First Community Corp 10-Q for FY2021 Q3
First Community Corp (FCCO)
About this 10-Q
First Community Corp filed this 10-Q on November 9, 2021, covering the quarter ended September 30, 2021 (FY2021 Q3).
Headline figures
Quarter ended September 30, 2021, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $257K
- up 6.2% from $242K a year earlier
- Net income
- $4.75M
- up 79.0% from net income of $2.65M a year earlier
- Diluted EPS
- $0.63
- up 80.0% from $0.35 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
| Quarterly report pursuant to Section 13
or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended | |
| Transition report pursuant to Section 13
or 15(d) of the Securities Exchange Act of 1934 for the transition period from ____ to ____ |
Commission
File Number:
| (Exact name of registrant as specified in its charter) | |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
(Address of principal executive offices) (Zip Code)
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of exchange on which registered |
| The
|
Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.
Indicate by check mark whether the
registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation
S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required
to submit such files). x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer o | Accelerated filer o | |
| Smaller reporting company
| ||
| Emerging growth company
|
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: On November 9, 2021, shares of the issuer’s common stock, par value $1.00 per share, were issued and outstanding.
TABLE OF CONTENTS
| INDEX TO EXHIBITS |
| EX-31.1 RULE 13A-14(A) CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER |
| EX-31.2 RULE 13A-14(A) CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER |
| EX-32 SECTION 1350 CERTIFICATIONS |
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
FIRST COMMUNITY CORPORATION
CONSOLIDATED BALANCE SHEETS
| September 30, | ||||||||
| (Dollars in thousands, except par value) | 2021 | December 31, | ||||||
| (Unaudited) | 2020 | |||||||
| ASSETS | ||||||||
| Cash and due from banks | $ | $ | ||||||
| Interest-bearing bank balances | ||||||||
| Investment securities available-for-sale | ||||||||
| Other investments, at cost | ||||||||
| Loans held-for-sale | ||||||||
| Loans held-for-investment | ||||||||
| Less, allowance for loan losses | ||||||||
| Net loans held-for-investment | ||||||||
| Property and equipment - net | ||||||||
| Lease right-of-use asset | ||||||||
| Premises held-for-sale | ||||||||
| Bank owned life insurance | ||||||||
| Other real estate owned | ||||||||
| Intangible assets | ||||||||
| Goodwill | ||||||||
| Other assets | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES | ||||||||
| Deposits: | ||||||||
| Non-interest bearing | $ | $ | ||||||
| Interest bearing | ||||||||
| Total deposits | ||||||||
| Securities sold under agreements to repurchase | ||||||||
| Junior subordinated debt | ||||||||
| Lease liability | ||||||||
| Other liabilities | ||||||||
| Total liabilities | ||||||||
| SHAREHOLDERS’ EQUITY | ||||||||
| Preferred stock, par value $ per share, shares authorized; issued and outstanding | ||||||||
| Common stock, par value $ per share; shares authorized; issued and outstanding at September 30, 2021 at December 31, 2020 | ||||||||
| Nonvested restricted stock | ( | ) | ( | ) | ||||
| Additional paid in capital | ||||||||
| Retained earnings | ||||||||
| Accumulated other comprehensive income | ||||||||
| Total shareholders’ equity | ||||||||
| Total liabilities and shareholders’ equity | $ | $ | ||||||
See Notes to Consolidated Financial Statements
| 1 |
FIRST COMMUNITY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
| (Dollars in thousands, except per share amounts) | Nine Months ended September 30, | |||||||
| 2021 | 2020 | |||||||
| Interest and dividend income: | ||||||||
| Loans, including fees | $ | $ | ||||||
| Investment securities - taxable | ||||||||
| Investment securities - non taxable | ||||||||
| Other short term investments and CD’s | ||||||||
| 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 on sale of other real estate owned | ||||||||
| Non-recurring bank owned life insurance (BOLI) income | ||||||||
| Other | ||||||||
| Total non-interest income | ||||||||
| Non-interest expense: | ||||||||
| Salaries and employee benefits | ||||||||
| Occupancy | ||||||||
| Equipment | ||||||||
| Marketing and public relations | ||||||||
| FDIC Insurance assessments | ||||||||
| Other real estate expense | ||||||||
| Amortization of intangibles | ||||||||
| Other | ||||||||
| Total non-interest expense | ||||||||
| Net income before tax | ||||||||
| Income tax expense | ||||||||
| Net income | $ | $ | ||||||
See Notes to Consolidated Financial Statements
| 2 |
FIRST COMMUNITY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
| (Dollars in thousands, except per share amounts) | Three Months ended September 30, | |||||||
| 2021 | 2020 | |||||||
| Interest and dividend income: | ||||||||
| Loans, including fees | $ | $ | ||||||
| Investment securities - taxable | ||||||||
| Investment securities - non taxable | ||||||||
| Other short term investments and CD’s | ||||||||
| 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 on sale of other real estate owned | ||||||||
| Non-recurring bank owned life insurance (BOLI) income | ||||||||
| Other | ||||||||
| Total non-interest income | ||||||||
| Non-interest expense: | ||||||||
| Salaries and employee benefits | ||||||||
| Occupancy | ||||||||
| Equipment | ||||||||
| Marketing and public relations | ||||||||
| FDIC Insurance assessments | ||||||||
| Other real estate expense | ||||||||
| Amortization of intangibles | ||||||||
| Other | ||||||||
| Total non-interest expense | ||||||||
| Net income before tax | ||||||||
| Income tax expense | ||||||||
| Net income | $ | $ | ||||||
See Notes to Consolidated Financial Statements
| 3 |
FIRST COMMUNITY CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
| (Dollars in thousands) | ||||||||
| Nine months ended September 30, | ||||||||
| 2021 | 2020 | |||||||
| Net income | $ | $ | ||||||
| Other comprehensive income: | ||||||||
| Unrealized gain (loss) during the period on available-for-sale securities, net of tax benefit of | ( | ) | ||||||
| Reclassification adjustment for gain on available-for-sale securities included in net income, net of tax benefit of $ | ( | ) | ||||||
| Other comprehensive income (loss) | ( | ) | ||||||
| Comprehensive income | $ | $ | ||||||
| (Dollars in thousands) | ||||||||
| Three months ended September 30, | ||||||||
| 2021 | 2020 | |||||||
| Net income | $ | $ | ||||||
| Other comprehensive income: | ||||||||
| Unrealized gain (loss) during the period on available-for-sale securities, net of tax benefit of $ | ( | ) | ||||||
| Reclassification adjustment for gain on available-for-sale securities included in net income, net of tax benefit of $ | ( | ) | ||||||
| Other comprehensive income (loss) | ( | ) | ||||||
| Comprehensive income | $ | $ | ||||||
See Notes to Consolidated Financial Statements
| 4 |
FIRST COMMUNITY CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Nine months ended September 30, 2021 and 2020
(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, 2020 | $ | $ | $ | ( | ) | $ | $ | $ | ||||||||||||||||||||
| Net income | ||||||||||||||||||||||||||||
| Other comprehensive loss net of tax benefit of $ | ( | ) | ( | ) | ||||||||||||||||||||||||
| Issuance of common stock | ||||||||||||||||||||||||||||
| Issuance of restricted stock | ( | ) | ||||||||||||||||||||||||||
| Issuance of common stock-deferred compensation | ||||||||||||||||||||||||||||
| Amortization of compensation on restricted stock | ||||||||||||||||||||||||||||
| Shares forfeited | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||
| Dividends: Common ($ per share) | ( | ) | ( | ) | ||||||||||||||||||||||||
| Dividend reinvestment plan | ||||||||||||||||||||||||||||
| Balance, September 30, 2021 | $ | $ | $ | ( | ) | $ | $ | $ | ||||||||||||||||||||
| 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 expense 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, September 30, 2020 | $ | $ | $ | ( | ) | $ | $ | $ | ||||||||||||||||||||
See Notes to Consolidated Financial Statements
| 5 |
FIRST COMMUNITY CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Unaudited)
| Accumulated | ||||||||||||||||||||||||||||
| Common | Additional | Nonvested | Other | |||||||||||||||||||||||||
| (Dollars in thousands) | Shares | Common | Paid-in | Restricted | Retained | Comprehensive | ||||||||||||||||||||||
| Issued | Stock | Capital | Stock | Earnings | Income (loss) | Total | ||||||||||||||||||||||
| Balance, December 31, 2020 | $ | $ | $ | ( | ) | $ | $ | $ | ||||||||||||||||||||
| Net income | ||||||||||||||||||||||||||||
| Other comprehensive loss net of tax benefit of $ | ( | ) | ( | ) | ||||||||||||||||||||||||
| Issuance of common stock | ||||||||||||||||||||||||||||
| Issuance of restricted stock | ( | ) | ||||||||||||||||||||||||||
| Amortization of compensation on restricted stock | ||||||||||||||||||||||||||||
| Shares retired / forfeited | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||
| Dividends: Common ($ per share) | ( | ) | ( | ) | ||||||||||||||||||||||||
| Dividend reinvestment plan | ||||||||||||||||||||||||||||
| Balance, March 31, 2021 | $ | $ | $ | ( | ) | $ | $ | $ | ||||||||||||||||||||
| Net income | ||||||||||||||||||||||||||||
| Other comprehensive income net of tax expense of $ | ||||||||||||||||||||||||||||
| Issuance of common stock-deferred compensation | ||||||||||||||||||||||||||||
| Amortization of compensation on restricted stock | ||||||||||||||||||||||||||||
| Dividends: Common ($ per share) | ( | ) | ( | ) | ||||||||||||||||||||||||
| Dividend reinvestment plan | ||||||||||||||||||||||||||||
| Balance, June 30, 2021 | $ | $ | $ | ( | ) | $ | $ | $ | ||||||||||||||||||||
| Net income | ||||||||||||||||||||||||||||
| Other comprehensive loss net of tax benefit of $ | ( | ) | ( | ) | ||||||||||||||||||||||||
| Amortization of compensation on restricted stock | ||||||||||||||||||||||||||||
| Dividends: Common ($ per share) | ( | ) | ( | ) | ||||||||||||||||||||||||
| Dividend reinvestment plan | ||||||||||||||||||||||||||||
| Balance, September 30, 2021 | $ | $ | $ | ( | ) | $ | $ | $ | ||||||||||||||||||||
See Notes to Consolidated Financial Statements
| 6 |
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 expense 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 expense of $ | ||||||||||||||||||||||||||||
| Issuance of common stock-Deferred Compensation | ||||||||||||||||||||||||||||
| Amortization of compensation on restricted stock | ||||||||||||||||||||||||||||
| Dividends: Common ($ per share) | ( | ) | ( | ) | ||||||||||||||||||||||||
| Dividend reinvestment plan | ||||||||||||||||||||||||||||
| Balance, June 30, 2020 | $ | $ | $ | ( | ) | $ | $ | $ | ||||||||||||||||||||
| Net income | ||||||||||||||||||||||||||||
| Other comprehensive income net of tax expense of $ | ||||||||||||||||||||||||||||
| Amortization of compensation on restricted stock | ||||||||||||||||||||||||||||
| Dividends: Common ($ per share) | ( | ( | ) | |||||||||||||||||||||||||
| Dividend reinvestment plan | ||||||||||||||||||||||||||||
| Balance, September 30, 2020 | $ | $ | $ | ( | ) | $ | $ | $ | ||||||||||||||||||||
See Notes to Consolidated Financial Statements
| 7 |
FIRST COMMUNITY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| Nine months ended September 30, | ||||||||
| (Dollars in thousands) | 2021 | 2020 | ||||||
| Cash flows from operating activities: | ||||||||
| Net income | $ | $ | ||||||
| Adjustments to reconcile net income to net cash provided (used) from operating activities: | ||||||||
| Depreciation | ||||||||
| Net premium amortization | ||||||||
| Provision for loan losses | ||||||||
| Origination of loans held-for-sale | ( | ) | ( | ) | ||||
| Sale of loans held-for-sale | ||||||||
| Write-down of other real estate owned | ||||||||
| Gain on sale of fixed assets | ( | ) | ||||||
| Gain on sale of other real estate owned | ( | ) | ( | ) | ||||
| Gain on sale of securities | ( | ) | ||||||
| Amortization of intangibles | ||||||||
| Accretion on acquired loans | ( | ) | ( | ) | ||||
| Loss (gain) on fair value of equity investments | ( | ) | ||||||
| Increase (decrease) in other assets | ( | ) | ||||||
| Decrease in other liabilities | ( | ) | ( | ) | ||||
| Net cash provided (used) from operating activities | ( | ) | ||||||
| Cash flows from investing activities: | ||||||||
| Purchase of investment securities available-for-sale | ( | ) | ( | ) | ||||
| Purchase of other investment securities | ( | ) | ( | ) | ||||
| Maturity/call of investment securities available-for-sale | ||||||||
| Increase in loans | ( | ) | ( | ) | ||||
| Proceeds from sale of securities available-for-sale | ||||||||
| Proceeds from sale of other securities | ||||||||
| Proceeds from sale of fixed assets | ||||||||
| Proceeds from sale of other real estate owned | ||||||||
| 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 / forfeited | ( | ) | ( | ) | ||||
| Dividends paid: Common Stock | ( | ) | ( | ) | ||||
| Issuance of deferred compensation shares | ||||||||
| Proceeds from issuance of Common Stock | ||||||||
| Change in non-vested restricted 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 (loss) on securities, net of tax | $ | ( | ) | $ | ||||
| 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 September 30, 2021 and December 31, 2020, and the Company’s results of operations for the three and nine months ended September 30, 2021 and 2020 and cash flows for the nine months ended September 30, 2021 and 2020. The results of operations for the three and nine months ended September 30, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021.
