First munity (FCCO) - 2019 Q4 - Annual Report

PART I This part provides an overview of First Community Corporation's business, operations, and the extensive regulatory environment governing its activities. Business Overview First Community Corporation is a South Carolina-incorporated bank holding company operating First Community Bank, providing commercial banking services through 21 offices across South Carolina and Georgia. General First Community Corporation, established in 1994, is a bank holding company for First Community Bank, regulated by the FDIC and the S.C. Board, operating 21 offices and trading on NASDAQ under 'FCCO'. - First Community Corporation was incorporated in South Carolina in 1994 to own and control First Community Bank, which began operations in August 1995[14] - The Bank's primary federal regulator is the Federal Deposit Insurance Corporation (FDIC), and it is also regulated by the South Carolina Board of Financial Institutions (S.C. Board)[14] - As of December 31, 2019, the company had approximately $1.2 billion in assets, $737.0 million in loans, $988.2 million in deposits, and $120.2 million in shareholders' equity[16] - The company offers a wide range of traditional banking products and services for professionals and small-to medium-sized businesses, including consumer and commercial, mortgage, brokerage and investment, and insurance services, along with online banking[18] - The company's stock trades on The NASDAQ Capital Market under the symbol 'FCCO'[19] Location and Service Area The Bank operates 21 full-service offices across the Midlands, CSRA, and Upstate regions, serving small-to-medium sized businesses and individuals in diverse, growth-oriented economies. - The Bank operates 13 full-service offices in the Midlands region, 4 in the CSRA region, and 4 in the Upstate region[22] - The market areas are considered attractive with long-term growth potential, a well-educated employment base, and a diverse economy primarily composed of service industries, government, and education[25] Market Area Deposits and Share (as of June 30, 2019) | Region | Total Offices | Estimated Population | Total Market Deposits ($ thousands) | Our Market Deposits ($ thousands) | Market Share | | :----------- | :------------ | :------------------- | :---------------------------------- | :-------------------------------- | :----------- | | Midlands | 13 | 813,720 | 19,811,601 | 705,878 | 3.56% | | CSRA | 4 | 525,246 | 8,007,643 | 116,604 | 1.46% | | Upstate | 4 | 839,632 | 16,898,818 | 118,322 | 0.70% | Banking Services First Community Bank offers a comprehensive suite of deposit and loan services, including various accounts, commercial, consumer, and real estate loans, alongside internet banking and cash management, adhering to federal lending limits. - The Bank offers a full range of deposit services, including checking, NOW, savings, and various time deposits, along with retirement account services (IRAs), all FDIC-insured up to $250,000[26] - Loan offerings include commercial (working capital, expansion, equipment), consumer (auto, home improvement, education), and real estate construction and acquisition loans, with most mortgage loans sold into the secondary market[27] - The Bank's general loans-to-one-borrower limit is 15% of unimpaired capital and surplus, or 25% if fully secured by readily marketable collateral, amounting to $18.0 million at December 31, 2019[27] - Other services include internet banking, cash management, safe deposit boxes, travelers checks, direct deposit, automatic drafts, investment brokerage through LPL Financial, and MasterCard debit/credit card services[29] Competition The banking industry is highly competitive, with First Community Bank competing against numerous financial institutions by focusing on quality and personal service for small-to-medium sized businesses and individuals. - The banking business is highly competitive, with 23 financial institutions operating 171 offices in the Midlands, 17 institutions with 101 branches in the CSRA, and 35 institutions with 225 branches in the Upstate as of June 30, 2019[31] - Competition is based on interest rates, credit and service charges, service quality, and convenience, with larger banks having advantages in lending limits and geographic reach[31] - First Community Bank concentrates on small-to-medium sized businesses and individuals, competing effectively through quality and personal service[31] Employees As of December 31, 2019, First Community Corporation had 242 full-time employees and maintains good relations with its workforce. - As of December 31, 2019, the company had 242 full-time employees and believes it has good relations with them[32] Executive Officers of First Community Corporation Key executive officers of First Community Corporation, elected annually by the board, include Michael C. Crapps (CEO & President) and D. Shawn Jordan (CFO) as of March 13, 2020. Executive Officers (as of March 13, 2020) | Name (Age) | Position | Company Since | | :------------------ | :------------------------------------------------------------------------ | :------------ | | Michael C. Crapps (61) | Chief Executive Officer and President, Director | 1994 | | John T. Nissen (58) | Chief Commercial and Retail Banking Officer | 1995 | | Robin D. Brown (52) | Chief Human Resources and Marketing Officer | 1994 | | Tanya A. Butts (61) | Chief Operations Officer/Chief Risk Officer | 2016 | | John F. (Jack) Walker (54) | Chief Credit Officer, formerly Senior Vice President and Loan Approval and Special Assets Officer | 2009 | | D. Shawn Jordan (52) | Chief Financial Officer, formerly Executive Vice President | 2019 | Supervision and Regulation First Community Corporation and its subsidiary bank are subject to extensive state and federal banking laws and regulations, primarily aimed at protecting depositors, with recent reforms modifying certain Dodd-Frank Act rules. - Both the Company and the Bank are subject to extensive state and federal banking laws and regulations, primarily intended to protect depositors, not shareholders[36] - The Company is a bank holding company regulated by the Federal Reserve and the South Carolina Banking and Branching Efficiency Act[37] - The 2018 Regulatory Relief Act modified certain financial reform rules, including expanding the definition of qualified mortgages and simplifying capital rules for institutions with less than $10 billion in assets, though the company does not currently plan to opt into the community bank leverage ratio framework[38][39] - The Bank is subject to Basel III capital standards, requiring minimum Common Equity Tier 1, Tier 1, total risk-based, and leverage ratios, plus a capital conservation buffer[45][46] - The new CECL model for credit impairment will become effective for the company on January 1, 2023, and is expected to materially affect the allowance for loan losses[50] 