First Community Corp 10-Q for FY2021 Q1
First Community Corp (FCCO)
About this 10-Q
First Community Corp filed this 10-Q on May 7, 2021, covering the quarter ended March 31, 2021 (FY2021 Q1).
Headline figures
Quarter ended March 31, 2021, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $246K
- down 38.3% from $399K a year earlier
- Net income
- $3.26M
- up 81.4% from net income of $1.79M a year earlier
- Diluted EPS
- $0.43
- up 79.2% from $0.24 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
| Quarterly
report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended | |
| Transition
report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from ____ to ____ |
Commission
File Number:
| (Exact name of registrant as specified in its charter) | |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
(Address of principal executive offices) (Zip Code)
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of exchange on which registered |
| The
|
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 the past 90 days.
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period
that the registrant was required to submit such files). x
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.
| Large accelerated filer o | Accelerated filer o | |
| Smaller
reporting company | ||
| Emerging
growth company |
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 is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: On May 7, 2021, shares of the issuer’s common stock, par value $1.00 per share, were issued and outstanding.
TABLE OF CONTENTS
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
FIRST COMMUNITY CORPORATION
CONSOLIDATED BALANCE SHEETS
| March 31, | ||||||||
| (Dollars in thousands, except par value) | 2021 | December 31, | ||||||
| (Unaudited) | 2020 | |||||||
| ASSETS | ||||||||
| Cash and due from banks | $ | $ | ||||||
| Interest-bearing bank balances | ||||||||
| Investment securities available-for-sale | ||||||||
| Other investments, at cost | ||||||||
| Loans held-for-sale | ||||||||
| Loans held-for-investment | ||||||||
| Less, allowance for loan losses | ||||||||
| Net loans held-for-investment | ||||||||
| Property and equipment - net | ||||||||
| Lease right-of-use asset | ||||||||
| Premises held-for-sale | ||||||||
| Bank owned life insurance | ||||||||
| Other real estate owned | ||||||||
| Intangible assets | ||||||||
| Goodwill | ||||||||
| Other assets | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES | ||||||||
| Deposits: | ||||||||
| Non-interest bearing | $ | $ | ||||||
| Interest bearing | ||||||||
| Total deposits | ||||||||
| Securities sold under agreements to repurchase | ||||||||
| Junior subordinated debt | ||||||||
| Lease liability | ||||||||
| Other liabilities | ||||||||
| Total liabilities | ||||||||
| SHAREHOLDERS’ EQUITY | ||||||||
| Preferred stock, par value $ per share, shares authorized; issued and outstanding | ||||||||
| Common stock, par value $ per share; shares authorized; issued and outstanding at March 31, 2021 at December 31, 2020 | ||||||||
| Nonvested restricted stock | ( | ) | ( | ) | ||||
| Additional paid in capital | ||||||||
| Retained earnings | ||||||||
| Accumulated other comprehensive income | ||||||||
| Total shareholders’ equity | ||||||||
| Total liabilities and shareholders’ equity | $ | $ | ||||||
See Notes to Consolidated Financial Statements
1
| FIRST COMMUNITY CORPORATION |
| CONSOLIDATED STATEMENTS OF INCOME (Unaudited) |
| (Dollars in thousands, except per share amounts) | Three Months ended March 31, | |||||||
| 2021 | 2020 | |||||||
| Interest income: | ||||||||
| Loans, including fees | $ | $ | ||||||
| Investment securities – taxable | ||||||||
| Investment securities - non taxable | ||||||||
| Other short term investments | ||||||||
| Total interest income | ||||||||
| Interest expense: | ||||||||
| Deposits | ||||||||
| Securities sold under agreement to repurchase | ||||||||
| Other borrowed money | ||||||||
| Total interest expense | ||||||||
| Net interest income | ||||||||
| Provision for loan losses | ||||||||
| Net interest income after provision for loan losses | ||||||||
| Non-interest income: | ||||||||
| Deposit service charges | ||||||||
| Mortgage banking income | ||||||||
| Investment advisory fees and non-deposit commissions | ||||||||
| Gain on sale of other real estate owned | ||||||||
| Other | ||||||||
| Total non-interest income | ||||||||
| Non-interest expense: | ||||||||
| Salaries and employee benefits | ||||||||
| Occupancy | ||||||||
| Equipment | ||||||||
| Marketing and public relations | ||||||||
| FDIC Insurance assessments | ||||||||
| Other real estate expense | ||||||||
| Amortization of intangibles | ||||||||
| Other | ||||||||
| Total non-interest expense | ||||||||
| Net income before tax | ||||||||
| Income tax expense | ||||||||
| Net income | $ | $ | ||||||
| Basic earnings per common share | $ | $ | ||||||
| Diluted earnings per common share | $ | $ | ||||||
See Notes to Consolidated Financial Statements
2
FIRST COMMUNITY CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(Dollars in thousands)
| Three months ended March 31, | ||||||||
| 2021 | 2020 | |||||||
| Net income | $ | $ | ||||||
| Other comprehensive income: | ||||||||
| Unrealized gain (loss) during the period on available-for-sale securities, net of tax (benefit) expense of ($ | ( | ) | ||||||
| Other comprehensive (loss) income | ( | ) | ||||||
| Comprehensive (loss) income | $ | ( | ) | $ | ||||
See Notes to Consolidated Financial Statements
3
FIRST COMMUNITY CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Three Months ended March 31, 2021 and March 31, 2020
(Unaudited)
| Accumulated | ||||||||||||||||||||||||||||
| Common | Additional | Nonvested | Other | |||||||||||||||||||||||||
| (Dollars in thousands) | Shares | Common | Paid-in | Restricted | Retained | Comprehensive | ||||||||||||||||||||||
| Issued | Stock | Capital | Stock | Earnings | Income (loss) | Total | ||||||||||||||||||||||
| Balance, December 31, 2019 | $ | $ | $ | ( | ) | $ | $ | $ | ||||||||||||||||||||
| Net income | ||||||||||||||||||||||||||||
| Other comprehensive income net of tax of $ | ||||||||||||||||||||||||||||
| Issuance of common stock | ||||||||||||||||||||||||||||
| Issuance of restricted stock | ( | ) | ||||||||||||||||||||||||||
| Amortization of compensation on restricted stock | ||||||||||||||||||||||||||||
| Shares retired / forfeited | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||
| Dividends: Common ($ per share) | ( | ) | ( | ) | ||||||||||||||||||||||||
| Dividend reinvestment plan | ||||||||||||||||||||||||||||
| Balance, March 31, 2020 | $ | $ | $ | ( | ) | $ | $ | $ | ||||||||||||||||||||
| Balance, December 31, 2020 | $ | $ | $ | ( | ) | $ | $ | $ | ||||||||||||||||||||
| Net income | ||||||||||||||||||||||||||||
| Other comprehensive loss net of tax of $ | ( | ) | ( | ) | ||||||||||||||||||||||||
| Issuance of common stock | ||||||||||||||||||||||||||||
| Issuance of restricted stock | ( | ) | ||||||||||||||||||||||||||
| Amortization of compensation on restricted stock | ||||||||||||||||||||||||||||
| Shares retired / forfeited | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||
| Dividends: Common ($ per share) | ( | ) | ( | ) | ||||||||||||||||||||||||
| Dividend reinvestment plan | ||||||||||||||||||||||||||||
| Balance, March 31, 2021 | $ | $ | $ | ( | ) | $ | $ | $ | ||||||||||||||||||||
See Notes to Consolidated Financial Statements
4
| FIRST COMMUNITY CORPORATION |
| CONSOLIDATED STATEMENTS OF CASH FLOWS |
| (Unaudited) |
| Three months ended March 31, | ||||||||
| (Dollars in thousands) | 2021 | 2020 | ||||||
| Cash flows from operating activities: | ||||||||
| Net income | $ | $ | ||||||
| Adjustments to reconcile net income to net cash provided (used) from operating activities: | ||||||||
| Depreciation | ||||||||
| Net premium amortization | ||||||||
| Provision for loan losses | ||||||||
| Origination of loans held-for-sale | ( | ) | ( | ) | ||||
| Sale of loans held-for-sale | ||||||||
| Gain on sale of other real estate owned | ( | ) | ( | ) | ||||
| Amortization of intangibles | ||||||||
| Accretion on acquired loans | ( | ) | ( | ) | ||||
| Loss on fair value of securities | ( | ) | ||||||
| Increase (decrease) in other assets | ( | ) | ||||||
| Decrease in other liabilities | ( | ) | ( | ) | ||||
| Net cash provided (used) from operating activities | ||||||||
| Cash flows from investing activities: | ||||||||
| Purchase of investment securities available-for-sale | ( | ) | ( | ) | ||||
| Purchase of other investment securities | ( | ) | ||||||
| Maturity/call of investment securities available-for-sale | ||||||||
| Proceeds from FHLB stock sales | ||||||||
| Increase in loans | ( | ) | ( | ) | ||||
| Proceeds from sale of other real estate owned | ||||||||
| Purchase of property and equipment | ( | ) | ( | ) | ||||
| Net cash (used) provided in investing activities | ( | ) | ( | ) | ||||
| Cash flows from financing activities: | ||||||||
| Increase (decrease) in deposit accounts | ( | ) | ||||||
| Increase in securities sold under agreements to repurchase | ||||||||
| Advances from the Federal Home Loan Bank | ||||||||
| Repayment of advances from Federal Home Loan Bank | ( | ) | ||||||
| Shares retired / forfeited | ( | ) | ( | ) | ||||
| Dividends paid: Common Stock | ( | ) | ( | ) | ||||
| Proceeds from issuance of Common Stock | ||||||||
| Change in non-vested restricted stock | ||||||||
| Dividend reinvestment plan | ||||||||
| Net cash provided (used) from financing activities | ||||||||
| Net increase in cash and cash equivalents | ||||||||
| Cash and cash equivalents at beginning of period | ||||||||
| Cash and cash equivalents at end of period | $ | $ | ||||||
| Supplemental disclosure: | ||||||||
| Cash paid during the period for: | ||||||||
| Interest | $ | $ | ||||||
| Income taxes | $ | $ | ||||||
| Non-cash investing and financing activities: | ||||||||
| Unrealized loss on securities | $ | ( | ) | $ | ||||
| Transfer of loans to foreclosed property | $ | — | $ | 78 | ||||
See Notes to Consolidated Financial Statements
5
Notes to Consolidated Financial Statements (Unaudited)
Note 1—Nature of Business and Basis of Presentation
Basis of Presentation
In the opinion of management, the accompanying unaudited consolidated balance sheets, and the consolidated statements of income, comprehensive income, changes in shareholders’ equity, and the cash flows of First Community Corporation (the “Company”) and its wholly owned subsidiary, First Community Bank (the “Bank”), present fairly in all material respects the Company’s financial position at March 31, 2021 and December 31, 2020, and the Company’s results of operations and cash flows for the three months ended March 31, 2021 and 2020. The results of operations for the three months ended March 31, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021.
In the opinion of management, all adjustments necessary to fairly present the consolidated financial position and consolidated results of operations have been made. All such adjustments are of a normal, recurring nature. All significant intercompany accounts and transactions have been eliminated in consolidation. The consolidated financial statements and notes thereto are presented in accordance with the instructions for Quarterly Reports on Form 10-Q. The information included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 should be referred to in connection with these unaudited interim financial statements.
Risk and Uncertainties
The coronavirus (COVID-19) pandemic, which was declared a national emergency in the United States in March 2020, continues to create extensive disruptions to the global economy and financial markets and to businesses and the lives of individuals throughout the world.
The impact of the COVID-19 pandemic is fluid and continues to evolve, adversely affecting many of the Bank’s customers. The unprecedented and rapid spread of COVID-19 and its associated impacts on trade (including supply chains and export levels), travel, employee productivity, unemployment, consumer spending, and other economic activities has resulted in less economic activity, significant volatility and disruption in financial markets, and has had an adverse effect on the Company’s business, financial condition and results of operations. The ultimate extent of the impact of the COVID-19 pandemic on the Company’s business, financial condition and results of operations is currently uncertain and will depend on various developments and other factors, including the effect of governmental and private sector initiatives, the effect of the recent rollout of vaccinations for the virus, whether such vaccinations will be effective against any resurgence of the virus, including any new strains, and the ability for customers and businesses to return to their pre-pandemic routines.
The Company’s business, financial condition and results of operations generally rely upon the ability of the Bank’s borrowers to repay their loans, the value of collateral underlying the Bank’s secured loans, and demand for loans and other products and services the Bank offers, which are highly dependent on the business environment in the Bank’s primary markets where it operates and in the United States as a whole.
In addition, due to the COVID-19 pandemic, market interest rates declined significantly, with the 10-year Treasury bond falling to a low of 0.52% in early August 2020, but increasing significantly since that time to 1.75% at March 31, 2021. In March 2020, the Federal Open Market Committee reduced the targeted federal funds interest rate range to 0% to 0.25% percent, and this low targeted rate was still in effect as of March 31, 2021. These reductions in interest rates and the other effects of the COVID-19 pandemic have had, and are expected to continue to have, possibly materially, an adverse effect on the Company’s business, financial condition and results of operations. For instance, the pandemic has had a negative effect on the Bank’s net interest margin, provision for loan losses, and deposit service charges, salaries and benefits, occupancy expense, and equipment expense. Other financial impacts could occur though such potential impact is unknown at this time.
Beginning in March 2020, the Company proactively offered payment deferrals for up to 90 days to its loan customers. The Company continues to consider potential deferrals with respect to certain customers, which are evaluated on a case-by-case basis. At its peak, which occurred during the second quarter of 2020, the Company granted payment deferments on loans totaling $206.9 million. As a result of payments being resumed by loan customers at the conclusion of their payment deferral period, loans for which payments were being deferred decreased from the peak of $206.9 million to $175.0 million at June 30, 2020, to $27.3 million at September 30, 2020, to $16.1 million at December 31, 2020, and to $8.7 million at March 31, 2021. Deferrals were $118.3 million at March 31, 2020. Some of these deferments were to businesses that temporarily closed or reduced operations and some were requested as a pre-cautionary measure to conserve cash. The Company proactively offered deferrals to its customers regardless of the impact of the pandemic on their business or personal finances.
The Company has evaluated its exposure to certain industry segments most impacted by the COVID-19 pandemic as of March 31, 2021:
| Industry Segments | Outstanding | % of Loan | Avg. Loan | Avg. Loan to | ||||||||||||
| (Dollars in millions) | Loan Balance | Portfolio | Size | Value | ||||||||||||
| Hotels | $ | % | $ | % | ||||||||||||
| Restaurants | $ | % | $ | % | ||||||||||||
| Assisted Living | $ | % | $ | % | ||||||||||||
| Retail | $ | % | $ | % | ||||||||||||
6
(In thousands except average market price and per share data)
| Three months ended | ||||||||
| March 31, | ||||||||
| 2021 | 2020 | |||||||
| Numerator (Net income available to common shareholders) | $ | $ | ||||||
| Denominator | ||||||||
| Weighted average common shares outstanding for: | ||||||||
| Basic shares | ||||||||
| Dilutive securities: | ||||||||
| Deferred compensation | ||||||||
| Restricted stock -Treasury stock method | ||||||||
| Diluted shares | ||||||||
| Earnings per common share: | ||||||||
| Basic | $ | $ | ||||||
| Diluted | $ | |||||||
| The average market price used in calculating assumed number of shares | $ | $ | ||||||
In
2006, the Company established a Non-Employee Director Deferred Compensation Plan, whereby a director may elect to defer all or
any part of annual retainer and monthly meeting fees payable with respect to service on the board of directors or a committee
of the board. Units of common stock are credited to the director’s account at the time compensation is earned and are included
in dilutive securities in the table above. The non-employee director’s account balance is distributed by issuance of common
stock at the time of retirement or resignation from the board of directors.
In 2011, the Company and its shareholders adopted a stock incentive plan whereby 350,000 shares were reserved for issuance by the Company upon the grant of stock options or restricted stock awards under the plan (the “2011 Plan”). The 2011 Plan provided for the grant of options to key employees and directors as determined by a stock option committee made up of at least two members of the board of directors. Options are exercisable for a period of ten years from date of grant. There were no stock options outstanding and exercisable at March 31, 2021, December 31, 2020 and March 31, 2020. At December 31, 2020, the Company had shares reserved for future grants under the 2011 Plan.