In the opinion of management, all adjustments necessary to fairly present the consolidated financial position and consolidated results of operations have been made. All such adjustments are of a normal, recurring nature. All significant intercompany accounts and transactions have been eliminated in consolidation. The consolidated financial statements and notes thereto are presented in accordance with the instructions for Quarterly Reports on Form 10-Q. The information included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 should be referred to in connection with these unaudited interim financial statements.
Risk and Uncertainties
The coronavirus (COVID-19) pandemic, which was declared a national emergency in the United States in March 2020, continues to create extensive disruptions to the global economy and financial markets and to businesses and the lives of individuals throughout the world. The impact of the COVID-19 pandemic is fluid and continues to evolve, adversely affecting many of the Bank’s customers. The unprecedented and rapid spread of COVID-19 and its associated impacts on trade (including supply chains and export levels), travel, employee productivity, unemployment, consumer spending, and other economic activities has resulted in less economic activity, significant volatility and disruption in financial markets. There have been encouraging signs of strength in the economic recovery, including growth in consumer spending and improvement in the labor market, but many businesses continue to face difficulty in hiring employees and meeting consumer demand, and certain portions of the global supply chain remain challenged by shortages and delays that first occurred due to the initial COVID-19 outbreak. There remains uncertainty about the pace of economic recovery, including uncertainty related to the labor market, inflation and fiscal and monetary policy responses from the federal government. In addition, due to the COVID-19 pandemic, market interest rates declined significantly, with the 10-year Treasury bond falling to a low of 0.52% in early August 2020, but increasing significantly since that time to 1.74% at March 31, 2021, then declining to 1.45% at June 30, 2021, but increasing to 1.52% at September 30, 2021. In March 2020, the Federal Open Market Committee reduced the targeted federal funds interest rate to a range from 0% to 0.25%, and this low targeted range was still in effect as of September 30, 2021. These reductions in interest rates and the other effects of the COVID-19 pandemic have had, and are expected to continue to have, possibly materially, an adverse effect on the Company’s business, financial condition and results of operations. The ultimate extent of the impact of the COVID-19 pandemic on the Company’s business, financial condition and results of operations is currently uncertain and will depend on various developments and other factors, including the effect of governmental and private sector initiatives, the effect of the continued rollout of vaccinations for the virus, whether such vaccinations will be effective against another resurgence of the virus, including any new strains, and the ability for customers and businesses to return to their pre-pandemic routines.
Beginning in March 2020, the Company proactively offered payment deferrals for up to 90 days to its loan customers. The Company continues to consider potential deferrals with respect to certain customers, which are evaluated on a case-by-case basis. At its peak, which occurred during the second quarter of 2020, the Company granted payment deferments on loans totaling $206.9 million. As a result of payments being resumed by loan customers at the conclusion of their payment deferral period, loans for which payments were being deferred decreased from the peak of $206.9 million to $175.0 million at June 30, 2020, to $27.3 million at September 30, 2020, to $16.1 million at December 31, 2020, to $8.7 million at March 31, 2021, to $4.5 million at June 30, 2021, and to $4.1 million at September 30, 2021. Some of these deferments were to businesses that temporarily closed or reduced operations and some were requested as a pre-cautionary measure to conserve cash. The Company proactively offered deferrals to its customers regardless of the impact of the pandemic on their business or personal finances.
| 9 |
The Company has evaluated its exposure to certain industry segments most impacted by the COVID-19 pandemic as of September 30, 2021:
| Industry Segments | Outstanding | % of Loan | ||||||
| (Dollars in millions) | Loan Balance | Portfolio | ||||||
| Hotels | $ | |||||||
| Restaurants | $ | |||||||
| Assisted Living | $ | |||||||
| Retail | $ | |||||||
Schedule of Earning Per Common Share
(In thousands except average market price and per share data)
| Nine months | Three months | |||||||||||||||
| Ended September 30, | Ended September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Numerator (Net income available to common shareholders) | $ | $ | $ | $ | ||||||||||||
| Denominator | ||||||||||||||||
| Weighted average common shares outstanding for: | ||||||||||||||||
| Basic shares | ||||||||||||||||
| Dilutive securities: | ||||||||||||||||
| Deferred compensation | ||||||||||||||||
| Restricted stock – Treasury stock method | ||||||||||||||||
| Diluted shares | ||||||||||||||||
| Earnings per common share: | ||||||||||||||||
| Basic | ||||||||||||||||
| Diluted | ||||||||||||||||
| The average market price used in calculating assumed number of shares | $ | $ | $ | $ | ||||||||||||
Non-Employee Director Deferred Compensation Plan
Under the Company’s Non-Employee
Director Deferred Compensation Plan, as amended and restated effective as of January 1, 2021, 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 as of the last day of such calendar quarter during
which the 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 within 30 days following such director’s separation from service
from the board of directors.
First Community Corporation 2011 Stock Incentive Plan
In 2011, the Company and its shareholders adopted a stock incentive plan whereby 350,000 shares were reserved for issuance by the Company upon the grant of stock options or restricted stock awards under the plan (the “2011 Plan”). The 2011 Plan provided for the grant of options to key employees and directors as determined by a stock option committee made up of at least two members of the board of directors. Options are exercisable for a period of ten years from the date of grant. There were no stock options outstanding and exercisable at September 30, 2021, December 31, 2020 and September 30, 2020. At December 31, 2020, the Company had shares reserved for future grants under the 2011 Plan. The 2011 Plan expired on March 15, 2021 and no new awards may be granted under the 2011 Plan. However, any awards outstanding under the 2011 Plan will continue to be outstanding and governed by the provisions of the 2011 Plan.
| 10 |
Under the 2011 Plan, the employee
restricted shares and units cliff vest over a three-year period and the non-employee director shares vest approximately one year
after issuance. The unrecognized compensation cost at September 30, 2021 and December 31, 2020 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 for time-based units is accrued over the vesting period and was $
Historically, the Company granted time-based equity awards that vested based on continued service. Beginning in 2021 and in addition to time-based equity awards, the Company began granting performance-based equity awards in the form of performance-based restricted stock units, with the target number of performance-based restricted stock units for the Company’s Chief Executive Officer and other executive officers representing 50% of total target equity awards. These performance-based restricted stock units cliff vest over three years and include conditions based on the following performance measures: total shareholder return, return on average equity, and non-performing assets. The Company granted 13,302 performance-based restricted stock units with a fair value of $234.0 thousand during the first nine months of 2021. The Company granted no performance-based restricted stock units in 2020. The related compensation cost for the performance-based restricted stock units is accrued over the vesting period and was $45.5 thousand during the first nine months of 2021. The total related compensation cost for restricted stock units was $116.2 thousand and $107.4 thousand at September 30, 2021, and December 31, 2020, respectively, including both time-based and performance-based restricted stock units.
First Community Corporation 2021 Omnibus Equity Incentive Plan
In 2021, the Company and its shareholders adopted an omnibus equity incentive plan whereby shares were reserved for issuance by the Company to help the company attract, retain and motivate directors, officers, employees, consultants and advisors of the Company and its subsidiaries (the “2021 Plan”). The 2021 Plan replaced the 2011 Plan. No awards have been granted under the 2021 Plan as of September 30, 2021.
Note 3—Investment Securities
The amortized cost and estimated fair values of investment securities are summarized below:
Schedule of Investment Available-For-Sale
AVAILABLE-FOR-SALE:
| Gross | Gross | |||||||||||||||
| Amortized | Unrealized | Unrealized | ||||||||||||||
| (Dollars in thousands) | Cost | Gains | Losses | Fair Value | ||||||||||||
| September 30, 2021 | ||||||||||||||||
| US Treasury securities | $ | $ | $ | $ | ||||||||||||
| Government Sponsored Enterprises | ||||||||||||||||
| Mortgage-backed securities | ||||||||||||||||
| Small Business Administration pools | ||||||||||||||||
| State and local government | ||||||||||||||||
| Corporate and other securities | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
| Gross | Gross | |||||||||||||||
| Amortized | Unrealized | Unrealized | ||||||||||||||
| (Dollars in thousands) | Cost | Gains | Losses | Fair Value | ||||||||||||
| December 31, 2020 | ||||||||||||||||
| US Treasury securities | $ | $ | $ | $ | ||||||||||||
| Government Sponsored Enterprises | ||||||||||||||||
| Mortgage-backed securities | ||||||||||||||||
| Small Business Administration pools | ||||||||||||||||
| State and local government | ||||||||||||||||
| Corporate and other securities | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
There were no investment securities listed as held-to-maturity as of September 30, 2021 or December 31, 2020.
| 11 |
During the nine months ended September 30, 2021, the Company did not receive any proceeds from the sale of investment securities available-for-sale. During the nine months ended September 30, 2020, the company received $2.2 million from the sale of investment securities available-for-sale. For the nine months ended September 30, 2021, there were no gross realized gains or losses from the sale of investment securities available-for-sale. For the nine months ended September 30, 2020, there were $99 thousand in gross realized gains from the sale of investment securities available-for-sale.
At September 30, 2021, corporate
and other securities available-for-sale included the following at fair value: corporate fixed-to-float bonds at $
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 September 30, 2021 and December 31, 2020.