2018 Regulatory Reform The Economic Growth, Regulatory Reform and Consumer Protection Act of 2018 eased some Dodd-Frank Act regulations for smaller financial institutions, expanding qualified mortgage definitions and simplifying capital rules. - The Regulatory Relief Act, enacted in May 2018, modified or removed certain financial reform rules, including some from the Dodd-Frank Act[38] - It expanded the definition of qualified mortgages and simplified regulatory capital rules for financial institutions with less than $10 billion in total consolidated assets, allowing them to opt into a 'community bank leverage ratio' framework if they meet specific criteria (e.g., leverage ratio > 9%)[39] - The company does not have immediate plans to elect the community bank leverage ratio framework but may do so in the future[39] - The Act also provided regulatory relief for community banks regarding examination cycles, call reports, the Volcker Rule, mortgage disclosures, and risk weights for certain commercial real estate loans[40] The Dodd-Frank Wall Street Reform and Consumer Protection Act The Dodd-Frank Act, signed in 2010, significantly impacted financial institutions by creating new regulatory bodies, modifying capital standards, and imposing stricter requirements on various banking activities. - The Dodd-Frank Act, signed in July 2010, created the Financial Stability Oversight Council, granted additional authority to the Federal Reserve, and established the Bureau of Consumer Financial Protection (CFPB)[42] - It also changed deposit insurance assessments, required modified capital standards, capped interchange fees for large banks, imposed stringent mortgage lender requirements, and limited proprietary trading[42] - Many provisions of the Dodd-Frank Act require regulators to adopt new regulations, some of which are still pending, and future governmental intervention could materially and adversely affect the company[43] Basel Capital Standards Basel III capital reforms, fully phased in by January 1, 2019, require the Bank to maintain specific minimum capital levels, including a Common Equity Tier 1 risk-based capital ratio of 4.5% and a capital conservation buffer. - Basel III, fully phased in by January 1, 2019, requires the Bank to maintain specific minimum capital levels[44][46] - A capital conservation buffer of 2.500% of risk-weighted assets (fully effective January 1, 2019) is required, consisting entirely of Common Equity Tier 1 capital, to avoid limitations on dividends and discretionary bonuses[46] - The company made a one-time opt-out election at the end of Q1 2015 to retain its pre-existing treatment for Accumulated Other Comprehensive Income (AOCI)[48] - New CECL model for credit impairment will be effective January 1, 2023, and may require a significant increase in the allowance for loan losses[50] Required Minimum Capital Levels (Bank) | Capital Ratio | Minimum Requirement | | :---------------------------- | :------------------ | | Common Equity Tier 1 risk-based | 4.5% | | Tier 1 risk-based | 6% | | Total risk-based | 8% | | Leverage ratio | 4% | Proposed Legislation and Regulatory Action Various legislative and regulatory initiatives are continuously introduced, which could significantly alter the banking industry's operating environment, impacting business costs, permissible activities, and competitive dynamics. - Various legislative and regulatory initiatives are introduced in Congress and state legislatures, as well as by regulatory agencies, which could expand or contract powers of bank holding companies and depository institutions[51] - Such legislation could change banking statutes and the operating environment in substantial and unpredictable ways, potentially increasing or decreasing business costs, limiting or expanding permissible activities, or affecting competitive balance[51] Permitted Activities Under the Bank Holding Company Act, the company is generally permitted to engage in banking and activities closely related to banking, as determined by the Federal Reserve, including various lending, leasing, and advisory functions. - Under the Bank Holding Company Act, a bank holding company is generally permitted to engage in banking, managing or controlling banks, furnishing services to subsidiaries, and activities closely related to banking as determined by the Federal Reserve[53] - Closely related activities include factoring accounts receivable, making/servicing loans, leasing property, operating non-bank depository institutions, trust functions, financial/investment advisory, discount securities brokerage, and certain insurance activities[53] - The company can elect 'financial holding company' status to engage in a broader array of financial activities, but has not yet sought this status[54] Change in Control Acquisitions of control over a bank or bank holding company are subject to regulatory review under the Bank Holding Company Act and the Change in Bank Control Act, with recent Federal Reserve guidance clarifying presumptions of controlling influence. - Acquisitions of 'control' of a bank or bank holding company require regulatory review under the Bank Holding Company Act and the Change in Bank Control Act[56] - Control is generally defined as acquiring 25% or more of voting securities, controlling a majority of the board, or exercising a controlling influence[56] - Federal Reserve guidance (February 2020) clarifies presumptions of controlling influence based on voting interest (e.g., 5% or more with significant business relationships, 10% or more with 5% business relationships, 15% or more with 2% business relationships), director representation, and senior management interlocks[58] Source of Strength Bank holding companies are required to serve as a "source of financial strength" for their subsidiary depository institutions, committing resources to support them during financial distress and having payment priority in bankruptcy. - The Federal Reserve requires a bank holding company to serve as a source of financial strength to its subsidiary depository institutions, committing resources to support them[60] - Under FDICIA, a bank holding company must guarantee compliance with capital restoration plans for 'undercapitalized' subsidiaries, up to the lesser of 5% of total assets or the amount needed to meet capital standards[60] - The 'cross guarantee' provisions of the FDIA require insured depository institutions under common control to reimburse the FDIC for losses from a commonly controlled institution's default[63] - In a bank holding company's bankruptcy, commitments to federal regulators to maintain subsidiary bank capital have payment priority over general unsecured creditors[65] Capital Requirements (Company) As a small bank holding company, First Community Corporation is generally exempt from direct capital requirements at the holding company level, though its subsidiary