Under
the 2011 Plan, the employee restricted shares and units cliff vest over a three-year period and the non-employee director shares
vest one year after issuance. The unrecognized compensation cost at March 31, 2021 and December 31, 2020 for non-vested shares
amounts to $ thousand and $ thousand, respectively. Each unit is convertible into one share of common stock at the time
the unit vests. The related compensation cost is accrued over the vesting period and was $
The 2011 Plan expired on March 15, 2021, and the Company has submitted a new equity incentive plan for consideration at the Company’s 2021 annual meeting of shareholders.
7
Note 3—Investment Securities
The amortized cost and estimated fair values of investment securities are summarized below:
AVAILABLE-FOR-SALE:
| Gross | Gross | |||||||||||||||
| Amortized | Unrealized | Unrealized | ||||||||||||||
| (Dollars in thousands) | Cost | Gains | Losses | Fair Value | ||||||||||||
| March 31, 2021 | ||||||||||||||||
| US Treasury securities | $ | $ | $ | $ | ||||||||||||
| Government Sponsored Enterprises | ||||||||||||||||
| Mortgage-backed securities | ||||||||||||||||
| Small Business Administration pools | ||||||||||||||||
| State and local government | ||||||||||||||||
| Corporate and other securities | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
| Gross | Gross | |||||||||||||||
| Amortized | Unrealized | Unrealized | ||||||||||||||
| (Dollars in thousands) | Cost | Gains | Losses | Fair Value | ||||||||||||
| December 31, 2020 | ||||||||||||||||
| US Treasury securities | $ | $ | $ | $ | ||||||||||||
| Government Sponsored Enterprises | ||||||||||||||||
| Mortgage-backed securities | ||||||||||||||||
| Small Business Administration pools | ||||||||||||||||
| State and local government | ||||||||||||||||
| Corporate and other securities | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
There were no investment securities listed as held-to-maturity as of March 31, 2021 or December 31, 2020.
During the three months ended March 31, 2021 and 2020, the Company did not receive any proceeds from the sale of investment securities available-for-sale. For the three months ended March 31, 2021, and 2020 there were no gross realized gains from the sale of investment securities available-for-sale and no gross realized losses.
At
March 31, 2021, corporate and other securities available-for-sale included the following at fair value: corporate fixed-to-float
bonds at $
8
The following tables show gross unrealized losses and fair values, aggregated by investment category and length of time that individual securities have been in a continuous loss position, at March 31, 2021 and December 31, 2020.
| (Dollars in thousands) | Less than 12 months | 12 months or more | Total | |||||||||||||||||||||
| March 31, 2021 | Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | ||||||||||||||||||
| Available-for-sale securities: | Value | Loss | Value | Loss | Value | Loss | ||||||||||||||||||
| US Treasury Securities | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Mortgage-backed securities | ||||||||||||||||||||||||
| Small Business Administration pools | ||||||||||||||||||||||||
| State and local government | ||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| (Dollars in thousands) | Less than 12 months | 12 months or more | Total | |||||||||||||||||||||
| December 31, 2020 | Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | ||||||||||||||||||
| Available-for-sale securities: | Value | Loss | Value | Loss | Value | Loss | ||||||||||||||||||
| Mortgage-backed securities | ||||||||||||||||||||||||
| Small Business Administration pools | ||||||||||||||||||||||||
| State and local government | ||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
Government
Sponsored Enterprise, Mortgage-Backed Securities: The Company owned mortgage-backed securities (“MBSs”), including
collateralized mortgage obligations (“CMOs”), issued by government sponsored enterprises (“GSEs”) with
an amortized cost of $
Non-agency
Mortgage Backed Securities: The Company held private label mortgage-backed securities (“PLMBSs”), including CMOs,
at March 31, 2021 with an amortized cost of $
State and Local Governments and Other: Management monitors these securities on a quarterly basis to identify any deterioration in the credit quality. Included in the monitoring is a review of the credit rating, a financial analysis and certain demographic data on the underlying issuer. The Company does not consider these securities to be other-than-temporarily impaired at March 31, 2021.
The following sets forth the amortized cost and fair value of investment securities at March 31, 2021 by contractual maturity. Expected maturities differ from contractual maturities because borrowers may have the right to call or prepay the obligations with or without prepayment penalties. MBSs are based on average life at estimated prepayment speeds.
| Available-for-sale | ||||||||
| March 31, 2021 | Amortized | Fair | ||||||
| (Dollars in thousands) | Cost | Value | ||||||
| Due in one year or less | $ | $ | ||||||
| Due after one year through five years | ||||||||
| Due after five years through ten years | ||||||||
| Due after ten years | ||||||||
| Total | $ | $ | ||||||
9
Note 4—Loans
The following table summarizes the composition of our loan portfolio. Total loans are recorded net of deferred loan fees and costs, which totaled $3.4 million and $2.2 million as of March 31, 2021 and December 31, 2020, respectively.
| March 31, | December 31, | |||||||
| (Dollars in thousands) | 2021 | 2020 | ||||||
| Commercial, financial and agricultural | $ | $ | ||||||
| Real estate: | ||||||||
| Construction | ||||||||
| Mortgage-residential | ||||||||
| Mortgage-commercial | ||||||||
| Consumer: | ||||||||
| Home equity | ||||||||
| Other | ||||||||
| Total loans, net of deferred loan fees and costs | $ | $ | ||||||
Commercial,
financial, and agricultural category includes $
The detailed activity in the allowance for loan losses and the recorded investment in loans receivable as of and for the three months ended March 31, 2021 and March 31, 2020 and for the year ended December 31, 2020 is as follows:
| Real estate | Real estate | Consumer | ||||||||||||||||||||||||||||||
| Real estate | Mortgage | Mortgage | Home | Consumer | ||||||||||||||||||||||||||||
| (Dollars in thousands) | Commercial | Construction | Residential | Commercial | equity | Other | Unallocated | Total | ||||||||||||||||||||||||
| March 31, 2021 | ||||||||||||||||||||||||||||||||
| Allowance for loan losses: | ||||||||||||||||||||||||||||||||
| Beginning balance December 31, 2020 | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Charge-offs | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Recoveries | ||||||||||||||||||||||||||||||||
| Provisions | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||
| Ending balance March 31, 2021 | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Ending balances: | ||||||||||||||||||||||||||||||||
| Individually evaluated for impairment | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Collectively evaluated for impairment | ||||||||||||||||||||||||||||||||
| March 31, 2021 Loans receivable: | ||||||||||||||||||||||||||||||||
| Ending balance-total | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Ending balances: | ||||||||||||||||||||||||||||||||
| Individually evaluated for impairment | ||||||||||||||||||||||||||||||||
| Collectively evaluated for impairment | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
10
| Real estate | Real estate | Consumer | ||||||||||||||||||||||||||||||
| Real estate | Mortgage | Mortgage | Home | Consumer | ||||||||||||||||||||||||||||
| (Dollars in thousands) | Commercial | Construction | Residential | Commercial | equity | Other | Unallocated | Total | ||||||||||||||||||||||||
| March 31, 2020 | ||||||||||||||||||||||||||||||||
| Allowance for loan losses: | ||||||||||||||||||||||||||||||||
| Beginning balance December 31, 2019 | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Charge-offs | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Recoveries | ||||||||||||||||||||||||||||||||
| Provisions | ( | ) | ||||||||||||||||||||||||||||||
| Ending balance March 31, 2020 | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Ending balances: | ||||||||||||||||||||||||||||||||
| Individually evaluated for impairment | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Collectively evaluated for impairment | ||||||||||||||||||||||||||||||||
| March 31, 2020 Loans receivable: | ||||||||||||||||||||||||||||||||
| Ending balance-total | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Ending balances: | ||||||||||||||||||||||||||||||||
| Individually evaluated for impairment | ||||||||||||||||||||||||||||||||
| Collectively evaluated for impairment | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
11
| Real estate | Real estate | Consumer | ||||||||||||||||||||||||||||||
| Real estate | Mortgage | Mortgage | Home | Consumer | ||||||||||||||||||||||||||||
| (Dollars in thousands) | Commercial | Construction | Residential | Commercial | equity | Other | Unallocated | Total | ||||||||||||||||||||||||
| December 31, 2020 | ||||||||||||||||||||||||||||||||
| Allowance for loan losses: | ||||||||||||||||||||||||||||||||
| Beginning balance December 31, 2019 | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Charge-offs | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||
| Recoveries | ||||||||||||||||||||||||||||||||
| Provisions | ( | ) | ||||||||||||||||||||||||||||||
| Ending balance December 31, 2020 | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Ending balances: | ||||||||||||||||||||||||||||||||
| Individually evaluated for impairment | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Collectively evaluated for impairment | ||||||||||||||||||||||||||||||||
| December 31, 2020 Loans receivable: | ||||||||||||||||||||||||||||||||
| Ending balance-total | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Ending balances: | ||||||||||||||||||||||||||||||||
| Individually evaluated for impairment | ||||||||||||||||||||||||||||||||
| Collectively evaluated for impairment | ||||||||||||||||||||||||||||||||
12
The following table presents at March 31, 2021 and December 31, 2020 loans individually evaluated and considered impaired under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 310 “Accounting by Creditors for Impairment of a Loan.” Impairment includes performing troubled debt restructurings (“TDRs”).
| March 31, | December 31, | |||||||
| (Dollars in thousands) | 2021 | 2020 | ||||||
| Total loans considered impaired | $ | $ | ||||||
| Loans considered impaired for which there is a related allowance for loan loss: | ||||||||
| Outstanding loan balance | $ | $ | ||||||
| Related allowance | $ | $ | ||||||
| Average impaired loans | $ | $ | ||||||
| Amount of interest earned during period of impairment | $ | $ | ||||||
The following tables as of March 31, 2021, March 31, 2020, and December 31, 2020, are by loan category and present loans individually evaluated and considered impaired under FASB ASC 310 “Accounting by Creditors for Impairment of a Loan.” Impairment includes performing TDRs.
| Three months ended | ||||||||||||||||||||
| Unpaid | Average | Interest | ||||||||||||||||||
| (Dollars in thousands) | Recorded | Principal | Related | Recorded | Income | |||||||||||||||
| March 31, 2021 | Investment | Balance | Allowance | Investment | Recognized | |||||||||||||||
| With no allowance recorded: | ||||||||||||||||||||
| Commercial | $ | $ | $ | — | $ | $ | ||||||||||||||
| Real estate: | ||||||||||||||||||||
| Construction | — | |||||||||||||||||||
| Mortgage-residential | — | |||||||||||||||||||
| Mortgage-commercial | — | |||||||||||||||||||
| Consumer: | ||||||||||||||||||||
| Home Equity | — | |||||||||||||||||||
| Other | — | |||||||||||||||||||
| With an allowance recorded: | ||||||||||||||||||||
| Commercial | ||||||||||||||||||||
| Real estate: | ||||||||||||||||||||
| Construction | ||||||||||||||||||||
| Mortgage-residential | ||||||||||||||||||||
| Mortgage-commercial | ||||||||||||||||||||
| Consumer: | ||||||||||||||||||||
| Home Equity | ||||||||||||||||||||
| Other | ||||||||||||||||||||
| Total: | ||||||||||||||||||||
| Commercial | ||||||||||||||||||||
| Real estate: | ||||||||||||||||||||
| Construction | ||||||||||||||||||||
| Mortgage-residential | ||||||||||||||||||||
| Mortgage-commercial | ||||||||||||||||||||
| Consumer: | ||||||||||||||||||||
| Home Equity | ||||||||||||||||||||
| Other | ||||||||||||||||||||
| $ | $ | $ | $ | $ | ||||||||||||||||
13
| Three months ended | ||||||||||||||||||||
| Unpaid | Average | Interest | ||||||||||||||||||
| (Dollars in thousands) | Recorded | Principal | Related | Recorded | Income | |||||||||||||||
| March 31, 2020 | Investment | Balance | Allowance | Investment | Recognized | |||||||||||||||
| With no allowance recorded: | ||||||||||||||||||||
| Commercial | $ | $ | $ | — | $ | $ | ||||||||||||||
| Real estate: | ||||||||||||||||||||
| Construction | — | |||||||||||||||||||
| Mortgage-residential | — | |||||||||||||||||||
| Mortgage-commercial | — | |||||||||||||||||||
| Consumer: | ||||||||||||||||||||
| Home Equity | — | |||||||||||||||||||
| Other | — | |||||||||||||||||||
| With an allowance recorded: | ||||||||||||||||||||
| Commercial | ||||||||||||||||||||
| Real estate: | ||||||||||||||||||||
| Construction | ||||||||||||||||||||
| Mortgage-residential | ||||||||||||||||||||
| Mortgage-commercial | ||||||||||||||||||||
| Consumer: | ||||||||||||||||||||
| Home Equity | ||||||||||||||||||||
| Other | ||||||||||||||||||||
| Total: | ||||||||||||||||||||
| Commercial | ||||||||||||||||||||
| Real estate: | ||||||||||||||||||||
| Construction | ||||||||||||||||||||
| Mortgage-residential | ||||||||||||||||||||
| Mortgage-commercial | ||||||||||||||||||||
| Consumer: | ||||||||||||||||||||
| Home Equity | ||||||||||||||||||||
| Other | ||||||||||||||||||||
| $ | $ | $ | $ | $ | ||||||||||||||||
14
| Unpaid | Average | Interest | ||||||||||||||||||
| (Dollars in thousands) | Recorded | Principal | Related | Recorded | Income | |||||||||||||||
| December 31, 2020 | Investment | Balance | Allowance | Investment | Recognized | |||||||||||||||
| With an allowance recorded: | ||||||||||||||||||||
| Commercial | — | — | — | — | — | |||||||||||||||
| With no allowance recorded: | ||||||||||||||||||||
| Commercial | $ | $ | $ | — | $ | $ | ||||||||||||||
| Real estate: | ||||||||||||||||||||
| Construction | — | |||||||||||||||||||
| Mortgage-residential | — | |||||||||||||||||||
| Mortgage-commercial | — | |||||||||||||||||||
| Consumer: | ||||||||||||||||||||
| Home Equity | — | |||||||||||||||||||
| Other | — | |||||||||||||||||||
| With an allowance recorded: | ||||||||||||||||||||
| Commercial | ||||||||||||||||||||
| Real estate: | ||||||||||||||||||||
| Construction | ||||||||||||||||||||
| Mortgage-residential | ||||||||||||||||||||
| Mortgage-commercial | ||||||||||||||||||||
| Consumer: | ||||||||||||||||||||
| Home Equity | ||||||||||||||||||||
| Other | ||||||||||||||||||||
| Total: | ||||||||||||||||||||
| Commercial | ||||||||||||||||||||
| Real estate: | ||||||||||||||||||||
| Construction | ||||||||||||||||||||
| Mortgage-residential | ||||||||||||||||||||
| Mortgage-commercial | ||||||||||||||||||||
| Consumer: | ||||||||||||||||||||
| Home Equity | ||||||||||||||||||||
| Other | ||||||||||||||||||||
| $ | $ | $ | $ | $ | ||||||||||||||||
The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt, including current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis is performed on a monthly basis. The Company uses the following definitions for risk ratings:
Special Mention. Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date. Special mention assets are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification.
Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.
Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.
15
Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered as pass rated loans. Based on the most recent analysis performed, the risk category of loans by class of loans is shown in the table below as of March 31, 2021 and December 31, 2020. As of March 31, 2021 and December 31, 2020, no loans were classified as doubtful.
| (Dollars in thousands) | Special | |||||||||||||||||||
| March 31, 2021 | Pass | Mention | Substandard | Doubtful | Total | |||||||||||||||
| Commercial, financial & agricultural | $ | $ | $ | $ | $ | |||||||||||||||
| Real estate: | ||||||||||||||||||||
| Construction | ||||||||||||||||||||
| Mortgage – residential | ||||||||||||||||||||
| Mortgage – commercial | ||||||||||||||||||||
| Consumer: | ||||||||||||||||||||
| Home Equity | ||||||||||||||||||||
| Other | ||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | |||||||||||||||
| (Dollars in thousands) | Special | |||||||||||||||||||
| December 31, 2020 | Pass | Mention | Substandard | Doubtful | Total | |||||||||||||||
| Commercial, financial & agricultural | $ | $ | $ | $ | $ | |||||||||||||||
| Real estate: | ||||||||||||||||||||
| Construction | ||||||||||||||||||||
| Mortgage – residential | ||||||||||||||||||||
| Mortgage – commercial | ||||||||||||||||||||
| Consumer: | ||||||||||||||||||||
| Home Equity | ||||||||||||||||||||
| Other | ||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | |||||||||||||||
At March 31, 2020 and December 31, 2020, non-accrual loans totaled $4.5 million and $4.6 million, respectively.