Schedule of gross unrealized losses and fair values, aggregated by investment category and length of time that individual securities have been in a continuous loss position
| (Dollars in thousands) | Less than 12 months | 12 months or more | Total | |||||||||||||||||||||
| September 30, 2021 | Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | ||||||||||||||||||
| Available-for-sale securities: | Value | Loss | Value | Loss | Value | Loss | ||||||||||||||||||
| US Treasury Securities | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Mortgage-backed securities | ||||||||||||||||||||||||
| Small Business Administration pools | ||||||||||||||||||||||||
| State and local government | ||||||||||||||||||||||||
| Corporate and other securities | ||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| (Dollars in thousands) | Less than 12 months | 12 months or more | Total | |||||||||||||||||||||
| December 31, 2020 | Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | ||||||||||||||||||
| Available-for-sale securities: | Value | Loss | Value | Loss | Value | Loss | ||||||||||||||||||
| Mortgage-backed securities | ||||||||||||||||||||||||
| Small Business Administration pools | ||||||||||||||||||||||||
| State and local government | ||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
Government
Sponsored Enterprise, Mortgage-Backed Securities: The Company owned mortgage-backed securities (“MBSs”), including
collateralized mortgage obligations (“CMOs”), issued by government sponsored enterprises (“GSEs”) with
an amortized cost of $
| 12 |
Non-agency
Mortgage Backed Securities: The Company held private label mortgage-backed securities (“PLMBSs”), including CMOs,
at September 30, 2021 with an amortized cost of $
State and Local Governments and Other: Management monitors these securities on a quarterly basis to identify any deterioration in the credit quality. Included in the monitoring is a review of the credit rating, a financial analysis and certain demographic data on the underlying issuer. The Company does not consider these securities to be other-than-temporarily impaired at September 30, 2021.
The following sets forth the amortized cost and fair value of investment securities at September 30, 2021 by contractual maturity. Expected maturities differ from contractual maturities because borrowers may have the right to call or prepay the obligations with or without prepayment penalties. MBSs are based on average life at estimated prepayment speeds.
Schedule of the amortized cost and fair value of investment securities by expected maturity
| Available-for-sale | ||||||||
| September 30, 2021 | Amortized | Fair | ||||||
| (Dollars in thousands) | Cost | Value | ||||||
| Due in one year or less | $ | $ | ||||||
| Due after one year through five years | ||||||||
| Due after five years through ten years | ||||||||
| Due after ten years | ||||||||
| Total | $ | $ | ||||||
Note 4—Loans
The following table summarizes the composition of our loan portfolio. Total loans are recorded net of deferred loan fees and costs, which totaled $1.7 million and $2.2 million as of September 30, 2021 and December 31, 2020, respectively.
Schedule of Loan Portfolio
| September 30, | December 31, | |||||||
| (Dollars in thousands) | 2021 | 2020 | ||||||
| Commercial, financial and agricultural | $ | $ | ||||||
| Real estate: | ||||||||
| Construction | ||||||||
| Mortgage-residential | ||||||||
| Mortgage-commercial | ||||||||
| Consumer: | ||||||||
| Home equity | ||||||||
| Other | ||||||||
| Total loans, net of deferred loan fees and costs | $ | $ | ||||||
Commercial, financial, and agricultural
category includes $
| 13 |
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 nine months ended September 30, 2021 and September 30, 2020 and for the year ended December 31, 2020 is as follows:
Schedule of activity in the allowance for loan losses and the recorded investment in loans receivable
| (Dollars in thousands) | ||||||||||||||||||||||||||||||||
| Commercial | Real estate Construction | Real estate Mortgage Residential | Real estate Mortgage Commercial | Consumer Home equity | Consumer Other | Unallocated | Total | |||||||||||||||||||||||||
| Three months ended September 30, 2021 | ||||||||||||||||||||||||||||||||
| Allowance for loan losses: | ||||||||||||||||||||||||||||||||
| Beginning balance June 30, 2021 | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Charge-offs | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Recoveries | ||||||||||||||||||||||||||||||||
| Provisions | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||
| Ending balance September 30, 2021 | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Real estate | Real estate | Consumer | ||||||||||||||||||||||||||||||
| Real estate | Mortgage | Mortgage | Home | Consumer | ||||||||||||||||||||||||||||
| (Dollars in thousands) | Commercial | Construction | Residential | Commercial | equity | Other | Unallocated | Total | ||||||||||||||||||||||||
| Nine months ended September 30, 2021 | ||||||||||||||||||||||||||||||||
| Allowance for loan losses: | ||||||||||||||||||||||||||||||||
| Beginning balance December 31, 2020 | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Charge-offs | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Recoveries | ||||||||||||||||||||||||||||||||
| Provisions | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Ending balance September 30, 2021 | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Ending balances: | ||||||||||||||||||||||||||||||||
| Individually evaluated for impairment | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Collectively evaluated for impairment | ||||||||||||||||||||||||||||||||
| September 30, 2021 Loans receivable: | ||||||||||||||||||||||||||||||||
| Ending balance-total | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Ending balances: | ||||||||||||||||||||||||||||||||
| Individually evaluated for impairment | ||||||||||||||||||||||||||||||||
| Collectively evaluated for impairment | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| 14 |
| (Dollars in thousands) | ||||||||||||||||||||||||||||||||
| Commercial | Real estate Construction | Real estate Mortgage Residential | Real estate Mortgage Commercial | Consumer Home equity | Consumer Other | Unallocated | Total | |||||||||||||||||||||||||
| Three months ended September 30, 2020 | ||||||||||||||||||||||||||||||||
| Allowance for loan losses: | ||||||||||||||||||||||||||||||||
| Beginning balance June 30, 2020 | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Charge-offs | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||
| Recoveries | ||||||||||||||||||||||||||||||||
| Provisions | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Ending balance September 30, 2020 | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||||||||||
| Real estate | Real estate | Consumer | ||||||||||||||||||||||||||||||
| Real estate | Mortgage | Mortgage | Home | Consumer | ||||||||||||||||||||||||||||
| Commercial | Construction | Residential | Commercial | equity | Other | Unallocated | Total | |||||||||||||||||||||||||
| Nine months ended September 30, 2020 | ||||||||||||||||||||||||||||||||
| Allowance for loan losses: | ||||||||||||||||||||||||||||||||
| Beginning balance December 31, 2019 | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Charge-offs | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||
| Recoveries | ||||||||||||||||||||||||||||||||
| Provisions | ( | ) | ||||||||||||||||||||||||||||||
| Ending balance September 30, 2020 | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Ending balances: | ||||||||||||||||||||||||||||||||
| Individually evaluated for impairment | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Collectively evaluated for impairment | ||||||||||||||||||||||||||||||||
| September 30, 2020 Loans receivable: | ||||||||||||||||||||||||||||||||
| Ending balance-total | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Ending balances: | ||||||||||||||||||||||||||||||||
| Individually evaluated for impairment | ||||||||||||||||||||||||||||||||
| Collectively evaluated for impairment | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| 15 |
| Real estate | Real estate | Consumer | ||||||||||||||||||||||||||||||
| Real estate | Mortgage | Mortgage | Home | Consumer | ||||||||||||||||||||||||||||
| (Dollars in thousands) | Commercial | Construction | Residential | Commercial | equity | Other | Unallocated | Total | ||||||||||||||||||||||||
| December 31, 2020 | ||||||||||||||||||||||||||||||||
| Allowance for loan losses: | ||||||||||||||||||||||||||||||||
| Beginning balance December 31, 2019 | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Charge-offs | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||
| Recoveries | ||||||||||||||||||||||||||||||||
| Provisions | ( | ) | ||||||||||||||||||||||||||||||
| Ending balance December 31, 2020 | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Ending balances: | ||||||||||||||||||||||||||||||||
| Individually evaluated for impairment | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Collectively evaluated for impairment | ||||||||||||||||||||||||||||||||
| December 31, 2020 Loans receivable: | ||||||||||||||||||||||||||||||||
| Ending balance-total | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Ending balances: | ||||||||||||||||||||||||||||||||
| Individually evaluated for impairment | ||||||||||||||||||||||||||||||||
| Collectively evaluated for impairment | ||||||||||||||||||||||||||||||||
| 16 |
The following tables as of September 30, 2021, September 30, 2020, and December 31, 2020, are by loan category and present loans individually evaluated and considered impaired under FASB ASC 310 “Accounting by Creditors for Impairment of a Loan.” Impairment includes performing TDRs.
Schedule of loan category and loans individually evaluated and considered impaired
| (Dollars in thousands) | Nine months ended | Three months ended | ||||||||||||||||||||||||||
| Unpaid | Average | Interest | Average | Interest | ||||||||||||||||||||||||
| Recorded | Principal | Related | Recorded | income | Recorded | Income | ||||||||||||||||||||||
| September 30, 2021 | 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 | ||||||||||||||||||||||||||||
| $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||
| 17 |
| (Dollars in thousands) | Nine months ended | Three months ended | ||||||||||||||||||||||||||
| Unpaid | Average | Interest | Average | Interest | ||||||||||||||||||||||||
| Recorded | Principal | Related | Recorded | income | Recorded | Income | ||||||||||||||||||||||
| September 30, 2020 | 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 | ||||||||||||||||||||||||||||
| $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||
| 18 |
| Unpaid | Average | Interest | ||||||||||||||||||
| (Dollars in thousands) | Recorded | Principal | Related | Recorded | Income | |||||||||||||||
| December 31, 2020 | Investment | Balance | Allowance | Investment | Recognized | |||||||||||||||
| With an allowance recorded: | ||||||||||||||||||||
| Commercial | — | |||||||||||||||||||
| With no allowance recorded: | ||||||||||||||||||||
| Commercial | $ | $ | $ | — | $ | $ | ||||||||||||||
| Real estate: | ||||||||||||||||||||
| Construction | — | |||||||||||||||||||
| Mortgage-residential | — | |||||||||||||||||||
| Mortgage-commercial | — | |||||||||||||||||||
| Consumer: | ||||||||||||||||||||
| Home Equity | — | |||||||||||||||||||
| Other | — | |||||||||||||||||||
| With an allowance recorded: | ||||||||||||||||||||
| Commercial | ||||||||||||||||||||
| Real estate: | ||||||||||||||||||||
| Construction | ||||||||||||||||||||
| Mortgage-residential | ||||||||||||||||||||
| Mortgage-commercial | ||||||||||||||||||||
| Consumer: | ||||||||||||||||||||
| Home Equity | ||||||||||||||||||||
| Other | ||||||||||||||||||||
| Total: | ||||||||||||||||||||
| Commercial | ||||||||||||||||||||
| Real estate: | ||||||||||||||||||||
| Construction | ||||||||||||||||||||
| Mortgage-residential | ||||||||||||||||||||
| Mortgage-commercial | ||||||||||||||||||||
| Consumer: | ||||||||||||||||||||
| Home Equity | ||||||||||||||||||||
| Other | ||||||||||||||||||||
| $ | $ | $ | $ | $ | ||||||||||||||||
The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt, including current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis is performed on a monthly basis. The Company uses the following definitions for risk ratings:
Special Mention. Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date. Special mention assets are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification.
Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.
Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.
| 19 |
Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered as pass rated loans. Based on the most recent analysis performed, the risk category of loans by class of loans is shown in the table below as of September 30, 2021 and December 31, 2020. As of September 30, 2021 and December 31, 2020, no loans were classified as doubtful.