Bank remains subject to them. - As a small bank holding company, First Community Corporation is generally not subject to capital requirements at the holding company level, but its Bank is[66] - The company can borrow money or issue securities to make capital contributions to the Bank, with loan repayments dependent on Bank dividends[66] Dividends (Company) The company's ability to pay dividends is subject to Federal Reserve guidelines, requiring payments from current earnings consistent with capital needs, and is dependent on the Bank's ability to pay dividends. - The Company's ability to declare and pay dividends is dependent on federal and state regulatory considerations, including Federal Reserve guidelines[67] - Federal Reserve policies generally require dividends to be paid only out of current earnings and consistent with the organization's capital needs, asset quality, and overall financial condition[67] - The Company's ability to pay dividends is also dependent on the Bank's ability to pay dividends to it, which is subject to regulatory restrictions[69] South Carolina State Regulation As a South Carolina bank holding company, First Community Corporation is subject to state-level limitations on mergers and acquisitions, requiring prior approval from the S.C. Board for state-chartered bank acquisitions. - As a South Carolina bank holding company, the company is subject to limitations on sales to or mergers with other financial institutions[69] - Acquiring a national bank's capital stock requires 15 days prior notification to the S.C. Board, while acquiring a South Carolina state-chartered bank or holding company requires prior S.C. Board approval[69] First Community Bank First Community Bank, a South Carolina state bank, is primarily regulated by the FDIC and the S.C. Board, with extensive oversight across all operations, including capital adequacy, lending, and consumer protection. - First Community Bank is a South Carolina state bank, primarily regulated by the FDIC and the S.C. Board, with deposits insured up to $250,000[70] - Regulators monitor virtually all areas of the Bank's operations, including security, capitalization, loans, investments, borrowings, deposits, mergers, and dividends[71] - The Bank is subject to 'prompt corrective action' rules, categorizing banks into five levels based on capital, with increasingly severe actions for lower capital levels[76] - As of December 31, 2019, the Bank was deemed 'well capitalized'[83] - The Bank must maintain anti-money laundering programs, comply with the USA PATRIOT Act/Bank Secrecy Act, and adhere to OFAC regulations to combat terrorism financing[107][109][111] - The Bank's non-owner-occupied commercial loans (263%) and construction and land development loans (72%) as of December 31, 2019, are monitored for commercial real estate concentration risk relative to total risk-based capital[128] Risk Factors This section outlines significant risks that could materially affect First Community Corporation's business, financial condition, and results of operations, including economic downturns, credit quality, and regulatory compliance. - The company's financial performance is highly dependent on the business environment in its primary markets (South Carolina and Georgia) and the U.S. economy as a whole[130] - Credit losses are a significant risk, influenced by factors like declining real estate values, increasing interest rates, and unemployment, potentially requiring increased allowance for loan losses[7][133][135] - A significant portion (91.6% as of December 31, 2019) of the loan portfolio is secured by real estate, making the business vulnerable to real estate market deterioration and natural disasters[144] - The banking business is highly competitive, and failure to keep pace with technological changes or effectively manage competition could adversely affect the business[174][178] - The company is subject to extensive federal and state banking laws and regulations, with non-compliance potentially leading to sanctions, penalties, and reputational damage[195][197] - The company's ability to pay cash dividends is limited by Federal Reserve guidelines and the Bank's ability to pay dividends, which are subject to regulatory restrictions[222][224] General Business Risks General business risks include adverse financial market and economic conditions, credit losses, concentration in real estate loans, and operational vulnerabilities to cyber attacks and dependence on key personnel. - The company's financial performance is highly dependent on economic conditions in South Carolina, Georgia, and the U.S., with unfavorable conditions potentially leading to deteriorating credit quality, increased delinquencies, and reduced demand for services[130][132] - Making loans carries inherent risks of nonpayment, and the allowance for loan losses may not be sufficient to cover actual charge-offs, potentially decreasing net income and capital[133][135][136] - Approximately 91.6% of the loan portfolio is secured by real estate, making the business vulnerable to deterioration in the real estate market and natural disasters[144] - The company has a concentration of $587.4 million (79.7% of total loans) in commercial real estate loans as of December 31, 2019, which are generally riskier than residential loans[146] - The banking business is highly competitive, with many larger competitors having greater financial resources and broader service offerings[174] - Heavy reliance on communications and information systems exposes the company to cyber attacks, security breaches, and operational failures, which could disrupt business, lead to data misuse, and damage reputation[186][189] Legal and Regulatory Risks Legal and regulatory risks stem from extensive oversight by federal and state agencies, imposing stringent capital requirements and increasing operational costs, with non-compliance leading to significant penalties. - The company operates in a highly regulated industry, subject to examination, supervision, and comprehensive regulation by various agencies, including the Federal Reserve, FDIC, and S.C. Board[196] - Failure to comply with laws, regulations, or policies can result in heightened regulatory scrutiny, sanctions (e.g., cease and desist orders), civil money penalties, and reputational damage[197] - The Bank is subject to strict capital requirements under Basel III, and failure to meet these could restrict activities, capital actions (like dividends), and potentially lower return on equity[199][200] - New accounting standards, specifically the CECL model effective January 1, 2023, are expected to require a significant increase in the allowance for loan losses and may create more volatility[207][208] - The Federal Reserve's 'source of strength' doctrine may require the company to make capital injections into the Bank if it experiences financial distress, potentially