TDRs
that are still accruing and included in impaired loans at March 31, 2021 and at December 31, 2020 amounted to $
Loans greater than 90 days delinquent and still accruing interest were $0 and $1.3 million at March 31, 2021 and December 31, 2020, respectively. The following tables are by loan category and present loans past due and on non-accrual status as of March 31, 2021 and December 31, 2020:
| Greater than | ||||||||||||||||||||||||||||
| (Dollars in thousands) | 30-59 Days | 60-89 Days | 90 Days and | Total | ||||||||||||||||||||||||
| March 31, 2021 | Past Due | Past Due | Accruing | Nonaccrual | Past Due | Current | Total Loans | |||||||||||||||||||||
| Commercial | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| Real estate: | ||||||||||||||||||||||||||||
| Construction | ||||||||||||||||||||||||||||
| Mortgage-residential | ||||||||||||||||||||||||||||
| Mortgage-commercial | ||||||||||||||||||||||||||||
| Consumer: | ||||||||||||||||||||||||||||
| Home equity | ||||||||||||||||||||||||||||
| Other | ||||||||||||||||||||||||||||
| $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||
16
| Greater than | ||||||||||||||||||||||||||||
| (Dollars in thousands) | 30-59 Days | 60-89 Days | 90 Days and | Total | ||||||||||||||||||||||||
| December 31, 2020 | Past Due | Past Due | Accruing | Nonaccrual | Past Due | Current | Total Loans | |||||||||||||||||||||
| Commercial | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| Real estate: | ||||||||||||||||||||||||||||
| Construction | ||||||||||||||||||||||||||||
| Mortgage-residential | ||||||||||||||||||||||||||||
| Mortgage-commercial | ||||||||||||||||||||||||||||
| Consumer: | ||||||||||||||||||||||||||||
| Home equity | ||||||||||||||||||||||||||||
| Other | ||||||||||||||||||||||||||||
| $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||
The Cares Act and Initiatives Related to COVID-19. On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act, was signed into law. The CARES Act provided for approximately $2.2 trillion in direct economic relief in response to the public health and economic impacts of COVID-19. Many of the CARES Act’s programs are, and remain, dependent upon the direct involvement of financial institutions like the Bank. These programs have been implemented through rules and guidance adopted by federal departments and agencies, including the U.S. Department of Treasury, the Federal Reserve and other federal bank regulatory authorities, including those with direct supervisory jurisdiction over the Company and the Bank. Furthermore, as the COVID-19 pandemic evolves, federal regulatory authorities continue to issue additional guidance with respect to the implementation, life cycle, and eligibility requirements for the various CARES Act programs, as well as industry-specific recovery procedures for COVID-19. On December 27, 2020, the federal government signed into law the Consolidated Appropriations Act, 2021 implementing a second round of stimulus relief of $900 billion. The American Rescue Plan Act of 2021, or the American Rescue Plan, the third round of stimulus relief, is a $1.9 trillion dollar economic stimulus bill that was passed by Congress and signed into law on March 11, 2021. The purpose of the American Rescue Plan is to speed up the recovery from the economic and health effects of the COVID-19 pandemic and the ongoing recession. The Company continues to assess the impact of the CARES Act, the Consolidated Appropriations Act, 2021, and the American Rescue Plan, and other statutes, regulations and supervisory guidance related to the COVID-19 pandemic.
COVID-19 Related Troubled Debt Restructurings and Loan Modifications for Affected Borrowers. The CARES Act, as extended by certain provisions of the Consolidated Appropriations Act, 2021, permits banks to suspend requirements under GAAP for loan modifications to borrowers affected by COVID-19 that may otherwise be characterized as troubled debt restructurings. Or TDRs, and suspend any determination related thereto if (i) the borrower was not more than 30 days past due as of December 31, 2019, (ii) the modifications are related to COVID-19, and (iii) the modification occurs between March 1, 2020 and the earlier of 60 days after the date of termination of the national emergency or January 1, 2022. Federal bank regulatory authorities also issued guidance to encourage banks to make loan modifications for borrowers affected by COVID-19.
The Company is focused on servicing the financial needs of its commercial and consumer customers with flexible loan payment arrangements, including short-term loan modifications or forbearance payments and reducing or waiving certain fees on deposit accounts. Future governmental actions may require these and other types of customer-related responses. Beginning in March 2020, the Company proactively offered payment deferrals for up to 90 days to its loan customers regardless of the impact of the pandemic on their business or personal finances. The Company continues to consider potential deferrals with respect to certain customers, which are evaluated on a case-by-case basis. At its peak, which occurred during the second quarter of 2020, the Company granted payment deferments on loans totaling $206.9 million. As a result of payments being resumed at the conclusion of their payment deferral period, loans in which payments were being deferred decreased from the peak of $206.9 million to $175.0 million at June 30, 2020, to $27.3 million at September 30, 2020, to $16.1 million at December 31, 2020, and to $8.7 million at March 31, 2021. The Company had no loans on which payments were deferred related to the COVID-19 pandemic at December 31, 2019. The Company had no loans remaining on initial deferral status in which both principal and interest were deferred at March 31, 2021. The $8.7 million in deferrals at March 31, 2021 consists of three loans on which only principal is being deferred. Two of the continuing deferrals at March 31, 2021 totaling $4.5 million are in the retail industry segment identified by the Company as one of the industry segments most impacted by the COVID-19 pandemic; the other continuing deferral totaling $4.2 million is a mixed use office space that the Company does not consider to be in an industry segment most impacted by the COVID-19 pandemic. Some of these deferments were to businesses that temporarily closed or reduced operations and some were requested as a pre-cautionary measure to conserve cash.
17
Troubled Debt Restructurings. The Company identifies TDRs as impaired under the guidance in ASC 310-10-35. There were no loans determined to be TDRs that were restructured during the three-month periods ended March 31, 2021 and March 31, 2020. Additionally, there were no loans determined to be TDRs in the previous twelve months that had payment defaults. Defaulted loans are those loans that are greater than 90 days past due.
In the determination of the allowance for loan losses, all TDRs are reviewed to ensure that one of the three proper valuation methods (fair market value of the collateral, present value of cash flows, or observable market price) is adhered to. All non-accrual loans are written down to their corresponding collateral value. All troubled TDR accruing loans that have a loan balance that exceeds the present value of cash flows will have a specific allocation. All nonaccrual loans are considered impaired. Under ASC 310-10, a loan is impaired when it is probable that the Company will be unable to collect all amounts due including both principal and interest according to the contractual terms of the loan agreement.
Acquired credit-impaired loans are accounted for under the accounting guidance for loans and debt securities acquired with deteriorated credit quality, found in FASB ASC Topic 310-30, (Receivables—Loans and Debt Securities Acquired with Deteriorated Credit Quality), and initially measured at fair value, which includes estimated future credit losses expected to be incurred over the life of the loans. Loans acquired in business combinations with evidence of credit deterioration are considered impaired. Loans acquired through business combinations that do not meet the specific criteria of FASB ASC Topic 310-30, but for which a discount is attributable, at least in part to credit quality, are also accounted for under this guidance. Certain acquired loans, including performing loans and revolving lines of credit (consumer and commercial), are accounted for in accordance with FASB ASC Topic 310-20, where the discount is accreted through earnings based on estimated cash flows over the estimated life of the loan.
A summary of changes in the accretable yield for purchased credit-impaired loans for the three months ended March 31, 2021 and March 31, 2020 are as follows:
| (Dollars in thousands) | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | ||||||
| Accretable yield, beginning of period | $ | $ | ||||||
| Accretion | ( | ) | ( | ) | ||||
| Accretable yield, end of period | $ | $ | ||||||
At
March 31, 2021 and December 31, 2020, the recorded investment in purchased impaired loans was $
Related party loans and lines of credit are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated persons and generally do not involve more than the normal risk of collectability. The following table presents related party loan transactions for the three months ended March 31, 2021 and March 31, 2020:
| (Dollars in thousands) | 2021 | 2020 | ||||||
| Beginning Balance December 31, | $ | $ | ||||||
| New Loans | ||||||||
| Less loan repayments | ||||||||
| Ending Balance March 31, | $ | $ | ||||||
18
Note 5—Recently Issued Accounting Pronouncements
The following is a summary of recent authoritative pronouncements:
In June 2016, the FASB issued guidance to change the accounting for credit losses and modify the impairment model for certain debt securities. The amendments will be effective for the Company for reporting periods beginning after December 15, 2022. Early adoption is permitted for all organizations for periods beginning after December 15, 2018. The Company is evaluating the impact that this will have on its financial statements.
In November 2019, the FASB issued guidance to defer the effective dates for private companies, not-for-profit organizations, and certain smaller reporting companies applying standards on current expected credit losses (CECL), leases, hedging. The new effective date for the Company for CECL will be fiscal years beginning after December 15, 2022 including interim periods within those fiscal years. The Company is evaluating the impact that this will have on its financial statements.
In November 2019, the FASB issued guidance that addresses issues raised by stakeholders during the implementation of ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The amendments affect a variety of topics in the ASC. For entities that have not yet adopted the amendments in ASU 2016-13, the amendments are effective for fiscal years beginning after December 15, 2022 including interim periods within those fiscal years-all other entities. Early adoption is permitted in any interim period as long as an entity has adopted the amendments in ASU 2016-13. The Company is evaluating the impact that this will have on its financial statements.
In December 2019, the FASB issued guidance to simplify accounting for income taxes by removing specific technical exceptions that often produce information investors have a hard time understanding. The amendments also improve consistent application of, and simplify, GAAP for other areas of Topic 740 by clarifying and amending existing guidance. The amendments became effective for the Company for interim and annual periods beginning after December 15, 2020. The Company does not expect these amendments to have a material effect on its financial statements.
In January 2020, the FASB issued guidance to address accounting for the transition into and out of the equity method and measuring certain purchased options and forward contracts to acquire investments. The amendments became effective for the Company for interim and annual periods beginning after December 15, 2020. The Company does not expect these amendments to have a material effect on its financial statements.
In February 2020, the FASB issued guidance to add and amend SEC paragraphs in the ASC to reflect the issuance of SEC Staff Accounting Bulletin No. 119 related to the new credit losses standard and comments by the SEC staff related to the revised effective date of the new leases standard. The amendments were effective upon issuance and did not have a material impact on the Company’s financial statements.
In March 2020, the FASB issued guidance that makes narrow-scope improvements to various aspects of the financial instrument guidance, including the CECL guidance issued in 2016. For public business entities, the amendments were effective upon issuance of the final ASU. For all other entities, the amendments were effective for fiscal years beginning after December 15, 2019, and are effective for interim periods within those fiscal years beginning after December 15, 2020. The effective date of the amendments to ASU 2016-01 were effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. For the amendments related to ASU 2016-13, public business entities that meet the definition of an SEC filer, excluding eligible smaller reporting companies (as defined by the SEC), should adopt the amendments in ASU 2016-13 during 2020. All other entities should adopt the amendments in ASU 2016-13 during 2023. Early adoption is permitted. For entities that have not yet adopted the guidance in ASU 2016-13, the effective dates and the transition requirements for these amendments are the same as the effective date and transition requirements in ASU 2016-13. For entities that have adopted the guidance in ASU 2016-13, the amendments were effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. For those entities, the amendments should be applied on a modified-retrospective basis by means of a cumulative-effect adjustment to opening retained earnings in the statement of financial position as of the date that an entity adopted the amendments in ASU 2016-13. On November 15, 2019, FASB issued ASU 2019-10, which delayed the effective date for the ASU 2016-13 for smaller public business entities, including Community Banks, and nonpublic business entities to January 1, 2023. The Company does not expect these amendments to have a material effect on its financial statements.
19
In March 2020, the FASB issued guidance to provide temporary optional guidance to ease the potential burden in accounting for reference rate reform. The guidance provides optional expedients and exceptions for applying GAAP to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. This ASU is intended to help stakeholders during the global market-wide reference rate transition period. The amendments are effective through December 31, 2022. The Company does not expect these amendments to have a material effect on its financial statements.
In August 2020, the FASB issued guidance to improve financial reporting associated with accounting for convertible instruments and contracts in an entity’s own equity. The amendments will be effective the Company for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020. The Company does not expect these amendments to have a material effect on its financial statements.
In October 2020, the FASB issued guidance to clarify the FASB’s intent that an entity should reevaluate whether a callable debt security that has multiple call dates is within the scope of FASB ASC 310-20-35-33 for each reporting period. The amendments were effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. The Company is evaluating the impact that this will have on its financial statements.
In October 2020, the FASB issued amendments to clarify the ASC and make minor improvements that are not expected to have a significant effect on current accounting practice or create a significant administrative cost to most entities. The amendments were effective for annual periods beginning after December 15, 2020. The Company is evaluating the impact that this will have on its financial statements.
Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have a material impact on the Company’s financial position, results of operations or cash flows.
Note 6—Fair Value of Financial Instruments
The Company adopted FASB ASC Fair Value Measurement Topic 820, which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. ASC 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:
| Level l | Quoted prices in active markets for identical assets or liabilities. |
| Level 2 | Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. |
| Level 3 | Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. |
FASB ASC 825-10-50 “Disclosure about Fair Value of Financial Instruments”, requires the Company to disclose estimated fair values for its financial instruments. The Company’s fair value estimates, methods, and assumptions are set forth below.
Cash and Short Term Investments - The carrying amount of these financial instruments (cash and due from banks, interest-bearing bank balances, federal funds sold and securities purchased under agreements to resell) approximates fair value. All mature within 90 days and do not present unanticipated credit concerns and are classified as Level 1.
Investment Securities Available-for-Sale - Measurement is on a recurring basis based upon quoted market prices, if available. If quoted market prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for prepayment assumptions, projected credit losses, and liquidity. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, or by dealers or brokers in active over-the-counter markets. Level 2 securities include mortgage-backed securities issued both by government sponsored enterprises and private label mortgage-backed securities. Generally, these fair values are priced from established pricing models. Level 3 securities include corporate debt obligations and asset–backed securities that are less liquid or for which there is an inactive market.
20
Loans Held-for-Sale - The Company originates fixed rate residential loans on a servicing released basis in the secondary market. Loans closed but not yet settled with an investor, are carried in the Company’s loans held-for-sale portfolio. These loans are fixed rate residential loans that have been originated in the Company’s name and have closed. Virtually all of these loans have commitments to be purchased by investors at a locked in price with the investors on the same day that the loan was locked in with the company’s customers. Therefore, these loans present very little market risk for the Company and are classified as Level 2. The carrying amount of these loans approximates fair value.
Loans - The valuation of loans receivable is estimated using the exit price notion which incorporates factors, such as enhanced credit risk, illiquidity risk and market factors that sometimes exist in exit prices in dislocated markets. This credit risk assumption is intended to approximate the fair value that a market participant would realize in a hypothetical orderly transaction. The Company’s loan portfolio is initially fair valued using a segmented approach. The Company divides its loan portfolio into the following categories: variable rate loans, impaired loans and all other loans. The results are then adjusted to account for credit risk as described above.
Other Real Estate Owned (“OREO”) - OREO is carried at the lower of carrying value or fair value on a non-recurring basis. Fair value is based upon independent appraisals or management’s estimation of the collateral and is considered a Level 3 measurement.
Accrued Interest Receivable - The fair value approximates the carrying value and is classified as Level 1.
Deposits - The fair value of demand deposits, savings accounts, and money market accounts is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposits is estimated by discounting the future cash flows using rates currently offered for deposits of similar remaining maturities. Deposits are classified as Level 2.
Securities Sold Under Agreements to Repurchase - The carrying value of short term borrowings (securities sold under agreements to repurchase and demand notes to the Treasury) approximates fair value. These are classified as Level 2.
Junior Subordinated Debt - The fair value of junior subordinated debt is estimated by using discounted cash flow analyses based on incremental borrowing rates for similar types of instruments. These are classified as Level 2.
Accrued Interest Payable -The fair value approximates the carrying value and is classified as Level 1.