Schedule of loan category and loan by risk categories
| (Dollars in thousands) | Special | |||||||||||||||||||
| September 30, 2021 | Pass | Mention | Substandard | Doubtful | Total | |||||||||||||||
| Commercial, financial & agricultural | $ | $ | $ | $ | $ | |||||||||||||||
| Real estate: | ||||||||||||||||||||
| Construction | ||||||||||||||||||||
| Mortgage – residential | ||||||||||||||||||||
| Mortgage – commercial | ||||||||||||||||||||
| Consumer: | ||||||||||||||||||||
| Home Equity | ||||||||||||||||||||
| Other | ||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | |||||||||||||||
| (Dollars in thousands) | Special | |||||||||||||||||||
| December 31, 2020 | Pass | Mention | Substandard | Doubtful | Total | |||||||||||||||
| Commercial, financial & agricultural | $ | $ | $ | $ | $ | |||||||||||||||
| Real estate: | ||||||||||||||||||||
| Construction | ||||||||||||||||||||
| Mortgage – residential | ||||||||||||||||||||
| Mortgage – commercial | ||||||||||||||||||||
| Consumer: | ||||||||||||||||||||
| Home Equity | ||||||||||||||||||||
| Other | ||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | |||||||||||||||
At September 30, 2021 and December 31, 2020, non-accrual loans totaled $359 thousand and $4.67 million, respectively.
TDRs that are still accruing and
included in impaired loans at September 30, 2021 and at December 31, 2020 amounted to $
Loans greater than 90 days delinquent
and still accruing interest were $
The following tables are by loan category and present loans past due and on non-accrual status as of September 30, 2021 and December 31, 2020:
Schedule of loan category and present loans past due and on non-accrual status
| Greater than | ||||||||||||||||||||||||||||
| (Dollars in thousands) | 30-59 Days | 60-89 Days | 90 Days and | Total | ||||||||||||||||||||||||
| September 30, 2021 | Past Due | Past Due | Accruing | Nonaccrual | Past Due | Current | Total Loans | |||||||||||||||||||||
| Commercial | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| Real estate: | ||||||||||||||||||||||||||||
| Construction | ||||||||||||||||||||||||||||
| Mortgage-residential | ||||||||||||||||||||||||||||
| Mortgage-commercial | ||||||||||||||||||||||||||||
| Consumer: | ||||||||||||||||||||||||||||
| Home equity | ||||||||||||||||||||||||||||
| Other | ||||||||||||||||||||||||||||
| $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||
| 20 |
| Greater than | ||||||||||||||||||||||||||||
| (Dollars in thousands) | 30-59 Days | 60-89 Days | 90 Days and | Total | ||||||||||||||||||||||||
| December 31, 2020 | Past Due | Past Due | Accruing | Nonaccrual | Past Due | Current | Total Loans | |||||||||||||||||||||
| Commercial | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| Real estate: | ||||||||||||||||||||||||||||
| Construction | ||||||||||||||||||||||||||||
| Mortgage-residential | ||||||||||||||||||||||||||||
| Mortgage-commercial | ||||||||||||||||||||||||||||
| Consumer: | ||||||||||||||||||||||||||||
| Home equity | ||||||||||||||||||||||||||||
| Other | ||||||||||||||||||||||||||||
| $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||
The Cares Act and Initiatives Related to COVID-19. On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act, was signed into law. The CARES Act provided for approximately $2.2 trillion in direct economic relief in response to the public health and economic impacts of COVID-19. Many of the CARES Act’s programs are, and remain, dependent upon the direct involvement of financial institutions like the Bank. These programs have been implemented through rules and guidance adopted by federal departments and agencies, including the U.S. Department of Treasury, the Federal Reserve and other federal bank regulatory authorities, including those with direct supervisory jurisdiction over the Company and the Bank. On December 27, 2020, the federal government signed into law the Consolidated Appropriations Act, 2021 implementing a second round of stimulus relief of $900 billion. The American Rescue Plan Act of 2021, or the American Rescue Plan, the third round of stimulus relief, was a $1.9 trillion dollar economic stimulus bill that was passed by Congress and signed into law on March 11, 2021. The purpose of the American Rescue Plan was to speed up the recovery from the economic and health effects of the COVID-19 pandemic and the ongoing recession. The Company continues to assess the impact of the CARES Act, the Consolidated Appropriations Act, 2021, and the American Rescue Plan, and other statutes, regulations and supervisory guidance related to the COVID-19 pandemic.
COVID-19 Related Troubled Debt Restructurings and Loan Modifications for Affected Borrowers. The CARES Act, as extended by certain provisions of the Consolidated Appropriations Act, 2021, permits banks to suspend requirements under generally accepted accounting principles (“GAAP”) for loan modifications to borrowers affected by COVID-19 that may otherwise be characterized as troubled debt restructurings, or TDRs, and suspend any determination related thereto if (i) the borrower was not more than 30 days past due as of December 31, 2019, (ii) the modifications are related to COVID-19, and (iii) the modification occurs between March 1, 2020 and the earlier of 60 days after the date of termination of the national emergency or January 1, 2022. Federal bank regulatory authorities also issued guidance to encourage banks to make loan modifications for borrowers affected by COVID-19.
The Company is focused on servicing the financial needs of its commercial and consumer customers with flexible loan payment arrangements, including short-term loan modifications or forbearance payments and reducing or waiving certain fees on deposit accounts. Future governmental actions may require these and other types of customer-related responses. Beginning in March 2020, the Company proactively offered payment deferrals for up to 90 days to its loan customers regardless of the impact of the pandemic on their business or personal finances. The Company continues to consider potential deferrals with respect to certain customers, which are evaluated on a case-by-case basis. At its peak, which occurred during the second quarter of 2020, the Company granted payment deferments on loans totaling $206.9 million. As a result of payments being resumed at the conclusion of their payment deferral period, loans in which payments were being deferred decreased from the peak of $206.9 million to $175.0 million at June 30, 2020, to $27.3 million at September 30, 2020, to $16.1 million at December 31, 2020, to $8.7 million at March 31, 2021, $4.5 million at June 30, 2021, and $4.1 million at September 30, 2021. The Company had no loans remaining on initial deferral status in which both principal and interest were deferred at December 31, 2020, March 31, 2021, June 30, 2021, and September 30, 2021. The $4.1 million in deferrals at September 30, 2021 related to one loan to an events/meeting center.
Troubled Debt Restructurings. The Company identifies TDRs as impaired under the guidance in ASC 310-10-35. There were no loans determined to be TDRs that were restructured during the three-month and nine-month periods ended September 30, 2021 and September 30, 2020. Additionally, there were no loans determined to be TDRs in the previous twelve months that had payment defaults. Defaulted loans are those loans that are greater than 90 days past due.
| 21 |
In the determination of the allowance for loan losses, all TDRs are reviewed to ensure that one of the three proper valuation methods (fair market value of the collateral, present value of cash flows, or observable market price) is adhered to. All non-accrual loans are written down to their corresponding collateral value. All troubled TDR accruing loans that have a loan balance that exceeds the present value of cash flows will have a specific allocation. All nonaccrual loans are considered impaired. Under ASC 310-10, a loan is impaired when it is probable that the Company will be unable to collect all amounts due including both principal and interest according to the contractual terms of the loan agreement.
Acquired credit-impaired loans are accounted for under the accounting guidance for loans and debt securities acquired with deteriorated credit quality, found in FASB ASC Topic 310-30, (Receivables—Loans and Debt Securities Acquired with Deteriorated Credit Quality), and initially measured at fair value, which includes estimated future credit losses expected to be incurred over the life of the loans. Loans acquired in business combinations with evidence of credit deterioration are considered impaired. Loans acquired through business combinations that do not meet the specific criteria of FASB ASC Topic 310-30, but for which a discount is attributable, at least in part to credit quality, are also accounted for under this guidance. Certain acquired loans, including performing loans and revolving lines of credit (consumer and commercial), are accounted for in accordance with FASB ASC Topic 310-20, where the discount is accreted through earnings based on estimated cash flows over the estimated life of the loan.
A summary of changes in the accretable yield for purchased credit-impaired loans for the three months and nine months ended September 30, 2021 and September 30, 2020 are as follows:
Schedule for changes in the accretable yield for PCI loans
| (Dollars in thousands) | Three Months Ended September 30, 2021 | Three Months Ended September 30, 2020 | ||||||
| Accretable yield, beginning of period | $ | $ | ||||||
| Accretion | ( | ) | ( | ) | ||||
| Accretable yield, end of period | $ | $ | ||||||
| (Dollars in thousands) | Nine Months Ended September 30, 2021 | Nine Months Ended September 30, 2020 | ||||||
| Accretable yield, beginning of period | $ | $ | ||||||
| Accretion | ( | ) | ( | ) | ||||
| Accretable yield, end of period | $ | $ | ||||||
At September 30, 2021 and December 31,
2020, the recorded investment in purchased impaired loans was $
| 22 |
Note 5—Recently Issued Accounting Pronouncements
The following is a summary of recent authoritative pronouncements:
In June 2016, the FASB issued guidance to change the accounting for credit losses and modify the impairment model for certain debt securities. The amendments will be effective for the Company for reporting periods beginning after December 15, 2022. Early adoption is permitted for all organizations for periods beginning after December 15, 2018. The Company is evaluating the impact that this will have on its financial statements.
In November 2019, the FASB issued guidance to defer the effective dates for private companies, not-for-profit organizations, and certain smaller reporting companies applying standards on current expected credit losses (CECL), leases, hedging. The new effective date for the Company for CECL will be fiscal years beginning after December 15, 2022 including interim periods within those fiscal years. The Company is evaluating the impact that this will have on its financial statements.
In November 2019, the FASB issued guidance that addresses issues raised by stakeholders during the implementation of ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The amendments affect a variety of topics in the ASC. For entities that have not yet adopted the amendments in ASU 2016-13, the amendments are effective for fiscal years beginning after December 15, 2022 including interim periods within those fiscal years-all other entities. Early adoption is permitted in any interim period as long as an entity has adopted the amendments in ASU 2016-13. The Company is evaluating the impact that this will have on its financial statements.
In December 2019, the FASB issued guidance to simplify accounting for income taxes by removing specific technical exceptions that often produce information investors have a hard time understanding. The amendments also improve consistent application of, and simplify, GAAP for other areas of Topic 740 by clarifying and amending existing guidance. The amendments became effective for the Company for interim and annual periods beginning after December 15, 2020 and did not have a material effect on its financial statements.
In January 2020, the FASB issued guidance to address accounting for the transition into and out of the equity method and measuring certain purchased options and forward contracts to acquire investments. The amendments became effective for the Company for interim and annual periods beginning after December 15, 2020 and did not have a material effect on its financial statements.
In March 2020, the FASB issued guidance that makes narrow-scope improvements to various aspects of the financial instrument guidance, including the CECL guidance issued in 2016. For public business entities, the amendments were effective upon issuance of the final ASU. For all other entities, the amendments were effective for fiscal years beginning after December 15, 2019, and were effective for interim periods within those fiscal years beginning after December 15, 2020. The effective date of the amendments to ASU 2016-01 were effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. For the amendments related to ASU 2016-13, public business entities that meet the definition of an SEC filer, excluding eligible smaller reporting companies (as defined by the SEC), should adopt the amendments in ASU 2016-13 during 2020. All other entities should adopt the amendments in ASU 2016-13 during 2023. Early adoption is permitted. For entities that have not yet adopted the guidance in ASU 2016-13, the effective dates and the transition requirements for these amendments are the same as the effective date and transition requirements in ASU 2016-13. For entities that have adopted the guidance in ASU 2016-13, the amendments were effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. For those entities, the amendments should be applied on a modified-retrospective basis by means of a cumulative-effect adjustment to opening retained earnings in the statement of financial position as of the date that an entity adopted the amendments in ASU 2016-13. On November 15, 2019, FASB issued ASU 2019-10, which delayed the effective date for the ASU 2016-13 for smaller public business entities, including Community Banks, and nonpublic business entities to January 1, 2023. The Company does not expect these amendments to have a material effect on its financial statements.