requiring borrowing at unfavorable terms[209][210] - The company is party to various claims and lawsuits, and adverse outcomes could result in significant financial liability, reputational damage, and disruption to business operations[215][216] Risks Related to Common Stock Investment Investing in First Community Corporation's common stock carries risks, including dividend limitations, stock price volatility, potential dilution from future capital raises, and anti-takeover provisions. - The company's ability to pay cash dividends is limited by Federal Reserve policy and the Bank's ability to pay dividends, which are subject to regulatory restrictions[222][224] - The stock price may be volatile due to variations in earnings, analyst projections, industry trends, new technology, and regulatory changes, potentially leading to losses for investors and litigation[225] - Future sales of common stock by shareholders or the perception of such sales could cause the stock price to decline, especially given the relatively low trading volume[226] - The need to raise additional capital in the future could result in the issuance of new shares, diluting existing shareholders' ownership and book value per share[227][230] - Provisions in the company's articles of incorporation and bylaws, South Carolina law, and banking regulations could delay or prevent a third-party takeover[231][233][234] - An investment in the company's common stock is not a bank deposit and is not insured by the FDIC or any other entity, making it inherently risky[235] Unresolved Staff Comments This item indicates that there are no unresolved staff comments from the SEC. - There are no unresolved staff comments[236] Properties First Community Corporation's principal place of business and the Bank's main office are in Lexington, South Carolina, operating 21 full-service offices, mostly owned by the Bank, with ongoing modernization. - The principal place of business for both the Company and the Bank is 5455 Sunset Boulevard, Lexington, South Carolina 29072[237] - The company operates 21 full-service offices across South Carolina (Lexington, Richland, Newberry, Kershaw, Aiken, Greenville, Anderson, Pickens Counties) and Georgia (Richmond, Columbia Counties)[237] - Most properties are owned by the Bank, except for the Downtown Augusta, GA, and Greenville, SC, full-service branch offices, which are leased[237] - The company has a continuing program of modernization, expansion, and occasional replacement of facilities[237] Legal Proceedings In the ordinary course of business, First Community Corporation may be involved in various legal proceedings, but management does not believe any would have a material adverse effect on the company. - The company may be a party to various legal proceedings in the ordinary course of operations[238] - Management does not believe any pending or threatened proceeding would have a material effect on the business, results of operations, or financial condition[238] Mine Safety Disclosures This item is not applicable to First Community Corporation. - This item is not applicable[240] PART II This part covers the market for the registrant's common equity, selected financial data, management's discussion and analysis, and financial statements with supplementary data. Market for Common Equity and Shareholder Matters As of February 29, 2020, First Community Corporation had approximately 1,549 shareholders, with its common stock trading on NASDAQ under 'FCCO', consistently paying quarterly cash dividends and executing share repurchases. - As of February 29, 2020, there were approximately 1,549 shareholders of record for the common stock, which trades on The NASDAQ Capital Market under 'FCCO'[243] - The company intends to continue paying quarterly cash dividends, subject to board approval and regulatory considerations, including Federal Reserve guidelines and the Bank's ability to pay dividends[245][246] - In 2019, the company completed a repurchase of 300,000 shares under the Prior Repurchase Plan for $5.6 million (average price $18.79) and approved a New Repurchase Plan for up to 200,000 additional shares[249][251] Quarterly Common Stock Price Ranges and Dividends | Year | Quarter Ended | High ($) | Low ($) | Dividends ($) | | :--- | :----------------- | :------- | :------ | :------------ | | 2019 | March 31, 2019 | 22.79 | 17.93 | 0.11 | | 2019 | June 30, 2019 | 20.28 | 17.08 | 0.11 | | 2019 | September 30, 2019 | 20.45 | 17.55 | 0.11 | | 2019 | December 31, 2019 | 22.00 | 18.48 | 0.11 | | 2018 | March 31, 2018 | 23.50 | 20.56 | 0.10 | | 2018 | June 30, 2018 | 26.25 | 21.95 | 0.10 | | 2018 | September 30, 2018 | 26.25 | 23.30 | 0.10 | | 2018 | December 31, 2018 | 24.38 | 18.54 | 0.10 | Selected Financial Data This section provides a five-year summary of First Community Corporation's selected financial data, including balance sheet items, results of operations, per share data, and asset quality ratios, highlighting consistent growth and improved asset quality. - The efficiency ratio is a key performance indicator, calculated as non-interest expense divided by the sum of net interest income (tax equivalent) and non-interest income (net of securities gains/losses and write-downs)[253] - Non-GAAP financial measures like 'efficiency ratio,' 'tangible book value at period end,' 'return on average tangible common equity,' and 'tangible common shareholders' equity to tangible assets' are used to enhance evaluation of operating results[256] Selected Financial Data (2015-2019, in thousands) | Metric | 2019 | 2018 | 2017 | 2016 | 2015 | | :----------------------------------------- | :------------ | :------------ | :------------ | :------------ | :------------ | | Balance Sheet Data: | | | | | | | Total assets | $1,170,279 | $1,091,595 | $1,050,731 | $914,793 | $862,734 | | Loans | 737,028 | 718,462 | 646,805 | 546,709 | 489,191 | | Deposits | 988,201 | 925,523 | 888,323 | 766,622 | 716,151 | | Total common shareholders' equity | 120,194 | 112,497 | 105,663 | 81,861 | 79,038 | | Results of Operations: | | | | | | | Interest income | $42,630 | $39,729 | $32,156 | $29,506 | $28,649 | | Net interest income | 36,849 | 35,748 | 29,394 | 26,459 | 25,253 | | Provision for loan losses | 139 | 346 | 530 | 774 | 1,138 | | Net income | 10,971 | 11,229 | 5,815 | 6,682 | 6,127 | | Per Share Data: | | | | | | | Basic earnings per common share | $1.46 | $1.48 | $0.85 | $1.01 | $0.93 | | Diluted earnings per common share | 1.45 | 1.45 | 0.83 | 0.98 | 0.91 | | Book value at period end | 16.16 | 14.73 | 13.93 | 12.24 | 11.81 | | Dividends per common share | 0.44 | 0.40 | 0.36 | 0.32 | 0.28 | | Asset Quality Ratios: | | | | | | | Non-performing assets to total assets | 0.32% | 0.37% | 0.51% | 0.57% | 0.85% | | Allowance for loan losses to total loans | 0.90% | 0.87% | 0.89% | 0.94% | 0.94% | | Selected Ratios: | | | | | | | Return on average assets | 0.98% | 