Commitments to Extend Credit - The fair value of these commitments is immaterial because their underlying interest rates approximate market.
The carrying amount and estimated fair value by classification level of the Company’s financial instruments as of March 31, 2021 and December 31, 2020 are as follows:
| March 31, 2021 | ||||||||||||||||||||
| Fair Value | ||||||||||||||||||||
| (Dollars in thousands) | Carrying Amount | Total | Level 1 | Level 2 | Level 3 | |||||||||||||||
| Financial Assets: | ||||||||||||||||||||
| Cash and short term investments | $ | $ | $ | $ | $ | |||||||||||||||
| Investment securities available-for-sale | ||||||||||||||||||||
| Other investments, at cost | ||||||||||||||||||||
| Loans held-for-sale | ||||||||||||||||||||
| Net loans receivable | ||||||||||||||||||||
| Accrued interest receivable | ||||||||||||||||||||
| Financial liabilities: | ||||||||||||||||||||
| Non-interest bearing demand | $ | $ | $ | $ | $ | |||||||||||||||
| Interest bearing demand deposits and money market accounts | ||||||||||||||||||||
| Savings | ||||||||||||||||||||
| Time deposits | ||||||||||||||||||||
| Total deposits | ||||||||||||||||||||
| Securities sold under agreements to repurchase | ||||||||||||||||||||
| Junior subordinated debt | ||||||||||||||||||||
| Accrued interest payable | ||||||||||||||||||||
21
| December 31, 2020 | ||||||||||||||||||||
| Carrying | Fair Value | |||||||||||||||||||
| (Dollars in thousands) | Amount | Total | Level 1 | Level 2 | Level 3 | |||||||||||||||
| Financial Assets: | ||||||||||||||||||||
| Cash and short term investments | $ | $ | $ | $ | $ | |||||||||||||||
| Investment securities available-for-sale | ||||||||||||||||||||
| Other investments, at cost | ||||||||||||||||||||
| Loans held for sale | ||||||||||||||||||||
| Net loans receivable | ||||||||||||||||||||
| Accrued interest receivable | ||||||||||||||||||||
| Financial liabilities: | ||||||||||||||||||||
| Non-interest bearing demand | $ | $ | $ | $ | $ | |||||||||||||||
| Interest bearing demand deposits and money market accounts | ||||||||||||||||||||
| Savings | ||||||||||||||||||||
| Time deposits | ||||||||||||||||||||
| Total deposits | ||||||||||||||||||||
| Securities sold under agreements to repurchase | ||||||||||||||||||||
| Junior subordinated debt | ||||||||||||||||||||
| Accrued interest payable | ||||||||||||||||||||
The following tables summarize quantitative disclosures about the fair value for each category of assets carried at fair value as of March 31, 2021 and December 31, 2020 that are measured on a recurring basis. There were no liabilities carried at fair value as of March 31, 2021 or December 31, 2020 that are measured on a recurring basis.
(Dollars in thousands)
| Description | March 31, 2021 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||
| Available-for-sale securities | ||||||||||||||||
| US treasury securities | $ | $ | $ | $ | ||||||||||||
| Government sponsored enterprises | ||||||||||||||||
| Mortgage-backed securities | ||||||||||||||||
| Small Business Administration pools | ||||||||||||||||
| State and local government | ||||||||||||||||
| Corporate and other securities | ||||||||||||||||
| Total Available-for-sale securities | ||||||||||||||||
| Loans held-for-sale | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
22
(Dollars in thousands)
| Description | December 31, 2020 | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
| Available- for-sale securities | ||||||||||||||||
| US Treasury Securities | $ | $ | $ | $ | ||||||||||||
| Government Sponsored Enterprises | ||||||||||||||||
| Mortgage-backed securities | ||||||||||||||||
| Small Business Administration pools | ||||||||||||||||
| State and local government | ||||||||||||||||
| Corporate and other securities | ||||||||||||||||
| Loans held for sale | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
The following tables summarize quantitative disclosures about the fair value for each category of assets carried at fair value as of March 31, 2021 and December 31, 2020 that are measured on a non-recurring basis. There were no Level 3 financial instruments for the three months ended March 31, 2021 and March 31, 2020 measured on a recurring basis.
| (Dollars in thousands) | ||||||||||||||||
| Description | March 31, 2021 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||
| Impaired loans: | ||||||||||||||||
| Commercial & Industrial | $ | $ | $ | $ | ||||||||||||
| Real estate: | ||||||||||||||||
| Mortgage-residential | ||||||||||||||||
| Mortgage-commercial | ||||||||||||||||
| Consumer: | ||||||||||||||||
| Home equity | ||||||||||||||||
| Other | ||||||||||||||||
| Total impaired | ||||||||||||||||
| Other real estate owned: | ||||||||||||||||
| Construction | ||||||||||||||||
| Mortgage-residential | ||||||||||||||||
| Total other real estate owned | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
23
| (Dollars in thousands) | ||||||||||||||||
| Description | December 31, 2020 | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
| Impaired loans: | ||||||||||||||||
| Commercial & Industrial | $ | $ | $ | $ | ||||||||||||
| Real estate: | ||||||||||||||||
| Mortgage-residential | ||||||||||||||||
| Mortgage-commercial | ||||||||||||||||
| Consumer: | ||||||||||||||||
| Home equity | ||||||||||||||||
| Other | ||||||||||||||||
| Total impaired | ||||||||||||||||
| Other real estate owned: | ||||||||||||||||
| Construction | ||||||||||||||||
| Mortgage-commercial | ||||||||||||||||
| Total other real estate owned | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
The Company has a large percentage of loans with real estate serving as collateral. Loans which are deemed to be impaired are primarily valued on a nonrecurring basis at the fair value of the underlying real estate collateral. Such fair values are obtained using independent appraisals, which the Company considers to be Level 3 inputs. Third party appraisals are generally obtained when a loan is identified as being impaired or at the time it is transferred to OREO. This internal process consists of evaluating the underlying collateral to independently obtained comparable properties. With respect to less complex or smaller credits, an internal evaluation may be performed. Generally, the independent and internal evaluations are updated annually. Factors considered in determining the fair value include, among others, geographic sales trends, the value of comparable surrounding properties and the condition of the property. The aggregate amount of impaired loans was $6.0 million and $6.1 million as of March 31, 2021 and December 31, 2020, respectively.
24
For Level 3 assets and liabilities measured at fair value on a non-recurring basis as of March 31, 2021 and December 31, 2020, the significant unobservable inputs used in the fair value measurements were as follows:
| (Dollars in thousands) | Fair Value as of December 31, 2021 | Valuation Technique | Significant Observable Inputs | Significant Unobservable Inputs | ||||||
| OREO | $ | Appraisal Value/Comparison Sales/Other estimates | Appraisals and or sales of comparable properties | Appraisals discounted | ||||||
| Impaired loans | $ | Appraisal Value | Appraisals and or sales of comparable properties | Appraisals discounted | ||||||
| (Dollars in thousands) | Fair Value as of December 31, 2020 | Valuation Technique | Significant Observable Inputs | Significant Unobservable Inputs | ||||||
| OREO | $ | Appraisal Value/Comparison Sales/Other estimates | Appraisals and or sales of comparable properties | Appraisals discounted | ||||||
| Impaired loans | $ | Appraisal Value | Appraisals and or sales of comparable properties | Appraisals discounted | ||||||
Note 7—Deposits
The Company’s total deposits are comprised of the following at the dates indicated:
| March 31, | December 31, | |||||||
| (Dollars in thousands) | 2021 | 2020 | ||||||
| Non-interest bearing demand deposits | $ | $ | ||||||
| Interest bearing demand deposits and money market accounts | ||||||||
| Savings | ||||||||
| Time deposits | ||||||||
| Total deposits | $ | $ | ||||||
As
of March 31, 2021 and December 31, 2020, the Company had time deposits that meet or exceed the $250,000 FDIC insurance limit of
$
Note 8—Reportable Segments
The Company’s reportable segments represent the distinct product lines the Company offers and are viewed separately for strategic planning by management. The Company has four reportable segments:
| ● | Commercial and retail banking: The Company’s primary business is to provide deposit and lending products and services to its commercial and retail customers. |
| ● | Mortgage banking: This segment provides mortgage origination services for loans that will be sold to investors in the secondary market. |
25
| ● | Investment advisory and non-deposit: This segment provides investment advisory services and non-deposit products. |
| ● | Corporate: This segment includes the parent company financial information, including interest on parent company debt and dividend income received from the Bank. |
The following tables present selected financial information for the Company’s reportable business segments for the three months ended March 31, 2021 and March 31, 2020.
| Three months ended March 31, 2021 | Commercial | Investment | ||||||||||||||||||||||
| (Dollars in thousands) | and Retail | Mortgage | advisory and | |||||||||||||||||||||
| Banking | Banking | non-deposit | Corporate | Eliminations | Consolidated | |||||||||||||||||||
| Dividend and Interest Income | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||
| Interest expense | ||||||||||||||||||||||||
| Net interest income | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||
| Provision for loan losses | ||||||||||||||||||||||||
| Noninterest income | ||||||||||||||||||||||||
| Noninterest expense | ||||||||||||||||||||||||
| Net income before taxes | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||
| Income tax provision (benefit) | ( | ) | ||||||||||||||||||||||
| Net income | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||
| Three months ended March 31, 2020 | Commercial | Investment | ||||||||||||||||||||||
| (Dollars in thousands) | and Retail | Mortgage | advisory and | |||||||||||||||||||||
| Banking | Banking | non-deposit | Corporate | Eliminations | Consolidated | |||||||||||||||||||
| Dividend and Interest Income | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||
| Interest expense | ||||||||||||||||||||||||
| Net interest income | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||
| Provision for loan losses | ||||||||||||||||||||||||
| Noninterest income | ||||||||||||||||||||||||
| Noninterest expense | ||||||||||||||||||||||||
| Net income before taxes | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||
| Income tax provision (benefit) | ( | ) | ||||||||||||||||||||||
| Net income | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||
| Commercial | Investment | |||||||||||||||||||||||
| (Dollars in thousands) | and Retail | Mortgage | advisory and | |||||||||||||||||||||
| Banking | Banking | non-deposit | Corporate | Eliminations | Consolidated | |||||||||||||||||||
| Total Assets as of March 31, 2021 | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||
| Total Assets as of December 31, 2020 | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||
| Commercial | Investment | |||||||||||||||||||||||
| (Dollars in thousands) | and Retail | Mortgage | advisory and | |||||||||||||||||||||
| Banking | Banking | non-deposit | Corporate | Eliminations | Consolidated | |||||||||||||||||||
| Total Assets as of March 31, 2020 | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||
| Total Assets as of December 31, 2019 | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||
26
Note 9—Leases
During
the period ended March 31, 2021 and March 31, 2020, the Company made cash payments for operating leases in the amount of $
| (Dollars in thousands) | Liability | ||||||||||||
| Year | Cash | Lease Expense | Reduction | ||||||||||
| 2021 | $ | $ | $ | ||||||||||
| 2022 | |||||||||||||
| 2023 | |||||||||||||
| 2024 | |||||||||||||
| 2025 | |||||||||||||
| Thereafter | |||||||||||||
| Total | $ | $ | $ | ||||||||||
Note 10—Subsequent Events
Subsequent events are events or transactions that occur after the balance sheet date but before financial statements are issued. Recognized subsequent events are events or transactions that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements. Non-recognized subsequent events are events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after that date. Management has reviewed events occurring through the date the financial statements were available to be issued and no subsequent events occurred requiring accrual or that require disclosure and have not been disclosed in the footnotes to the Company’s unaudited consolidated financial statements as of March 31, 2021.
27
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This report, including information included or incorporated by reference in this report, contains statements which constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements may relate to, among other matters, the financial condition, results of operations, plans, objectives, future performance, and business of our company. Forward-looking statements are based on many assumptions and estimates and are not guarantees of future performance. Our actual results may differ materially from those anticipated in any forward-looking statements, as they will depend on many factors about which we are unsure, including many factors which are beyond our control. The words “may,” “approximately,” “is likely,” “would,” “could,” “should,” “will,” “expect,” “anticipate,” “predict,” “project,” “potential,” “continue,” “assume,” “believe,” “intend,” “plan,” “forecast,” “goal,” and “estimate,” as well as similar expressions, are meant to identify such forward-looking statements. Potential risks and uncertainties that could cause our actual results to differ materially from those anticipated in our forward-looking statements include, without limitation, those described under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2020 as filed with the U.S. Securities and Exchange Commission (the “SEC”) on March 12, 2021 and the following:
| ● | The impact of the outbreak of the novel coronavirus, or COVID-19, on our business, including the impact of the actions taken by governmental authorities to try and contain the virus or address the impact of the virus on the United States economy (including, without limitation, the CARES Act; the Consolidated Appropriations Act, 2021; and the American Rescue Plan Act of 2021), and the resulting effect of these items on our operations, liquidity and capital position, and on the financial condition of our borrowers and other customers; |
| ● | credit losses as a result of, among other potential factors, declining real estate values, increasing interest rates, increasing unemployment, or changes in customer payment behavior or other factors; |
| ● | the amount of our loan portfolio collateralized by real estate and weaknesses in the real estate market; |
| ● | restrictions or conditions imposed by our regulators on our operations; |
| ● | the adequacy of the level of our allowance for loan losses and the amount of loan loss provisions required in future periods; |
| ● | examinations by our regulatory authorities, including the possibility that the regulatory authorities may, among other things, require us to increase our allowance for loan losses, write-down assets, or take other actions; |
| ● | risks associated with actual or potential information gatherings, investigations or legal proceedings by customers, regulatory agencies or others; |
| ● | reduced earnings due to higher other-than-temporary impairment charges resulting from additional decline in the value of our securities portfolio, specifically as a result of increasing default rates, and loss severities on the underlying real estate collateral; |
| ● | increases in competitive pressure in the banking and financial services industries; |
| ● | changes in the interest rate environment which could reduce anticipated or actual margins; |
| ● | changes in political or social conditions or the legislative or regulatory environment, including governmental initiatives affecting the financial services industry, including as a result of the 2020 presidential and congressional elections; |
| ● | general economic conditions resulting in, among other things, a deterioration in credit quality; |
| ● | changes occurring in business conditions and inflation; |
| ● | changes in access to funding or increased regulatory requirements with regard to funding; |
28
| ● | cybersecurity risk related to our dependence on internal computer systems and the technology of outside service providers, as well as the potential impacts of third party security breaches, which subject us to potential business disruptions or financial losses resulting from deliberate attacks or unintentional events; |
| ● | changes in deposit flows; |
| ● | changes in technology; |
| ● | our current and future products, services, applications and functionality and plans to promote them; |
| ● | changes in monetary and tax policies, including potential changes in tax laws and regulations; |
| ● | changes in accounting standards, policies, estimates and practices; |
| ● | our assumptions and estimates used in applying critical accounting policies, which may prove unreliable, inaccurate or not predictive of actual results; |
| ● | the rate of delinquencies and amounts of loans charged-off; |
| ● | the rate of loan growth in recent years and the lack of seasoning of a portion of our loan portfolio; |
| ● | our ability to maintain appropriate levels of capital, including levels of capital required under the capital rules implementing Basel III; |
| ● | our ability to successfully execute our business strategy; |
| ● | our ability to attract and retain key personnel; |
| ● | our ability to retain our existing customers, including our deposit relationships; |
| ● | adverse changes in asset quality and resulting credit risk-related losses and expenses; |
| ● | the potential effects of events beyond our control that may have a destabilizing effect on financial markets and the economy, such as epidemics and pandemics (including COVID-19), war or terrorist activities, disruptions in our customers’ supply chains, disruptions in transportation, essential utility outages or trade disputes and related tariffs; |
| ● | disruptions due to flooding, severe weather or other natural disasters; and |
| ● | other risks and uncertainties detailed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2020, and from time to time in our other filings with the SEC. |
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 our Annual Report on Form 10-K for the year ended December 31, 2020. In addition, our past results of operations do not necessarily indicate our future results. Therefore, we caution you not to place undue reliance on our forward-looking information and statements.
All forward-looking statements in this report are based on information available to us as of the date of this report. Although we believe that the expectations reflected in our forward-looking statements are reasonable, we cannot guarantee you that these expectations will be achieved. We undertake no obligation to publicly update or otherwise revise any forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by applicable law.