In March 2020, the FASB issued guidance to provide temporary optional guidance to ease the potential burden in accounting for reference rate reform. The guidance provides optional expedients and exceptions for applying GAAP to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. This ASU is intended to help stakeholders during the global market-wide reference rate transition period. The amendments are effective through December 31, 2022. The Company does not expect these amendments to have a material effect on its financial statements.
| 23 |
In August 2020, the FASB issued guidance to improve financial reporting associated with accounting for convertible instruments and contracts in an entity’s own equity. The amendments will be effective the Company for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020. The Company does not expect these amendments to have a material effect on its financial statements.
In October 2020, the FASB issued guidance to clarify the FASB’s intent that an entity should reevaluate whether a callable debt security that has multiple call dates is within the scope of FASB ASC 310-20-35-33 for each reporting period. The amendments were effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020 and did not have a material effect on the Company’s financial statements.
In October 2020, the FASB issued amendments to clarify the ASC and make minor improvements that are not expected to have a significant effect on current accounting practice or create a significant administrative cost to most entities. The amendments were effective for annual periods beginning after December 15, 2020 and did not have a material effect on the Company’s financial statements.
Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have a material impact on the Company’s financial position, results of operations or cash flows.
Note 6—Fair Value of Financial Instruments
The Company adopted FASB ASC Fair Value Measurement Topic 820, which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. ASC 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:
| Level l | Quoted prices in active markets for identical assets or liabilities. |
| Level 2 | Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. |
| Level 3 | Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. |
FASB ASC 825-10-50 “Disclosure about Fair Value of Financial Instruments”, requires the Company to disclose estimated fair values for its financial instruments. The Company’s fair value estimates, methods, and assumptions are set forth below.
Cash and Short Term Investments - The carrying amount of these financial instruments (cash and due from banks, interest-bearing bank balances, federal funds sold and securities purchased under agreements to resell) approximates fair value. All mature within 90 days and do not present unanticipated credit concerns and are classified as Level 1.
Investment Securities Available-for-Sale - Measurement is on a recurring basis based upon quoted market prices, if available. If quoted market prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for prepayment assumptions, projected credit losses, and liquidity. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, or by dealers or brokers in active over-the-counter markets. Level 2 securities include mortgage-backed securities issued both by government sponsored enterprises and private label mortgage-backed securities. Generally, these fair values are priced from established pricing models. Level 3 securities include corporate debt obligations and asset–backed securities that are less liquid or for which there is an inactive market.
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.
| 24 |
Loans - The valuation of loans receivable is estimated using the exit price notion which incorporates factors, such as enhanced credit risk, illiquidity risk and market factors that sometimes exist in exit prices in dislocated markets. This credit risk assumption is intended to approximate the fair value that a market participant would realize in a hypothetical orderly transaction. The Company’s loan portfolio is initially fair valued using a segmented approach. The Company divides its loan portfolio into the following categories: variable rate loans, impaired loans and all other loans. The results are then adjusted to account for credit risk as described above.
Other Real Estate Owned (“OREO”) - OREO is carried at the lower of carrying value or fair value on a non-recurring basis. Fair value is based upon independent appraisals or management’s estimation of the collateral and is considered a Level 3 measurement.
Accrued Interest Receivable - The fair value approximates the carrying value and is classified as Level 1.
Deposits - The fair value of demand deposits, savings accounts, and money market accounts is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposits is estimated by discounting the future cash flows using rates currently offered for deposits of similar remaining maturities. Deposits are classified as Level 2.
Securities Sold Under Agreements to Repurchase - The carrying value of short term borrowings (securities sold under agreements to repurchase and demand notes to the Treasury) approximates fair value. These are classified as Level 2.
Junior Subordinated Debt - The fair value of junior subordinated debt is estimated by using discounted cash flow analyses based on incremental borrowing rates for similar types of instruments. These are classified as Level 2.
Accrued Interest Payable -The fair value approximates the carrying value and is classified as Level 1.
Commitments to Extend Credit - The fair value of these commitments is immaterial because their underlying interest rates approximate market.
The carrying amount and estimated fair value by classification level of the Company’s financial instruments as of September 30, 2021 and December 31, 2020 are as follows:
Fair Value, by Balance Sheet Grouping
| September 30, 2021 | ||||||||||||||||||||
| Carrying | Fair Value | |||||||||||||||||||
| (Dollars in thousands) | Amount | Total | Level 1 | Level 2 | Level 3 | |||||||||||||||
| Financial Assets: | ||||||||||||||||||||
| Cash and short term investments | $ | $ | $ | $ | $ | |||||||||||||||
| Investment securities available-for-sale | ||||||||||||||||||||
| Other investments, at cost | ||||||||||||||||||||
| Loans held-for-sale | ||||||||||||||||||||
| Net loans receivable | ||||||||||||||||||||
| Accrued interest receivable | ||||||||||||||||||||
| Financial liabilities: | ||||||||||||||||||||
| Non-interest bearing demand | $ | $ | $ | $ | $ | |||||||||||||||
| Interest bearing demand deposits and money market accounts | ||||||||||||||||||||
| Savings | ||||||||||||||||||||
| Time deposits | ||||||||||||||||||||
| Total deposits | ||||||||||||||||||||
| Securities sold under agreements to repurchase | ||||||||||||||||||||
| Junior subordinated debt | ||||||||||||||||||||
| Accrued interest payable | ||||||||||||||||||||
| 25 |
| December 31, 2020 | ||||||||||||||||||||
| Carrying | Fair Value | |||||||||||||||||||
| (Dollars in thousands) | Amount | Total | Level 1 | Level 2 | Level 3 | |||||||||||||||
| Financial Assets: | ||||||||||||||||||||
| Cash and short term investments | $ | $ | $ | $ | $ | |||||||||||||||
| Investment securities available-for-sale | ||||||||||||||||||||
| Other investments, at cost | ||||||||||||||||||||
| Loans held for sale | ||||||||||||||||||||
| Net loans receivable | ||||||||||||||||||||
| Accrued interest receivable | ||||||||||||||||||||
| Financial liabilities: | ||||||||||||||||||||
| Non-interest bearing demand | $ | $ | $ | $ | $ | |||||||||||||||
| Interest bearing demand deposits and money market accounts | ||||||||||||||||||||
| Savings | ||||||||||||||||||||
| Time deposits | ||||||||||||||||||||
| Total deposits | ||||||||||||||||||||
| Securities sold under agreements to repurchase | ||||||||||||||||||||
| Junior subordinated debt | ||||||||||||||||||||
| Accrued interest payable | ||||||||||||||||||||
The following tables summarize quantitative disclosures about the fair value for each category of assets carried at fair value as of September 30, 2021 and December 31, 2020 that are measured on a recurring basis. There were no liabilities carried at fair value as of September 30, 2021 or December 31, 2020 that are measured on a recurring basis.
Fair Value, Assets Measured on Recurring Basis
(Dollars in thousands)
| Description | September 30, 2021 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||
| Available-for-sale securities | ||||||||||||||||
| US treasury securities | $ | $ | $ | $ | ||||||||||||
| Government sponsored enterprises | ||||||||||||||||
| Mortgage-backed securities | ||||||||||||||||
| Small Business Administration pools | ||||||||||||||||
| State and local government | ||||||||||||||||
| Corporate and other securities | ||||||||||||||||
| Total Available-for-sale securities | ||||||||||||||||
| Loans held-for-sale | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
| 26 |
(Dollars in thousands)
| Description | December 31, 2020 | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
| Available- for-sale securities | ||||||||||||||||
| US Treasury Securities | $ | $ | $ | $ | ||||||||||||
| Government Sponsored Enterprises | ||||||||||||||||
| Mortgage-backed securities | ||||||||||||||||
| Small Business Administration pools | ||||||||||||||||
| State and local government | ||||||||||||||||
| Corporate and other securities | ||||||||||||||||
| Total Available-for-sale 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 September 30, 2021 and December 31, 2020 that are measured on a non-recurring basis. There were no Level 3 financial instruments for the three months ended September 30, 2021 and September 30, 2020 measured on a recurring basis.
Fair Value Measurements, Nonrecurring
| (Dollars in thousands) | ||||||||||||||||
| Description | September 30, 2021 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||
| Impaired loans: | ||||||||||||||||
| Commercial & Industrial | $ | $ | $ | $ | ||||||||||||
| Real estate: | ||||||||||||||||
| Mortgage-residential | ||||||||||||||||
| Mortgage-commercial | ||||||||||||||||
| Consumer: | ||||||||||||||||
| Home equity | ||||||||||||||||
| Other | ||||||||||||||||
| Total impaired | ||||||||||||||||
| Other real estate owned: | ||||||||||||||||
| Construction | ||||||||||||||||
| Mortgage-residential | ||||||||||||||||
| Total other real estate owned | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
| 27 |
| (Dollars in thousands) | ||||||||||||||||
| Description | December 31, 2020 | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
| Impaired loans: | ||||||||||||||||
| Commercial & Industrial | $ | $ | $ | $ | ||||||||||||
| Real estate: | ||||||||||||||||
| Mortgage-residential | ||||||||||||||||
| Mortgage-commercial | ||||||||||||||||
| Consumer: | ||||||||||||||||
| Home equity | ||||||||||||||||
| Other | ||||||||||||||||
| Total impaired | ||||||||||||||||
| Other real estate owned: | ||||||||||||||||
| Construction | ||||||||||||||||
| Mortgage-commercial | ||||||||||||||||
| Total other real estate owned | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
The Company has a large percentage of loans with real estate serving as collateral. Loans which are deemed to be impaired are primarily valued on a nonrecurring basis at the fair value of the underlying real estate collateral. Such fair values are obtained using independent appraisals, which the Company considers to be Level 3 inputs. Third party appraisals are generally obtained when a loan is identified as being impaired or at the time it is transferred to OREO. This internal process consists of evaluating the underlying collateral to independently obtained comparable properties. With respect to less complex or smaller credits, an internal evaluation may be performed. Generally, the independent and internal evaluations are updated annually. Factors considered in determining the fair value include, among others, geographic sales trends, the value of comparable surrounding properties and the condition of the property. The aggregate amount of impaired loans was $1.8 million and $6.1 million as of September 30, 2021 and December 31, 2020, respectively.
