First Community Corp 10-Q for FY2020 Q2
First Community Corp (FCCO)
About this 10-Q
First Community Corp filed this 10-Q on August 10, 2020, covering the quarter ended June 30, 2020 (FY2020 Q2).
Headline figures
Quarter ended June 30, 2020, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $210K
- down 44.7% from $380K a year earlier
- Net income
- $2.22M
- down 23.0% from net income of $2.88M a year earlier
- Diluted EPS
- $0.30
- down 18.9% from $0.37 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 No.
| (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)
(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 | ||
| Non-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 August 10, 2020, 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
| June 30, | ||||||||
| (Dollars in thousands, except par value) | 2020 | December 31, | ||||||
| (Unaudited) | 2019 | |||||||
| ASSETS | ||||||||
| Cash and due from banks | $ | $ | ||||||
| Interest-bearing bank balances | ||||||||
| Federal funds sold and securities purchased under agreements to resell | ||||||||
| Investment securities available-for-sale | ||||||||
| Other investments, at cost | ||||||||
| Loans held-for-sale | ||||||||
| Loans | ||||||||
| Less, allowance for loan losses | ||||||||
| Net loans | ||||||||
| Property, furniture 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 | ||||||||
| Federal Home Loan Bank advances | ||||||||
| 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 June 30, 2020 at December 31, 2019 | ||||||||
| 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)
| Six | Six | |||||||
| Months Ended | Months Ended | |||||||
| June 30, | June 30, | |||||||
| 2020 | 2019 | |||||||
| (Dollars in thousands, except per share amounts) | (Unaudited) | (Unaudited) | ||||||
| Interest income: | ||||||||
| Loans, including fees | $ | $ | ||||||
| Taxable securities | ||||||||
| Non-taxable securities | ||||||||
| Other | ||||||||
| 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 securities | ||||||||
| Gain (loss) on sale of other assets | ( | ) | ||||||
| Other | ||||||||
| Total non-interest income | ||||||||
| Non-interest expense: | ||||||||
| Salaries and employee benefits | ||||||||
| Occupancy | ||||||||
| Equipment | ||||||||
| Marketing and public relations | ||||||||
| FDIC assessments | ||||||||
| Other real estate expense | ||||||||
| Amortization of intangibles | ||||||||
| Other | ||||||||
| Total non-interest expense | ||||||||
| Net income before tax | ||||||||
| Income taxes | ||||||||
| 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 INCOME
(Unaudited)
| Three | Three | |||||||
| Months Ended | Months Ended | |||||||
| June 30, | June 30, | |||||||
| 2020 | 2019 | |||||||
| (Dollars in thousands, except per share amounts) | (Unaudited) | (Unaudited) | ||||||
| Interest income: | ||||||||
| Loans, including fees | $ | $ | ||||||
| Taxable securities | ||||||||
| Non-taxable securities | ||||||||
| Other | ||||||||
| 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 securities | ||||||||
| Gain (loss) on sale of other assets | ( | ) | ||||||
| Other | ||||||||
| Total non-interest income | ||||||||
| Non-interest expense: | ||||||||
| Salaries and employee benefits | ||||||||
| Occupancy | ||||||||
| Equipment | ||||||||
| Marketing and public relations | ||||||||
| FDIC assessment | ||||||||
| Other real estate expense | ||||||||
| Amortization of intangibles | ||||||||
| Other | ||||||||
| Total non-interest expense | ||||||||
| Net income before tax | ||||||||
| Income taxes | ||||||||
| Net income | $ | $ | ||||||
| Basic earnings per common share | $ | $ | ||||||
| Diluted earnings per common share | $ | $ | ||||||
See Notes to Consolidated Financial Statements
| 3 |
FIRST COMMUNITY CORPORATION
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
| (Dollars in thousands) | ||||||||
| Six months ended June 30, | ||||||||
| 2020 | 2019 | |||||||
| Net income | $ | $ | ||||||
| Other comprehensive income: | ||||||||
| Unrealized
(loss) gain during the period on available-for-sale securities, net of tax expense of $ | ||||||||
| Reclassification
adjustment for gain on available-for-sale securities included in net income, net of tax benefit $ | ( | ) | ||||||
| Other comprehensive income | ||||||||
| Comprehensive income | $ | $ | ||||||
| (Dollars in thousands) | ||||||||
| Three months ended June 30, | ||||||||
| 2020 | 2019 | |||||||
| Net income | $ | $ | ||||||
| Other comprehensive income: | ||||||||
| Unrealized
gain during the period on available-for-sale securities, net of tax expense of $ | ||||||||
| Reclassification
adjustment for gain on available-for-sale securities included in net income, net of tax expense of $ | ( | ) | ||||||
| Other comprehensive income | ||||||||
| Comprehensive income | $ | $ | ||||||
See Notes to Consolidated Financial Statements
| 4 |
FIRST COMMUNITY CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Six months ended June 30, 2020 and 2019
(Unaudited)
| Accumulated | ||||||||||||||||||||||||||||
| Common | Additional | Nonvested | Other | |||||||||||||||||||||||||
| (Dollars and shares 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 | ( | ) | ||||||||||||||||||||||||||
| Issuance of common stock-deferred compensation | ||||||||||||||||||||||||||||
| Amortization of compensation on restricted stock | ||||||||||||||||||||||||||||
| Shares retired | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||
| Dividends: Common ($ per share) | ( | ) | ( | ) | ||||||||||||||||||||||||
| Dividend reinvestment plan | ||||||||||||||||||||||||||||
| Balance, June 30, 2020 | $ | $ | $ | ( | ) | $ | $ | $ | ||||||||||||||||||||
| Accumulated | ||||||||||||||||||||||||||||||||
| Common | Common | Additional | Nonvested | Other | ||||||||||||||||||||||||||||
| (Dollars and shares in thousands) | Shares | Common | Stock | Paid-in | Restricted | Retained | Comprehensive | |||||||||||||||||||||||||
| Issued | Stock | Warrants | Capital | Stock | Earnings | Income (loss) | Total | |||||||||||||||||||||||||
| Balance, December 31, 2018 | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | |||||||||||||||||||||
| Net Income | ||||||||||||||||||||||||||||||||
| Other comprehensive income net of tax of $ | ||||||||||||||||||||||||||||||||
| Issuance of restricted stock | ( | ) | ||||||||||||||||||||||||||||||
| Amortization of compensation on restricted stock | ||||||||||||||||||||||||||||||||
| Shares retired | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||
| Exercise of warrants | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Stock repurchase plan | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||
| Shares issued - deferred compensation | ||||||||||||||||||||||||||||||||
| Dividends: Common ($ per share) | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Dividend reinvestment plan | ||||||||||||||||||||||||||||||||
| Balance, June 30, 2019 | $ | $ | $ | $ | ( | ) | $ | $ | $ | |||||||||||||||||||||||
See Notes to Consolidated Financial Statements
| 5 |
FIRST COMMUNITY CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Unaudited)
| Accumulated | ||||||||||||||||||||||||||||
| Common | Additional | Nonvested | Other | |||||||||||||||||||||||||
| (Dollars and shares 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 | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||
| Dividends: Common ($ per share) | ( | ) | ( | ) | ||||||||||||||||||||||||
| Dividend reinvestment plan | ||||||||||||||||||||||||||||
| Balance, March 31, 2020 | $ | $ | $ | ( | ) | $ | $ | $ | ||||||||||||||||||||
| Net income | ||||||||||||||||||||||||||||
| Other comprehensive income net of tax of $ | ||||||||||||||||||||||||||||
| Issuance of common stock-Deferred Compensation | ||||||||||||||||||||||||||||
| Amortization of compensation on restricted stock | ||||||||||||||||||||||||||||
| Dividends: Common ($ per share) | ( | ) | ( | ) | ||||||||||||||||||||||||
| Dividend reinvestment plan | ||||||||||||||||||||||||||||
| Balance, June 30, 2020 | $ | $ | $ | ( | ) | $ | $ | $ | ||||||||||||||||||||
See Notes to Consolidated Financial Statements
| 6 |
FIRST COMMUNITY CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Unaudited)
| Accumulated | ||||||||||||||||||||||||||||||||
| Common | Common | Additional | Nonvested | Other | ||||||||||||||||||||||||||||
| (Dollars and shares in thousands) | Shares | Common | Stock | Paid-in | Restricted | Retained | Comprehensive | |||||||||||||||||||||||||
| Issued | Stock | Warrants | Capital | Stock | Earnings | Income (loss) | Total | |||||||||||||||||||||||||
| Balance December 31, 2018 | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | |||||||||||||||||||||
| Net Income | ||||||||||||||||||||||||||||||||
| Other comprehensive income net of tax of $ | ||||||||||||||||||||||||||||||||
| Issuance of restricted stock | ( | ) | ||||||||||||||||||||||||||||||
| Amortization of compensation on restricted stock | ||||||||||||||||||||||||||||||||
| Shares retired | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||
| Exercise of warrants | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Dividends: Common ($ per share) | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Dividend reinvestment plan | ||||||||||||||||||||||||||||||||
| Balance March 31, 2019 | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | |||||||||||||||||||||
| Net income | ||||||||||||||||||||||||||||||||
| Other comprehensive income net of tax of $ | ||||||||||||||||||||||||||||||||
| Amortization of compensation on restricted stock | ||||||||||||||||||||||||||||||||
| Exercise of warrants | ( | ) | ||||||||||||||||||||||||||||||
| Stock repurchase plan | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||
| Shares issued-deferred compensation | ||||||||||||||||||||||||||||||||
| Dividends: Common ($ per share) | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Dividend reinvestment plan | ||||||||||||||||||||||||||||||||
| Balance June 30, 2019 | $ | $ | $ | $ | ( | ) | $ | $ | $ | |||||||||||||||||||||||
See Notes to Consolidated Financial Statements
| 7 |
FIRST COMMUNITY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| Six months ended June 30, | ||||||||
| (Dollars in thousands) | 2020 | 2019 | ||||||
| Cash flows from operating activities: | ||||||||
| Net income | $ | $ | ||||||
| Adjustments to reconcile net income to net cash used from operating activities: | ||||||||
| Depreciation | ||||||||
| Net premium amortization | ||||||||
| Provision for loan losses | ||||||||
| Loss on sale of other real estate owned | ||||||||
| Writedowns of other real estate owned | ||||||||
| Origination of loans held-for-sale | ( | ) | ( | ) | ||||
| Sale of loans held-for-sale | ||||||||
| Amortization of intangibles | ||||||||
| Accretion on acquired loans | ( | ) | ( | ) | ||||
| Gain on sale of securities | ( | ) | ||||||
| Increase in other assets | ( | ) | ( | ) | ||||
| Increase in other liabilities | ||||||||
| Net cash 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 sale of securities available-for-sale | ||||||||
| Proceeds from sale of other securities | ||||||||
| (Increase) in loans | ( | ) | ( | ) | ||||
| Proceeds from sale of other real estate owned | ||||||||
| Proceeds from sale of fixed assets | ||||||||
| Purchase of property and equipment | ( | ) | ( | ) | ||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Cash flows from financing activities: | ||||||||
| Increase 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 | ( | ) | ( | ) | ||||
| Repurchase of common stock | ( | ) | ||||||
| Issuance of deferred compensation shares | ||||||||
| Dividends paid: Common Stock | ( | ) | ( | ) | ||||
| Proceeds from issuance of Common Stock | ||||||||
| Dividend reinvestment plan | ||||||||
| Net cash provided 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 gain on securities | $ | $ | ||||||
| Recognition of operating lease right of use asset | $ | $ | ||||||
| Recognition of operating lease liability | $ | $ | ||||||
| Transfer of investment securities held-to-maturity to available-for-sale | $ | $ | ||||||
| Transfer of loans to foreclosed property | $ | $ | ||||||
See Notes to Consolidated Financial Statements
| 8 |
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 June 30, 2020 and December 31, 2019, and the Company’s results of operations for the three and six months ended June 30, 2020 and 2019 and cash flows for the six months ended June 30, 2020 and 2019. The results of operations for the three and six months ended June 30, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020.
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, 2019 should be referred to in connection with these unaudited interim financial statements.
Risk and Uncertainties
In December 2019, a novel strain of coronavirus (COVID-19) was reported to have surfaced in China,and has since spread to a number of other countries, including the United States. In March 2020, the World Health Organization declared COVID-19 a global pandemic and the United States declared a National Public Health Emergency. The COVID-19 pandemic has severely restricted the level of economic activity in the Bank’s markets. In response to the COVID-19 pandemic, the governments of the states in which the Bank has retail offices, and of most other states, have taken preventative or protective actions, such as imposing restrictions on travel and business operations, advising or requiring individuals to limit or forego their time outside of their homes, and ordering temporary closures of businesses that have been deemed to be non-essential.
While the Bank’s business has been designated an essential business, which allows the Bank to continue to serve its customers, the Bank serves many customers that have been deemed, or who are employed by businesses that have been deemed, to be non-essential. And many of the Bank’s customers that have been categorized to date as essential businesses, or who are employed by businesses that have been categorized as essential businesses, have been adversely affected by the COVID-19 pandemic.
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, 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 the timing and pace of recovery will depend on various developments and other factors, including, among others, the duration and scope of the pandemic, as well as governmental, regulatory and private sector responses to the pandemic, and the associated impacts on the economy, financial markets and the Company’s customers, employees and vendors.
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.
On March 3, 2020, the Federal Reserve reduced the target federal funds rate by 50 basis points, followed by an additional reduction of 100 basis points on March 16, 2020. 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.
| 9 |
Note 1—Nature of Business and Basis of Presentation-continued
As of June 30, 2020, the Bank’s capital ratios were in excess of all regulatory requirements. While management believes that the Company has sufficient capital to withstand an extended economic recession brought about by the COVID-19 pandemic, the Bank’s reported and regulatory capital ratios could be adversely impacted by further credit losses.