Overview
The following discussion describes our results of operations for the three months ended March 31, 2021 as compared to the three-month period ended March 31, 2020 and analyzes our financial condition as of March 31, 2021 as compared to December 31, 2020. Like most community banks, we derive most of our income from interest we receive on our loans and investments. Our primary source of funds for making these loans and investments is our deposits, on which we pay interest. Consequently, one of the key measures of our success is our amount of net interest income, or the difference between the income on our interest-earning assets, such as loans and investments, and the expense on our interest-bearing liabilities, such as deposits and borrowings. Another key measure is the spread between the yield we earn on our interest-earning assets and the rate we pay on our interest-bearing liabilities. There are risks inherent in all loans, so we maintain an allowance for loan losses to absorb probable losses on existing loans that may become uncollectible. We establish and maintain this allowance by charging a provision for loan losses against our operating earnings. In the following section, we have included a discussion of this process, as well as several tables describing our allowance for loan losses and the allocation of this allowance among our various categories of loans.
29
In addition to earning interest on our loans and investments, we earn income through fees and other expenses we charge to our customers. We describe the various components of this non-interest income, as well as our non-interest expense, in the following discussion.
The following discussion and analysis identify significant factors that have affected our financial position and operating results during the periods included in the accompanying financial statements. We encourage you to read this discussion and analysis in conjunction with the financial statements and the related notes and the other statistical information also included in this report.
Unless the context requires otherwise, references to the “Company,” “we,” “us,” “our,” or similar references mean First Community Corporation and its subsidiaries.
Recent Events – COVID-19 Pandemic
Our financial performance generally, and in particular the ability of our borrowers to repay their loans, the value of collateral securing those loans, as well as demand for loans and other products and services we offer, is highly dependent on the business environment in our primary markets where we operate and in the United States as a whole. The COVID-19 pandemic continues to create extensive disruptions to the global economy and financial markets and to businesses and the lives of individuals throughout the world.
The impact of the COVID-19 pandemic is fluid and continues to evolve. The unprecedented and rapid spread of COVID-19 and its associated impacts on trade (including supply chains and export levels), travel, employee productivity, unemployment, consumer spending, and other economic activities has resulted in less economic activity, lower bank equity market valuations and significant volatility and disruption in financial markets. In addition, due to the COVID-19 pandemic, market interest rates declined significantly, with the 10-year Treasury bond falling to a low of 0.52% in early August 2020, but increasing significantly since that time to 1.74% at March 31, 2021. In March 2020, the Federal Open Market Committee reduced the targeted federal funds interest rate range to 0% to 0.25% percent, and this low rate was still in effect as of March 31, 2021. Furthermore, one-month to three-year Treasury yields ranged from 0.01% to 0.35% at March 31, 2021. These reductions in interest rates and the other effects of the COVID-19 pandemic have had, and are expected to continue to have, possibly materially, an adverse effect on our business, financial condition and results of operations. For instance, the pandemic has had negative effects on the Bank’s net interest margin, provision for loan losses, deposit service charges, salaries and benefits, occupancy expense, and equipment expense. The ultimate extent of the impact of the COVID-19 pandemic on our business, financial condition and results of operations is currently uncertain and will depend on various developments and other factors, including the effect of governmental and private sector initiatives, the effect of the recent rollout of vaccinations for the virus, whether such vaccinations will be effective against any resurgence of the virus, including any new strains, and the ability for customers and businesses to return to their pre-pandemic routine.
Our business, financial condition and results of operations generally rely upon the ability of our borrowers to repay their loans, the value of collateral underlying our secured loans, and demand for loans and other products and services we offer, which are highly dependent on the business environment in our primary markets where we operate and in the United States as a whole.
We are focused on servicing the financial needs of our commercial and consumer customers with flexible loan payment arrangements, including short-term loan modifications or forbearance payments and reducing or waiving certain fees on deposit accounts. Future governmental actions may require these and other types of customer-related responses. Beginning in March 2020, we proactively offered payment deferrals for up to 90 days to our loan customers regardless of the impact of the pandemic on their business or personal finances. We continue to consider potential deferrals with respect to certain customers, which we evaluate on a case-by-case basis. Loans on which payments have been deferred declined to $8.7 million at March 31, 2021 from $16.1 million at December 31, 2020 and from $118.3 million at March 31, 2020. At its peak, which occurred during the second quarter of 2020, we granted payment deferments on loans totaling $206.9 million. As a result of payments being resumed at the conclusion of their payment deferral period, loans for which payments were being deferred decreased from the peak of $206.9 million to $175.0 million at June 30, 2020, to $27.3 million at September 30, 2020, to $16.1 million at December 31, 2020, and to $8.7 million at March 31, 2021. We had no loans remaining on initial deferral status in which both principal and interest were deferred at December 31, 2020 and March 31, 2021. The $16.1 million in deferrals at December 31, 2020 consisted of seven loans on which only principal was being deferred. We had three loans totaling $8.7 million in continuing deferral status in which only principal is being deferred at March 31, 2021. Two of the continuing deferrals at March 31, 2021 totaling $4.5 million are in the retail industry segment identified by us as one of the industry segments most impacted by the COVID-19 pandemic; the other continuing deferral totaling $4.2 million is a mixed use office space that we do not consider to be in an industry segment most impacted by the COVID-19 pandemic. Some of these deferments were to businesses that temporarily closed or reduced operations and some were requested as a pre-cautionary measure to conserve cash.
30
We are also a small business administration approved lender and participated in the Paycheck Protection Program, or PPP, established under the CARES Act. We had PPP loans totaling $64.1 million gross of deferred fees and costs and $61.8 million net of deferred fees and costs at March 31, 2021. We had PPP loans totaling $43.3 million gross of deferred fees and costs and $42.2 million net of deferred fees and costs at December 31, 2020. The PPP deferred fees net of deferred costs will be recognized as interest income over the remaining life of the PPP loans.
Our asset quality metrics as of March 31, 2021 remained sound. The non-performing asset ratio was 0.37% of total assets with the nominal level of $5.6 million in non-performing assets at March 31, 2021 compared to 0.50% and $7.0 million at December 31, 2020. Loans past due 30 days or more represented 0.04% of the loan portfolio at March 31, 2021 compared to 0.23% at December 31, 2020. The ratio of classified loans plus OREO and repossessed assets increased to 9.90% of total bank regulatory risk-based capital at March 31, 2021 from 6.89% at December 31, 2020 due to one loan relationship, which was impacted by the COVID-19 pandemic. During the three months ended March 31, 2021, we experienced net loan charge-offs of $8 thousand and net overdraft recoveries of $5 thousand.
At March 31, 2021, our non-performing assets were not yet materially impacted by the economic pressures of the COVID-19 pandemic. As we closely monitor credit risk and our exposure to increased loan losses resulting from the impact of COVID-19 on our customers, we evaluated and identified our exposure to certain industry segments most impacted by the COVID-19 pandemic as of March 31, 2021:
| Industry Segments | Outstanding | % of Loan | Avg. Loan | Avg. Loan to | ||||||||||||
| (Dollars in millions) | Loan Balance | Portfolio | Size | Value | ||||||||||||
| Hotels | $ | 33.2 | 3.8 | % | $ | 2.4 | 69 | % | ||||||||
| Restaurants | $ | 22.2 | 2.6 | % | $ | 0.7 | 72 | % | ||||||||
| Assisted Living | $ | 8.8 | 1.0 | % | $ | 1.5 | 47 | % | ||||||||
| Retail | $ | 82.4 | 9.5 | % | $ | 0.7 | 57 | % | ||||||||
We are also monitoring the impact of the COVID-19 pandemic on the operations and value of our investments. We mark to market our publicly traded investments and review our investment portfolio for impairment at, a minimum, quarterly. We do not consider any securities in our investment portfolio to be other-than-temporarily impaired at March 31, 2021. However, because of changing economic and market conditions affecting issuers, we may be required to recognize future impairments on the securities we hold as well as reductions in other comprehensive income. We cannot currently determine the ultimate impact of the pandemic on the long-term value of our portfolio.
Our capital remained strong and exceeded the well-capitalized regulatory requirements at March 31, 2021. Total shareholders’ equity declined $3.6 million or 2.7% to $132.7 million at March 31, 2021 from $136.3 million at December 31, 2020. The $3.6 million decline was due to a $6.2 million reduction in accumulated other comprehensive income partially offset by a $2.4 million increase in retention of earnings less dividends paid. The decline in accumulated other comprehensive income was due to an increase in longer-term market interest rates, which resulted in a reduction in the net unrealized gains in our investment securities portfolio. In 2018, the Federal Reserve increased the asset size to qualify as a small bank holding company. As a result of this change, we are generally not subject to the Federal Reserve capital requirements unless advised otherwise. The Bank remains subject to capital requirements including a minimum leverage ratio and a minimum ratio of “qualifying capital” to risk weighted assets. These requirements are essentially the same as those that applied to the Company prior to the change in the definition of a small bank holding company. Each of the regulatory capital ratios for the Bank exceeds the well capitalized minimum levels currently required by regulatory statute at March 31, 2021 and December 31, 2020. Refer to the Liquidity and Capital Resources section for more details.
31
| Dollars in thousands | Prompt Corrective Action (PCA) Requirements | Excess Capital $s of PCA Requirements | ||||||||||||||||||
| Capital Ratios | Actual | Well Capitalized | Adequately Capitalized | Well Capitalized | Adequately Capitalized | |||||||||||||||
| March 31, 2021 | ||||||||||||||||||||
| Leverage Ratio | 8.73 | % | 5.00 | % | 4.00 | % | $ | 52,529 | $ | 66,594 | ||||||||||
| Common Equity Tier 1 Capital Ratio | 13.20 | % | 6.50 | % | 4.50 | % | 62,377 | 80,985 | ||||||||||||
| Tier 1 Capital Ratio | 13.20 | % | 8.00 | % | 6.00 | % | 48,421 | 67,029 | ||||||||||||
| Total Capital Ratio | 14.34 | % | 10.00 | % | 8.00 | % | 40,375 | 58,984 | ||||||||||||
| December 31, 2020 | ||||||||||||||||||||
| Leverage Ratio | 8.84 | % | 5.00 | % | 4.00 | % | $ | 52,270 | $ | 65,893 | ||||||||||
| Common Equity Tier 1 Capital Ratio | 12.83 | % | 6.50 | % | 4.50 | % | 59,406 | 78,169 | ||||||||||||
| Tier 1 Capital Ratio | 12.83 | % | 8.00 | % | 6.00 | % | 45,334 | 64,097 | ||||||||||||
| Total Capital Ratio | 13.94 | % | 10.00 | % | 8.00 | % | 36,961 | 55,723 | ||||||||||||
Based on our strong capital, conservative underwriting, and internal stress testing, we expect to remain well capitalized throughout the COVID-19 pandemic. However, the Bank’s reported regulatory capital ratios could be adversely impacted by future credit losses related to the COVID-19 pandemic. We recognize that we face extraordinary circumstances, and we intend to monitor developments and potential impacts on our capital.
We believe that we have ample liquidity to meet the needs of our customers and to manage through the COVID-19 pandemic through our low cost deposits; our ability to borrow against approved lines of credit (federal funds purchased) from correspondent banks; and our ability to obtain advances secured by certain securities and loans from the Federal Home Loan Bank.
Critical Accounting Policies
We have adopted various accounting policies that govern the application of accounting principles generally accepted in the United States and with general practices within the banking industry in the preparation of our financial statements. Our significant accounting policies are described in the footnotes to our unaudited consolidated financial statements as of March 31, 2021 and our notes included in the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2020 as filed with the SEC on March 12, 2021.
Certain accounting policies inherently involve a greater reliance on the use of estimates, assumptions and judgments and, as such, have a greater possibility of producing results that could be materially different than originally reported, which could have a material impact on the carrying values of our assets and liabilities and our results of operations. We consider these accounting policies and estimates to be critical accounting policies. We have identified the determination of the allowance for loan losses, goodwill and other intangibles, income taxes, deferred tax assets, and deferred tax liabilities, other-than-temporary impairment, business combinations, and method of accounting for loans acquired to be the accounting areas that require the most subjective or complex judgments and, as such, could be most subject to revision as new or additional information becomes available or circumstances change, including overall changes in the economic climate and/or market interest rates. Therefore, management has reviewed and approved these critical accounting policies and estimates and has discussed these policies with our Audit and Compliance Committee. A brief discussion of each of these areas appears in our 2020 Annual Report on Form 10-K. During the first three months of 2021, we did not significantly alter the manner in which we applied our Critical Accounting Policies or developed related assumptions and estimates.
There have been no significant changes to the Company’s critical accounting policies as disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.
32
Comparison of Results of Operations for Three Months Ended March 31, 2021 to the Three Months Ended March 31, 2020
Net Income
Our net income for the three months ended March 31, 2021 was $3.3 million, or $0.43 diluted earnings per common share, as compared to $1.8 million, or $0.24 diluted earnings per common share, for the three months ended March 31, 2020. The $1.5 million increase in net income between the two periods is primarily due to a $1.2 million increase in net interest income, a $368 thousand increase in non-interest income, and an $898 thousand reduction in provision for loan losses partially offset by a $502 thousand increase in non-interest expense and $453 thousand increase in income tax expense. The increase in net interest income results from an increase of $261.8 million in average earning assets partially offset by a 32 basis point decline in the net interest margin between the two periods. The increase in non-interest income is primarily related to increases in investment advisory fees and non-deposit commissions of $243 thousand, ATM/debit card income of $116 thousand, gains on sale of assets of $77 thousand, and $100 thousand from the collection of a summary judgment related to a loan charged off at a bank, which we subsequently acquired. The reduction in provision for loan losses is primarily related to an increase in the qualitative factors in our allowance for loan losses methodology related to the economic uncertainties caused by the COVID-19 pandemic during the first three months of 2020. The increase in non-interest expense is primarily related to increased salaries and employee benefits expense of $311 thousand, increased occupancy expense of $87 thousand, and increased FDIC assessment of $127 thousand. Our effective tax rate was 21.49% during the first quarter of 2021 compared to 19.62% during the first quarter of 2020.
Net Interest Income
Net interest income is our primary source of revenue. Net interest income is the difference between income earned on assets and interest paid on deposits and borrowings used to support such assets. Net interest income is determined by the rates earned on our interest-earning assets and the rates paid on our interest-bearing liabilities, the relative amounts of interest-earning assets and interest-bearing liabilities, and the degree of mismatch and the maturity and repricing characteristics of our interest-earning assets and interest-bearing liabilities.
Please refer to the table at the end of this Item 2 (Management’s Discussion and Analysis of Financial Condition and Results of Operations) for the average yields on assets and average rates on interest-bearing liabilities during the three-month periods ended March 31, 2021 and 2020, along with average balances and the related interest income and interest expense amounts.
Net interest income increased $1.2 million, or 12.2%, to $10.6 million for the three months ended March 31, 2021 from $9.4 million for the three months ended March 31, 2020. Our net interest margin declined by 32 basis points to 3.20% during the three months ended March 31, 2021 from 3.52% during the three months ended March 31, 2020. Our net interest margin, on a taxable equivalent basis, was 3.23% for the three months ended March 31, 2021 compared to 3.55% for the three months ended March 31, 2020. Average earning assets increased $261.8 million, or 24.3%, to $1.3 billion for the three months ended March 31, 2021 compared to $1.1 billion in the same period of 2020. The increase in net interest income was primarily due to a higher level of average earning assets partially offset by lower net interest margin. The increase in average earning assets was due to increases in loans, securities, and other short-term investments primarily due to Non-PPP loan growth, PPP loans, organic deposit growth, and excess liquidity from PPP loan proceeds and other stimulus funds related to the COVID-19 pandemic. The decline in net interest margin was primarily due to the Federal Reserve reducing the target range of the federal funds rate two times totaling 150 basis points during the first quarter of 2020 and the excess liquidity generated from PPP loan proceeds and other stimulus funds related to the COVID-19 pandemic being deployed in lower yielding securities and other short-term investments. Lower market rates, the competitive loan pricing environment, and the COVID-19 pandemic put downward pressure on our net interest margin during 2020 and the first three months of 2021.