For Level 3 assets and liabilities measured at fair value on a non-recurring basis as of September 30, 2021, and December 31, 2020, the significant unobservable inputs used in the fair value measurements were as follows:
Fair Value Measurement Inputs and Valuation Techniques
| (Dollars in thousands) | Fair Value as of September 30, 2021 | Valuation Technique | Significant Observable Inputs | Significant Unobservable Inputs | ||||||
| OREO | $ | Appraisal Value/Comparison Sales/Other estimates | Appraisals and or sales of comparable properties | Appraisals discounted | ||||||
| Impaired loans | $ | Appraisal Value | Appraisals and or sales of comparable properties | Appraisals discounted | ||||||
| (Dollars in thousands) | Fair Value as of December 31, 2020 | Valuation Technique | Significant Observable Inputs | Significant Unobservable Inputs | ||||||
| OREO | $ | Appraisal Value/Comparison Sales/Other estimates | Appraisals and or sales of comparable properties | Appraisals discounted | ||||||
| Impaired loans | $ | Appraisal Value | Appraisals and or sales of comparable properties | Appraisals discounted | ||||||
| 28 |
Note 7—Deposits
The Company’s total deposits are comprised of the following at the dates indicated:
Schedule of Total Deposits
| September 30, | December 31, | |||||||
| (Dollars in thousands) | 2021 | 2020 | ||||||
| Non-interest bearing demand deposits | $ | $ | ||||||
| Interest bearing demand deposits and money market accounts | ||||||||
| Savings | ||||||||
| Time deposits | ||||||||
| Total deposits | $ | $ | ||||||
As of September 30, 2021 and December
31, 2020, the Company had time deposits that meet or exceed the $250,000 FDIC insurance limit of $
Note 8—Reportable Segments
The Company’s reportable segments represent the distinct product lines the Company offers and are viewed separately for strategic planning by management. The Company has four reportable segments:
| ● | Commercial and retail banking: The Company’s primary business is to provide deposit and lending products and services to its commercial and retail customers. |
| ● | Mortgage banking: This segment provides mortgage origination services for loans that will be sold to investors in the secondary market. |
| ● | 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 nine months ended September 30, 2021 and September 30, 2020.
Schedule of Segment Reporting Information, by Segment
| (Dollars in thousands) | Commercial | Investment | ||||||||||||||||||||||
| Nine months ended September 30, 2021 | 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 | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||
| 29 |
| (Dollars in thousands) | Commercial | Investment | ||||||||||||||||||||||
| Nine months ended September 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 September 30, 2021 | 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 September 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 | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||
| Commercial | Investment | |||||||||||||||||||||||
| (Dollars in thousands) | and Retail | Mortgage | advisory and | |||||||||||||||||||||
| Banking | Banking | non-deposit | Corporate | Eliminations | Consolidated | |||||||||||||||||||
| Total Assets as of September 30, 2021 | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||
| Total Assets as of December 31, 2020 | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||
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Note 9—Leases
During the three-month period ended
September 30, 2021 and September 30, 2020, the Company made cash payments for operating leases in the amount of $
| (Dollars in thousands) | Liability | |||||||||||
| Year | Cash | Lease Expense | Reduction | |||||||||
| 2021 | $ | $ | $ | |||||||||
| 2022 | ||||||||||||
| 2023 | ||||||||||||
| 2024 | ||||||||||||
| 2025 | ||||||||||||
| Thereafter | ||||||||||||
| Total | $ | $ | $ | |||||||||
Note 10—Subsequent Events
Subsequent events are events or transactions that occur after the balance sheet date but before financial statements are issued. Recognized subsequent events are events or transactions that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements. Non-recognized subsequent events are events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after that date. Management has reviewed events occurring through the date the financial statements were available to be issued and no subsequent events occurred requiring accrual or that require disclosure and have not been disclosed in the footnotes to the Company’s unaudited consolidated financial statements as of September 30, 2021.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This report, including information included or incorporated by reference in this report, contains statements which constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements may relate to, among other matters, the financial condition, results of operations, plans, objectives, future performance, and business of our company. Forward-looking statements are based on many assumptions and estimates and are not guarantees of future performance. Our actual results may differ materially from those anticipated in any forward-looking statements, as they will depend on many factors about which we are unsure, including many factors which are beyond our control. The words “may,” “approximately,” “is likely,” “would,” “could,” “should,” “will,” “expect,” “anticipate,” “predict,” “project,” “potential,” “continue,” “assume,” “believe,” “intend,” “plan,” “forecast,” “goal,” and “estimate,” as well as similar expressions, are meant to identify such forward-looking statements. Potential risks and uncertainties that could cause our actual results to differ materially from those anticipated in our forward-looking statements include, without limitation, those described under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2020 as filed with the U.S. Securities and Exchange Commission (the “SEC”) on March 12, 2021 and the following:
| ● | The impact of the outbreak of the novel coronavirus, or COVID-19, on our business, including the impact of the actions taken by governmental authorities to try and contain the virus or address the impact of the virus on the United States economy, and the resulting effect of these items on our operations, liquidity and capital position, and on the financial condition of our borrowers and other customers; |
| ● | risks associated with our participation in the Paycheck Protection Program, otherwise the PPP, established by the CARES Act, including but not limited to, 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; |
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| ● | credit losses as a result of, among other potential factors, declining real estate values, increasing interest rates, increasing unemployment, or changes in customer payment behavior or other factors; |
| ● | the amount of our loan portfolio collateralized by real estate and weaknesses in the real estate market; |
| ● | restrictions or conditions imposed by our regulators on our operations; |
| ● | the adequacy of the level of our allowance for loan losses and the amount of loan loss provisions required in future periods; |
| ● | examinations by our regulatory authorities, including the possibility that the regulatory authorities may, among other things, require us to increase our allowance for loan losses, write-down assets, or take other actions; |
| ● | risks associated with actual or potential information gatherings, investigations or legal proceedings by customers, regulatory agencies or others; |
| ● | reduced earnings due to higher other-than-temporary impairment charges resulting from additional decline in the value of our securities portfolio, specifically as a result of increasing default rates, and loss severities on the underlying real estate collateral; |
| ● | increases in competitive pressure in the banking and financial services industries; |
| ● | changes in the interest rate environment which could reduce anticipated or actual margins; |
| ● | changes in political or social conditions or the legislative or regulatory environment, including governmental initiatives affecting the financial services industry, including as a result of the presidential administration and congressional elections; |
| ● | general economic conditions resulting in, among other things, a deterioration in credit quality; |
| ● | changes occurring in business conditions and inflation; |
| ● | changes in access to funding or increased regulatory requirements with regard to funding; |
| ● | cybersecurity risk related to our dependence on internal computer systems and the technology of outside service providers, as well as the potential impacts of third party security breaches, which subject us to potential business disruptions or financial losses resulting from deliberate attacks or unintentional events; |
| ● | changes in deposit flows; |
| ● | changes in technology; |
| ● | our current and future products, services, applications and functionality and plans to promote them; |
| ● | changes in monetary and tax policies, including potential changes in tax laws and regulations; |
| ● | changes in accounting standards, policies, estimates and practices as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the SEC and the Public Company Accounting Oversight Board; |
| ● | 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; |
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| ● | 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 the results of political elections, epidemics and pandemics (including COVID-19), war or terrorist activities, disruptions in our customers’ supply chains, disruptions in transportation, essential utility outages or trade disputes and related tariffs; |
| ● | disruptions due to flooding, severe weather or other natural disasters; and |
| ● | other risks and uncertainties detailed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2020, in Part II, Item 1A of our Quarterly Reports 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. For additional information with respect to factors that could cause actual results to differ from the expectations stated in the forward-looking statements, see “Risk Factors” under Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2020. In addition, our past results of operations do not necessarily indicate our future results. Therefore, we caution you not to place undue reliance on our forward-looking information and statements.
All forward-looking statements in this report are based on information available to us as of the date of this report. Although we believe that the expectations reflected in our forward-looking statements are reasonable, we cannot guarantee you that these expectations will be achieved. We undertake no obligation to publicly update or otherwise revise any forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by applicable law.
Overview
The following discussion describes our results of operations for the nine months and three months ended September 30, 2021 as compared to the nine months and three months ended September 30, 2020; and analyzes our financial condition as of September 30, 2021 as compared to December 31, 2020. Like most community banks, we derive most of our income from interest we receive on our loans and investments. Our primary source of funds for making these loans and investments is our deposits, on which we pay interest. Consequently, one of the key measures of our success is our amount of net interest income, or the difference between the income on our interest-earning assets, such as loans and investments, and the expense on our interest-bearing liabilities, such as deposits and borrowings. Another key measure is the spread between the yield we earn on our interest-earning assets and the rate we pay on our interest-bearing liabilities. There are risks inherent in all loans, so we maintain an allowance for loan losses to absorb probable losses on existing loans that may become uncollectible. We establish and maintain this allowance by charging a provision for loan losses against our operating earnings. In the following section, we have included a discussion of this process, as well as several tables describing our allowance for loan losses and the allocation of this allowance among our various categories of loans.
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.
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Unless the context requires otherwise, references to the “Company,” “we,” “us,” “our,” or similar references mean First Community Corporation and its subsidiaries.
COVID-19 Pandemic
Our financial performance generally, and in particular the ability of our borrowers to repay their loans, the value of collateral securing those loans, as well as demand for loans and other products and services we offer, is highly dependent on the business environment in our primary markets where we operate and in the United States as a whole. The COVID-19 pandemic and related restrictive measures taken by governments, businesses and individuals to contain the spread of the virus caused unprecedented uncertainty, volatility and disruption in financial markets and in governmental, commercial and consumer activity in the United States and globally, including our local markets. As these restrictive measures eased in the second half of 2020 and into 2021, the U.S. economy has begun to recover and, with the broad availability and distribution of COVID-19 vaccines. There have been encouraging signs of strength in the economic recovery, including growth in consumer spending and improvement in the labor market, but many businesses continue to face difficulty in hiring employees and meeting consumer demand, and certain portions of the global supply chain remain challenged by shortages and delays that first occurred due to the initial COVID-19 outbreak. There remains uncertainty about the pace of economic recovery, including uncertainty related to the labor market, inflation and fiscal and monetary policy responses from the federal government.
While there are reasons for optimism, we recognize that some of our customers are still experiencing varying degrees of financial distress. Commercial activity has improved, but has not returned to the levels existing before the outbreak of the pandemic, which may result in our borrowers’ inability to meet their loan obligations. Economic pressures and uncertainties related to the COVID-19 pandemic have also resulted in changes in consumer spending behaviors, which may negatively impact the demand for loans and other services we offer. In addition, our loan portfolio includes customers in industries such as hotels, restaurants and assisted living facilities, all of which have been significantly impacted by the COVID-19 pandemic. We recognize that these industries may take longer to recover as consumers may be hesitant to return to full social interaction or may change their spending habits on a more permanent basis as a result of the pandemic. We continue to monitor these customers closely. As of September 30, 2021, the States of South Carolina and Georgia, like most of the nation, are open with limited restrictions.
In addition, due to the COVID-19 pandemic, market interest rates declined significantly, with the 10-year Treasury bond falling to a low of 0.52% in early August 2020, but increasing significantly since that time to 1.52% at September 30, 2021. In March 2020, the Federal Open Market Committee reduced the targeted federal funds interest rate to a range from 0% to 0.25%, and this low range was still in effect as of September 30, 2021. Furthermore, one-month to one-year Treasury yields ranged from 0.04% to 0.09% at September 30, 2021. These reductions in interest rates, low interest rate environment, and the other effects of the COVID-19 pandemic have had, and are expected to continue to have, an adverse effect on our business, financial condition and results of operations.
The ultimate extent of the impact of the COVID-19 pandemic on our business, financial condition and results of operations remains uncertain and will depend on various developments and other factors, including the effect of governmental and private sector initiatives, the effect of the continued rollout of vaccinations for the virus, whether such vaccinations will be effective against another resurgence of the virus, including any new strains, and the ability for customers and businesses to return to their pre-pandemic routine.
