. – Distribution,
LPL Financial, Wells Fargo Home Mortgage, 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.
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, of which some are sold into the secondary market and some are placed in our loans held-for-investment portfolio. 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, 2024, the maximum amount
we could lend to one borrower is $26.6 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, 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, 2024, there were 27 financial institutions
operating approximately 158 offices in the Midlands market, 21 financial institutions operating 90 branches in the CSRA market,
41 financial institutions operating 230 branches in the Upstate market, and 18 financial institutions operating 47 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; we instead 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, 2024, we had 260 full-time, 10 part-time, and eight 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,” or purpose, is “Impacting Lives for Success and Significance,” which
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 our success. 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 paid time off to allow employees
to support causes that are close to their heart.
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 are directed to 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 fun 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,
each of whom 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. We offer 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, as such, 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 ensure they
stay current with the most up-to-date information and best practices. To develop our current and future leaders, we created the
First Community Bank Leadership Institute, 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. Furthermore, we have an internal CEO Conversation
Group, which provides our current and emerging leaders with leadership conversations with our CEO. 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 14, 2025, are as follows:
Name (age) Position and Five Year History with Company With the Company Since
Michael C. Crapps (66) Chief Executive Officer and President, Director 1994
Robin D. Brown (57) Chief Human Resources and Marketing Officer 1994
John F. (Jack) Walker (59) Chief Credit Officer 2009
D. Shawn Jordan (57) Chief Financial Officer 2019
On December 14,
2023, we announced promotions and additions to our Executive Leadership Team. Effective January 1, 2024, Joseph A. “Drew”
Painter and Vaughan R. Dozier, Jr. became Executive Vice Presidents in the roles of Co-Chief Commercial and Retail Banking Officers.
In their roles as Co-Chief Commercial and Retail Banking Officers, Mr. Painter and Mr. Dozier are responsible for leading the
Bank’s network of banking offices.
Effective July
1, 2024, J. Ted Nissen became the CEO of the Bank while still retaining the role of President and joined the boards of directors
of the Company and the Bank. Michael C. “Mike” Crapps continues in his role as President and CEO of the Company. In
his role as CEO of the Bank, Mr. Nissen is responsible for the leadership of day-to-day operations of the Bank including its mortgage
and financial planning lines of business. Mr. Crapps continues to focus on board governance, investor relations, strategy development
and growth decisions, client retention and prospecting, and leadership development.
Effective January
1, 2025, Sarah T. Donley, former Senior Vice President and Controller of First Community Bank and a 27-year employee of the Bank,
succeeded Ms. Tanya Butts (who retired effective December 31, 2024) as Executive Vice President and Chief Operations Officer/Chief
Risk Officer.
None of the above
officers are related and there are no arrangements or understandings between them and any other person pursuant to which any of
them was elected as an officer, other than arrangements or understandings with the directors or officers of the Company acting
solely in their capacities as such.
SUPERVISION
AND REGULATION
Both the Company
and the Bank are subject to extensive state and federal banking laws and regulations that impose specific requirements or restrictions
on and provide for general regulatory oversight of virtually all aspects of our operations. These laws generally are intended
primarily for the protection of customers, depositors and other consumers, the FDIC’s Deposit Insurance Fund (the “DIF”),
and the banking system as a whole; not for the protection of our other creditors and shareholders.
The following
discussion is not intended to be a complete list of all the activities regulated by the banking laws or of the impact of those
laws and regulations on our operations. The following summary is qualified by reference to the statutory and regulatory provisions
discussed. Changes in applicable laws or regulations may have a material effect on our business and prospects. Our operations
may be affected by legislative changes and the policies of various regulatory authorities. We cannot predict the effect that fiscal
or monetary policies, economic control, or new federal or state legislation may have on our business and earnings in the future.
Legislative
and Regulatory Developments
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 and the bank failures in 2023 will continue to have an impact on our operations.
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 2.5%, 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.
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 credit 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.
Proposed new
rules for U.S. implementation of capital requirements under Basel IV rules, more recently referred to as the “Basel III
Endgame,” were issued by the U.S. federal banking agencies on July 27, 2023. These proposed rules include broad-based changes
to the risk-weighting framework for various credit exposures and operational risk capital requirements. However, the proposed
rules generally apply only to large banking organizations with total assets of $100 billion or more, and are expected to not be
applicable to us. Recent regulatory developments have introduced uncertainty regarding the implementation of the Basel III Endgame
rules. Changes in leadership and evolving policy priorities within regulatory agencies have led to speculation about potential
delays or modifications to the final rulemaking process.
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 Office of the Comptroller of the Currency (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.
On
September 17, 2024, the FDIC approved a final Statement of Policy on Bank Merger Transactions, updating its approach to evaluating
bank mergers under the Bank Merger Act. The new policy emphasizes a principles-based evaluation, focusing on factors such as the
effect of the transaction on competition, financial stability, and the convenience and needs of the community to be served. The
OCC concurrently approved a final rule updating its regulations for business combinations involving national banks and federal
savings associations, including a policy statement summarizing the principles used during its review of Bank Merger Act applications.
Importantly, the Federal Reserve did not join with the FDIC and the OCC in this updated guidance. Additionally, the DOJ announced
its withdrawal from the 1995 Bank Merger Competitive Review Guidelines, indicating that it would apply its 2023 Merger Guidelines
to the banking industry.
These
developments reflect a heightened regulatory focus on bank mergers, with an emphasis on maintaining competition, ensuring financial
stability, and addressing community needs. However, given the shift in administration under President Trump, regulatory priorities
may change. Financial institutions considering mergers or acquisitions should monitor potential regulatory shifts under the new
administration, as changes in policy priorities may impact the level of scrutiny and the application of existing regulatory frameworks.
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. The Federal Reserve’s standards for determining
whether one company has control over another 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 standards, 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. In 2024, the Federal Reserve
indicated it may revisit certain aspects of this framework to address evolving market structures and investor behavior, though
no formal rulemaking has been issued.
In August 2024,
the FDIC proposed amendments to its regulations implementing the Change in Bank Control Act. The proposed rule aims to remove
certain existing exemptions and seeks public comment on the FDIC’s overall approach to changes in control affecting FDIC-supervised
institutions. If adopted, these amendments could result in more transactions being subject to the Change in Bank Control Act notice
requirements and FDIC review.
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.
The federal
banking agencies have extended the temporary relief from enforcement actions related to Regulation O multiple times, most recently
on December 27, 2024. The relief, which applies to banks and asset managers that become principal stockholders of banks, will
now expire on the earlier of January 1, 2026, or the effective date of a final Federal Reserve rule revising Regulation O. This
extension allows additional time for regulators to address the treatment of bank credit extensions to complex-controlled portfolio
companies that qualify as insiders. Financial institutions and asset managers should continue monitoring updates, as a final rule
could impact the relief before its expiration.
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. 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;