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. Furthermore, we are eligible to participate in the Paycheck Protection Program Liquidity Facility (“PPPLF”) to fund Paycheck Protection Program (“PPP”) loans if needed.
Beginning in March 2020, the Company proactively offered payment deferrals for up to 90 days to its loan customers. 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 increased to $175.0 million at June 30, 2020 from $118.3 million at March 31, 2020. 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 normal payments being resumed by loan customers at the conclusion of their applicable payment deferral period, loans in which payments have been deferred decreased from the peak of $206.9 million to $175.0 million at June 30, 2020 and to $64.3 million at July 31, 2020.
The Company has evaluated its exposure to certain industry segments most impacted by the COVID-19 pandemic as of June 30, 2020:
| Industry Segments | Outstanding | % of Loan | Avg. Loan | Avg. Loan to | ||||||||||||
| (Dollars in millions) | Loan Balance | Portfolio | Size | Value | ||||||||||||
| Hotels | $ | % | $ | % | ||||||||||||
| Restaurants | $ | % | $ | % | ||||||||||||
| Assisted Living | $ | % | $ | % | ||||||||||||
| Retail | $ | % | $ | % | ||||||||||||
| 10 |
(In thousands except average market price)
| Six months | Three months | |||||||||||||||
| Ended June 30, | Ended June 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Numerator (Net income available to common shareholders) | $ | $ | $ | $ | ||||||||||||
| Denominator | ||||||||||||||||
| Weighted average common shares outstanding for: | ||||||||||||||||
| Basic shares | ||||||||||||||||
| Dilutive securities: | ||||||||||||||||
| Deferred compensation | ||||||||||||||||
| Warrants/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 the fourth quarter of 2011, we
issued $
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.
The Company has adopted a stock option plan whereby shares have been reserved for issuance by the Company upon the grant of stock options or restricted stock awards. At June 30, 2020 and December 31, 2019 the Company had and shares, respectively, reserved for future grants. The 350,000 shares reserved were approved by shareholders at the 2011 annual meeting. The plan provides 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 June 30, 2020 and December 31, 2019.
The employee restricted shares and units cliff vest over a three-year period; the non-employee
director shares vest one year after issuance. The unrecognized compensation cost at June 30, 2020 and December 31, 2019 for non-vested
shares amounts to $ and $, 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 $
| 11 |
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 | ||||||||||||
| June 30, 2020 | ||||||||||||||||
| US Treasury securities | $ | $ | $ | $ | ||||||||||||
| Government Sponsored Enterprises | ||||||||||||||||
| Mortgage-backed securities | ||||||||||||||||
| Small Business Administration pools | ||||||||||||||||
| State and local government | ||||||||||||||||
| Other securities | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
| Gross | Gross | |||||||||||||||
| Amortized | Unrealized | Unrealized | ||||||||||||||
| (Dollars in thousands) | Cost | Gains | Losses | Fair Value | ||||||||||||
| December 31, 2019 | ||||||||||||||||
| US Treasury securities | $ | $ | $ | $ | ||||||||||||
| Government Sponsored Enterprises | ||||||||||||||||
| Mortgage-backed securities | ||||||||||||||||
| Small Business Administration pools | ||||||||||||||||
| State and local government | ||||||||||||||||
| Other securities | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
During the first quarter of 2019, the Company reclassified the portfolio of securities listed as held-to-maturity to available-for-sale. There were no investment securities listed as held-to-maturity as of June 30, 2020.
During
the six months ended June 30, 2020 and 2019, the Company received proceeds of $0
and $51.1
million, respectively, from the sale of investment securities available-for-sale.
For the three months ended June 30, 2020, there were no gross realized gains from the sale of investment securities available-for-sale
and no gross realized losses. For the three months ended June 30, 2019, gross realized gains from the sale of investment securities
available-for-sale amounted to $
At June 30, 2020, other securities
available-for-sale included the following at fair value: a mutual fund at $
| 12 |
Note 3—Investment Securities-continued
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 June 30, 2020 and December 31, 2019.
| (Dollars in thousands) | Less than 12 months | 12 months or more | Total | |||||||||||||||||||||
| June 30, 2020 | Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | ||||||||||||||||||
| Available-for-sale securities: | Value | Loss | Value | Loss | Value | Loss | ||||||||||||||||||
| Mortgage-backed securities | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Small Business Administration pools | ||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| (Dollars in thousands) | Less than 12 months | 12 months or more | Total | |||||||||||||||||||||
| December 31, 2019 | 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 | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
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 June 30, 2020 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 June 30, 2020.
| 13 |
Note 3—Investment Securities-continued
The following sets forth the amortized cost and fair value of investment securities at June 30, 2020 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.
| June 30, 2020 | Available-for-sale | |||||||
| 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 | $ | $ | ||||||
Note 4—Loans
Loans summarized by category as of June 30, 2020, December 31, 2019 and June 30, 2019 are as follows:
| June 30, | December 31, | June 30, | ||||||||||
| (Dollars in thousands) | 2020 | 2019 | 2019 | |||||||||
| Commercial, financial and agricultural | $ | $ | $ | |||||||||
| Real estate: | ||||||||||||
| Construction | ||||||||||||
| Mortgage-residential | ||||||||||||
| Mortgage-commercial | ||||||||||||
| Consumer: | ||||||||||||
| Home equity | ||||||||||||
| Other | ||||||||||||
| Total | $ | $ | $ | |||||||||
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 and six months ended June 30, 2020 and June 30, 2019 and for the year ended December 31, 2019 is as follows:
| (Dollars in thousands) | ||||||||||||||||||||||||||||||||
| Real estate | Real estate | Consumer | ||||||||||||||||||||||||||||||
| Real estate | Mortgage | Mortgage | Home | Consumer | ||||||||||||||||||||||||||||
| Commercial | Construction | Residential | Commercial | equity | Other | Unallocated | Total | |||||||||||||||||||||||||
| Three months ended June 30, 2020 | ||||||||||||||||||||||||||||||||
| Allowance for loan losses: | ||||||||||||||||||||||||||||||||
| Beginning balance March 31, 2020 | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Charge-offs | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Recoveries | ||||||||||||||||||||||||||||||||
| Provisions | ( | ) | ||||||||||||||||||||||||||||||
| Ending balance June 30, 2020 | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| 14 |
Note 4—Loans-continued
| (Dollars in thousands) | ||||||||||||||||||||||||||||||||
| Real estate | Real estate | Consumer | ||||||||||||||||||||||||||||||
| Real estate | Mortgage | Mortgage | Home | Consumer | ||||||||||||||||||||||||||||
| Commercial | Construction | Residential | Commercial | equity | Other | Unallocated | Total | |||||||||||||||||||||||||
| Six months ended June 30, 2020 | ||||||||||||||||||||||||||||||||
| Allowance for loan losses: | ||||||||||||||||||||||||||||||||
| Beginning balance December 31, 2019 | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Charge-offs | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Recoveries | ||||||||||||||||||||||||||||||||
| Provisions | ( | ) | ||||||||||||||||||||||||||||||
| Ending balance June 30, 2020 | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Ending balances: | ||||||||||||||||||||||||||||||||
| Individually evaluated for impairment | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Collectively evaluated for impairment | ||||||||||||||||||||||||||||||||
| June 30, 2020 Loans receivable: | ||||||||||||||||||||||||||||||||
| Ending balance-total | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Ending balances: | ||||||||||||||||||||||||||||||||
| Individually evaluated for impairment | ||||||||||||||||||||||||||||||||
| Collectively evaluated for impairment | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||||||||||
| Real estate | Real estate | Consumer | ||||||||||||||||||||||||||||||
| Real estate | Mortgage | Mortgage | Home | Consumer | ||||||||||||||||||||||||||||
| Commercial | Construction | Residential | Commercial | equity | Other | Unallocated | Total | |||||||||||||||||||||||||
| Three months ended June 30, 2019 | ||||||||||||||||||||||||||||||||
| Allowance for loan losses: | ||||||||||||||||||||||||||||||||
| Beginning
balance March 31, 2019 | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Charge-offs | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Recoveries | ||||||||||||||||||||||||||||||||
| Provisions | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||
| Ending
balance June 30, 2019 | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| 15 |
Note 4—Loans-continued
| Real estate | Real estate | Consumer | ||||||||||||||||||||||||||||||
| Real estate | Mortgage | Mortgage | Home | Consumer | ||||||||||||||||||||||||||||
| Commercial | Construction | Residential | Commercial | equity | Other | Unallocated | Total | |||||||||||||||||||||||||
| Six months ended June 30, 2019 | ||||||||||||||||||||||||||||||||
| Allowance for loan losses: | ||||||||||||||||||||||||||||||||
| Beginning balance December 31, 2018 | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Charge-offs | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||
| Recoveries | ||||||||||||||||||||||||||||||||
| Provisions | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||
| Ending balance June 30, 2019 | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Ending balances: | ||||||||||||||||||||||||||||||||
| Individually evaluated for impairment | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Collectively evaluated for impairment | ||||||||||||||||||||||||||||||||
| June 30, 2019 Loans receivable: | ||||||||||||||||||||||||||||||||
| Ending balance-total | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Ending balances: | ||||||||||||||||||||||||||||||||
| Individually evaluated for impairment | ||||||||||||||||||||||||||||||||
| Collectively evaluated for impairment | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| 16 |
Note 4—Loans-continued
| (Dollars in thousands) | ||||||||||||||||||||||||||||||||
| Real estate | Real estate | Consumer | ||||||||||||||||||||||||||||||
| Real estate | Mortgage | Mortgage | Home | Consumer | ||||||||||||||||||||||||||||
| Commercial | Construction | Residential | Commercial | equity | Other | Unallocated | Total | |||||||||||||||||||||||||
| December 31, 2019 | ||||||||||||||||||||||||||||||||
| Allowance for loan losses: | ||||||||||||||||||||||||||||||||
| Beginning balance December 31, 2018 | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Charge-offs | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||
| Recoveries | ||||||||||||||||||||||||||||||||
| Provisions | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Ending balance December 31, 2019 | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Ending balances: | ||||||||||||||||||||||||||||||||
| Individually evaluated for impairment | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Collectively evaluated for impairment | ||||||||||||||||||||||||||||||||
| December 31, 2019 Loans receivable: | ||||||||||||||||||||||||||||||||
| Ending balance-total | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Ending balances: | ||||||||||||||||||||||||||||||||
| Individually evaluated for impairment | ||||||||||||||||||||||||||||||||
| Collectively evaluated for impairment | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| 17 |
Note 4—Loans-continued
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 six months ended June 30, 2020 and June 30, 2019:
| (Dollars in thousands) | 2020 | 2019 | ||||||
| Beginning Balance January 1 | $ | $ | ||||||
| New Loans | ||||||||
| Less loan repayments | ||||||||
| Ending Balance June 30 | $ | $ | ||||||
The following table presents at June 30, 2020 and December 31, 2019 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”).
| (Dollars in thousands) | June 30, | December 31, | ||||||
| 2020 | 2019 | |||||||
| Total loans considered impaired | $ | $ | ||||||
| Loans considered impaired for which there is a related allowance for loan loss: | ||||||||
| Outstanding loan balance | $ | $ | ||||||
| Related allowance | $ | $ | ||||||
| Loans considered impaired and previously written down to fair value | $ | $ | ||||||
| Average impaired loans | $ | $ | ||||||
| Amount of interest earned during period of impairment | $ | $ | ||||||
| 18 |
Note 4—Loans-continued
The following tables are by loan category and present at June 30, 2020, June 30, 2019 and December 31, 2019, loans individually evaluated and considered impaired under FASB ASC 310 “Accounting by Creditors for Impairment of a Loan.” Impairment includes performing TDRs.