1.04% | 0.62% | 0.75% | 0.73% | | Return on average common equity | 9.38% | 10.48% | 6.56% | 8.08% | 7.94% | | Efficiency Ratio (non-GAAP) | 70.52% | 68.06% | 74.34% | 72.27% | 71.25% | | Net interest margin (tax equivalent) | 3.65% | 3.69% | 3.52% | 3.35% | 3.38% | | Equity to assets | 10.27% | 10.31% | 10.06% | 8.95% | 9.16% | | Tier 1 risk-based capital (Bank) | 13.47% | 13.19% | 13.40% | 13.84% | 14.72% | | Total risk-based capital (Bank) | 14.26% | 13.96% | 14.18% | 14.66% | 15.54% | | Leverage (Bank) | 9.97% | 9.98% | 9.66% | 9.77% | 9.73% | Management's Discussion and Analysis This section provides a detailed analysis of First Community Corporation's financial condition and operating results for 2019, 2018, and 2017, covering net interest income, loan loss provisions, and critical accounting policies. - Net income for 2019 was $11.0 million ($1.45 diluted EPS), compared to $11.2 million ($1.45 diluted EPS) in 2018, and $5.8 million ($0.83 diluted EPS) in 2017[281][283] - Net interest income increased by $1.1 million (3.1%) to $36.8 million in 2019, primarily due to a $37.3 million increase in average earning assets, despite a 4 basis point decline in net interest margin to 3.65%[281] - Noninterest income increased by $1.1 million (10.3%) to $11.7 million in 2019, driven by mortgage banking income, investment advisory fees, and ATM debit card income[281] - Noninterest expense increased by $2.5 million (7.8%) to $34.6 million in 2019, mainly due to increases in salaries and employee benefits, occupancy, and data processing expenses, reflecting strategic investments in new offices and digital platforms[281] - The provision for loan losses decreased to $139 thousand in 2019 from $346 thousand in 2018, reflecting an assessment of general loan loss risk and asset quality[281][307] - Total assets increased by $78.7 million to $1.17 billion at December 31, 2019, with organic loan growth of $18.6 million (2.6%) and deposit growth of $62.7 million[330] Overview First Community Corporation, headquartered in Lexington, SC, is a bank holding company for First Community Bank, offering commercial and retail banking services with a focus on personalized service and local decision-making. - First Community Corporation is headquartered in Lexington, SC, and serves as the bank holding company for First Community Bank, engaging in commercial and retail banking[260] - The company operates 21 full-service offices across South Carolina (Lexington, Richland, Newberry, Kershaw, Aiken, Greenville, Anderson, Pickens Counties) and Georgia (Richmond, Columbia Counties)[260] - Primary income is derived from interest on loans and investments, with deposits as a main funding source, and net interest income is a key measure of success[261] - The discussion covers results of operations for 2019, 2018, and 2017, and financial condition as of December 31, 2019, including detailed analysis of average balances, interest sensitivity, allowance for loan losses, and noninterest income/expense[261][262][263][264] Recent Market Conditions The company's financial performance is highly sensitive to market and economic conditions, with the novel coronavirus outbreak in early 2020 creating significant, unpredictable uncertainty for financial markets and economic activity. - Financial performance is highly dependent on the business environment in primary markets and the United States[265] - The coronavirus outbreak in early 2020 has had, and may continue to have, a destabilizing effect on financial markets and economic activity, impacting trade, travel, and employee productivity[265] - The extent of the coronavirus's impact on operational and financial performance is currently uncertain and cannot be predicted[265] Critical Accounting Policies and Estimates The company's financial statements rely on critical accounting policies and estimates that involve significant judgment and assumptions, particularly for the allowance for loan losses, goodwill, and income taxes. - Critical accounting policies and estimates involve significant judgment and assumptions, with potential for material differences from original reports[268] - Key critical accounting areas include allowance for loan losses, goodwill and other intangibles, income taxes and deferred tax assets, other-than-temporary impairment, business combinations, and accounting for acquired loans[268] - Management has reviewed and approved these critical accounting policies and estimates with the Audit and Compliance Committee[268] Allowance for Loan Losses The allowance for loan losses is a critical accounting policy requiring significant judgment based on creditworthiness and economic conditions, with the upcoming CECL model expected to materially increase and add volatility to the allowance. - The allowance for loan losses is a critical accounting policy requiring significant judgment and estimates, including borrower creditworthiness, collateral value, cash flow assumptions, loss factors, and economic conditions[269] - The new Current Expected Credit Loss (CECL) model, effective January 1, 2023, will require presenting financial assets at the net amount expected to be collected, based on past events, current conditions, and reasonable forecasts[270] - The adoption of CECL is expected to materially affect how the allowance for loan losses is determined and could require a significant increase, potentially creating more volatility[270] - A one-time cumulative-effect adjustment to the allowance for loan losses is expected at the beginning of the first reporting period in which CECL is effective[271] Goodwill and Other Intangibles Goodwill, representing the excess of purchase price over acquired net assets, has an indefinite useful life and is annually evaluated for impairment, while core deposit intangibles are amortized over their estimated useful lives. - Goodwill represents the excess of purchase price over the fair value of acquired tangible and identifiable intangible assets, with an indefinite useful life, and is evaluated for impairment annually[273] - Core deposit intangibles represent the estimated value of long-term deposit relationships acquired in bank or branch acquisitions and are amortized over their estimated useful lives[274] - Goodwill impairment is identified by comparing a reporting unit's estimated fair value to its carrying value; if impaired, a second step measures the impairment amount[273][274] Income Taxes and Deferred Tax Assets Income taxes are accounted for by recognizing current and deferred taxes arising from temporary differences, with a valuation allowance recorded if deferred tax assets are unlikely to be realized. - Income taxes are provided for current and deferred tax effects, with deferred taxes arising from temporary differences between tax and accounting bases of assets and liabilities[275] - Deferred tax assets and liabilities are reflected at income tax