Average loans increased $132.7 million, or 17.6%, to $886.4 million for the three months ended March 31, 2021 from $753.7 million for the same period in 2020. Average PPP loans increased $55.5 million and average Non-PPP loans increased $77.2 million to $55.5 million and $830.8 million, respectively, for the three months ended March 31, 2021. We had no PPP loans at March 31, 2020. Average loans represented 66.2% of average earning assets during the three months ended March 31, 2021 compared to 70.0% of average earning assets during the same period in 2020. The decline in average loans as a percentage of average earning assets was primarily due to increases in deposits of $238.7 million and securities sold under agreements to repurchase of $8.4 million. The growth in our deposits and securities sold under agreements to repurchase was higher than the growth in our loans, which resulted in the excess funds being deployed in our securities portfolio and other short-term investments and to reduce the amount of our Federal Home Loan Bank advances. The yield on loans declined 39 basis points to 4.32% during the three months ended March 31, 2021 from 4.71% during the same period in 2020. The yield on PPP loans was 4.99% and the yield on Non-PPP loans was 4.28% during the three months ended March 31, 2021. Average securities and average other short-term investments for the three months ended March 31, 2021 increased $87.0 million and $42.1 million, respectively, from the prior year period. The yield on our securities portfolio declined to 1.88% for the three months ended March 31, 2021 from 2.42% for the same period in 2020 while the yield on our other short-term investments declined to 0.17% for the three months ended March 31, 2021 from 1.70% for the same period in 2020. These declines were primarily related to the Federal Reserve reducing the target range of the federal funds rate as described above. The yield on earning assets for the three months ended March 31, 2021 and 2020 was 3.40% and 4.00%, respectively. The cost of interest-bearing liabilities was at 29 basis points during the three months ended March 31, 2021 compared to 69 basis points during the same period in 2020.
33
We continue to focus on growing our pure deposits (demand deposits, interest-bearing transaction accounts, savings deposits, money market accounts, and IRAs) as these accounts tend to be low-cost deposits and assist us in controlling our overall cost of funds. During the three months ended March 31, 2021, these deposits averaged 89.2% of total deposits as compared to 85.6% during the same period of 2020. This increase was due to PPP loan proceeds, other stimulus funds related to the COVID-19 pandemic, and organic growth.
Provision and Allowance for Loan Losses
We account for our allowance for loan losses under the incurred loss model. As discussed above, the CECL model will become effective for us on January 1, 2023. At March 31, 2021, the allowance for loan losses was $10.6 million, or 1.22% of total loans (excluding loans held-for-sale), compared to $10.4 million or 1.23% of total loans (excluding loans held-for-sale) at December 31, 2020, and $7.7 million, or 1.03% of total loans (excluding loans held-for-sale), at March 31, 2020. Excluding PPP loans and loans held-for-sale, the allowance for loan losses was 1.31% of total loans at March 31, 2021 compared to 1.30% of total loans at December 31, 2020. The increase in the allowance for loan losses is primarily related to an increase in the qualitative factors in our allowance for loan losses methodology related to loan growth and economic uncertainties caused by the COVID-19 pandemic.
Loans that we acquired in our acquisition of Cornerstone Bancorp, otherwise referred to herein as Cornerstone, in 2017 as well as in our acquisition of Savannah River Financial Corp., otherwise referred to herein as Savannah River, in 2014 are accounted for under FASB ASC 310-30. These acquired loans were initially measured at fair value, which includes estimated future credit losses expected to be incurred over the life of the loans. The credit component on loans related to cash flows not expected to be collected is not subsequently accreted (non-accretable difference) into interest income. Any remaining portion representing the excess of a loan’s or pool’s cash flows expected to be collected over the fair value is accreted (accretable difference) into interest income. At March 31, 2021 and December 31, 2020, the remaining credit component on loans attributable to acquired loans in the Cornerstone and Savannah River transactions was $229 thousand and $264 thousand, respectively.
Our provision for loan losses was $177 thousand for the three months ended March 31, 2021 compared to $1.1 million during the same period in 2020. The decline in the provision for loan losses is primarily related to an increase during the first three months of 2020 in the qualitative factors in our allowance for loan losses methodology related to the deteriorating economic conditions and economic uncertainties caused by the COVID-19 pandemic.
The allowance for loan losses represents an amount which we believe will be adequate to absorb probable losses on existing loans that may become uncollectible. Our judgment as to the adequacy of the allowance for loan losses is based on assumptions about future events, which we believe to be reasonable, but which may or may not prove to be accurate. Our determination of the allowance for loan losses is based on evaluations of the collectability of loans, including consideration of factors such as the balance of impaired loans, the quality, mix, and size of our overall loan portfolio, the knowledge and depth of lending personnel, economic conditions (local and national) that may affect the borrower’s ability to repay, the amount and quality of collateral securing the loans, our historical loan loss experience, and a review of specific problem loans. We also consider qualitative factors such as changes in the lending policies and procedures, changes in the local/national economy, changes in volume or type of credits, changes in volume/severity of problem loans, quality of loan review and board of director oversight, and concentrations of credit. During the first quarter of 2020, we added a new qualitative factor related to the economic uncertainties caused by the COVID-19 pandemic. We charge recognized losses to the allowance and add subsequent recoveries back to the allowance for loan losses. There can be no assurance that charge-offs of loans in future periods will not exceed the allowance for loan losses as estimated at any point in time or that provisions for loan losses will not be significant to a particular accounting period, especially considering the uncertainties related to the COVID-19 pandemic.
We perform an analysis quarterly to assess the risk within the loan portfolio. The portfolio is segregated into similar risk components for which historical loss ratios are calculated and adjusted for identified changes in current portfolio characteristics. Historical loss ratios are calculated by product type and by regulatory credit risk classification (See Note 4 to the Consolidated Financial Statements). The annualized weighted average loss ratios over the last 36 months for loans classified as substandard, special mention and pass have been approximately 0.02%, 0.02% and 0.01%, respectively. The allowance consists of an allocated and unallocated allowance. The allocated portion is determined by types and ratings of loans within the portfolio. The unallocated portion of the allowance is established for losses that exist in the remainder of the portfolio and compensates for uncertainty in estimating the loan losses. The allocated portion of the allowance is based on historical loss experience as well as certain qualitative factors as explained above. The qualitative factors have been established based on certain assumptions made as a result of the current economic conditions and are adjusted as conditions change to be directionally consistent with these changes. The unallocated portion of the allowance is composed of factors based on management’s evaluation of various conditions that are not directly measured in the estimation of probable losses through the experience formula or specific allowances. The overall risk as measured in our three-year lookback, both quantitatively and qualitatively, does not encompass a full economic cycle. Net charge-offs in the 2009 to 2011 period averaged 63 basis points annualized in our loan portfolio. Over the most recent three-year period, our net charge-offs have experienced a modest net recovery. We currently believe the unallocated portion of our allowance represents potential risk associated throughout a full economic cycle; however, the COVID-19 pandemic and the government and economic responses thereto may materially affect the risk within our loan portfolios.
34
We have a significant portion of our loan portfolio with real estate as the underlying collateral. At March 31, 2021 and December 31, 2020, approximately 86.3% and 87.5%, respectively, of the loan portfolio had real estate collateral. The reduction in the percent of our loan portfolio with real estate as the underlying collateral is due to the increase in PPP loans, which increased to $61.8 million at March 31, 2021 from $42.2 at December 31, 2020. When loans, whether commercial or personal, are granted, they are based on the borrower’s ability to generate repayment cash flows from income sources sufficient to service the debt. Real estate is generally taken to reinforce the likelihood of the ultimate repayment and as a secondary source of repayment. We work closely with all our borrowers that experience cash flow or other economic problems, and we believe that we have the appropriate processes in place to monitor and identify problem credits. There can be no assurance that charge-offs of loans in future periods will not exceed the allowance for loan losses as estimated at any point in time or that provisions for loan losses will not be significant to a particular accounting period. The allowance is also subject to examination and testing for adequacy by regulatory agencies, which may consider such factors as the methodology used to determine adequacy and the size of the allowance relative to that of peer institutions. Such regulatory agencies could require us to adjust our allowance based on information available to them at the time of their examination.
Non-performing assets were $5.6 million (0.37% of total assets) at March 31, 2021 as compared to $7.0 million (0.50% of total assets) at December 31, 2020. This decrease was related to a $1.3 million reduction in loans past due 90 days and still accruing. Total loans past due declined to $317 thousand, or 0.04% of total loans, at March 31, 2021 compared to $1.9 million, or 0.23% of total loans, at December 31, 2020. While we believe the non-performing assets to total assets ratios are favorable in comparison to current industry results (both nationally and locally), we continue to monitor the impact of the COVID-19 pandemic on our customer base of local businesses and professionals. There were 19 loans totaling $4.5 million (0.52% of total loans) included in non-performing status (non-accrual loans and loans past due 90 days and still accruing) at March 31, 2021. The largest loan included in non-accrual status is in the amount of $1.7 million and is secured by commercial real estate located in North Augusta, South Carolina. The average balance of the remaining 18 loans is approximately $158 thousand with a range between $0 and $1.2 million, and the majority of these loans are secured by first mortgage liens. Furthermore, we had $1.5 million in accruing trouble debt restructurings, or TDRs, at March 31, 2021 compared to $1.6 million at December 31, 2020. We consider a loan impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due, including both principal and interest, according to the contractual terms of the loan agreement. Nonaccrual loans and accruing TDRs are considered impaired. At March 31, 2021, we had 21 impaired loans totaling $6.0 million compared to 23 impaired loans totaling $6.1 million at December 31, 2020. These loans were measured for impairment under the fair value of collateral method or present value of expected cash flows method. For collateral dependent loans, the fair value of collateral method is used and the fair value is determined by an independent appraisal less estimated selling costs. At March 31, 2021, we had loans totaling $317 thousand that were delinquent 30 days to 89 days representing 0.04% of total loans compared to $665 thousand or 0.08% of total loans at December 31, 2020.
During the ongoing COVID-19 pandemic and because of our proactive offering of payment deferrals, loans on which payments have been deferred declined to $8.7 million at March 31, 2021, from $16.1 million at December 31, 2020, from $27.3 million at September 30, 2020, from $175.0 million at June 30, 2020 and from $118.3 million at March 31, 2020. The $16.1 million in deferrals at December 31, 2020 consist of seven loans on which only principal is being deferred. We had three loans totaling $8.7 million in continuing deferral status in which only principal is being deferred at March 31, 2021. Two of the continuing deferrals at March 31, 2021 totaling $4.5 million are in the retail industry segment identified by us as one of the industry segments most impacted by the COVID-19 pandemic; the other continuing deferral totaling $4.2 million is a mixed use office space that we do not consider to be in an industry segment most impacted by the COVID-19 pandemic. Some of these deferments were to businesses that temporarily closed or reduced operations and some were requested as a pre-cautionary measure to conserve cash. We proactively offered initial deferrals to our customers regardless of the impact of the pandemic on their business or personal finances. We obtained additional information from customers who requested second or continuing deferrals and we performed additional analyses to justify the need for the second or continuing deferral requests. Our management continuously monitors non-performing, classified and past due loans to identify deterioration regarding the condition of these loans and given the ongoing and uncertain impact of the COVID-19 pandemic, we will continue to monitor our loan portfolio for potential risks.
35
The following table summarizes the activity related to our allowance for loan losses for the periods indicated:
Allowance for Loan Losses
| Three Months Ended | ||||||||
| March 31, | ||||||||
| (Dollars in thousands) | 2021 | 2020 | ||||||
| Average loans outstanding (including loans held-for-sale) | $ | 886,379 | $ | 753,659 | ||||
| Loans outstanding at period end (excluding loans held-for-sale) | $ | 869,066 | $ | 749,529 | ||||
| Non-performing assets: | ||||||||
| Nonaccrual loans | $ | 4,521 | $ | 1,739 | ||||
| Loans 90 days past due still accruing | — | 168 | ||||||
| Foreclosed real estate | 1,070 | 1,481 | ||||||
| Repossessed-other | 7 | — | ||||||
| Total non-performing assets | $ | 5,598 | $ | 3,388 | ||||
| Beginning balance of allowance | $ | 10,389 | $ | 6,627 | ||||
| Loans charged-off: | ||||||||
| Commercial | — | — | ||||||
| Real Estate - Construction | — | — | ||||||
| Real Estate Mortgage - Residential | — | — | ||||||
| Real Estate Mortgage - Commercial | — | — | ||||||
| Consumer - Home Equity | — | — | ||||||
| Consumer - Other | 25 | 23 | ||||||
| Total loans charged-off | 25 | 23 | ||||||
| Recoveries: | ||||||||
| Commercial | 1 | — | ||||||
| Real Estate - Construction | — | — | ||||||
| Real Estate Mortgage - Residential | — | — | ||||||
| Real Estate Mortgage - Commercial | 4 | 6 | ||||||
| Consumer - Home Equity | 1 | 1 | ||||||
| Consumer - Other | 16 | 8 | ||||||
| Total recoveries | 22 | 15 | ||||||
| Net loan charge offs | 3 | 8 | ||||||
| Provision for loan losses | 177 | 1,075 | ||||||
| Balance at period end | $ | 10,563 | $ | 7,694 | ||||
| Net charge offs to average loans (annualized) | 0.00 | % | 0.00 | % | ||||
| Allowance as percent of total loans | 1.22 | % | 1.03 | % | ||||
| Non-performing assets as % of total assets | 0.37 | % | 0.29 | % | ||||
| Allowance as % of non-performing loans | 233.6 | % | 403.5 | % | ||||
36
The following allocation of the allowance to specific components is not necessarily indicative of future losses or future allocations. The entire allowance is available to absorb losses in the portfolio.
Composition of the Allowance for Loan Losses
| (Dollars in thousands) | March 31, 2021 | December 31, 2020 | ||||||||||||||
| % of allowance in | % of allowance in | |||||||||||||||
| Amount | Category | Amount | Category | |||||||||||||
| Commercial, Financial and Agricultural | $ | 758 | 7.2 | % | $ | 778 | 7.5 | % | ||||||||
| Real Estate – Construction | 134 | 1.3 | % | 145 | 1.4 | % | ||||||||||
| Real Estate Mortgage: | ||||||||||||||||
| Residential | 480 | 4.5 | % | 541 | 5.2 | % | ||||||||||
| Commercial | 8,137 | 77.0 | % | 7,855 | 75.6 | % | ||||||||||
| Consumer: | ||||||||||||||||
| Home Equity | 309 | 2.9 | % | 324 | 3.1 | % | ||||||||||
| Other | 124 | 1.2 | % | 125 | 1.2 | % | ||||||||||
| Unallocated | 621 | 5.9 | % | 621 | 6.0 | % | ||||||||||
| Total | $ | 10,563 | 100.0 | % | $ | 10,389 | 100.0 | % | ||||||||
Accrual of interest is discontinued on loans when management believes, after considering economic and business conditions and collection efforts that a borrower’s financial condition is such that the collection of interest is doubtful. A delinquent loan is generally placed in nonaccrual status when it becomes 90 days or more past due. At the time a loan is placed in nonaccrual status, all interest, which has been accrued on the loan but remains unpaid is reversed and deducted from earnings as a reduction of reported interest income. No additional interest is accrued on the loan balance until the collection of both principal and interest becomes reasonably certain.
Non-interest Income and Non-interest Expense
Non-interest income during the three months ended March 31, 2021 was $3.3 million compared to $2.9 million during the same period in 2020. Deposit service charges declined $153 thousand during the three months ended March 31, 2021 compared to the same period in 2020 primarily due to lower overdraft fees. Mortgage banking income increased by $8 thousand to $990 thousand during the three months ended March 31, 2021 from $982 thousand during the same period in 2020. While mortgage banking income was approximately equal to last year’s first quarter result, the gain-on-sale margin of 2.32% in the first quarter of 2021 was limited as we worked on certain loans not yet sold, in an effort to resolve processing and delivery issues. As we work to improve our mortgage processing and delivery efficiency, we anticipate the gain-on-sale margin will recover to more normal levels, which for the Company would be approximately 3.00% to 3.25%. Mortgage production during the three months ended March 31, 2021 was $42.7 million compared to $35.3 million during the same period in 2020. Investment advisory fees increased $243 thousand to $877 thousand during the three months ended March 31, 2021 from $634 thousand during the same period in 2020. Total assets under management increased to $519.3 million at March 31, 2021 compared to $319.7 million at March 31, 2020. Management continues to focus on increasing both the mortgage banking income as well as the investment advisory fees and commissions. Gain on sale of other assets was $77 thousand during the three months ended March 31, 2021 compared to $6 thousand during the same period in 2020.