| (Dollars in thousands) | Six months ended | Three months ended | ||||||||||||||||||||||||||
| Unpaid | Average | Interest | Average | Interest | ||||||||||||||||||||||||
| June 30, 2020 | Recorded | Principal | Related | Recorded | income | Recorded | Income | |||||||||||||||||||||
| Investment | Balance | Allowance | Investment | Recognized | Investment | Recognized | ||||||||||||||||||||||
| With no allowance recorded: | ||||||||||||||||||||||||||||
| Commercial, financial, agricultural | $ | $ | $ | — | $ | $ | $ | $ | ||||||||||||||||||||
| Real estate: | ||||||||||||||||||||||||||||
| Construction | — | |||||||||||||||||||||||||||
| Mortgage-residential | — | |||||||||||||||||||||||||||
| Mortgage-commercial | — | |||||||||||||||||||||||||||
| Consumer: | ||||||||||||||||||||||||||||
| Home equity | — | |||||||||||||||||||||||||||
| Other | — | |||||||||||||||||||||||||||
| With an allowance recorded: | ||||||||||||||||||||||||||||
| Commercial, financial, agricultural | ||||||||||||||||||||||||||||
| Real estate: | ||||||||||||||||||||||||||||
| Construction | ||||||||||||||||||||||||||||
| Mortgage-residential | ||||||||||||||||||||||||||||
| Mortgage-commercial | ||||||||||||||||||||||||||||
| Consumer: | ||||||||||||||||||||||||||||
| Home equity | ||||||||||||||||||||||||||||
| Other | ||||||||||||||||||||||||||||
| Total: | ||||||||||||||||||||||||||||
| Commercial, financial, agricultural | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| Real estate: | ||||||||||||||||||||||||||||
| Construction | ||||||||||||||||||||||||||||
| Mortgage-residential | ||||||||||||||||||||||||||||
| Mortgage-commercial | ||||||||||||||||||||||||||||
| Consumer: | ||||||||||||||||||||||||||||
| Home equity | ||||||||||||||||||||||||||||
| Other | ||||||||||||||||||||||||||||
| $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||
| 19 |
Note 4—Loans-continued
| (Dollars in thousands) | Six months ended | Three months ended | ||||||||||||||||||||||||||
| Unpaid | Average | Interest | Average | Interest | ||||||||||||||||||||||||
| June 30, 2019 | Recorded | Principal | Related | Recorded | income | Recorded | Income | |||||||||||||||||||||
| Investment | Balance | Allowance | Investment | Recognized | Investment | Recognized | ||||||||||||||||||||||
| With no allowance recorded: | ||||||||||||||||||||||||||||
| Commercial, financial, agricultural | $ | $ | $ | — | $ | $ | $ | $ | ||||||||||||||||||||
| Real estate: | ||||||||||||||||||||||||||||
| Construction | — | |||||||||||||||||||||||||||
| Mortgage-residential | — | |||||||||||||||||||||||||||
| Mortgage-commercial | — | |||||||||||||||||||||||||||
| Consumer: | ||||||||||||||||||||||||||||
| Home equity | — | |||||||||||||||||||||||||||
| Other | — | |||||||||||||||||||||||||||
| With an allowance recorded: | ||||||||||||||||||||||||||||
| Commercial, financial, agricultural | ||||||||||||||||||||||||||||
| Real estate: | ||||||||||||||||||||||||||||
| Construction | ||||||||||||||||||||||||||||
| Mortgage-residential | ||||||||||||||||||||||||||||
| Mortgage-commercial | ||||||||||||||||||||||||||||
| Consumer: | ||||||||||||||||||||||||||||
| Home equity | ||||||||||||||||||||||||||||
| Other | ||||||||||||||||||||||||||||
| Total: | ||||||||||||||||||||||||||||
| Commercial, financial, agricultural | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| Real estate: | ||||||||||||||||||||||||||||
| Construction | ||||||||||||||||||||||||||||
| Mortgage-residential | ||||||||||||||||||||||||||||
| Mortgage-commercial | ||||||||||||||||||||||||||||
| Consumer: | ||||||||||||||||||||||||||||
| Home equity | ||||||||||||||||||||||||||||
| Other | ||||||||||||||||||||||||||||
| $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||
| 20 |
Note 4—Loans-continued
| (Dollars in thousands) | ||||||||||||||||||||
| December 31, 2019 | Unpaid | Average | Interest | |||||||||||||||||
| Recorded | Principal | Related | Recorded | Income | ||||||||||||||||
| 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 | ||||||||||||||||||||
| $ | $ | $ | $ | $ | ||||||||||||||||
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.
| 21 |
Note 4—Loans-continued
Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered as pass rated loans. As of June 30, 2020 and December 31, 2019, and based on the most recent analysis performed, the risk category of loans by class of loans is shown in the table below. As of June 30, 2020 and December 31, 2019, no loans were classified as doubtful.
| (Dollars in thousands) | ||||||||||||||||||||
| June 30, 2020 | Special | |||||||||||||||||||
| Pass | Mention | Substandard | Doubtful | Total | ||||||||||||||||
| Commercial, financial & agricultural | $ | $ | $ | $ | $ | |||||||||||||||
| Real estate: | ||||||||||||||||||||
| Construction | ||||||||||||||||||||
| Mortgage – residential | ||||||||||||||||||||
| Mortgage – commercial | ||||||||||||||||||||
| Consumer: | ||||||||||||||||||||
| Home Equity | ||||||||||||||||||||
| Other | ||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | |||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||
| December 31, 2019 | Special | |||||||||||||||||||
| Pass | Mention | Substandard | Doubtful | Total | ||||||||||||||||
| Commercial, financial & agricultural | $ | $ | $ | $ | $ | |||||||||||||||
| Real estate: | ||||||||||||||||||||
| Construction | ||||||||||||||||||||
| Mortgage – residential | ||||||||||||||||||||
| Mortgage – commercial | ||||||||||||||||||||
| Consumer: | ||||||||||||||||||||
| Home Equity | ||||||||||||||||||||
| Other | ||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | |||||||||||||||
At June 30, 2020 and December 31, 2019, non-accrual loans totaled $1.8 million and $2.3 million, respectively.
TDRs that are still accruing and
included in impaired loans at June 30, 2020 and at December 31, 2019 amounted to $
Loans greater than 90 days delinquent
and still accruing interest were $
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.
| 22 |
Note 4—Loans-continued
A summary of changes in the accretable yield for purchased credit-impaired loans for the three months ended June 30, 2020 and June 30, 2019 follows:
| (Dollars in thousands) | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | ||||||
| Accretable yield, beginning of period | $ | $ | ||||||
| Additions | ||||||||
| Accretion | ( | ) | ( | ) | ||||
| Reclassification of nonaccretable difference due to improvement in expected cash flows | ||||||||
| Other changes, net | ||||||||
| Accretable yield, end of period | $ | $ | ||||||
At June 30, 2020 and December 31,
2019, the recorded investment in purchased impaired loans was $
The following tables are by loan category and present loans past due and on non-accrual status as of June 30, 2020 and December 31, 2019:
| (Dollars in thousands) | Greater than | |||||||||||||||||||||||||||
| 30-59 Days | 60-89 Days | 90 Days and | Total | |||||||||||||||||||||||||
| June 30, 2020 | Past Due | Past Due | Accruing | Nonaccrual | Past Due | Current | Total Loans | |||||||||||||||||||||
| Commercial | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| Real estate: | ||||||||||||||||||||||||||||
| Construction | ||||||||||||||||||||||||||||
| Mortgage-residential | ||||||||||||||||||||||||||||
| Mortgage-commercial | ||||||||||||||||||||||||||||
| Consumer: | ||||||||||||||||||||||||||||
| Home equity | ||||||||||||||||||||||||||||
| Other | ||||||||||||||||||||||||||||
| $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||
| (Dollars in thousands) | Greater than | |||||||||||||||||||||||||||
| 30-59 Days | 60-89 Days | 90 Days and | Total | |||||||||||||||||||||||||
| December 31, 2019 | Past Due | Past Due | Accruing | Nonaccrual | Past Due | Current | Total Loans | |||||||||||||||||||||
| Commercial | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| Real estate: | ||||||||||||||||||||||||||||
| Construction | ||||||||||||||||||||||||||||
| Mortgage-residential | ||||||||||||||||||||||||||||
| Mortgage-commercial | ||||||||||||||||||||||||||||
| Consumer: | ||||||||||||||||||||||||||||
| Home equity | ||||||||||||||||||||||||||||
| Other | ||||||||||||||||||||||||||||
| $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||
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 June 30, 2020 and June 30, 2019.
| 23 |
Note 4—Loans-continued
During the six-month periods ended June 30, 2020 and June 30, 2019, 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 89 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. In accordance with interagency guidance issued in March 2020, short term deferrals granted due to the COVID-19 pandemic are not considered TDRs unless the borrower was previously experiencing financial difficulty.
Note 5—Recently Issued Accounting Pronouncements
The following is a summary of recent authoritative pronouncements:
In February 2016, the FASB amended the Leases topic of the ASC to revise certain aspects of recognition, measurement, presentation, and disclosure of leasing transactions. The amendments were effective for fiscal years beginning after December 15, 2018 including interim periods within those fiscal years. The Company adopted the guidance using the modified retrospective method and practical expedients for transition. The practical expedients allow the Company to largely account for our existing leases consistent with current guidance except for the incremental balance sheet recognition of leases. The impact of adoption on January 1, 2019 was recording a right-of-use asset and lease liability of $2.9 million. See Note 9 “Leases” to the consolidated financial statements.
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 currently evaluating the effect that implementation of the new standard will have on its financial position, results of operations, and cash flows.
In January 2017, the FASB amended the Goodwill and Other Topic of the ASC to simplify the accounting for goodwill impairment for public business entities and other entities that have goodwill reported in their financial statements and have not elected the private company alternative for the subsequent measurement of goodwill. The amendment removes Step 2 of the goodwill impairment test. Goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The effective date and transition requirements for the technical corrections were effective for the Company for reporting periods beginning after December 15, 2019. These amendments did not have a material impact on the Company’s financial statements.
In March 2017, the FASB amended the requirements in the Receivables—Nonrefundable Fees and Other Costs Topic of the ASC related to the amortization period for certain purchased callable debt securities held at a premium. The amendments shorten the amortization period for the premium to the earliest call date. The amendments became effective for the Company for interim and annual periods beginning after December 15, 2018 and did not have a material effect on the Company’s financial statements.
In July 2018, the FASB amended the Leases Topic of the ASC to make narrow amendments to clarify how to apply certain aspects of the new leases standard. Additionally, amendments were made to give entities another option for transition and to provide lessors with a practical expedient. The amendments were effective for reporting periods beginning after December 15, 2018 and did not have a material effect on the Company’s financial statements.
In August 2018, the FASB amended the Fair Value Measurement Topic of the ASC. The amendments remove, modify, and add certain fair value disclosure requirements based on the concepts in the FASB Concepts Statement, Conceptual Framework for Financial Reporting—Chapter 8: Notes to Financial Statements. The amendments were effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019 and did not have a material effect on the Company’s financial statements.
| 24 |
Note 5—Recently Issued Accounting Pronouncements-continued
In August 2018, the FASB amended the Intangibles—Goodwill and Other Topic of the ASC to align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The amendments are effective for the Company for fiscal years beginning after December 15, 2019 and did not have a material effect on the Company’s financial statements
In March 2019, the FASB issued guidance to address concerns companies had raised about an accounting exception they would lose when assessing the fair value of underlying assets under the leases standard and clarify that lessees and lessors are exempt from a certain interim disclosure requirement associated with adopting the new standard. The amendments were effective for the Company for reporting periods beginning after December 15, 2019 and did not have a material effect on the Company’s financial statements.
In April 2019, the FASB issued guidance that clarifies and improves areas of guidance related to the recently issued standards on credit losses, hedging, and recognition and measurement of financial instruments. The amendments related to credit losses were effective for the Company for reporting periods beginning after December 15, 2019. The amendments related to hedging were effective for the Company for interim and annual periods beginning after December 15, 2018. The amendments related to recognition and measurement of financial instruments were effective for the Company for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. These amendments did not have a material impact on the Company’s financial statements.
In July 2019, the FASB updated various Topics of the ASC to align the guidance in various SEC sections of the ASC with the requirements of certain SEC final rules. The amendments were effective upon issuance and did not have a material effect on the Company’s 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 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 Accounting Standards Codification. 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 are effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. Early adoption is permitted. 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 are effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Early adoption is permitted, including early adoption in an interim period. 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.
| 25 |
Note 5—Recently Issued Accounting Pronouncements-continued
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 are effective upon issuance of this 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. Early application is permitted. The effective date of the amendments to ASU 2016-01 is 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 (SRCs) 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 will continue to be 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. The Company is evaluating the impact that this will have on its financial statements In March 2020, the FASB issued guidance to provide temporary optional guidance to ease the potential burden in accounting for reference rate reform. The amendments are effective as of March 12, 2020 through December 31, 2022. The Company does not expect these amendments to have a material effect on its financial statements.
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 generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. The ASU is intended to help stakeholders during the global market-wide reference rate transition period. The amendments are effective as of March 12, 2020 through December 31, 2022. The Company does not expect these amendments to have a material effect 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. |
| 26 |
Note 6—Fair Value of Financial Instruments-continued
FASB ASC 825-10-50 “Disclosure about Fair Value of Financial Instruments”, requires the Company to disclose estimated fair values for its financial instruments. 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—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.
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.
Federal Home Loan Bank Advances - Fair value is estimated based on discounted cash flows using current market rates for borrowings with similar terms and are classified as Level 2.
Short Term Borrowings - 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 Debentures - The fair value of junior subordinated debentures 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.
| 27 |
Note 6—Fair Value of Financial Instruments-continued
The carrying amount and estimated fair value by classification level of the Company’s financial instruments as of June 30, 2020 and December 31, 2019 are as follows:
| June 30, 2020 | ||||||||||||||||||||
| Fair Value | ||||||||||||||||||||
| (Dollars in thousands) | Carrying Amount | Total | Level 1 | Level 2 | Level 3 | |||||||||||||||
| Financial Assets: | ||||||||||||||||||||
| Cash and short term investments | $ | $ | $ | $ | $ | |||||||||||||||
| Available-for-sale securities | ||||||||||||||||||||
| Other investments, at cost | ||||||||||||||||||||
| Loans held-for-sale | ||||||||||||||||||||
| Net loans receivable | ||||||||||||||||||||
| Accrued interest | ||||||||||||||||||||
| Financial liabilities: | ||||||||||||||||||||
| Non-interest bearing demand | $ | $ | $ | $ | $ | |||||||||||||||
| Interest bearing demand deposits and money market accounts | ||||||||||||||||||||
| Savings | ||||||||||||||||||||
| Time deposits | ||||||||||||||||||||
| Total deposits | ||||||||||||||||||||
| Short term borrowings | ||||||||||||||||||||
| Junior subordinated debentures | ||||||||||||||||||||
| Accrued interest payable | ||||||||||||||||||||
| 28 |
Note 6—Fair Value of Financial Instruments-continued
| December 31, 2019 | ||||||||||||||||||||
| Fair Value | ||||||||||||||||||||
| (Dollars in thousands) | Carrying Amount | Total | Level 1 | Level 2 | Level 3 | |||||||||||||||
| Financial Assets: | ||||||||||||||||||||
| Cash and short term investments | $ | $ | $ | $ | $ | |||||||||||||||
| Available-for-sale securities | ||||||||||||||||||||
| Other investments, at cost | ||||||||||||||||||||
| Loans held-for-sale | ||||||||||||||||||||
| Net loans receivable | ||||||||||||||||||||
| Accrued interest | ||||||||||||||||||||
| Financial liabilities: | ||||||||||||||||||||
| Non-interest bearing demand | $ | $ | $ | $ | $ | |||||||||||||||
| Interest bearing demand deposits and money market accounts | ||||||||||||||||||||
| Savings | ||||||||||||||||||||
| Time deposits | ||||||||||||||||||||
| Total deposits | ||||||||||||||||||||
| Federal Home Loan Bank advances | ||||||||||||||||||||
| Short term borrowings | ||||||||||||||||||||
| Junior subordinated debentures | ||||||||||||||||||||
| Accrued interest payable | ||||||||||||||||||||
The following tables summarize quantitative disclosures about the fair value for each category of assets carried at fair value as of June 30, 2020 and December 31, 2019 that are measured on a recurring basis. There were no liabilities carried at fair value as of June 30, 2020 or December 31, 2019 that are measured on a recurring basis.