rates applicable to the period of expected realization or settlement[275] - A valuation allowance is recorded if it is 'more likely than not' that a deferred tax asset will not be realized[275] - The Tax Act reduced corporate income taxes, resulting in an adjustment of the deferred tax asset in 2017[275] Other-Than-Temporary Impairment The company quarterly evaluates securities for other-than-temporary impairment (OTTI), considering factors such as fair value decline, issuer's financial condition, and the company's intent and ability to hold the investment. - Securities are evaluated for other-than-temporary impairment (OTTI) at least quarterly[277] - Considerations for OTTI include the length and extent of fair value decline, issuer's financial condition, prospects for contractual cash flows, interest rate outlook, and the company's intent and ability to hold the investment[277] Business Combinations and Acquired Loans Acquisitions are accounted for using the acquisition method, recording identifiable assets, including loans, at fair value, with no allowance for loan losses recorded at acquisition. - Acquisitions are accounted for under FASB ASC Topic 805, Business Combinations, using the acquisition method, where identifiable assets, including loans, are recorded at fair value[278] - No allowance for loan losses is recorded on acquired loans at the acquisition date, as their fair value incorporates credit risk assumptions[278] - Acquired credit-impaired loans are accounted for under FASB ASC Topic 310-30, initially measured at fair value, which includes estimated future credit losses[279] - Other acquired loans (performing, revolving lines of credit) are accounted for under FASB ASC Topic 310-20, with discounts accreted into earnings based on estimated cash flows[279] Results of Operations First Community Corporation's net income was $11.0 million in 2019, slightly down from $11.2 million in 2018, but significantly up from $5.8 million in 2017, with net interest income increasing despite a slight decline in net interest margin. Net Income and EPS (2017-2019) | Year | Net Income ($ millions) | Diluted EPS ($) | | :--- | :---------------------- | :-------------- | | 2019 | 11.0 | 1.45 | | 2018 | 11.2 | 1.45 | | 2017 | 5.8 | 0.83 | - Net interest income increased by $1.1 million (3.1%) to $36.8 million in 2019, driven by a $37.3 million increase in average earning assets, partially offset by a 4 basis point decline in net interest margin to 3.65%[281] - Noninterest income increased by $1.1 million (10.3%) to $11.7 million in 2019, primarily from mortgage banking income, investment advisory fees, and ATM debit card income[281] - Noninterest expense increased by $2.5 million (7.8%) to $34.6 million in 2019, mainly due to higher salaries and employee benefits, occupancy expense (from two new offices), and data processing expense[281] - The 2017 net income was impacted by a $1.2 million tax expense adjustment due to the Tax Act's corporate tax rate reduction[283] Net Interest Income Net interest income, the company's primary revenue source, was $36.8 million in 2019, with the net interest margin slightly declining to 3.65% due to Federal Reserve rate reductions and a flat yield curve. Net Interest Income and Margin (2017-2019) | Metric | 2019 ($ millions) | 2018 ($ millions) | 2017 ($ millions) | | :----------------------------------- | :---------------- | :---------------- | :---------------- | | Net Interest Income | 36.8 | 35.7 | 29.4 | | Yield on Earning Assets | 4.19% | 4.05% | 3.74% | | Rate Paid on Interest-Bearing Liabilities | 0.80% | 0.55% | 0.43% | | Fully Taxable Equivalent Net Interest Margin | 3.65% | 3.69% | 3.52% | - The decline in net interest margin in 2019 was partially due to Federal Reserve rate reductions (75 basis points total) and a flat-to-inverted yield curve, which negatively impacted variable rate asset repricing[287] - Average loan portfolio as a percentage of average earning assets increased to 72.2% in 2019 from 70.0% in 2018, contributing to improved yield on earning assets[285][287] - The loan to deposit ratio declined to 75.7% at December 31, 2019, from 78.0% at December 31, 2018, due to deposit growth exceeding loan growth[285] Provision and Allowance for Loan Losses The allowance for loan losses was $6.6 million (0.90% of loans) at December 31, 2019, with the provision decreasing to $139 thousand, reflecting improved asset quality and declining non-performing assets. Allowance for Loan Losses (ALL) and Non-Performing Assets (2017-2019) | Metric | 2019 ($ thousands) | 2018 ($ thousands) | 2017 ($ thousands) | | :----------------------------------------- | :----------------- | :----------------- | :----------------- | | ALL at period end | 6,627 | 6,263 | 5,797 | | ALL as % of total loans | 0.90% | 0.87% | 0.89% | | Provision for loan losses | 139 | 346 | 530 | | Non-performing assets | 3,700 | 4,000 | 5,300 | | Non-performing assets to total assets | 0.32% | 0.37% | 0.51% | | Net loans recovered (charged off) | 225 | 120 | 53 | - Loans acquired in the Cornerstone (2017) and Savannah River (2014) acquisitions are accounted for under FASB ASC 310-30, with estimated future credit losses incorporated into their fair value at acquisition[306] - Non-accrual loans totaled $2.3 million (0.31% of total loans) at December 31, 2019, and $2.5 million (0.35%) at December 31, 2018[311] - Approximately 91.6% of the loan portfolio had real estate as underlying collateral at December 31, 2019[310] Non-interest Income and Expense Non-interest income increased to $11.7 million in 2019, driven by mortgage banking and advisory fees, while non-interest expense rose to $34.6 million due to increased salaries, occupancy, and data processing. Non-Interest Income (2018-2019, in thousands) | Category | 2019 | 2018 | | :---------------------------------------- | :----- | :----- | | Deposit service charges | $1,649 | $1,769 | | Mortgage banking income | 4,555 | 3,895 | | Investment advisory fees and non-deposit commissions | 2,021 | 1,683 | | Gain (loss) on sale of securities | 136 | (342) | | Write-down on premises held-for-sale | (282) | — | | Other non-interest income | 3,660 | 3,615 | | Total Non-interest income | 11,736 | 10,644 | Non-Interest Expense (2017-2019, in thousands) | Category | 2019 | 2018 | 2017 | | :------------------------------------- | :----- | :----- | :----- | | Salaries and employee benefits | $21,261 | $19,515 | $16,951 | | Occupancy | 2,696 | 2,380 | 2,166 | | ATM/debit card and data processing | 2,834 | 2,300 | 1,412 | | FDIC/FICO premium | 57 | 375 | 312 | | Amortization of intangibles | 523 | 563 | 343 | | Merger expenses | — | — | 945 | | Total Non-interest expense | 34,617 | 32,123 | 29,358 | - Mortgage loan production increased to $139.6 million in 2019 from $119.7 million in 2018[319] - Total assets under management (AUM) increased to $369.7 million at December 31, 