Non-interest income, other increased $199 thousand during the three months ended March 31, 2021 compared to the same period in 2020 primarily due to $100 thousand received from the collection of a summary judgment related to a loan charged off at a bank, which the company subsequently acquired and due to a $116 thousand increase in ATM debit card income, partially offset by a $29 thousand reduction in income on bank owned life insurance.
The following is a summary of the components of other non-interest income for the periods indicated:
| (Dollars in thousands) | Three months ended March 31, | |||||||
| 2021 | 2020 | |||||||
| ATM debit card income | $ | 628 | $ | 512 | ||||
| Income on bank owned life insurance | 167 | 196 | ||||||
| Rental income | 70 | 66 | ||||||
| Other service fee and safe deposit box fees | 62 | 59 | ||||||
| Wire transfer fees | 26 | 20 | ||||||
| Other | 153 | 54 | ||||||
| Total | $ | 1,106 | $ | 907 | ||||
37
Non-interest expense increased $502 thousand during the three months ended March 31, 2021 to $9.5 million compared to $9.0 million during the same period in 2020. Salary and benefit expense increased $311 thousand to $6.0 million during the three months ended March 31, 2021 from $5.7 million during the same period in 2020. This increase is primarily a result of the normal salary adjustments and increased mortgage and financial planning and investment advisory commissions. We had 243 full time equivalent employees at March 31, 2021 compared to 242 at March 31, 2020. Occupancy expense increased $87 thousand to $730 thousand during the three months ended March 31, 2021 compared to $643 thousand during the same period in 2020. FDIC assessments increased $127 thousand due to a higher assessment rate in 2021 related to a decrease in our leverage ratio and an increase in our assessment base due to higher average assets as well as $39 thousand of small bank assessment credits utilized in the three months ended March 31, 2020. The reduction in our leverage ratio and the increase in our assessment base were partially related to PPP loans and the excess liquidity generated from PPP loan proceeds and other stimulus funds related to the COVID-19 pandemic. Furthermore, we received FDIC small bank assessment credits during the three months ended March 31, 2020 compared to none during the same period in 2021. The FDIC small bank assessment credits were fully utilized during the first quarter of 2020.
The following is a summary of the components of other non-interest expense for the periods indicated:
| (Dollars in thousands) | Three months ended | |||||||
| March 31, | ||||||||
| 2021 | 2020 | |||||||
| Data processing | $ | 856 | $ | 777 | ||||
| Telephone | 89 | 81 | ||||||
| Correspondent services | 70 | 66 | ||||||
| Insurance | 79 | 78 | ||||||
| Legal and professional fees | 263 | 255 | ||||||
| Director fees | 95 | 82 | ||||||
| Shareholder expense | 49 | 50 | ||||||
| Dues | 40 | 37 | ||||||
| Loan closing costs/fees | 50 | 70 | ||||||
| Other | 329 | 392 | ||||||
| $ | 1,920 | $ | 1,888 | |||||
Income Tax Expense
We incurred income tax expense of $891 thousand and $438 thousand for the three months ended March 31, 2021 and 2020, respectively. Our effective tax rate was 21.5% and 19.6% for the three months ended March 31, 2021 and 2020, respectively.
Financial Position
Assets totaled $1.5 billion at March 31, 2021 and $1.4 billion at December 31, 2020. Loans (excluding loans held-for-sale) increased $24.9 million to $869.1 million at March 31, 2021 from $844.2 million at December 31, 2020.
Total loan production excluding PPP loans and a PPP related credit facility was $40.2 million during the three months ended March 31, 2021 compared to $33.5 million during the same period in 2020. Loans held-for-sale declined to $23.5 million at March 31, 2021 from $45.0 million at December 31, 2020 due to an improvement in the number of loans purchased by investors. Mortgage production was $42.7 million during the three months ended March 31, 2021 compared to $35.3 million during the same period in 2020. The loan-to-deposit ratio (including loans held-for-sale) at March 31, 2021 and December 31, 2020 was 70.2% and 74.8%, respectively. The loan-to-deposit ratio (excluding loans held-for-sale) at March 31, 2021 and December 31, 2020 was 68.4% and 71.0%, respectively. Investment securities increased to $407.5 million at March 31, 2021 from $361.9 million at December 31, 2020. Other short-term investments increased to $88.4 million at March 31, 2021 from $46.1 million at December 31, 2020. The increases in investments and other short-term investments are primarily due to organic deposit growth and excess liquidity from customer’s PPP loan proceeds and other stimulus funds related to the COVID-19 pandemic.
38
Non-PPP loans increased $5.3 million to $807.2 million at March 31, 2021 from $801.9 million at December 31, 2020. PPP loans increased $19.6 million to $61.8 million at March 31, 2021 from $42.2 million at December 31, 2020. PPP loans totaled $64.1 million gross of deferred fees and costs and $61.8 million net of deferred fees and costs at March 31, 2021. During 2020, we originated 843 PPP loans totaling $51.2 million gross of deferred fees and costs and $49.8 million net of deferred fees and costs. Furthermore, during 2020, we facilitated the origination of 111 PPP loans totaling $31.2 million related to our customers with a third party prior to establishing our own PPP platform. During 2020, 159 PPP loans totaling $8.0 million were forgiven through the SBA PPP forgiveness process. As of May 3, 2021, 552 PPP loans originated by the Company totaling $27.3 million, gross of deferred fees, had been forgiven. An additional 208 loans totaling $5.8 million are in process of being forgiven. As of May 3, 2021, we originated 563 PPP loans in 2021, totaling $36.7 million, gross of deferred fees, under The Consolidated Appropriations Act, 2021. The $2.2 million in PPP deferred fees net of deferred costs at March 31, 2021 will be recognized as interest income over the remaining life of the PPP loans.
One of our goals as a community bank has been, and continues to be, to grow our assets through quality loan growth by providing credit to small and mid-size businesses and individuals within the markets we serve. We remain committed to meeting the credit needs of our local markets.
The following table shows the composition of the loan portfolio by category at the dates indicated:
| (Dollars in thousands) | March 31, 2021 | December 31, 2020 | ||||||||||||||
| Amount | Percent | Amount | Percent | |||||||||||||
| Commercial, financial & agricultural | $ | 110,776 | 12.7 | % | $ | 96,688 | 11.5 | % | ||||||||
| Real estate: | ||||||||||||||||
| Construction | 104,065 | 12.0 | % | 95,282 | 11.3 | % | ||||||||||
| Mortgage – residential | 38,947 | 4.5 | % | 43,928 | 5.2 | % | ||||||||||
| Mortgage – commercial | 582,083 | 67.0 | % | 573,258 | 67.9 | % | ||||||||||
| Consumer: | ||||||||||||||||
| Home Equity | 25,068 | 2.9 | % | 26,442 | 3.1 | % | ||||||||||
| Other | 8,127 | 0.9 | % | 8,559 | 1.0 | % | ||||||||||
| Total gross loans | 869,066 | 100.0 | % | 844,157 | 100.0 | % | ||||||||||
| Allowance for loan losses | (10,563 | ) | (10,389 | ) | ||||||||||||
| Total net loans | $ | 858,503 | $ | 833,768 | ||||||||||||
In the context of this discussion, a real estate mortgage loan is defined as any loan, other than loans for construction purposes and advances on home equity lines of credit, secured by real estate, regardless of the purpose of the loan. Advances on home equity lines of credit are included in consumer loans. We follow the common practice of financial institutions in our market areas of obtaining a security interest in real estate whenever possible, in addition to any other available collateral. This collateral is taken to reinforce the likelihood of the ultimate repayment of the loan and tends to increase the magnitude of the real estate loan components. We generally limit the loan-to-value ratio to 80%.
Deposits increased $82.0 million to $1.3 billion at March 31, 2021 compared to $1.2 billion at December 31, 2020. Our pure deposits, which are defined as total deposits less certificates of deposits, increased $84.1 million to $1.143 billion at March 31, 2021 from $1.059 billion at December 31, 2020. We continue to focus on growing our pure deposits as a percentage of total deposits in order to better manage our overall cost of funds. We had no brokered deposits and no listing services deposits at March 31, 2021. Our securities sold under agreements to repurchase, which are related to our customer cash management accounts, increased $19.4 million to $60.3 million at March 31, 2021 from $40.9 million at December 31, 2020. This increase was due to seasonality in our cash management accounts.
Total shareholders’ equity declined $3.6 million, or 2.7%, to $132.7 million at March 31, 2021 from $136.3 million at December 31, 2020. The $3.6 million decline was due to a $6.2 million reduction in accumulated other comprehensive income partially offset by a $2.4 million increase in retention of earnings less dividends paid. The decline in accumulated other comprehensive income was due to an increase in longer-term market interest rates, which resulted in a reduction in the net unrealized gains in our investment securities portfolio. In late 2019, we obtained approval of a share repurchase plan of up to 200,000 shares of our outstanding common stock; however, no share repurchases were made under this repurchase plan prior to its expiration on December 31, 2020. On April 12, 2021, we announced that our Board of Directors approved the repurchase of up to 375,000 shares of our common stock (the “2021 repurchase plan”), which represents approximately 5% of our 7,524,944 shares outstanding as of March 31, 2021. The approved 2021 repurchase plan provides us with some flexibility in managing our capital going forward.
39
Market Risk Management
Market risk reflects the risk of economic loss resulting from adverse changes in market prices and interest rates. The risk of loss can be measured in either diminished current market values or reduced current and potential net income. Our primary market risk is interest rate risk. We have established an Asset/Liability Management Committee (the “ALCO”) to monitor and manage interest rate risk. The ALCO monitors and manages the pricing and maturity of our assets and liabilities in order to diminish the potential adverse impact that changes in interest rates could have on our net interest income. The ALCO has established policy guidelines and strategies with respect to interest rate risk exposure and liquidity.
A monitoring technique employed by us is the measurement of our interest sensitivity “gap,” which is the positive or negative dollar difference between assets and liabilities that are subject to interest rate repricing within a given period of time. Simulation modeling is performed to assess the impact varying interest rates and balance sheet mix assumptions will have on net interest income. We model the impact on net interest income for several different changes, to include a flattening, steepening and parallel shift in the yield curve. For each of these scenarios, we model the impact on net interest income in an increasing and decreasing rate environment of 100 and 200 basis points. We also periodically stress certain assumptions such as loan prepayment rates, deposit decay rates and interest rate betas to evaluate our overall sensitivity to changes in interest rates. Policies have been established in an effort to maintain the maximum anticipated negative impact of these modeled changes in net interest income at no more than 10% and 15%, respectively, in a 100 and 200 basis point change in interest rates over a 12-month period. Interest rate sensitivity can be managed by repricing assets or liabilities, selling securities available-for-sale, replacing an asset or liability at maturity or by adjusting the interest rate during the life of an asset or liability. Managing the amount of assets and liabilities repricing in the same time interval helps to hedge the risk and minimize the impact on net interest income of rising or falling interest rates. Neither the “gap” analysis or asset/liability modeling are precise indicators of our interest sensitivity position due to the many factors that affect net interest income including, the timing, magnitude and frequency of interest rate changes as well as changes in the volume and mix of earning assets and interest-bearing liabilities.
Based on the many factors and assumptions used in simulating the effect of changes in interest rates, the following table estimates the hypothetical percentage change in net interest income at March 31, 2021 and December 31, 2020 over the subsequent 12 months. At March 31, 2021 and December 31, 2020, we were slightly liability sensitive over the first three month period and over the balance of a 12-month period are asset sensitive on a cumulative basis. As a result, our modeling reflects slight exposure to falling rates and our rising rate exposure trends from neutral to slightly liability sensitive as rates move higher over the first 12 months. This negative impact of rising rates reverses and net interest income is favorably impacted over a 24-month period. In a declining rate environment, the model reflects a decline in net interest income. This primarily results from the current level of interest rates being paid on our interest bearing transaction accounts as well as money market accounts. The interest rates on these accounts are at a level where they cannot be repriced in proportion to the change in interest rates. The increase and decrease of 100 and 200 basis points, respectively, reflected in the table below assume a simultaneous and parallel change in interest rates along the entire yield curve.
Net Interest Income Sensitivity
| Change in short-term interest rates | Hypothetical percentage change in net interest income |
|||||||
| March 31, 2021 | December 31, 2020 | |||||||
| +200bp | -1.39 | % | -0.73 | % | ||||
| +100bp | -0.32 | % | +0.08 | % | ||||
| Flat | — | — | ||||||
| -100bp | -4.18 | % | -3.37 | % | ||||
| -200bp | -6.89 | % | -3.58 | % | ||||
We perform a valuation analysis projecting future cash flows from assets and liabilities to determine the Present Value of Equity (“PVE”) over a range of changes in market interest rates. The sensitivity of PVE to changes in interest rates is a measure of the sensitivity of earnings over a longer time horizon. At March 31, 2021 and December 31, 2020, the PVE exposure in a plus 200 basis point increase in market interest rates was estimated to be 6.25% and 11.47%, respectively. The PVE exposure in a down 100 basis point decrease was estimated to be (9.01)% at March 31, 2021 compared to (14.32)% at December 31, 2020.
40
Liquidity and Capital Resources
Liquidity management involves monitoring sources and uses of funds in order to meet our day-to-day cash flow requirements while maximizing profits. Liquidity represents our ability to convert assets into cash or cash equivalents without significant loss and to raise additional funds by increasing liabilities. Liquidity management is made more complicated because different balance sheet components are subject to varying degrees of management control. For example, the timing of maturities of the investment portfolio is very predictable and subject to a high degree of control at the time investment decisions are made. However, net deposit inflows and outflows are far less predictable and are not subject to nearly the same degree of control. Asset liquidity is provided by cash and assets which are readily marketable, or which can be pledged, or which will mature in the near future. Liability liquidity is provided by access to core funding sources, principally the ability to generate customer deposits in our market area. In addition, liability liquidity is provided through the ability to borrow against approved lines of credit (federal funds purchased) from correspondent banks and to borrow on a secured basis through securities sold under agreements to repurchase. The Bank is a member of the FHLB and has the ability to obtain advances for various periods of time. These advances are secured by eligible securities pledged by the Bank or assignment of eligible loans within the Bank’s portfolio.
As of March 31, 2021, we have not experienced any unusual pressure on our deposit balances or our liquidity position as a result of the COVID-19 pandemic. We had no brokered deposits and no listing services deposits at March 31, 2021. We believe that we have ample liquidity to meet the needs of our customers and to manage through the COVID-19 pandemic through our low cost deposits; our ability to borrow against approved lines of credit (federal funds purchased) from correspondent banks; and our ability to obtain advances secured by certain securities and loans from the Federal Home Loan Bank.
We generally maintain a high level of liquidity and adequate capital, which along with continued retained earnings, we believe will be sufficient to fund the operations of the Bank for at least the next 12 months. Shareholders’ equity declined to 8.9% of total assets at March 31, 2021 from 9.8% at December 31, 2020 primarily due to PPP loans and excess liquidity from customer’s PPP loans,other stimulus funds related to the COVID-19 pandemic, and due to a $6.2 million reduction in accumulated other comprehensive income. The Bank maintains federal funds purchased lines in the total amount of $60.0 million with two financial institutions, although these were not utilized at March 31, 2021; and $10 million through the Federal Reserve Discount Window. The FHLB of Atlanta has approved a line of credit of up to 25% of the Bank’s assets, which, when utilized, is collateralized by a pledge against specific investment securities and/or eligible loans.
Through the operations of our Bank, we have made contractual commitments to extend credit in the ordinary course of our business activities. These commitments are legally binding agreements to lend money to our customers at predetermined interest rates for a specified period of time. At March 31, 2021, we had issued commitments to extend unused credit of $141.7 million, including $41.6 million in unused home equity lines of credit, through various types of lending arrangements. At December 31, 2020, we had issued commitments to extend unused credit of $142.6 million, including $42.3 million in unused home equity lines of credit, through various types of lending arrangements. We evaluate each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by us upon extension of credit, is based on our credit evaluation of the borrower. Collateral varies but may include accounts receivable, inventory, property, plant and equipment, commercial and residential real estate. We manage the credit risk on these commitments by subjecting them to normal underwriting and risk management processes.