(Dollars in thousands)
| Description | June 30, 2020 | 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 | ||||||||||||||||
| Loans held-for-sale | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
| 29 |
Note 6—Fair Value of Financial Instruments-continued
(Dollars in thousands)
| Description | December 31, 2019 | 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 securities | ||||||||||||||||
| 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 June 30, 2020 and December 31, 2019 that are measured on a non-recurring basis. There were no Level 3 financial instruments for the six months ended June 30, 2020 and June 30, 2019 measured on a recurring basis.
| (Dollars in thousands) | ||||||||||||||||
| Description | June 30, 2020 | 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-commercial | ||||||||||||||||
| Total other real estate owned | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
| 30 |
Note 6—Fair Value of Financial Instruments-continued
| (Dollars in thousands) | ||||||||||||||||
| Description | December 31, 2019 | 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 | $ | $ | $ | $ | ||||||||||||
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. With respect to less complex or smaller credits, an internal evaluation may be performed. This internal process consists of evaluating the underlying collateral to independently obtained comparable properties. 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 $3.4 million and $4.0 million as of June 30, 2020 and December 31, 2019, respectively.
| 31 |
Note 6—Fair Value of Financial Instruments-continued
For Level 3 assets and liabilities measured at fair value on a non-recurring basis as of June 30, 2020 and December 31, 2019, the significant unobservable inputs used in the fair value measurements were as follows:
| (Dollars in thousands) | Fair
Value as of June 30, 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
| ||||
| (Dollars in thousands) | Fair
Value as of December 31, 2019 |
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:
| June 30, | December 31, | |||||||
| (Dollars in thousands) | 2020 | 2019 | ||||||
| Non-interest bearing demand deposits | $ | $ | ||||||
| Interest bearing demand deposits and money market accounts | ||||||||
| Savings | ||||||||
| Time deposits | ||||||||
| Total deposits | $ | $ | ||||||
As of June 30, 2020 and December
31, 2019, the Company had time deposits greater than $250,000 of $
| 32 |
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. |
| · | 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 and six months ended June 30, 2020 and June 30, 2019.
| (Dollars in thousands) | Commercial | Investment | ||||||||||||||||||||||
| Six months ended June 30, 2020 | 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 (loss) | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||
| (Dollars in thousands) | Commercial | Investment | ||||||||||||||||||||||
| Six months ended June 30, 2019 | 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 (loss) | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||
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Note 8—Reportable Segments-continued
| (Dollars in thousands) | Commercial | Investment | ||||||||||||||||||||||
| Three months ended June 30, 2020 | 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 | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||
| (Dollars in thousands) | Commercial | Investment | ||||||||||||||||||||||
| Three months ended June 30, 2019 | 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 June 30, 2020 | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||
| Total Assets as of December 31, 2019 | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||
Note 9—Leases
During the three-month period ended
June 30, 2020 and June 30, 2019, the Company made cash payments for operating leases in the amount of $
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Note 9—Leases-continued
| (Dollars in thousands) | ||||||||||||
| Lease | Liability | |||||||||||
| Year | Cash | Expense | Reduction | |||||||||
| 2020 | $ | $ | $ | |||||||||
| 2021 | ||||||||||||
| 2022 | ||||||||||||
| 2023 | ||||||||||||
| 2024 | ||||||||||||
| 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 has determined that no subsequent events occurred requiring accrual or that require disclosure and have not been disclosed in the footnotes to our unaudited consolidated financial statements as of June 30, 2020.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Cautionary Note 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, 2019 as filed with the U.S. Securities and Exchange Commission (the “SEC”) on March 13, 2020 and the following:
| · | the strength of the United States economy in general and the strength of the local economies in which we conduct operations may be different than expected including, but not limited to, due to the negative impacts and disruptions resulting from the outbreak of the novel coronavirus, or COVID-19, on the economies and communities we serve, which may have an adverse impact on our business, operations, and performance, and could have a negative impact on our credit portfolio, share price, borrowers, and on the economy as a whole both domestically and globally; |
| · | changes in legislation, regulation, policies or administrative practices, whether by judicial, governmental, or legislative action, including, but not limited to, the Coronavirus Aid, Relief, and Economic Security Act, or the “CARES Act”; |
| · | 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; |
| · | any impairment of our goodwill or other intangible assets; |
| · | 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, but not limited to, the CARES Act; |
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| · | risks associated with our participation in the Paycheck Protection Program, otherwise the PPP, established by the CARES Act, including but not limited to, litigation from borrowers and agents of borrowers of the PPP loans and the failure of the borrower to qualify for loan forgiveness, which would subject us to the risk of holding these loans at unfavorable interest rates as compared to the loans to customers that we would have otherwise extended credit; |
| · | 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; |
| · | 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; |
| · | changes in accounting standards, policies, estimates, practices or guidelines; |
| · | 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 the potential effects of the COVID-19 pandemic on trade, including supply chains and export levels, travel, employee activity and other economic activities), war or terrorist activities, 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, “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2019, in Part II, Item 1A, “Risk Factors” of our Quarterly Report on Form 10-Q, and 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. 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.
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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 six months and three months ended June 30, 2020 as compared to the six months and three months ended June 30, 2019; and analyzes our financial condition as of June 30, 2020 as compared to December 31, 2019. 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.
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
In December 2019, a novel strain of coronavirus (COVID-19) was reported to have surfaced in China, and has since spread to a number of other countries, including the United States. In March 2020, the World Health Organization declared COVID-19 a global pandemic and the United States declared a National Public Health Emergency. Beginning in March 2020, large public events were cancelled and governmental authorities began imposing restrictions on non-essential businesses and activities, resulting in severe restrictions in economic activity in our markets and across the United States. Although many businesses have begun to reopen, some markets, including certain of our markets, have since experienced a resurgence of COVID-19 cases, which may further slow overall economic activity and recovery. Uncertainty also remains regarding if, how and when schools will reopen and the impact of such decisions on the economy.
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, significant volatility and disruption in financial markets. In addition, due to the COVID-19 pandemic, market interest rates have declined significantly, with the 10-year Treasury bond falling below 1.00% on March 3, 2020, for the first time. The 10-year Treasury bond was 0.66% at June 30, 2020. On March 3, 2020, the Federal Open Market Committee reduced the targeted federal funds interest rate range by 50 basis points to 1.00% to 1.25%. This range was further reduced by 100 basis points to 0% to 0.25% on March 16, 2020. 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 the timing and pace of recovery will depend on various developments and other factors, including, among others, the duration and scope of the pandemic, as well as governmental, regulatory and private sector responses to the pandemic, and the associated impacts on the economy and financial markets; and on our customers, employees and vendors.
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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 have a business continuity plan that covers a variety of potential impacts to business operations. These plans are periodically reviewed and tested and have been designed to protect the ongoing viability of bank operations in the event of a disruption such as a pandemic. Beginning in March 2020, we activated our pandemic preparedness plan and began to roll it out in phases related to the COVID-19 pandemic.
Following recommendations from the Centers for Disease Control and Prevention and the South Carolina Department of Health and Environmental Control, we implemented enhanced cleaning of bank facilities and provided guidance to employees and customers on best practices to minimize the spread of the virus. As part of our efforts to exercise social distancing, we modified our delivery channels with a shift to drive thru only service at the banking offices supplemented by appointments for service in the office lobbies. The number of branch transactions decreased 15.2% during the second quarter of 2020 compared to the same period in 2019. We have encouraged the use of online and mobile channels and have seen the number of online banking users increase, as well as the dollar volume of bill payment, Zelle, and mobile deposit transactions trend higher. To support the health and well-being of our employees, a portion of our workforce is working from home. We have enhanced our remote work capabilities by providing additional laptops and various audio and video meeting technologies. Communication channels for employees and customers were created to provide periodic updates during this rapidly changing environment. These are still in place and in use.
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.
Our asset quality metrics as of June 30, 2020 remained sound. The non-performing asset ratio was 0.25% of total assets with the nominal level of $3.3 million in non-performing assets. Loans past due 30 days or more represented only 0.04% of the loan portfolio. The ratio of classified loans plus OREO was 5.41% of total bank regulatory risk-based capital. During the second quarter, the Bank experienced net loan charge-offs of $5 thousand and net overdraft charge-offs of $2 thousand. During the first six months of 2020, the Bank experienced net loan recoveries of $3 thousand and net overdraft charge-offs of $19 thousand. However, the impact of the COVID-19 pandemic is serious and is being felt by our customers and our communities. The ultimate impacts of this unique and evolving situation on our customers and our asset quality are too challenging to predict. Stay-at-home orders were implemented in our markets causing many businesses to close or significantly reduce their normal operations. While the stay-at-home orders have been lifted and there has been some recent relaxing of these restrictions in some of our markets, the timing of the return to normal is unknown. Our focus is on serving our many local business and individual customers at this time of great need and uncertainty.
Beginning in March 2020, the Company proactively offered payment deferrals for up to 90 days to its loan customers. 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 increased to $175.0 million at June 30, 2020 from $118.3 million at March 31, 2020. 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 restarted at the conclusion of their payment deferral period, loans in which payments have been deferred decreased from the peak of $206.9 million to $175.0 million at June 30, 2020 and to $64.3 million at July 31, 2020. Some of these deferments were to businesses that have temporarily closed or reduced operations and some were requested as a pre-cautionary measure to conserve cash. We proactively offered deferrals to our customers regardless of the impact of the pandemic on their business or personal finances.
We are also a small business administration approved lender and we are participating in the PPP, established under the CARES Act. Through June 30, 2020, we funded 770 PPP loans totaling $50.1 million in principal balance. Net of payoffs, we had 766 PPP loans totaling $49.4 million gross of deferred fees and costs and $47.9 million net of deferred fees and costs at June 30, 2020. The $1.5 million in PPP deferred fees net of deferred costs will be recognized as interest income over the remaining life of the PPP loans.
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At June 30, 2020, our non-performing assets were not yet materially impacted by the economic pressures of the COVID-19 pandemic. However, 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 June 30, 2020:
| Industry Segments | Outstanding | % of Loan | Avg. Loan | Avg. Loan to | ||||||||||||
| (Dollars in millions) | Loan Balance | Portfolio | Size | Value | ||||||||||||
| Hotels | $ | 28.8 | 3.5 | % | $ | 1.9 | 68 | % | ||||||||
| Restaurants | $ | 20.7 | 2.5 | % | $ | 0.7 | 69 | % | ||||||||
| Assisted Living | $ | 9.1 | 1.1 | % | $ | 1.8 | 49 | % | ||||||||
| Retail | $ | 78.7 | 9.6 | % | $ | 0.6 | 60 | % | ||||||||
We are 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 June 30, 2020. 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 June 30, 2020. Total shareholders’ equity increased $10.6 million or 8.8% to $130.8 million at June 30, 2020 from $120.2 million at December 31, 2019. 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 June 30, 2020 and December 31, 2019. Refer to Capital and Liquidity section for more details.
| 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 | |||||||||||||||
| June 30, 2020 | ||||||||||||||||||||
| Leverage Ratio | 9.31 | % | 5.00 | % | 4.00 | % | $ | 53,628 | $ | 66,062 | ||||||||||
| Common Equity Tier 1 Capital Ratio | 13.02 | % | 6.50 | % | 4.50 | % | 57,993 | 75,778 | ||||||||||||
| Tier 1 Capital Ratio | 13.02 | % | 8.00 | % | 6.00 | % | 44,654 | 62,440 | ||||||||||||
| Total Capital Ratio | 14.03 | % | 10.00 | % | 8.00 | % | 35,805 | 53,590 | ||||||||||||
| December 31, 2019 | ||||||||||||||||||||
| Leverage Ratio | 9.97 | % | 5.00 | % | 4.00 | % | $ | 56,197 | $ | 67,508 | ||||||||||
| Common Equity Tier 1 Capital Ratio | 13.47 | % | 6.50 | % | 4.50 | % | 58,345 | 75,086 | ||||||||||||
| Tier 1 Capital Ratio | 13.47 | % | 8.00 | % | 6.00 | % | 45,789 | 62,530 | ||||||||||||
| Total Capital Ratio | 14.26 | % | 10.00 | % | 8.00 | % | 35,675 | 52,416 | ||||||||||||
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. Furthermore, we are eligible to participate in the PPPLF to fund PPP loans, if needed.
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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 June 30, 2020 and our notes included in the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2019 as filed with the SEC on March 13, 2020.