Lending Operations and Accommodations to Borrowers; Impact of COVID-19 on Asset Quality and Value of Investment Securities
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. Beginning in March 2020, we proactively offered payment deferrals for up to 90 days to our loan customers regardless of the impact of the pandemic on their business or personal finances. 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 continue to consider potential deferrals with respect to certain customers, which we evaluate on a case-by-case basis. Loans on which payments have been deferred declined to $4.1 million at September 30, 2021 from $16.1 million at December 31, 2020 and from $27.3 million at September 30, 2020. We had no loans remaining on initial deferral status in which both principal and interest were deferred at December 31, 2020 and September 30, 2021. The $16.1 million in deferrals at December 31, 2020 consisted of seven loans on which only principal was being deferred. We had one loan, for an events/meeting center, totaling $4.1 million in continuing deferral status in which only principal is being deferred at September 30, 2021.
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We are also a small business administration approved lender and participated in the PPP, established under the CARES Act. We had PPP loans totaling $9.4 million gross of deferred fees and costs and $9.1 million net of deferred fees and costs at September 30, 2021. We had PPP loans totaling $43.3 million gross of deferred fees and costs and $42.2 million net of deferred fees and costs at December 31, 2020. During the nine months ended September 30, 2021 and September 30, 2021, we recognized $2.7 million and $367 thousand in net PPP deferred fees, respectively. The remaining net PPP deferred fees will be recognized as interest income over the remaining life of the PPP loans or when the loans are forgiven.
Our asset quality metrics as of September 30, 2021 remained sound. The non-performing asset ratio was 0.10% of total assets with the nominal level of $1.5 million in non-performing assets at September 30, 2021 compared to 0.50% and $7.0 million at December 31, 2020. The decline in the non-performing asset ratio was related to the successful resolution of several non-accrual and accruing loans past due of 90 days or more. Non-accrual loans declined $4.2 million to $359 thousand at September 30, 2021 from $4.6 million at December 31, 2020. Accruing loans past due 90 days or more declined to $1.3 million to $0 at September 30, 2021 from $1.3 million at December 31, 2021. Loans past due 30 days or more represented 0.03% of the loan portfolio at September 30, 2021 compared to 0.23% at December 31, 2020. The ratio of classified loans plus OREO and repossessed assets declined to 6.51% of total bank regulatory risk-based capital at September 30, 2021 from 6.89% at December 31, 2020. During the three months ended September 30, 2021, we experienced net loan recoveries of $354 thousand and net overdraft charge-offs of $16 thousand.
At September 30, 2021, our non-performing assets were not yet materially impacted by the economic pressures of the COVID-19 pandemic. As we closely monitor credit risk and our exposure to increased loan losses resulting from the impact of COVID-19 on our customers, we evaluated and identified our exposure to certain industry segments most impacted by the COVID-19 pandemic as of September 30, 2021:
| Industry Segments | Outstanding | % of Loan | ||||||
| (Dollars in millions) | Loan Balance | Portfolio | ||||||
| Hotels | $ | 34.7 | 3.9 | % | ||||
| Restaurants | $ | 22.6 | 2.6 | % | ||||
| Assisted Living | $ | 8.4 | 1.0 | % | ||||
| Retail | $ | 90.2 | 10.2 | % | ||||
We are also monitoring the impact of the COVID-19 pandemic on the operations and value of our investments. We mark to market our publicly traded investments and review our investment portfolio for impairment at, a minimum, quarterly. We do not consider any securities in our investment portfolio to be other-than-temporarily impaired at September 30, 2021. However, because of changing economic and market conditions affecting issuers, we may be required to recognize future impairments on the securities we hold as well as reductions in other comprehensive income. We cannot currently determine the ultimate impact of the pandemic on the long-term value of our portfolio.
Capital and Liquidity
Our capital remained strong and exceeded the well-capitalized regulatory requirements at September 30, 2021. Total shareholders’ equity increased $2.8 million, or 2.0%, to $139.1 million at September 30, 2021 from $136.3 million at December 31, 2020. The $2.8 million increase was due to an $8.9 million increase in retention of earnings less dividends paid, a $0.3 million increase due to employee and director stock awards, and a $0.3 million increase due to dividend reinvestment plan (DRIP) purchases partially offset by a $6.7 million reduction in accumulated other comprehensive income. The decline in accumulated other comprehensive income was due to an increase in longer-term market interest rates, which resulted in a reduction in the net unrealized gains in our investment securities portfolio. Under the Federal Reserve’s Small Bank Holding Company Policy Statement, the Company is not subject to the minimum capital adequacy and capital conservation buffer capital requirements at the holding company level, unless otherwise advised by the Federal Reserve. However, the Bank remains subject to capital requirements including a minimum leverage ratio and a minimum ratio of “qualifying capital” to risk weighted assets. Each of the regulatory capital ratios for the Bank exceeds the well capitalized minimum levels currently required by regulatory statute at September 30, 2021 and December 31, 2020. Refer to the Liquidity and Capital Resources section for more details.
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| 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 | |||||||||||||||
| September 30, 2021 | ||||||||||||||||||||
| Leverage Ratio | 8.56 | % | 5.00 | % | 4.00 | % | $ | 53,921 | $ | 69,085 | ||||||||||
| Common Equity Tier 1 Capital Ratio | 13.58 | % | 6.50 | % | 4.50 | % | 67,663 | 86,764 | ||||||||||||
| Tier 1 Capital Ratio | 13.58 | % | 8.00 | % | 6.00 | % | 53,337 | 72,438 | ||||||||||||
| Total Capital Ratio | 14.74 | % | 10.00 | % | 8.00 | % | 45,261 | 64,362 | ||||||||||||
| December 31, 2020 | ||||||||||||||||||||
| Leverage Ratio | 8.84 | % | 5.00 | % | 4.00 | % | $ | 52,270 | $ | 65,893 | ||||||||||
| Common Equity Tier 1 Capital Ratio | 12.83 | % | 6.50 | % | 4.50 | % | 59,406 | 78,169 | ||||||||||||
| Tier 1 Capital Ratio | 12.83 | % | 8.00 | % | 6.00 | % | 45,334 | 64,097 | ||||||||||||
| Total Capital Ratio | 13.94 | % | 10.00 | % | 8.00 | % | 36,961 | 55,723 | ||||||||||||
Based on our strong capital, conservative underwriting, and internal stress testing, we expect to remain well capitalized throughout the COVID-19 pandemic. However, the Bank’s reported regulatory capital ratios could be adversely impacted by future credit losses related to the COVID-19 pandemic. We recognize that we face extraordinary circumstances, and we intend to monitor developments and potential impacts on our capital.
We believe that we have ample liquidity to meet the needs of our customers 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 (“FHLB”).
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 September 30, 2021 and our notes included in the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2020 as filed with the SEC on March 12, 2021.
Certain accounting policies inherently involve a greater reliance on the use of estimates, assumptions and judgments and, as such, have a greater possibility of producing results that could be materially different than originally reported, which could have a material impact on the carrying values of our assets and liabilities and our results of operations. We consider these accounting policies and estimates to be critical accounting policies. We have identified the determination of the allowance for loan losses, goodwill and other intangibles, income taxes, deferred tax assets, and deferred tax liabilities, other-than-temporary impairment, business combinations, and method of accounting for loans acquired to be the accounting areas that require the most subjective or complex judgments and, as such, could be most subject to revision as new or additional information becomes available or circumstances change, including overall changes in the economic climate and/or market interest rates. Therefore, management has reviewed and approved these critical accounting policies and estimates and has discussed these policies with our Audit and Compliance Committee. A brief discussion of each of these areas appears in our 2020 Annual Report on Form 10-K. During the first nine months of 2021, we did not significantly alter the manner in which we applied our Critical Accounting Policies or developed related assumptions and estimates.
There have been no significant changes to our critical accounting policies as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2020.
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Comparison of Results of Operations for Nine Months Ended September 30, 2021 to the Nine Months Ended September 30, 2020
Net Income
Our net income for the nine months ended September 30, 2021 was $11.5 million, or $1.53 diluted earnings per common share, as compared to $6.7 million, or $0.89 diluted earnings per common share, for the nine months ended September 30, 2020. The $4.9 million increase in net income between the two periods is primarily due to a $4.8 million increase in net interest income, a $113 thousand increase in non-interest income, and a $3.0 million reduction in provision for loan losses partially offset by a $1.4 million increase in non-interest expense and $1.6 million increase in income tax expense. The increase in net interest income results from an increase of $229.1 million in average earning assets partially offset by a nine basis point decline in the net interest margin between the two periods. The increase in non-interest income is primarily related to increases in investment advisory fees and non-deposit commissions of $897 thousand, ATM/debit card income of $332 thousand, gain on sale of bank owned land of $13 thousand, and the collection of summary judgments of $147 thousand related to two loans charged off at a bank we acquired, partially offset by lower mortgage loan fees of $677 thousand, lower deposit service charges of $136 thousand, lower gain on sale of securities of $99 thousand, lower gain on sale of other real estate owned of $70 thousand, and lower non-recurring bank owned life insurance (BOLI) income of $311 thousand. The reduction in provision for loan losses is primarily related to net recoveries of $243 thousand during the nine months ended September 30, 2021 compared to net recoveries of $99 thousand during the same period in 2020 and a reduction in the qualitative factors in our allowance for loan losses methodology during 2021 related to the economic uncertainties caused by the COVID-19 pandemic and the change in total past due, rated, and non-accrual loans; partially offset by an increase in the qualitative factor for the change in economic conditions and loan growth of $37.1 million. We reduced the loss emergence period assumption on our COVID-19 qualitative factor, which was added to our allowance for loan losses methodology during 2020, to 18 months from 24 months at June 30, 2021 due to reductions in the number of COVID-19 cases, hospitalizations, and deaths in our markets. However, we partially offset these reductions by increasing our economic conditions qualitative factor by four basis points during 2021 (two basis points at June 30, 2021 and two basis points at September 30, 2021) due to higher inflation, supply chain bottlenecks, and labor shortages in certain industries. The increase in non-interest expense is primarily related to increased salaries and employee benefits expense of $726 thousand, increased occupancy expense of $149 thousand, increased FDIC assessment of $237 thousand, and increased computer service expense of $467 thousand partially offset by lower marketing and public relations expense of $94 thousand, and lower amortization of intangibles of $134 thousand. Our effective tax rate was 21.33% during the first nine months of 2021 compared to 19.05% during the same period in 2020.
Net Interest Income
Net interest income is our primary source of revenue. Net interest income is the difference between income earned on assets and interest paid on deposits and borrowings used to support such assets. Net interest income is determined by the rates earned on our interest-earning assets and the rates paid on our interest-bearing liabilities, the relative amounts of interest-earning assets and interest-bearing liabilities, and the degree of mismatch and the maturity and repricing characteristics of our interest-earning assets and interest-bearing liabilities.
Please refer to the table at the end of this Item 2 (Management’s Discussion and Analysis of Financial Condition and Results of Operations) for the average yields on assets and average rates on interest-bearing liabilities during the nine-month periods ended September 30, 2021 and 2020, along with average balances and the related interest income and interest expense amounts.
Net interest income increased $4.8 million, or 16.3%, to $34.1 million for the nine months ended September 30, 2021 from $29.3 million for the nine months ended September 30, 2020. Our net interest margin declined by nine basis points to 3.27% during the nine months ended September 30, 2021 from 3.36% during the nine months ended September 30, 2020. Our net interest margin, on a taxable equivalent basis, was 3.30% for the nine months ended September 30, 2021 compared to 3.39% for the nine months ended September 30, 2020. Average earning assets increased $229.1 million, or 19.7%, to $1.4 billion for the nine months ended September 30, 2021 compared to $1.2 billion in the same period of 2020. The increase in net interest income was due to a higher level of average earning assets partially offset by lower net interest margin. The increase in average earning assets was due to increases in loans, securities, and other short-term investments primarily due to Non-PPP loan growth, PPP loans, organic deposit growth, and excess liquidity from PPP loan proceeds and other stimulus funds related to the COVID-19 pandemic. The decline in net interest margin was primarily due to the Federal Reserve reducing the target range of the federal funds rate two times totaling 150 basis points during the first quarter of 2020 and the excess liquidity generated from PPP loan proceeds and other stimulus funds related to the COVID-19 pandemic being deployed in lower yielding securities and other short-term investments. Lower market rates, the competitive loan pricing environment, and the COVID-19 pandemic put downward pressure on our net interest margin during 2020 and the first nine months of 2021.