We regularly review our liquidity position and have implemented internal policies establishing guidelines for sources of asset-based liquidity and evaluate and monitor the total amount of purchased funds used to support the balance sheet and funding from noncore sources. Although uncertain, we may encounter stress on liquidity management as a direct result of the COVID-19 pandemic and the Bank’s participation in the PPP as a participating lender. We had PPP loans totaling $64.1 million gross of deferred fees and costs and $61.8 million net of deferred fees and costs at March 31, 2021 compared to $43.3 million gross of deferred fees and costs and $42.2 million net of deferred fees and costs at December 31, 2020. As customers manage their own liquidity stress, we could experience an increase in the utilization of existing lines of credit.
Regulatory capital rules adopted in July 2013 and fully-phased in as of January 1, 2019, which we refer to Basel III, impose minimum capital requirements for bank holding companies and banks. In 2018, the Federal Reserve increased the asset size to qualify as a small bank holding company. As a result of this change, we generally are not subject to the Federal Reserve capital requirements unless advised otherwise. The Bank remains subject to capital requirements including a minimum leverage ratio and a minimum ratio of “qualifying capital” to risk weighted assets. These requirements are essentially the same as those that applied to us prior to the change in the definition of a small bank holding company.
41
Specifically, the Bank is required to maintain he following minimum capital requirements:
| ● | 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%. |
Under the final Basel III rules, Tier 1 capital was redefined to include 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 (as discussed below). Tier 2 capital generally includes the allowance for loan losses up to 1.25% of risk-weighted assets, qualifying preferred stock, subordinated debt and qualifying tier 2 minority interests, less any deductions in Tier 2 instruments of an unconsolidated financial institution. Cumulative perpetual preferred stock is included only in Tier 2 capital, except that the Basel III rules permit bank holding companies with less than $15 billion in total consolidated assets to continue to include trust preferred securities and cumulative perpetual preferred stock issued before May 19, 2010 in Tier 1 Capital (but not in Common Equity Tier 1 capital), subject to certain restrictions. 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 much of this treatment of AOCI. We made this opt-out election and, as a result, retained our pre-existing treatment for AOCI.
In addition, in order to avoid restrictions on capital distributions or discretionary bonus payments to executives, under Basel III, a covered banking organization must maintain a “capital conservation buffer” on top of its minimum risk-based capital requirements. This buffer must consist solely of Tier 1 Common Equity, but the buffer applies to all three measurements (Common Equity Tier 1, Tier 1 capital and total capital). The 2.5% capital conservation buffer was phased in incrementally over time, and became fully effective for us on January 1, 2019, resulting in the following effective minimum capital plus capital conservation buffer ratios: (i) a Common Equity Tier 1 capital ratio of 7.0%, (ii) a Tier 1 risk-based capital ratio of 8.5%, and (iii) a total risk-based capital ratio of 10.5%.
In November 2019, the federal banking regulators published final rules implementing a simplified measure of capital adequacy for certain banking organizations that have less than $10 billion in total consolidated assets. Under the final rules, which went into effect on January 1, 2020, depository institutions and depository institution holding companies that have less than $10 billion in total consolidated assets and meet other qualifying criteria, including a leverage ratio of greater than 9%, off-balance-sheet exposures of 25% or less of total consolidated assets and trading assets plus trading liabilities of 5% or less of total consolidated assets, are deemed “qualifying community banking organizations” and are eligible to opt into the “community bank leverage ratio framework.” A qualifying community banking organization that elects to use the community bank leverage ratio framework and that maintains a leverage ratio of greater than 9% is considered to have satisfied the generally applicable risk-based and leverage capital requirements under the Basel III rules, discussed above, and, if applicable, is considered to have met the “well capitalized” capital ratio requirements for purposes of its primary federal regulator’s prompt corrective action rules, outlined below. The final rules include a two-quarter grace period during which a qualifying community banking organization that temporarily fails to meet any of the qualifying criteria, including the greater than 9% leverage capital ratio requirement, is generally still deemed “well capitalized” so long as the banking organization maintains a leverage capital ratio greater than 8%. A banking organization that fails to maintain a leverage capital ratio greater than 8% is not permitted to use the grace period and must comply with the generally applicable requirements under the Basel III rules and file the appropriate regulatory reports. We did not elect to use the community bank leverage ratio framework but may make such an election in the future.
42
As outlined above, we are generally not subject to the Federal Reserve capital requirements unless advised otherwise because we qualify as a small bank holding company. Our Bank remains subject to capital requirements including a minimum leverage ratio and a minimum ratio of “qualifying capital” to risk weighted assets. As of March 31, 2021, the Bank met all capital adequacy requirements under the rules on a fully phased-in basis.
| Dollars in thousands | Prompt Corrective Action (PCA) Requirements | Excess Capital $s of PCA Requirements | ||||||||||||||||||
| Capital Ratios | Actual | Well Capitalized | Adequately Capitalized | Well Capitalized | Adequately Capitalized | |||||||||||||||
| March 31, 2021 | ||||||||||||||||||||
| Leverage Ratio | 8.73 | % | 5.00 | % | 4.00 | % | $ | 52,529 | $ | 66,594 | ||||||||||
| Common Equity Tier 1 Capital Ratio | 13.20 | % | 6.50 | % | 4.50 | % | 62,377 | 80,985 | ||||||||||||
| Tier 1 Capital Ratio | 13.20 | % | 8.00 | % | 6.00 | % | 48,421 | 67,029 | ||||||||||||
| Total Capital Ratio | 14.34 | % | 10.00 | % | 8.00 | % | 40,375 | 58,984 | ||||||||||||
| December 31, 2020 | ||||||||||||||||||||
| Leverage Ratio | 8.84 | % | 5.00 | % | 4.00 | % | $ | 52,270 | $ | 65,893 | ||||||||||
| Common Equity Tier 1 Capital Ratio | 12.83 | % | 6.50 | % | 4.50 | % | 59,406 | 78,169 | ||||||||||||
| Tier 1 Capital Ratio | 12.83 | % | 8.00 | % | 6.00 | % | 45,334 | 64,097 | ||||||||||||
| Total Capital Ratio | 13.94 | % | 10.00 | % | 8.00 | % | 36,961 | 55,723 | ||||||||||||
The Bank’s risk-based capital ratios of leverage ratio, Tier 1, and total capital were 8.73%, 13.20% and 14.34%, respectively, at March 31, 2021 as compared to 8.84%, 12.83%, and 13.94%, respectively, at December 31, 2020. The Bank’s Common Equity Tier 1 ratio at March 31, 2021 was 13.20% and at December 31, 2020 was 12.83%. Under the Basel III rules, we anticipate that the Bank will remain a well capitalized institution for at least the next 12 months. Furthermore, based on our strong capital, conservative underwriting, and internal stress testing, we expect to remain well capitalized throughout the COVID-19 pandemic. However, the Bank’s reported and regulatory capital ratios could be adversely impacted by future credit losses related to the COVID-19 pandemic.
As a bank holding company, our ability to declare and pay dividends is dependent on certain federal and state regulatory considerations, including the guidelines of the Federal Reserve. The Federal Reserve has issued a policy statement regarding the payment of dividends by bank holding companies. In general, the Federal Reserve’s policies provide that dividends should be paid only out of current earnings and only if the prospective rate of earnings retention by the bank holding company appears consistent with the organization’s capital needs, asset quality and overall financial condition. The Federal Reserve’s policies also require that a bank holding company serve as a source of financial strength to its subsidiary bank(s) by standing ready to use available resources to provide adequate capital funds to those banks during periods of financial stress or adversity and by maintaining the financial flexibility and capital-raising capacity to obtain additional resources for assisting its subsidiary banks where necessary. In addition, under the prompt corrective action regulations, the ability of a bank holding company to pay dividends may be restricted if a subsidiary bank becomes undercapitalized. These regulatory policies could affect our ability to pay dividends or otherwise engage in capital distributions. Our Board of Directors approved a cash dividend for the first quarter of 2021 of $0.12 per common share. This dividend is payable on May 18, 2021 to shareholders of record of our common stock as of May 4, 2021.
As we are a legal entity separate and distinct from the Bank and do not conduct stand-alone operations, our ability to pay dividends depends on the ability of the Bank to pay dividends to us, which is also subject to regulatory restrictions. As a South Carolina-chartered bank, the Bank is subject to limitations on the amount of dividends that it is permitted to pay. Unless otherwise instructed by the South Carolina Board of Financial Institutions, the Bank is generally permitted under South Carolina State banking regulations to pay cash dividends of up to 100% of net income in any calendar year without obtaining the prior approval of the South Carolina Board of Financial Institutions. The FDIC also has the authority under federal law to enjoin a bank from engaging in what in its opinion constitutes an unsafe or unsound practice in conducting its business, including the payment of a dividend under certain circumstances.
Average Balances, Income Expenses and Rates. The following table depicts, for the periods indicated, certain information related to our average balance sheet and our average yields on assets and average costs of liabilities. Such yields are derived by dividing income or expense by the average balance of the corresponding assets or liabilities. Average balances have been derived from daily averages.
43
FIRST COMMUNITY CORPORATION
Yields
on Average Earning Assets and
Rates on Average Interest-Bearing Liabilities
| Three months ended March 31, 2021 | Three months ended March 31, 2020 | |||||||||||||||||||||||
| Average | Interest | Yield/ | Average | Interest | Yield/ | |||||||||||||||||||
| Balance | Earned/Paid | Rate | Balance | Earned/Paid | Rate | |||||||||||||||||||
| Assets | ||||||||||||||||||||||||
| Earning assets | ||||||||||||||||||||||||
| Loans | ||||||||||||||||||||||||
| PPP loans | $ | 55,540 | $ | 684 | 4.99 | % | $ | — | $ | — | NA | |||||||||||||
| Non-PPP loans | 830,839 | 8,767 | 4.28 | % | 753,659 | 8,827 | 4.71 | % | ||||||||||||||||
| Total Loans | 886,379 | 9,451 | 4.32 | % | 753,659 | 8,827 | 4.71 | % | ||||||||||||||||
| Securities | 373,340 | 1,734 | 1.88 | % | 286,332 | 1,726 | 2.42 | % | ||||||||||||||||
| Other short-term investments | 79,334 | 33 | 0.17 | % | 37,251 | 157 | 1.70 | % | ||||||||||||||||
| Total earning assets | 1,339,053 | 11,218 | 3.40 | % | 1,077,242 | 10,710 | 4.00 | % | ||||||||||||||||
| Cash and due from banks | 18,429 | 15,032 | ||||||||||||||||||||||
| Premises and equipment | 34,351 | 35,002 | ||||||||||||||||||||||
| Goodwill and other intangibles | 15,726 | 16,063 | ||||||||||||||||||||||
| Other assets | 38,124 | 39,691 | ||||||||||||||||||||||
| Allowance for loan losses | (10,424 | ) | (6,680 | ) | ||||||||||||||||||||
| Total assets | $ | 1,435,259 | $ | 1,176,350 | ||||||||||||||||||||
| Liabilities | ||||||||||||||||||||||||
| Interest-bearing liabilities | ||||||||||||||||||||||||
| Interest-bearing transaction accounts | $ | 277,476 | $ | 58 | 0.08 | % | $ | 216,198 | $ | 103 | 0.19 | % | ||||||||||||
| Money market accounts | 254,412 | 141 | 0.22 | % | 198,292 | 350 | 0.71 | % | ||||||||||||||||
| Savings deposits | 125,981 | 19 | 0.06 | % | 103,776 | 29 | 0.11 | % | ||||||||||||||||
| Time deposits | 160,321 | 301 | 0.76 | % | 169,397 | 537 | 1.27 | % | ||||||||||||||||
| Other borrowings | 78,266 | 132 | 0.68 | % | 70,332 | 274 | 1.57 | % | ||||||||||||||||
| Total interest-bearing liabilities | 896,456 | 651 | 0.29 | % | 757,995 | 1,293 | 0.69 | % | ||||||||||||||||
| Demand deposits | 389,891 | 281,714 | ||||||||||||||||||||||
| Other liabilities | 13,332 | 13,178 | ||||||||||||||||||||||
| Shareholders’ equity | 135,580 | 123,463 | ||||||||||||||||||||||
| Total liabilities and shareholders’ equity | $ | 1,435,259 | $ | 1,176,350 | ||||||||||||||||||||
| Cost of deposits, including demand deposits | 0.17 | % | 0.42 | % | ||||||||||||||||||||
| Cost of funds, including demand deposits | 0.21 | % | 0.50 | % | ||||||||||||||||||||
| Net interest spread | 3.11 | % | 3.31 | % | ||||||||||||||||||||
| Net interest income/margin | $ | 10,567 | 3.20 | % | $ | 9,417 | 3.52 | % | ||||||||||||||||
| Net interest income/margin (tax equivalent) | $ | 10,675 | 3.23 | % | $ | 9,495 | 3.55 | % | ||||||||||||||||
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
44
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Management, including our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports we file and submit under the Exchange Act is (i) recorded, processed, summarized and reported as and when required and (ii) accumulated and communicated to our management, including our Chief Executive Officer and the Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
The design of any system of controls and procedures is based in part upon certain assumptions about the likelihood of future events. There can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.
Changes in Internal Control over Financial Reporting
There has been no change in our internal control over financial reporting during the three months ended March 31, 2021 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
45
PART II -
OTHER INFORMATION
Item 1. Legal Proceedings.
We are a party to claims and lawsuits arising in the course of normal business activities. Management is not aware of any material pending legal proceedings against us which we believe, if determined adversely, would have a material adverse impact on our financial position, results of operations or cash flows.
Item 1A. Risk Factors.
Investing in shares of our common stock involves certain risks, including those identified and described in Item 1A. of our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, as well as cautionary statements contained in this Quarterly Report on Form 10-Q, including those under the caption “Cautionary Statement Regarding Forward-Looking Statements” set forth in Part I, Item 2 of this Quarterly Report on Form 10-Q, risks and matters described elsewhere in this Quarterly Report on Form 10-Q and in our other filings with the SEC.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
| (a) | Not Applicable. |
| (b) | Not Applicable. |
| (c) | No share repurchases were made during the three months ended March 31, 2021 and March 31, 2020. On April 12, 2021, we announced that our Board of Directors approved the repurchase of up to 375,000 shares of our common stock, which represents approximately 5% of our 7,524,944 shares outstanding as of March 31, 2021. |
Item 3. Defaults Upon Senior Securities.
Not Applicable.
Item 4. Mine Safety Disclosures.
Not Applicable.
Item 5. Other Information.
None.
Item 6. Exhibits.
| Exhibit | Description | |
| 3.1 | Restated Articles of Incorporation (incorporated by reference to Exhibit 3.1 to the Company’s Form 8-K filed on June 27, 2011). | |
| 3.2 | Articles of Amendment (incorporated by reference to Exhibit 3.1 to the Company’s Form 8-K filed on May 23, 2019). | |
| 3.3 | Amended and Restated Bylaws dated May 21, 2019 (incorporated by reference to Exhibit 3.1 to the Company’s Form 8-K filed on May 22, 2019). | |
| 31.1 | Rule 13a-14(a) Certification of the Principal Executive Officer. | |
| 31.2 | Rule 13a-14(a) Certification of the Principal Financial Officer. | |
| 32 | Section 1350 Certifications | |
| 101 | The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2021, formatted in iXBRL (inline eXtensible Business Reporting Language; (i) Consolidated Balance Sheets at March 31, 2021 and December 31, 2020, (ii) Consolidated Statements of Income for the three months ended March 31, 2021 and 2020, (iii) Consolidated Statements of Comprehensive Income for the three months ended March 31, 2021 and 2020 (iv) Consolidated Statements of Changes in Shareholders’ Equity for the three months ended March 31, 2021 and 2020, (v) Consolidated Statements of Cash Flows for the three months ended March 31, 2021 and 2020, and (vi) Notes to Consolidated Financial Statements. | |
| 104 | Cover Page Interactive Data File (the cover page XBRL tags are embedded within the iXBRL document). |
46
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| FIRST COMMUNITY CORPORATION | ||
| (REGISTRANT) | ||
| Date: May 7, 2021 | By: | /s/ Michael C. Crapps |
| Michael C. Crapps | ||
| President and Chief Executive Officer | ||
| (Principal Executive Officer) | ||
| Date: May 7, 2021 | By: | /s/ D. Shawn Jordan |
| D. Shawn Jordan | ||
| Executive Vice President and Chief Financial Officer | ||
| (Principal Financial and Accounting Officer) | ||
47