Certain accounting policies involve significant judgments and assumptions by us that have a material impact on the carrying value of certain assets and liabilities. We consider these accounting policies to be critical accounting policies. The judgment and assumptions we use are based on historical experience and other factors, which we believe to be reasonable under the circumstances. Because of the nature of the judgment and assumptions we make, actual results could differ from these judgments and estimates that could have a material impact on the carrying values of our assets and liabilities and our results of operations. A brief discussion of each of these areas appears in our 2019 Annual Report on Form 10-K. During the first six months of 2020, we did not significantly alter the manner in which we applied our Critical Accounting Policies or developed related assumptions and estimates.
Allowance for Loan Losses
We believe the allowance for loan losses is the critical accounting policy that requires the most significant judgment and estimates used in preparation of our consolidated financial statements. Some of the more critical judgments supporting the amount of our allowance for loan losses include judgments about the credit worthiness of borrowers, the estimated value of the underlying collateral, the assumptions about cash flow, determination of loss factors for estimating credit losses, the impact of current events and conditions, and other factors impacting the level of probable inherent losses. Under different conditions or using different assumptions, the actual amount of credit losses incurred by us may be different from management’s estimates provided in our consolidated financial statements. Refer to the portion of this discussion that addresses our allowance for loan losses for a more complete discussion of our processes and methodology for determining our allowance for loan losses.
FASB has issued a new credit impairment model, the Current Expected Credit Loss, or CECL model, which will become applicable to us in 2023. Under the CECL model, we will be required to present certain financial assets carried at amortized cost, such as loans held for investment and held-to-maturity debt securities, at the net amount expected to be collected. The measurement of expected credit losses is to be based on information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. This measurement will take place at the time the financial asset is first added to the balance sheet and periodically thereafter. This differs significantly from the “incurred loss” model currently required under GAAP, which delays recognition until it is probable a loss has been incurred. Accordingly, we expect that the adoption of the CECL model will materially affect how we determine our allowance for loan losses and could require us to significantly increase our allowance. Moreover, the CECL model may create more volatility in the level of our allowance for loan losses. If we are required to materially increase our level of allowance for loan losses for any reason, such increase could adversely affect our business, financial condition and results of operations.
The new CECL standard will become effective for us on January 1, 2023 and for interim periods within that year. We are currently evaluating the impact the CECL model will have on our accounting, but we expect to recognize a one-time cumulative-effect adjustment to our allowance for loan losses as of the beginning of the first reporting period in which the new standard is effective, consistent with regulatory expectations set forth in interagency guidance issued at the end of 2016. We cannot yet determine the magnitude of any such one-time cumulative adjustment or of the overall impact of the new standard on our business, financial condition and results of operations.
On December 21, 2018, the federal banking agencies issued a joint final rule to revise their regulatory capital rules to (i) address the upcoming implementation of CECL; (ii) provide an optional three-year phase-in period for the day-one adverse regulatory capital effects that banking organizations are expected to experience upon adopting CECL; and (iii) require for certain banking organizations that are subject to stress testing, the use of CECL in stress tests beginning with the 2020 capital planning and stress testing cycle.
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Goodwill and Other Intangibles
Goodwill represents the excess of the purchase price over the sum of the estimated fair values of the tangible and identifiable intangible assets acquired less the estimated fair value of the liabilities assumed. Goodwill has an indefinite useful life and is evaluated for impairment annually or more frequently if events and circumstances indicate that the asset might be impaired. An impairment loss is recognized to the extent that the carrying amount exceeds the asset’s fair value. Qualitative factors are assessed to first determine if it is more likely than not (more than 50%) that the carrying value of goodwill is less than fair value. These qualitative factors include but are not limited to overall deterioration in general economic conditions, industry and market conditions, and overall financial performance. If determined that it is more likely than not that there has been a deterioration in the fair value of the carrying value then the first of a two-step process would be performed. The first step, used to identify potential impairment, involves comparing each reporting unit’s estimated fair value to its carrying value, including goodwill. If the estimated fair value of a reporting unit exceeds its carrying value, goodwill is considered not to be impaired. If the carrying value exceeds estimated fair value, there is an indication of potential impairment and the second step is performed to measure the amount of impairment.
If required, the second step involves calculating an implied fair value of goodwill for each reporting unit for which the first step indicated impairment. The implied fair value of goodwill is determined in a manner similar to the amount of goodwill calculated in a business combination, by measuring the excess of the estimated fair value of the reporting unit, as determined in the first step, over the aggregate estimated fair values of the individual assets, liabilities and identifiable intangibles as if the reporting unit was being acquired in a business combination. If the implied fair value of goodwill exceeds the carrying value of goodwill assigned to the reporting unit, there is no impairment. If the carrying value of goodwill assigned to a reporting unit exceeds the implied fair value of the goodwill, an impairment charge is recorded for the excess. An impairment loss cannot exceed the carrying value of goodwill assigned to a reporting unit, and the loss establishes a new basis in the goodwill. Subsequent reversal of goodwill impairment losses is not permitted. Management has determined that the Company has four reporting units.
In January 2017, the FASB issued ASU No. 2017-04, which simplifies the accounting for goodwill impairment for all entities by requiring impairment charges to be based on the first step in today’s two-step impairment test under ASC Topic 350 and eliminating Step 2 from the goodwill impairment test. This guidance was effective for us as of January 1, 2020.
Core deposit intangibles represent the estimated value of long-term deposit relationships acquired in bank or branch acquisition transactions. These costs are amortized over the estimated useful lives of the deposit accounts acquired on a method that we believe reasonably approximates the anticipated benefit stream from the accounts. The estimated useful lives are periodically reviewed for reasonableness.
Depending on, among other things, the duration and severity of the impacts of the COVID-19 pandemic, we could have to reevaluate our financial condition and potential impairment of our goodwill.
Income Taxes and Deferred Tax Assets and Liabilities
Income taxes are provided for the tax effects of the transactions reported in our consolidated financial statements and consist of taxes currently due plus deferred taxes related to differences between the tax basis and accounting basis of certain assets and liabilities, including available-for-sale securities, allowance for loan losses, write-downs of OREO properties, write-downs on premises held-for-sale, accumulated depreciation, net operating loss carry forwards, accretion income, deferred compensation, intangible assets, and pension plan and post-retirement benefits. The deferred tax assets and liabilities represent the future tax return consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. Deferred tax assets and liabilities are reflected at income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. A valuation allowance is recorded when it is “more likely than not” that a deferred tax asset will not be realized. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. We file a consolidated federal income tax return for the Bank. At June 30, 2020 and December 31, 2019, we were in a net deferred tax asset position.
Other-Than-Temporary Impairment
We evaluate securities for other-than-temporary impairment at least on a quarterly basis. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) the outlook for receiving the contractual cash flows of the investments, (4) the anticipated outlook for changes in the general level of interest rates, and (5) our intent and ability to retain our investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value or for a debt security whether it is more-likely-than-not that the Company will be required to sell the debt security prior to recovering its fair value (See Note 3 to the Consolidated Financial Statements).
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Business Combinations, Method of Accounting for Loans Acquired
We account for acquisitions under FASB ASC Topic 805, Business Combinations, which requires the use of the acquisition method of accounting. All identifiable assets acquired, including loans, are recorded at fair value. No allowance for loan losses related to the acquired loans is recorded on the acquisition date because the fair value of the loans acquired incorporates assumptions regarding credit risk.
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.
Comparison of Results of Operations for Six Months Ended June 30, 2020 to the Six Months Ended June 30, 2019
Net Income
Our net income for the six months ended June 30, 2020 was $4.0 million, or $0.54 diluted earnings per common share, as compared to $5.4 million, or $0.70 diluted earnings per common share, for the six months ended June 30, 2019. The $1.4 million decrease in net income between the two periods is primarily due to increases in provision for loan losses expense of $2.2 million and non-interest expense of $1.2 million, partially offset by an increase in net interest income of $1.0 million, an increase in non-interest income of $620 thousand, and a decrease in income tax expense of $408 thousand. The increase in provision for loan losses is primarily related to an increase in the qualitative factors in the company’s allowance for loan losses methodology related to the deteriorating economic conditions and economic uncertainties caused by the COVID-19 pandemic. The increase in non-interest expense is primarily related to increased salaries and employee benefits expense of $1.1 million. The increase in net interest income results from an increase of $124.7 million in average earning assets partially offset by a 23 basis point decline in the net interest margin between the two periods. The increase in non-interest income is primarily related to an increase in mortgage banking income of $472 thousand and an increase in investment advisory fees and non-deposit commissions of $378 thousand partially offset by $182 thousand decrease in deposit service charges and $135 decrease in gains on sale of securities. Our effective tax rate was 19.47% during the first six months of 2020 compared to 20.40% during the first six months of 2019.
Net Interest Income
Net interest income is our primary source of revenue. Net interest income is the difference between income earned on assets such as loans, securities, and other short-term investments and interest paid on deposits and borrowings used to support such assets. Net interest income is determined by 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 six-month periods ended June 30, 2020 and 2019, along with average balances and the related interest income and interest expense amounts.
Net interest income increased $1.0 million or 5.6% to $19.2 million for the six months ended June 30, 2020 from $18.1 million for the six months ended June 30, 2019. Our net interest margin declined by 23 basis points to 3.43% during the first six months of 2020 from 3.66% during the first six months of 2019. Our net interest margin, on a taxable equivalent basis, was 3.46% for the first six months of 2020 compared to 3.70% for the first six months of 2019. Average earning assets increased $124.7 million, or 12.5%, to $1.1 billion for the six months ended June 30, 2020 as compared to $999.5 million in the same period of 2019. 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 an 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 three times totaling 75 basis points in reductions during 2019 and two times totaling 150 basis points in reductions during the first quarter of 2020 and lower yields on PPP loans 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, a flat-to-inverted yield curve, the competitive loan pricing environment, and the COVID-19 pandemic put downward pressure on our net interest margin during the first six months of 2020.
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Average loans increased $62.9 million, or 8.7%, to $789.3 million for the first six months of 2020 from $726.4 million for the first six months of 2019. Average PPP loans increased $15.9 million and average Non-PPP loans increased $46.9 million to $15.9 million and $773.3 million, respectively, for the first six months of 2020. Average loans represented 70.2% of average earning assets during the first six months of 2020 compared to 72.7% of average earning assets during the first six months of 2019. The decline in average loans as a percentage of average earning assets was primarily due to increases in deposits of $98.2 million and securities sold under agreements to repurchase of $17.7 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 Federal Home Loan Bank advances. The yield on loans declined 28 basis points to 4.55% in the first six months of 2020 from 4.83% in the first six months of 2019. Excluding PPP loans, the yield on Non-PPP loans was 4.58% in the first six months of 2020. Average securities and average other short-term investments for the six months ended June 30, 2020 increased $39.5 million and $22.4 million, respectively, from the prior year period. The yield on our securities portfolio declined to 2.31% for the six months ended June 30, 2020 from 2.66% for the same period in 2019; the yield on our other short-term investments declined to 0.88% for the six months ended June 30, 2020 from 2.43% for the same period in 2019. These declines were primarily related to the Federal Reserve reducing the target range of the federal funds as described above. The yield on earning assets for the six months ended June 30, 2020 and 2019 was 3.82% and 4.23%, respectively. The cost of interest-bearing liabilities was at 58 basis points in the first six months 2020 compared to 80 basis points in the first six months of 2019. We continue to focus on growing our pure deposits (demand deposits, interest-bearing transaction accounts, savings deposits and money market accounts). These accounts tend to be low-cost deposits and assist us in controlling our overall cost of funds. In the first six months of 2020, these deposits averaged 83.5% of total deposits as compared to 80.5% in the same period of 2019.
Provision and Allowance for Loan Losses
We account for our allowance for loan losses under the incurred loss model. As mentioned above, the CECL model will become effective for us on January 1, 2023. At June 30, 2020, the allowance for loan losses was $8.9 million, or 1.09% of total loans (excluding loans held-for-sale), compared to $7.7 million, or 1.03% of total loans (excluding loans held-for-sale) at March 31, 2020 and $6.6 million, or 0.90% of total loans (excluding loans held-for-sale) at December 31, 2019. 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 the deteriorating economic conditions and economic uncertainties caused by the COVID-19 pandemic.
Loans that were acquired in the acquisition of Cornerstone Bancorp, otherwise referred to herein as Cornerstone, in 2017 as well as in the 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 June 30, 2020 and December 31, 2019, the remaining credit component on loans attributable to acquired loans in the Cornerstone and Savannah River transactions was $356 thousand and $534 thousand, respectively. Our provision for loan losses was $2.3 million and $114 thousand for the six months ended June 30, 2020 and 2019, respectively. The increase in the provision for loan losses is primarily related to an increase 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 experience ability 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.
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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 – Loans). The annualized weighted average loss ratios over the last 36 months for loans classified as substandard, special mention and pass have been approximately 0.14%, 0.08% 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.
We have a significant portion of our loan portfolio with real estate as the underlying collateral. At June 30, 2020 and December 31, 2019, approximately 85.6% and 91.6%, 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 $47.9 million at June 30, 2020 from $0 at December 31, 2019. 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 $3.3 million (0.25% of total assets) at June 30, 2020 as compared to $3.7 million (0.32% of total assets) at December 31, 2019. 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 28 loans totaling $1.8 million (0.22% of total loans) included in non-performing status (non-accrual loans and loans past due 90 days and still accruing) at June 30, 2020. The largest loan included in non-accrual status is in the amount of $630 thousand and is secured by commercial non-owner occupied real estate located in Aiken, South Carolina. The average balance of the remaining 27 loans is approximately $44 thousand with a range between $0 and $300 thousand, and the majority of these loans are secured by first mortgage liens. Furthermore, we had $1.6 million in accruing trouble debt restructurings, or TDRs, at June 30, 2020 compared to $1.7 million at December 31, 2019. 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 trouble debt restructurings are considered impaired. At June 30, 2020, we had 33 impaired loans totaling $3.4 million compared to 33 impaired loans totaling $4.0 million at December 31, 2019. 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 June 30, 2020, we had loans totaling $311 thousand that were delinquent 30 days to 89 days representing 0.04% of total loans compared to $476 thousand or 0.06% of total loans at December 31, 2019.