2019, from $288.5 million at December 31, 2018[319] - The increase in salary and benefit expense in 2019 was due to normal adjustments and the addition of staff for two new full-service offices opened in Greenville, SC, and Evans, GA[324] Income Tax Expense Income tax expense for 2019 was $2.9 million, with an effective tax rate of 20.67%, significantly lower than historical rates due to the 2017 Tax Act, which also impacted the 2017 expense. Income Tax Expense (2017-2019, in thousands) | Year | Income Tax Expense | | :--- | :----------------- | | 2019 | $2,858 | | 2018 | $2,694 | | 2017 | $3,330 | - The 2017 income tax expense included an approximate $1.2 million charge to adjust the deferred tax asset due to the Tax Act's reduction of the corporate tax rate to 21%[329] - The effective tax rate was 20.67% in 2019 and 19.35% in 2018, lower than the historical 25%-27% range[281][329] - As of December 31, 2019, the company had net deferred tax assets of $1.0 million, with realization dependent on future taxable income[220][330] Financial Position First Community Corporation's total assets grew by $78.7 million to $1.17 billion at December 31, 2019, supported by organic loan growth and significant deposit growth, with shareholders' equity increasing to $120.2 million. - Total assets increased by $78.7 million to $1.17 billion at December 31, 2019, from $1.09 billion at December 31, 2018[330] - Organic loan growth (excluding held for sale) was approximately $18.6 million (2.6%) in 2019[330] - The loan-to-deposit ratio (including loans held for sale) declined to 75.7% at December 31, 2019, from 78.0% at December 31, 2018, due to deposit growth exceeding loan growth[330] - Total deposits grew by $62.7 million to $988.2 million at December 31, 2019[330] - Shareholders' equity increased to $120.2 million at December 31, 2019, from $112.5 million in 2018, primarily due to retained earnings and an increase in accumulated other comprehensive income, partially offset by $5.6 million in share repurchases[332] - The adoption of ASC 842 'Leases' resulted in the recognition of a right-of-use asset and lease liability of $3.2 million and $3.3 million, respectively, at December 31, 2019[330] Earning Assets Earning assets, primarily loans and investment securities, are a key focus for First Community Corporation, with loans constituting 72.2% of average earning assets in 2019 and a strategic goal of continued quality loan growth. - Loans accounted for 72.2% of average earning assets in 2019, with a strategic focus on quality loan portfolio growth[333] - New loan originations (excluding held-for-sale) were approximately $137.8 million in 2019[333] - Investment securities averaged $257.6 million in 2019 (25.3% of average earning assets), with a weighted average life of 5.1 years and a tax equivalent yield of 2.71% at December 31, 2019[341][342] - Short-term investments, including federal funds sold and interest-bearing bank balances, averaged $25.6 million in 2019 and serve as an immediate source of liquidity[348] Loan Portfolio Composition (as of December 31, 2019, in thousands) | Category | Amount ($) | % of Total Gross Loans | | :------------------------------------- | :--------- | :--------------------- | | Commercial, financial & agricultural | 51,805 | 7.0% | | Real estate: Construction | 73,512 | 10.0% | | Real estate: Mortgage—residential | 45,357 | 6.2% | | Real estate: Mortgage—commercial | 527,447 | 71.6% | | Consumer: Home equity | 28,891 | 3.9% | | Consumer: Other | 10,016 | 1.4% | | Total gross loans | 737,028 | 100.0% | Deposits and Other Interest-Bearing Liabilities Average deposits for First Community Corporation were $934.9 million in 2019, with core deposits representing a stable funding source, supplemented by borrowed funds like repurchase agreements and FHLB advances. - Average deposits were $934.9 million in 2019, with average interest-bearing deposits at $670.9 million[349] - Core deposits (excluding time deposits of $100 thousand or more) were $902.3 million at December 31, 2019, providing a relatively stable funding source[350] - Borrowed funds include securities sold under agreements to repurchase (average $34.2 million in 2019) and FHLB advances (average $3.2 million in 2019)[353][354] - The company has $14.964 million in junior subordinated debt from trust preferred securities, issued in 2004, accruing at LIBOR plus 257 basis points and maturing in 2034[354] Deposits by Category (as of December 31, 2019, in thousands) | Category | Amount ($) | % of Total Deposits | | :---------------------------------------- | :--------- | :------------------ | | Non-interest bearing demand deposits | 289,828 | 29.3% | | Interest bearing demand deposits and money market accounts | 423,257 | 42.8% | | Savings | 104,456 | 10.6% | | Time deposits | 170,660 | 17.3% | | Total deposits | 988,201 | 100.0% | Capital Adequacy and Dividend Policy First Community Corporation's shareholders' equity increased to $120.2 million, with the Bank consistently exceeding all regulatory capital ratios under Basel III, while the company's dividend policy is subject to Federal Reserve guidelines. - Total shareholders' equity increased to $120.2 million at December 31, 2019, from $112.5 million in 2018, driven by retained earnings and an increase in accumulated other comprehensive income, partially offset by $5.6 million in share repurchases[355] - The company's dividend policy is subject to Federal Reserve guidelines, requiring dividends to be paid from current earnings and consistent with capital needs, and is dependent on the Bank's ability to pay dividends[362][363] Bank Capital Ratios (as of December 31, 2019 and 2018, in thousands) | Capital Ratio | Required Amount | Required % | Actual Amount | Actual % | Excess Amount | Excess % | | :------------ | :-------------- | :--------- | :------------ | :------- | :------------ | :------- | | Dec 31, 2019: | | | | | | | | Tier 1 | $50,224 | 6.0% | $112,754 | 13.5% | $62,530 | 7.5% | | Total Capital | 66,965 | 8.0% | 119,381 | 14.3% | 52,416 | 6.3% | | CET1 | 37,668 | 4.5% | 112,754 | 13.5% | 75,086 | 9.0% | | Tier 1 Leverage | 45,246 | 4.0% | 112,754 | 10.0% | 67,508 | 6.0% | | Dec 31, 2018: | | | | | | | | Tier 1 | $49,043 | 6.0% | $107,806 | 13.2% | $58,764 | 7.2% | | Total Capital | 65,390 | 8.0% | 114,069 | 14.0% | 48,679 | 6.0% | | CET1 | 36,782 | 4.5% | 107,806 | 13.2% | 71,024 | 8.7% | | Tier 1 Leverage | 43,198 | 4.0% | 107,806 | 10.0% | 64,608 | 6.0% | Key Performance Ratios (2017-2019) | Metric | 2019 | 2018 | 2017 | | :-------------------------- | :----- | :----- | :----- | | Return on average assets | 0.98% | 1.04% | 0.62% | | Return on average common equity | 9.38% | 10.48% | 6.56% | | Equity to assets ratio | 10.27% | 10.31% | 10.06% | | Dividend Payout Ratio | 30.29% | 27.02% | 42.35% | Liquidity Management First Community Corporation actively manages liquidity to meet cash