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Due to the COVID-19 pandemic and our proactive offerings of payment deferrals, loans on which payments have been deferred increased to $175.0 million at June 30, 2020 from $118.3 million at March 31, 2020 and $0 at December 31, 2019. 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 offered deferrals to our customers regardless of the impact of the pandemic on their business or personal finances. Our management continuously monitors non-performing, classified and past due loans to identify deterioration regarding the condition of these loans and given the on-going and uncertain impact of the COVID-19 pandemic, we will continue to monitor our loan portfolio for potential risks.
The following table summarizes the activity related to our allowance for loan losses for the periods indicated:
Allowance for Loan Losses
| Six Months Ended | ||||||||
| June 30, | ||||||||
| (Dollars in thousands) | 2020 | 2019 | ||||||
| Average loans outstanding (including loans held-for-sale) | $ | 789,250 | $ | 726,398 | ||||
| Loans outstanding at period end (excluding loans held-for-sale) | $ | 817,372 | $ | 726,707 | ||||
| Non-performing assets: | ||||||||
| Nonaccrual loans | $ | 1,806 | $ | 2,690 | ||||
| Loans 90 days past due still accruing | — | — | ||||||
| Foreclosed real estate | 1,449 | 1,412 | ||||||
| Repossessed-other | — | — | ||||||
| Total non-performing assets | $ | 3,255 | $ | 4,102 | ||||
| Beginning balance of allowance | $ | 6,627 | $ | 6,263 | ||||
| Loans charged-off: | ||||||||
| Commercial | — | 2 | ||||||
| Real Estate - Construction | — | — | ||||||
| Real Estate Mortgage - Residential | — | 7 | ||||||
| Real Estate Mortgage - Commercial | 1 | — | ||||||
| Consumer - Home Equity | — | 1 | ||||||
| Consumer - Other | 47 | 66 | ||||||
| Total loans charged-off | 48 | 76 | ||||||
| Recoveries: | ||||||||
| Commercial | 3 | — | ||||||
| Real Estate - Construction | — | — | ||||||
| Real Estate Mortgage - Residential | — | — | ||||||
| Real Estate Mortgage - Commercial | 9 | 41 | ||||||
| Consumer - Home Equity | 1 | — | ||||||
| Consumer - Other | 19 | 20 | ||||||
| Total recoveries | 32 | 61 | ||||||
| Net loan charge offs | 16 | 15 | ||||||
| Provision for loan losses | 2,325 | 114 | ||||||
| Balance at period end | $ | 8,936 | $ | 6,362 | ||||
| Net charge offs to average loans (annualized) | 0.00 | % | 0.00 | % | ||||
| Allowance as percent of total loans | 1.09 | % | 0.88 | % | ||||
| Non-performing assets as % of total assets | 0.25 | % | 0.36 | % | ||||
| Allowance as % of non-performing loans | 274.53 | % | 155.09 | % | ||||
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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) | June 30, 2020 | December 31, 2019 | ||||||||||||||
| % of loans in | % of loans in | |||||||||||||||
| Amount | Category | Amount | Category | |||||||||||||
| Commercial, Financial and Agricultural | $ | 769 | 9.2 | % | $ | 427 | 7.3 | % | ||||||||
| Real Estate – Construction | 165 | 2.0 | % | 111 | 1.9 | % | ||||||||||
| Real Estate Mortgage: | ||||||||||||||||
| Residential | 497 | 6.0 | % | 367 | 6.3 | % | ||||||||||
| Commercial | 6,469 | 77.7 | % | 4,602 | 78.7 | % | ||||||||||
| Consumer: | ||||||||||||||||
| Home Equity | 293 | 3.5 | % | 240 | 4.1 | % | ||||||||||
| Other | 133 | 1.6 | % | 97 | 1.7 | % | ||||||||||
| Unallocated | 610 | N/A | 783 | N/A | ||||||||||||
| Total | $ | 8,956 | 100.0 | % | $ | 6,627 | 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 first six months of 2020 was $6.3 million as compared to $5.7 million during the same period in 2019. Deposit service charges decreased $182 thousand during the first six months of 2020 as compared to the same period in 2019 primarily due to customers holding higher balances in their deposit accounts due to proceeds from PPP loans and other stimulus funds related to the COVID-19 pandemic. Mortgage banking income increased by $472 thousand from $2.1 million in the first six months of 2019 to $2.6 million in the first six months of 2020. Mortgage production including loans held-for-sale and portfolio loans in the first six months of 2020 was $89.2 million as compared to $62.7 million in the same period of 2019. With the decline in mortgage interest rates, refinance activity increased during the first six months of 2020 and represented 53.7% of production. Investment advisory fees increased $378 thousand to $1.3 million during the first six months of 2020 from $927 thousand during the first six months of 2019. Total assets under management were $391 million at June 30, 2020 as compared to $370 million at December 31, 2019 and $334 million at June 30, 2019. Management continues to focus on increasing both the mortgage banking income as well as the investment advisory fees and commissions. Gain on sale of securities was $0 during the first six months of 2020 compared to $135 thousand during the first six months of 2019.
Non-interest income, other increased $78 thousand in the first six months of 2020 as compared to the same period in 2019 primarily due to higher ATM debit card income.
The following is a summary of the components of other non-interest income for the periods indicated:
| (Dollars in thousands) | Six months ended June 30, | |||||||
| 2020 | 2019 | |||||||
| ATM debit card income | $ | 1,064 | $ | 994 | ||||
| Income on bank owned life insurance | 365 | 341 | ||||||
| Rental income | 126 | 140 | ||||||
| Loan late charges | 59 | 49 | ||||||
| Safe deposit fees | 27 | 27 | ||||||
| Wire transfer fees | 43 | 38 | ||||||
| Other | 157 | 174 | ||||||
| Total | $ | 1,841 | $ | 1,763 | ||||
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Non-interest expense increased $1.2 million in the first six months of 2020 to $18.2 million as compared to $17.0 million in the first six months of 2019 primarily due to higher salaries and benefits, data processing expense, and COVID-19 related expenses. Salary and benefit expense increased $1.1 million from $10.4 million in the first six months of 2019 to $11.5 million in the first six months of 2020 primarily due to normal salary adjustments, temporary bonuses related to the COVID-19 pandemic paid to certain employees and the opening of our full-service de novo office in June 2019 in Evans, Georgia in Columbia County, a suburb of Augusta, Georgia. We had 242 full time equivalent employees at June 30, 2020 compared to 244 at June 30, 2019. Furthermore, we incurred COVID-19 related expenses in occupancy expense for additional cleaning and personal protective equipment for our employees and offices; and in equipment expense for laptops and other technology to promote a remote work environment.
Non-interest expense, other increased $287 thousand in the first six months of 2020 as compared to the same period in 2019 primarily due to higher data processing expense, which includes ATM debit card expense.
The following is a summary of the components of other non-interest expense for the periods indicated:
| (Dollars in thousands) | Six months ended June 30, | |||||||
| 2020 | 2019 | |||||||
| Data processing | $ | 1,533 | $ | 1,276 | ||||
| Supplies | 66 | 83 | ||||||
| Telephone | 171 | 211 | ||||||
| Courier | 83 | 68 | ||||||
| Correspondent services | 136 | 121 | ||||||
| Insurance | 156 | 121 | ||||||
| Postage | 20 | 23 | ||||||
| Legal and professional fees | 530 | 442 | ||||||
| Loss on limited partnership interest | — | 23 | ||||||
| Director fees | 172 | 183 | ||||||
| Shareholder expense | 98 | 78 | ||||||
| Dues | 72 | 70 | ||||||
| Subscriptions | 75 | 94 | ||||||
| Loan closing costs/fees | 176 | 161 | ||||||
| Other | 444 | 491 | ||||||
| Total | $ | 3,732 | $ | 3,445 | ||||
Income Tax Expense
Our effective tax rate was 19.5% and 20.4% in the first six months of 2020 and 2019, respectively. The effective rate in 2020 and 2019 is impacted by the passing of the Tax Cut and Jobs Act on December 22, 2017. The federal tax rate prior to this change was 34%, and beginning January 1, 2018, the rate was lowered to 21%.
Comparison of Results of Operations for Three Months Ended June 30, 2020 to the Three Months Ended June 30, 2019
Net Income
Our net income for the three months ended June 30, 2020 was $2.2 million, or $0.30 diluted earnings per common share, as compared to $2.9 million, or $0.37 diluted earnings per common share, for the three months ended June 30, 2019. The $664 thousand decrease in net income between the two periods is primarily due to increases in provision for loan losses expense of $1.2 million and non-interest expense of $491 thousand, partially offset by an increase in net interest income of $627 thousand, an increase in non-interest income of $201 thousand, and a decrease in income tax expense of $240 thousand. The increase 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 deteriorating economic conditions and economic uncertainties caused by the COVID-19 pandemic. The increase in non-interest expense is primarily related to increased salaries and employee benefits expense of $630 thousand partially offset by a decrease in marketing and public relations expense of $183 thousand. The increase in net interest income results from an increase of $165.8 million in average earning assets partially offset by a 29 basis point decline in the net interest margin between the two periods. The increase in non-interest income is primarily related to an increase in mortgage banking income of $334 thousand and an increase in investment advisory fees and non-deposit commissions of $182 thousand partially offset by $170 thousand in lower deposit service charges and $164 lower gains on sale of securities. Our effective tax rate was 19.35% during the second quarter of 2020 compared to 21.13% during the second quarter of 2019.
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Net Interest Income
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 June 30, 2020 and 2019, along with average balances and the related interest income and interest expense amounts.
Net interest income increased $627 thousand or 6.9% to $9.7 million for the three months ended June 30, 2020 from $9.1 million for the three months ended June 30, 2019. Our net interest margin declined by 29 basis points to 3.35% during the second quarter of 2020 from 3.64% during the second quarter of 2019. Our net interest margin, on a taxable equivalent basis, was 3.38% for the second quarter of 2020 compared to 3.67% for the second quarter of 2019. Average earning assets increased $165.8 million, or 16.5%, to $1.2 billion for the three months ended June 30, 2020 as compared to $1.0 billion in the same period of 2019. 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 an 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 three times totaling 75 basis points in reductions during 2019 and two times totaling 150 basis points in reductions during the first quarter of 2020 and lower yields on PPP loans 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 the second quarter of 2020.
Average loans increased $96.1 million, or 13.2%, to $824.8 million for the second quarter of 2020 from $728.7 million for the second quarter of 2019. Average PPP loans increased $31.8 million and average Non-PPP loans increased $64.3 million to $31.8 million and $793.0 million, respectively, for the second quarter of 2020. Average loans represented 70.4% of average earning assets during the second quarter of 2020 compared to 72.5% of average earning assets during the second quarter of 2019. The decline in average loans as a percentage of average earning assets was primarily due to increases in deposits of $135.9 million and securities sold under agreements to repurchase of $12.1 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. The yield on loans declined 44 basis points to 4.40% in the second quarter of 2020 from 4.84% in the second quarter of 2019. Excluding PPP loans, the yield on Non-PPP loans was 4.46% in the second quarter of 2020. Average securities and average other short-term investments for the three months ended June 30, 2020 increased $44.6 million and $25.1 million, respectively, from the prior year period. The yield on our securities portfolio declined to 2.20% for the three months ended June 30, 2020 from 2.66% for the same period in 2019; the yield on our other short-term investments declined to 0.29% for the three months ended June 30, 2020 from 2.37% for the same period in 2019. These declines were primarily related to the Federal Reserve reducing the target range of the federal funds as described above. The yield on earning assets for the three months ended June 30, 2020 and 2019 was 3.66% and 4.23%, respectively. The cost of interest-bearing liabilities was at 48 basis points in the second quarter of 2020 compared to 84 basis points in the second quarter of 2019. We continue to focus on growing our pure deposits (demand deposits, interest-bearing transaction accounts, savings deposits and money market accounts). These accounts tend to be low-cost deposits and assist us in controlling our overall cost of funds. In the second quarter of 2020, these deposits averaged 84.3% of total deposits as compared to 80.9% in the same period of 2019.
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Non-interest Income and Non-interest Expense
Non-interest income during the second quarter of 2020 was $3.4 million as compared to $3.2 million during the same period in 2019. Deposit service charges decreased $170 thousand during the second quarter of 2020 as compared to the same period in 2019 primarily due to customers holding higher balances in their deposit accounts due to proceeds from PPP loans and other stimulus funds related to the COVID-19 pandemic. Mortgage banking income increased by $334 thousand from $1.2 million in the second quarter of 2019 to $1.6 million in the second quarter of 2020. Mortgage production including loans held-for-sale and portfolio loans in the second quarter of 2020 was $53.9 million as compared to $36.9 million in the same period of 2019. With the low mortgage interest rate environment, refinance activity represented 59.6% of production during the second quarter of 2020. Investment advisory fees increased $182 thousand to $671 thousand during the second quarter of 2020 from $489 thousand during the second quarter of 2019. Total assets under management were $391 million at June 30, 2020 as compared to $370 million at December 31, 2019 and $334 million at June 30, 2019. Management continues to focus on increasing both the mortgage banking income as well as the investment advisory fees and commissions. Gain on sale of securities was $0 during the second quarter of 2020 compared to $164 thousand during the second quarter of 2019.
The following is a summary of the components of other non-interest income for the periods indicated:
| (Dollars in thousands) | Three months ended June 30, | |||||||
| 2020 | 2019 | |||||||
| ATM debit card income | $ | 552 | $ | 532 | ||||
| Income on bank owned life insurance | 183 | 172 | ||||||
| Rental income | 60 | 70 | ||||||
| Loan late charges | 33 | 23 | ||||||
| Safe deposit fees | 12 | 12 | ||||||
| Wire transfer fees | 23 | 20 | ||||||
| Other | 71 | 89 | ||||||
| Total | $ | 934 | $ | 918 | ||||
Non-interest expense increased $491 thousand in the second quarter of 2020 to $9.1 million as compared to $8.6 million in the second quarter of 2019. This increase is primarily a result of normal salary adjustments; COVID-19 related expenses in salaries and benefits for temporary bonuses paid to certain employees, in occupancy expense for additional cleaning and personal protective equipment for our employees and offices, and in equipment expense for laptops and other technology to promote a remote work environment; data processing expense; and the opening of our full-service de novo office in Evans, Georgia in June 2019 partially offset by lower marketing and public relations expense. Salary and benefit expense increased $630 thousand from $5.2 million in the second quarter of 2019 to $5.8 million in the second quarter of 2020. We had 242 full time equivalent employees at June 30, 2020 compared to 244 at June 30, 2019. Marketing and public relations expense declined $183 thousand to $247 thousand in the second quarter of 2020 from $430 in the second quarter of 2019. The timing of our planned media campaigns in 2020, which is a presidential election year, impacts the recognition of marketing expense, and it is expected that the overall 2020 annual media cost will not vary substantially from the annual cost incurred in 2019. Marketing and public relations expense for the first six months of 2020 was $601 thousand compared to $605 thousand in the first six months of 2019.
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Other non-interest expense increased $101 thousand to $1.8 million in the second quarter of 2020 as compared to $1.7 million in the same period of 2019 primarily due to higher data processing expense, which includes ATM debit card expense.
The following is a summary of the components of other non-interest expense for the periods indicated:
| (Dollars in thousands) | Three months ended | |||||||
| June 30, | ||||||||
| 2020 | 2019 | |||||||
| Data processing | $ | 756 | $ | 659 | ||||
| Supplies | 31 | 38 | ||||||
| Telephone | 89 | 106 | ||||||
| Courier | 41 | 30 | ||||||
| Correspondent services | 70 | 30 | ||||||
| Insurance | 78 | 64 | ||||||
| Postage | 9 | 12 | ||||||
| Legal and professional fees | 275 | 211 | ||||||
| Loss on limited partnership interest | — | 12 | ||||||
| Director fees | 90 | 96 | ||||||
| Shareholder expense | 48 | 38 | ||||||
| Dues | 36 | 35 | ||||||
| Subscriptions | 36 | 46 | ||||||
| Loan closing costs/fees | 106 | 80 | ||||||
| Other | 179 | 286 | ||||||
| $ | 1,844 | $ | 1,743 | |||||
Financial Position
Assets totaled
$1.3 billion at June 30, 2020 and $1.2 billion at December 31, 2019. Loans (excluding loans held-for-sale) increased $80.3 million
or 10.9% to $817.4 million at June 30, 2020 from $737.0 million at December 31, 2019.
Non-PPP loans increased $32.5 million or 4.4% to $769.5 million at June 30, 2020 from $737.0 million at December 31, 2019. Through
June 30, 2020, we funded 770 PPP loans totaling $50.1 million in principal balance. Net of payoffs, we had 766 PPP Loans totaling
$49.4 million gross of deferred fees and costs and $47.9 million net of deferred fees and costs at June 30, 2020. Total loan production
was $39.3 million during the second quarter of 2020 and $72.8 million during the first six months of 2020. The ratio of loan growth
to loan production increased to 50.8% during the second quarter of 2020 from 37.3% during the first quarter of 2020 and from the
average of approximately 32% in 2019. Loans held-for-sale increased to $33.5 million at June 30, 2020 from $11.2 million at December
31, 2019 due to record mortgage production of $53.9 million during the second quarter of 2020. The loan-to-deposit ratio (including
loans held-for-sale) at June 30, 2020 and December 31, 2019 was 76.0% and 75.7%, respectively. Investment securities increased
to $298.0 million at June 30, 2020 from $288.8 million at December 31, 2019. Other short-term investments increased to $77.6 million
at June 30, 2020 from $32.7 million at December 31, 2019. 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.
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.
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The following table shows the composition of the loan portfolio by category at the dates indicated:
| (Dollars in thousands) | June 30, 2020 | December 31, 2019 | ||||||||||||||
| Amount | Percent | Amount | Percent | |||||||||||||
| Commercial, financial & agricultural | $ | 107,184 | 13.1 | % | $ | 51,805 | 7.0 | % | ||||||||
| Real estate: | ||||||||||||||||
| Construction | 82,584 | 10.1 | % | 73,512 | 10.0 | % | ||||||||||
| Mortgage – residential | 45,424 | 5.6 | % | 45,357 | 6.2 | % | ||||||||||
| Mortgage – commercial | 544,670 | 66.6 | % | 527,447 | 71.5 | % | ||||||||||
| Consumer: | ||||||||||||||||
| Home Equity | 27,156 | 3.3 | % | 28,891 | 3.9 | % | ||||||||||
| Other | 10,355 | 1.3 | % | 10,016 | 1.4 | % | ||||||||||
| Total gross loans | 817,372 | 100.0 | % | 737,028 | 100.0 | % | ||||||||||
| Allowance for loan losses | (8,936 | ) | (6,627 | ) | ||||||||||||
| Total net loans | $ | 808,436 | $ | 730,401 | ||||||||||||
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 $130.7 million or 13.2% to $1.1 billion at June 30, 2020 as compared to $988.2 million at December 31, 2019. Our pure deposits, which are defined as total deposits less certificates of deposits, increased $136.5 million, or 16.1% to $983.8 million at June 30, 2020 from $847.3 million at December 31, 2019. The increase in pure deposits was primarily due to organic deposit growth and customer’s proceeds from PPP loans and other stimulus funds related to the COVID-19 pandemic. We had no brokered deposits and no listing services deposits at June 30, 2020. Our securities sold under agreements to repurchase, which are related to our customer cash management accounts, increased $12.4 million or 37.2% to $45.7 million at June 30, 2020 from $33.3 million at December 31, 2019. 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.
Total shareholders’ equity increased $10.6 million or 8.8% to $130.8 million at June 30, 2020 from $120.2 million at December 31, 2019. The increase in shareholders’ equity is primarily due to an increase in retention of earnings less dividends paid of $2.2 million, an increase in accumulated other comprehensive income of $7.9 million, $0.3 thousand related to executive and director stock awards, and $0.2 thousand related to our dividend reinvestment plan. The increase in accumulated other comprehensive income was due to a reduction in market interest rates, which resulted in an increase in the net unrealized gains in our investment securities portfolio. During 2019, we completed a repurchase plan approved in May 2019 of 300,000 shares of our outstanding common stock at a cost of approximately $5.6 million with an average price of $18.79. As of June 30, 2019, we repurchased 185,361 shares of our outstanding common stock of approximately $3.4 million with an average price of $18.41. The remaining 114,639 shares were repurchased in July 2019. We announced during the third quarter of 2019 the approval of a new share repurchase plan, which was the second share repurchase plan announced during 2019, of up to 200,000 shares of our outstanding common stock. Although no share repurchases have been made under this second share repurchase plan announced during 2020, it provides us with flexibility in managing our capital going forward.
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.
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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 June 30, 2020 and December 31, 2019 over the subsequent 12 months. At June 30, 2020 we were slightly asset sensitive over the first 12-months compared to slightly liability sensitive over the first 12-months at December 31, 2019. The change to the slightly asset sensitive position at June 30, 2020 was due to an increase in very rate sensitive interest bearing cash with the majority of funding growth occurring in less rate sensitive non-maturing deposits. At December 31, 2019, 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 at December 31, 2019 reflects a modest decline in our net interest income in a rising rate environment 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 | |||||||
| June 30, 2020 | December 31, 2019 | |||||||
| +200bp | 1.28 | % | -2.30 | % | ||||
| +100bp | 0.69 | % | -1.09 | % | ||||
| Flat | — | — | ||||||
| -100bp | -1.32 | % | -1.88 | % | ||||
| -200bp | -1.32 | % | -5.08 | % | ||||
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 June 30, 2020 and December 31, 2019, the PVE exposure in a plus 200 basis point increase in market interest rates was estimated to be 16.41% and 5.85%, respectively. The PVE exposure in a down 100 basis point decrease was estimated to be (12.63)% at June 30, 2020 compared to (7.68)% at December 31, 2019.
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.
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As of June 30, 2020, 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 June 30, 2020. 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. Furthermore, we are approved to participate in the PPPLF to fund PPP loans, if needed.
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 June 30, 2020, we had issued commitments to extend unused credit of $129.6 million, including $41.3 million in unused home equity lines of credit, through various types of lending arrangements. At December 31, 2019, we had issued commitments to extend unused credit of $135.7 million, including $39.8 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 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 9.9% of total assets at June 30, 2020 from 10.3% at December 31, 2019 primarily due to the PPP loans and excess liquidity from customer’s PPP loan proceeds and other stimulus funds related to the COVID-19 pandemic. 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 June 30, 2020; and $10.0 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. Furthermore, the Federal Reserve has provided a lending facility, the PPPLF, that will allow us to obtain funding specifically for loans that we make under the PPP, which will allow us to retain existing sources of liquidity for our traditional operations. PPP loans will be pledged as collateral on any of the Bank’s borrowings under the PPPLF lending facility. Through June 30, 2020, we funded 770 PPP loans totaling $50.1 million in principal balance. Net of payoffs, we had 766 PPP loans totaling $49.4 million gross of deferred fees and costs and $47.9 million net of deferred fees and costs at June 30, 2020. Currently, the Bank has sufficient liquidity to fund PPP loans without accessing the PPPLF; however, the Bank has the option to use the PPPLF, if needed.
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. 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.
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%. |
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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. 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.
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 June 30, 2020, 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 | |||||||||||||||
| June 30, 2020 | ||||||||||||||||||||
| Leverage Ratio | 9.31 | % | 5.00 | % | 4.00 | % | $ | 53,628 | $ | 66,062 | ||||||||||
| Common Equity Tier 1 Capital Ratio | 13.02 | % | 6.50 | % | 4.50 | % | 57,993 | 75,778 | ||||||||||||
| Tier 1 Capital Ratio | 13.02 | % | 8.00 | % | 6.00 | % | 44,654 | 62,440 | ||||||||||||
| Total Capital Ratio | 14.03 | % | 10.00 | % | 8.00 | % | 35,805 | 53,590 | ||||||||||||
| December 31, 2019 | ||||||||||||||||||||
| Leverage Ratio | 9.97 | % | 5.00 | % | 4.00 | % | $ | 56,197 | $ | 67,508 | ||||||||||
| Common Equity Tier 1 Capital Ratio | 13.47 | % | 6.50 | % | 4.50 | % | 58,345 | 75,086 | ||||||||||||
| Tier 1 Capital Ratio | 13.47 | % | 8.00 | % | 6.00 | % | 45,789 | 62,530 | ||||||||||||
| Total Capital Ratio | 14.26 | % | 10.00 | % | 8.00 | % | 35,675 | 52,416 | ||||||||||||
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The Bank’s risk-based capital ratios of leverage ratio, Tier 1, and total capital were 9.31%, 13.02% and 14.03%, respectively, at June 30, 2020 as compared to 9.97%, 13.47%, and 14.26%, respectively, at December 31, 2019. The Bank’s Common Equity Tier 1 ratio at June 30, 2020 was 13.02% and at December 31, 2019 was 13.47%. 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. We recognize that we face extraordinary circumstances, and we intend to monitor developments and potential impacts on our capital.
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 second quarter of 2020 of $0.12 per common share. This dividend is payable on August 17, 2020 to shareholders of record of our common stock as of August 3, 2020.
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 tables 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 on an annualized basis by the average balance of the corresponding assets or liabilities. Average balances have been derived from daily averages.