flow requirements and maximize profits, balancing asset convertibility and access to funding through core deposits and approved lines of credit. - Liquidity management involves monitoring sources and uses of funds to meet cash flow requirements and maximize profits, converting assets into cash without significant loss, and raising additional funds[364] - Asset liquidity is provided by cash, readily marketable assets, or those maturing soon, while liability liquidity comes from core funding sources like customer deposits and access to credit lines (federal funds purchased, FHLB advances)[364][365] - The Bank maintains federal funds purchased lines of $10.0 million with two financial institutions and an FHLB line of credit up to 25% of its assets[365] - Management believes existing stable core deposits and continued growth will successfully meet long-term and short-term liquidity needs[366] Off-Balance Sheet Arrangements First Community Corporation engages in off-balance sheet financial transactions, such as commitments to extend credit, which carry varying degrees of credit, interest rate, and liquidity risk, applying the same credit policies as on-balance sheet instruments. - The company engages in off-balance sheet financial transactions, including commitments to extend credit, which involve credit, interest rate, and liquidity risk[368] - These transactions are used for general corporate purposes (managing risk, optimizing capital) or to meet customer funding needs[368] - The Bank uses the same credit policies for commitments as for on-balance sheet instruments[572] Impact of Inflation First Community Corporation's performance is more significantly affected by interest rates than general inflation due to its monetary assets and liabilities, with active management of interest-sensitive assets and liabilities to mitigate fluctuations. - The company's assets and liabilities are primarily monetary, so interest rates have a more significant effect on performance than general inflation[369] - The company continually manages the relationships between interest-sensitive assets and liabilities to protect against wide interest rate fluctuations, including those resulting from inflation[369] Quantitative and Qualitative Disclosures About Market Risk This item is marked as 'Not Applicable', indicating that the company does not have additional quantitative and qualitative disclosures about market risk beyond what is already provided in other sections. - This item is not applicable[370] Financial Statements and Supplementary Data This section presents First Community Corporation's audited consolidated financial statements for 2019, 2018, and 2017, along with management's report on internal control and independent auditor's reports. - This item includes the Consolidated Balance Sheets as of December 31, 2019 and 2018, and Consolidated Statements of Income, Comprehensive Income, Shareholders' Equity, and Cash Flows for the years ended December 31, 2019, 2018, and 2017[5][391][395][398][400][403] - Management's Report on Internal Control Over Financial Reporting states that internal controls were effective as of December 31, 2019[374] - Elliott Davis, LLC, the independent registered public accounting firm, issued an unqualified opinion on the effectiveness of the company's internal control over financial reporting and on the consolidated financial statements[375][378][386] Management's Report on Internal Control Over Financial Reporting Management is responsible for establishing and maintaining effective internal control over financial reporting, concluding its effectiveness as of December 31, 2019, based on the COSO framework, and audited by Elliott Davis, LLC. - Management is responsible for establishing and maintaining adequate internal control over financial reporting, designed to provide reasonable assurance regarding financial reporting reliability[372] - As of December 31, 2019, management assessed the effectiveness of internal controls over financial reporting using the COSO 2013 framework and concluded they were effective[374] - The effectiveness of internal control over financial reporting as of December 31, 2019, was audited by Elliott Davis, LLC, who expressed an unqualified opinion[375] Report of Independent Registered Public Accounting Firm (Internal Control) Elliott Davis, LLC, as the independent registered public accounting firm, audited First Community Corporation's internal control over financial reporting as of December 31, 2019, issuing an unqualified opinion. - Elliott Davis, LLC audited the company's internal control over financial reporting as of December 31, 2019, based on COSO 2013 criteria[378] - The firm expressed an unqualified opinion, concluding that the company maintained, in all material respects, effective internal control over financial reporting[378] Report of Independent Registered Public Accounting Firm (Financial Statements) Elliott Davis, LLC also audited First Community Corporation's consolidated financial statements for 2019, 2018, and 2017, issuing an unqualified opinion that they fairly present the financial position and results in conformity with U.S. GAAP. - Elliott Davis, LLC audited the consolidated balance sheets as of December 31, 2019 and 2018, and related consolidated statements of income, comprehensive income, shareholders' equity, and cash flows for the three years ended December 31, 2019[386] - The firm expressed an unqualified opinion, stating that the consolidated financial statements present fairly, in all material respects, the financial position, results of operations, and cash flows in conformity with U.S. GAAP[386] Consolidated Balance Sheets The Consolidated Balance Sheets present First Community Corporation's financial position as of December 31, 2019, and 2018, showing total assets increased to $1.17 billion and shareholders' equity to $120.2 million. Consolidated Balance Sheets (as of December 31, in thousands) | ASSETS | 2019 | 2018 | | :------------------------------------------------------------------- | :------------ | :------------ | | Cash and due from banks | $14,951 | $14,328 | | Interest-bearing bank balances | 32,741 | 17,883 | | Investment securities available-for-sale | 286,800 | 237,893 | | Net loans | 730,401 | 712,199 | | Property and equipment - net | 35,008 | 34,987 | | Bank owned life insurance | 28,041 | 25,754 | | Goodwill | 14,637 | 14,637 | | Total assets | $1,170,279 | $1,091,595 | | LIABILITIES | | | | Total deposits | 988,201 | 925,523 | | Securities sold under agreements to repurchase | 33,296 | 28,022 | | Junior subordinated debt | 14,964 | 14,964 | | Total liabilities | 1,050,085 | 979,098 | | SHAREHOLDERS' EQUITY | | | | Total shareholders' equity | 120,194 | 112,497 | | Total liabilities and shareholders' equity | $1,170,279 | $1,091,595 | [Consolidated Statements of Income](index=79&type=section&id=Consolidated%20Statements%2