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FIRST COMMUNITY CORPORATION
Yields on Average Earning Assets and Rates
on Average Interest-Bearing Liabilities
| Six months ended June 30, 2020 | Six months ended June 30, 2019 | |||||||||||||||||||||||
| Average | Interest | Yield/ | Average | Interest | Yield/ | |||||||||||||||||||
| Balance | Earned/Paid | Rate | Balance | Earned/Paid | Rate | |||||||||||||||||||
| Assets | ||||||||||||||||||||||||
| Earning assets | ||||||||||||||||||||||||
| Loans | $ | 789,250 | $ | 17,845 | 4.55 | % | $ | 726,398 | $ | 17,401 | 4.83 | % | ||||||||||||
| Securities | 290,624 | 3,337 | 2.31 | % | 251,114 | 3,315 | 2.66 | % | ||||||||||||||||
| Other short-term investments | 44,339 | 194 | 0.88 | % | 21,952 | 264 | 2.43 | % | ||||||||||||||||
| Total earning assets | 1,124,213 | 21,376 | 3.82 | % | 999,464 | 20,980 | 4.23 | % | ||||||||||||||||
| Cash and due from banks | 14,926 | 13,680 | ||||||||||||||||||||||
| Premises and equipment | 34,920 | 35,645 | ||||||||||||||||||||||
| Goodwill and other intangibles | 16,015 | 16,509 | ||||||||||||||||||||||
| Other assets | 40,089 | 37,407 | ||||||||||||||||||||||
| Allowance for loan losses | (7,366 | ) | (6,334 | ) | ||||||||||||||||||||
| Total assets | $ | 1,222,797 | $ | 1,096,371 | ||||||||||||||||||||
| Liabilities | ||||||||||||||||||||||||
| Interest-bearing liabilities | ||||||||||||||||||||||||
| Interest-bearing transaction accounts | $ | 224,405 | 162 | 0.15 | % | $ | 198,270 | 284 | 0.29 | % | ||||||||||||||
| Money market accounts | 200,967 | 528 | 0.53 | % | 178,201 | 822 | 0.93 | % | ||||||||||||||||
| Savings deposits | 106,191 | 46 | 0.09 | % | 107,779 | 71 | 0.13 | % | ||||||||||||||||
| Time deposits | 167,696 | 1,019 | 1.22 | % | 178,424 | 1,005 | 1.14 | % | ||||||||||||||||
| Other borrowings | 69,623 | 461 | 1.33 | % | 53,290 | 662 | 2.51 | % | ||||||||||||||||
| Total interest-bearing liabilities | 768,882 | 2,216 | 0.58 | % | 715,964 | 2,844 | 0.80 | % | ||||||||||||||||
| Demand deposits | 315,473 | 253,839 | ||||||||||||||||||||||
| Other liabilities | 13,252 | 11,039 | ||||||||||||||||||||||
| Shareholders’ equity | 125,190 | 115,529 | ||||||||||||||||||||||
| Total liabilities and shareholders’ equity | $ | 1,222,797 | $ | 1,096,371 | ||||||||||||||||||||
| Cost of funds, including demand deposits | 0.41 | % | 0.59 | % | ||||||||||||||||||||
| Net interest spread | 3.24 | % | 3.43 | % | ||||||||||||||||||||
| Net interest income/margin | $ | 19,160 | 3.43 | % | $ | 18,136 | 3.66 | % | ||||||||||||||||
| Net interest income/margin FTE basis | $ | 19,341 | 3.46 | % | $ | 18,344 | 3.70 | % | ||||||||||||||||
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FIRST COMMUNITY CORPORATION
Yields on Average Earning Assets and Rates
on Average Interest-Bearing Liabilities
| Three months ended June 30, 2020 | Three months ended June 30, 2019 | |||||||||||||||||||||||
| Average | Interest | Yield/ | Average | Interest | Yield/ | |||||||||||||||||||
| Balance | Earned/Paid | Rate | Balance | Earned/Paid | Rate | |||||||||||||||||||
| Assets | ||||||||||||||||||||||||
| Earning assets | ||||||||||||||||||||||||
| Loans | $ | 824,842 | $ | 9,018 | 4.40 | % | $ | 728,711 | $ | 8,792 | 4.84 | % | ||||||||||||
| Securities | 294,915 | 1,611 | 2.20 | % | 250,316 | 1,658 | 2.66 | % | ||||||||||||||||
| Other short-term investments | 51,426 | 37 | 0.29 | % | 26,375 | 156 | 2.37 | % | ||||||||||||||||
| Total earning assets | 1,171,183 | 10,666 | 3.66 | % | 1,005,402 | 10,606 | 4.23 | % | ||||||||||||||||
| Cash and due from banks | 14,820 | 13,998 | ||||||||||||||||||||||
| Premises and equipment | 34,837 | 35,765 | ||||||||||||||||||||||
| Goodwill and other intangibles | 15,967 | 16,443 | ||||||||||||||||||||||
| Other assets | 40,489 | 38,094 | ||||||||||||||||||||||
| Allowance for loan losses | (8,052 | ) | (6,355 | ) | ||||||||||||||||||||
| Total assets | $ | 1,269,244 | $ | 1,103,347 | ||||||||||||||||||||
| Liabilities | ||||||||||||||||||||||||
| Interest-bearing liabilities | ||||||||||||||||||||||||
| Interest-bearing transaction accounts | $ | 232,611 | $ | 59 | 0.10 | % | $ | 202,096 | $ | 135 | 0.27 | % | ||||||||||||
| Money market accounts | 203,641 | 179 | 0.35 | % | 177,039 | 481 | 1.09 | % | ||||||||||||||||
| Savings deposits | 108,608 | 17 | 0.06 | % | 107,638 | 36 | 0.13 | % | ||||||||||||||||
| Time deposits | 165,995 | 481 | 1.17 | % | 176,715 | 528 | 1.20 | % | ||||||||||||||||
| Other borrowings | 68,913 | 187 | 1.09 | % | 50,012 | 310 | 2.49 | % | ||||||||||||||||
| Total interest-bearing liabilities | 779,768 | 923 | 0.48 | % | 713,500 | 1,490 | 0.84 | % | ||||||||||||||||
| Demand deposits | 349,232 | 260,712 | ||||||||||||||||||||||
| Other liabilities | 13,328 | 11,880 | ||||||||||||||||||||||
| Shareholders’ equity | 126,916 | 117,255 | ||||||||||||||||||||||
| Total liabilities and shareholders’ equity | $ | 1,269,244 | $ | 1,103,347 | ||||||||||||||||||||
| Cost of funds, including demand deposits | 0.33 | % | 0.61 | % | ||||||||||||||||||||
| Net interest spread | 3.18 | % | 3.39 | % | ||||||||||||||||||||
| Net interest income/margin | $ | 9,743 | 3.35 | % | $ | 9,116 | 3.64 | % | ||||||||||||||||
| Net interest income/margin FTE basis | $ | 9,846 | 3.38 | % | $ | 9,210 | 3.67 | % | ||||||||||||||||
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Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
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 six months ended June 30, 2020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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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 year ended December 31, 2019 and our Quarterly Report on Form 10-Q for the period ended March 31, 2020, as well as cautionary statements contained in this Quarterly Report on Form 10-Q, including those under the caption “Cautionary Note 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.
We are providing the following risk factors to supplement the risk factors contained in Item 1A. of our Annual Report on Form 10-K for the year ended December 31, 2019 and our Quarterly Report on Form 10-Q for the period ended March 31, 2020.
The COVID-19 pandemic has adversely affected our business, financial condition and results of operations, and the ultimate impacts of the pandemic on our business, financial condition and results of operations will depend on future developments and other factors that are highly uncertain and will be impacted by the scope and duration of the pandemic and actions taken by governmental authorities in response to the pandemic.
The ongoing COVID-19 global and national health emergency has caused significant disruption in the international and United States economies and financial markets and has had an adverse effect on our business, financial condition and results of operations. The spread of COVID-19 has caused illness, quarantines, cancellation of events and travel, business and school shutdowns, reduction in business activity and financial transactions, supply chain interruptions and overall economic and financial market instability. In response to the COVID-19 pandemic, the governments of the states in which we have retail offices, and of most other states, have taken preventative or protective actions, such as imposing restrictions on travel and business operations, advising or requiring individuals to limit or forego their time outside of their homes, and at times, ordering temporary closures of businesses. These restrictions and other consequences of the pandemic have resulted in significant adverse effects for many different types of businesses, including, among others, those in the travel, hospitality and food and beverage industries, and have resulted in a significant number of layoffs and furloughs of employees nationwide and in the regions in which we operate.
The ultimate effects of COVID-19 on the broader economy and the markets that we serve are not known nor is the ultimate length of the restrictions described above and any accompanying effects. Moreover, the Federal Reserve has taken action to lower the Federal Funds rate, which may negatively affect our interest income and, therefore, earnings, financial condition and results of operation. Additional impacts of COVID-19 on our business could be widespread and material, and may include, or exacerbate, among other consequences, the following:
| · | employees contracting COVID-19; |
| · | reductions in our operating effectiveness as a portion of our employees work from home; |
| · | a work stoppage, forced quarantine, or other interruption of our business; |
| · | unavailability of key personnel necessary to conduct our business activities; |
| · | effects on key employees, including operational management personnel and those charged with preparing, monitoring and evaluating our financial reporting and internal controls; |
| · | sustained closures of our branch lobbies or the offices of our customers; |
| · | declines in demand for loans and other banking services and products; |
| · | reduced consumer spending due to both job losses and other effects attributable to the COVID-19 pandemic; |
| · | unprecedented volatility in United States financial markets; |
| · | volatile performance of our investment securities portfolio; |
| · | decline in the credit quality of our loan portfolio, owing to the effects of the COVID-19 pandemic in the markets we serve, leading to a need to increase our allowance for loan losses; |
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| · | declines in value of collateral for loans, including real estate collateral; |
| · | declines in the net worth and liquidity of borrowers and loan guarantors, impairing their ability to honor commitments to us; and |
| · | declines in demand resulting from businesses suffering adverse effects from reduced levels of economic activity in our markets. |
These factors, together or in combination with other events or occurrences that may not yet be known or anticipated, may materially and adversely affect our business, financial condition and results of operations.
The ongoing COVID-19 pandemic has resulted in meaningfully lower stock prices for many companies, as well as the trading prices for many other securities. The further spread of the COVID-19 outbreak, as well as ongoing or new governmental, regulatory and private sector responses to the pandemic, may materially disrupt banking and other economic activity generally and in the areas in which we operate. This could result in further decline in demand for our banking products and services, and could negatively impact, among other things, our liquidity, regulatory capital and our growth strategy. Any one or more of these developments could have a material adverse effect on our business, financial condition and results of operations.
We are taking precautions to protect the safety and well-being of our employees and customers. However, no assurance can be given that the steps being taken will be adequate or deemed to be appropriate, nor can we predict the level of disruption which will occur to our employee’s ability to provide customer support and service. If we are unable to recover from a business disruption on a timely basis, our business, financial condition and results of operations could be materially and adversely affected. We may also incur additional costs to remedy damages caused by such disruptions, which could further adversely affect our business, financial condition and results of operations.
As a participating lender in the SBA Paycheck Protection Program, or PPP, the Company and the Bank are subject to additional risks of litigation from the Bank’s clients or other parties regarding the Bank’s processing of loans for the PPP and risks that the SBA may not fund some or all PPP loan guaranties.
On March 27, 2020, President Trump signed the CARES Act, which included a $349 billion loan program administered through the SBA referred to as the PPP. Under the PPP, small businesses and other entities and individuals can apply for loans from existing SBA lenders and other approved regulated lenders that enroll in the program, subject to numerous limitations and eligibility criteria. The Bank is participating as a lender in the PPP. The PPP opened on April 3, 2020; however, because of the short timeframe between the passing of the CARES Act and the opening of the PPP, there is some ambiguity in the laws, rules and guidance regarding the operation of the PPP, which exposes us to risks relating to noncompliance with the PPP. On or about April 16, 2020, the SBA notified lenders that the $349 billion earmarked for the PPP was exhausted. On April 24, 2020, an additional $320 billion of PPP loan funding was authorized. Since the opening of the PPP, several banks have been subject to litigation regarding the process, procedures and practices used in processing applications for the PPP, including litigation from purported agents with respect to agent fees. In mid-June 2020, we were named as a defendant, along with several other banks, in a potential class action lawsuit with respect to agent fees. We believe the lawsuit against us is meritless for several reasons, and will continue to defend it aggressively. The Company and the Bank may be exposed to further risk of litigation from both clients and non-clients regarding the process, procedures and practices used in processing applications for the PPP. If any such litigation is not resolved in a manner favorable to the Company or the Bank, it may result in significant financial liability or adversely affect the Company’s reputation. In addition, litigation can be costly, regardless of outcome. Any financial liability, litigation costs or reputational damage caused by PPP related litigation could have a material adverse impact on our business, financial condition and results of operations.
The Bank also has credit risk on PPP loans if a determination is made by the SBA that there is a deficiency in the manner in which the loan was originated, funded, or serviced by the Bank, such as an issue with the eligibility of a borrower to receive a PPP loan, which may or may not be related to the ambiguity in the laws, rules and guidance regarding the operation of the PPP. In the event of a loss resulting from a default on a PPP loan and a determination by the SBA that there was a deficiency in the manner in which the PPP loan was originated, funded, or serviced by the Bank, the SBA may deny its liability under the guaranty, reduce the amount of the guaranty, or, if it has already paid under the guaranty, seek recovery of any loss related to the deficiency from the Company or the Bank.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
| (a) | Not Applicable. |
| (b) | Not Applicable. |
| (c) | Although we have an authorized repurchase plan to repurchase up to 200,000 share of our common stock, no share repurchases were made in the second quarter of 2020. |
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 June 30, 2020, formatted in iXBRL (Inline eXtensible Business Reporting Language); (i) Consolidated Balance Sheets at June 30, 2020 and December 31, 2019, (ii) Consolidated Statements of Income for the three and six months ended June 30, 2020 and 2019, (iii) Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2020 and 2019 (iv) Consolidated Statements of Changes in Shareholders’ Equity for the three and six months ended June 30, 2020 and 2019, (v) Consolidated Statements of Cash Flows for the six months ended June 30, 2020 and 2019, and (vi) Notes to Consolidated Financial Statements. Cover Page Interactive Data File (the cover page XBRL tags are embedded within the Inline XBRL document). | |
| 104 | Cover Page Interactive Data File (the cover page XBRL tags are embedded within the Inline XBRL document). |
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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: August 10, 2020 | By: | /s/ Michael C. Crapps |
| Michael C. Crapps | ||
| President and Chief Executive Officer | ||
| (Principal Executive Officer) | ||
| Date: August 10, 2020 | By: | /s/ D. Shawn Jordan |
| D. Shawn Jordan | ||
| Executive Vice President and Chief Financial Officer | ||
| (Principal Financial and Accounting Officer) | ||
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