The net interest margin was positively affected by PPP loans and a $140 thousand interest recovery on a non-accrual loan that was successfully resolved during the nine months ended September 30, 2021. We earned $3.1 million in PPP loan interest income, which includes $2.7 million in accretion of PPP deferred fees net of deferred costs, on an average balance of $47.6 million during the nine months ended September 30, 2021 compared to $577 thousand in PPP loan interest income, which includes $367 thousand in accretion of PPP deferred loan fees net of deferred costs, on an average balance of $27.1 million during the nine months ended September 30, 2020. Excluding PPP loans, our net margin declined by 29 basis points to 3.08% during the nine months ended September 30, 2021 from 3.37% during the nine months ended September 30, 2020. Excluding PPP loans, our net interest margin, on a taxable equivalent basis, was 3.11% for the nine months ended September 30, 2021 compared to 3.41% for the nine months ended September 30, 2020.
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Average loans increased $76.3 million, or 9.3%, to $892.0 million for the nine months ended September 30, 2021 from $815.7 million for the same period in 2020. Average PPP loans increased $20.5 million to $47.6 million and average Non-PPP loans increased $55.7 million to $844.4 million for the nine months ended September 30, 2021. Average loans represented 63.9% of average earning assets during the nine months ended September 30, 2021 compared to 70.0% of average earning assets during the same period in 2020. The decline in average loans as a percentage of average earning assets was primarily due to increases in deposits of $213.2 million and securities sold under agreements to repurchase of $12.4 million. The growth in our deposits and securities sold under agreements to repurchase was higher than the growth in our loans, which resulted in the excess funds being deployed in our securities portfolio and other short-term investments and to reduce the amount of our FHLB advances. The yield on loans increased six basis points to 4.52% during the nine months ended September 30, 2021 from 4.46% during the same period in 2020. Excluding PPP loans, the yield on Non-PPP loans declined 24 basis points to 4.28% during the nine months ended September 30, 2021 from 4.52% during the same period in 2020. The yield on loans during the nine months ended September 30, 2021 also included $140 thousand in interest recoveries on a non-accrual relationship that was successfully resolved during the third quarter of 2021. The yield on PPP loans was 8.67% during the nine months ended September 30, 2021 compared to 2.85% during the same period in 2020. PPP loans declined to $9.1 million at September 30, 2021 from $49.8 million at September 30, 2020 due to PPP loans forgiven through the SBA PPP forgiveness process. When PPP loans are forgiven any remaining deferred fees net of deferred costs are recognized in interest income through accelerated accretion of the deferred fees net of deferred costs. Interest income on PPP loans increased $2.5 million to $3.1 thousand during the first nine months of 2021 from $577 thousand during the same period in 2020. The $3.1 million in interest income on PPP loans during the nine months ended September 30, 2021 includes $2.7 million in accretion of deferred fees net of deferred costs. Average securities and average other short-term investments for the nine months ended September 30, 2021 increased $137.6 million and $15.3 million, respectively, from the prior year period. The yield on our securities portfolio declined to 1.74% for the nine months ended September 30, 2021 from 2.21% for the same period in 2020; and the yield on our other short-term investments declined to 0.18% for the nine months ended September 30, 2021 from 0.56% for the same period in 2020. These declines were primarily related to the Federal Reserve reducing the target range of the federal funds rate as described above. The yield on earning assets for the nine months ended September 30, 2021 and 2020 was 3.44% and 3.71%, respectively. The cost of interest-bearing liabilities was at 25 basis points during the nine months ended September 30, 2021 compared to 51 basis points during the same period in 2020. The cost of deposits, including demand deposits, was 14 basis points during the nine months ended September 30, 2021 compared to 31 basis points during the same period in 2020. The cost of funds, including demand deposits, was 17 basis points during the nine months ended September 30, 2021 compared to 36 basis points during the same period in 2020.
We continue to focus on growing our pure deposits (demand deposits, interest-bearing transaction accounts, savings deposits, money market accounts, and IRAs) as these accounts tend to be low-cost deposits and assist us in controlling our overall cost of funds. During the nine months ended September 30, 2021, these deposits averaged 89.9% of total deposits as compared to 87.0% during the same period of 2020. This increase was due to PPP loan proceeds, other stimulus funds related to the COVID-19 pandemic, and organic deposit growth.
Provision and Allowance for Loan Losses
We account for our allowance for loan losses under the incurred loss model. As discussed above, the CECL model will become effective for us on January 1, 2023. At September 30, 2021, the allowance for loan losses was $11.0 million, or 1.25% of total loans (excluding loans held-for-sale), compared to $10.4 million, or 1.23% of total loans (excluding loans held-for-sale) at December 31, 2020, and $10.1 million, or 1.20% of total loans (excluding loans held-for-sale), at September 30, 2020. Excluding PPP loans and loans held-for-sale, the allowance for loan losses was 1.26% of total loans at September 30, 2021 compared to 1.30% of total loans at December 31, 2020, and 1.27% at September 30, 2020. The increase in the allowance for loan losses compared to September 30, 2020 is primarily related to loan growth of $37.1 million, $243 thousand in net recoveries, and an increase in our economic conditions qualitative factor by four basis points during 2021 (two basis points at June 30, 2021 and two basis points at September 30, 2021) due to higher inflation, supply chain bottlenecks, and labor shortages in certain industries. These increases were partially offset by a reduction in the loss emergence period assumption on our COVID-19 qualitative factor, which was added to our allowance for loan losses methodology during 2020, to 18 months from 24 months at June 30, 2021 due to a reduction in the number of COVID-19 cases, hospitalizations, and deaths in our markets.
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Loans that we acquired in our acquisition of Cornerstone Bancorp, otherwise referred to herein as Cornerstone, in 2017 as well as in our acquisition of Savannah River Financial Corp., otherwise referred to herein as Savannah River, in 2014 are accounted for under FASB ASC 310-30. These acquired loans were initially measured at fair value, which includes estimated future credit losses expected to be incurred over the life of the loans. The credit component on loans related to cash flows not expected to be collected is not subsequently accreted (non-accretable difference) into interest income. Any remaining portion representing the excess of a loan’s or pool’s cash flows expected to be collected over the fair value is accreted (accretable difference) into interest income. At September 30, 2021 and December 31, 2020, the remaining credit component on loans attributable to acquired loans in the Cornerstone and Savannah River transactions was $152 thousand and $264 thousand, respectively.
Our provision for loan losses was $394 thousand for the nine months ended September 30, 2021 compared to $3.4 million during the same period in 2020. The decline in the provision for loan losses is primarily related to an increase during the first nine months of 2020 in the qualitative factors in our allowance for loan losses methodology related to the deteriorating economic conditions and economic uncertainties caused by the COVID-19 pandemic. During the first nine months of 2020, we added a qualitative factor for the COVID-19 pandemic to our allowance for loan losses methodology. This new qualitative factor was based on the dollar amount of our deferrals and a one-year loss emergence period based on the highest period of annual historical loss rate since the Bank’s inception. As the pandemic worsened, we added our exposure to certain industry segments most impacted by the COVID-19 pandemic (hotels, restaurants, assisted living, and retail) to the COVID-19 qualitative factor and we extended the loss emergence period to two years based on the highest two periods of annual historical loss rates since the Bank’s inception. At June 30, 2021, we reduced the loss emergence period in the COVID-19 qualitative factor to 18 months from 24 months due to a reduction in the number of COVID-19 related cases, hospitalizations, and deaths within our markets. We also recognized $243 thousand in net recoveries during the nine months ended September 30, 2021. These items were partially offset by higher loan growth and a four basis points increase (two basis points at June 30, 2021 and two basis points at September 30, 2021) in our qualitative factor related to economic conditions due to an increase in inflation, supply chain bottlenecks, and labor shortages in our markets.
The allowance for loan losses represents an amount which we believe will be adequate to absorb probable losses on existing loans that may become uncollectible. Our judgment as to the adequacy of the allowance for loan losses is based on assumptions about future events, which we believe to be reasonable, but which may or may not prove to be accurate. Our determination of the allowance for loan losses is based on evaluations of the collectability of loans, including consideration of factors such as the balance of impaired loans, the quality, mix, and size of our overall loan portfolio, the knowledge and depth of lending personnel, economic conditions (local and national) that may affect the borrower’s ability to repay, the amount and quality of collateral securing the loans, our historical loan loss experience, and a review of specific problem loans. We also consider qualitative factors such as changes in the lending policies and procedures, changes in the local or national economies, changes in volume or type of credits, changes in volume/severity of problem loans, quality of loan review and board of director oversight, and concentrations of credit. During the first quarter of 2020, we added a new qualitative factor related to the economic uncertainties caused by the COVID-19 pandemic. We charge recognized losses to the allowance and add subsequent recoveries back to the allowance for loan losses. There can be no assurance that charge-offs of loans in future periods will not exceed the allowance for loan losses as estimated at any point in time or that provisions for loan losses will not be significant to a particular accounting period, especially considering the uncertainties related to the COVID-19 pandemic.
We perform an analysis quarterly to assess the risk within the loan portfolio. The portfolio is segregated into similar risk components for which historical loss ratios are calculated and adjusted for identified changes in current portfolio characteristics. Historical loss ratios are calculated by product type and by regulatory credit risk classification (See Note 4 to the Consolidated Financial Statements). The annualized weighted average loss ratios over the last 36 months for loans classified as substandard, special mention and pass have been approximately 0.180%, 0.019% and 0.004%, 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.
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We have a significant portion of our loan portfolio with real estate as the underlying collateral. At September 30, 2021 and December 31, 2020, approximately 89.9% and 87.5%, respectively, of the loan portfolio had real estate collateral. The increase in the percent of our loan portfolio with real estate as the underlying collateral is due to a $53.5 million increase in loans with real estate as the underlying collateral and a $33.1 million decline in PPP loans, which declined to $9.1 million at September 30, 2021 from $42.2 at December 31, 2020. When loans, whether commercial or personal, are granted, they are based on the borrower’s ability to generate repayment cash flows from income sources sufficient to service the debt. Real estate is generally taken to reinforce the likelihood of the ultimate repayment and as a secondary source of repayment. We work closely with all our borrowers that experience cash flow or other economic problems, and we believe that we have the appropriate processes in place to monitor and identify problem credits. There can be no assurance that charge-offs of loans in future periods will not exceed the allowance for loan losses as estimated at any point in time or that provisions for loan losses will not be significant to a particular accounting period. The allowance is also subject to examination and testing for adequacy by regulatory agencies, which may consider such factors as the methodology used to determine adequacy and the size of the allowance relative to that of peer institutions. Such regulatory agencies could require us to adjust our allowance based on information available to them at the time of their examination.
The non-performing asset ratio was 0.10% of total assets with the nominal level of $1.5 million in non-performing assets at September 30, 2021 compared to 0.50% and $7.0 million at December 31, 2020. The decline in the non-performing asset ratio was related to the successful resolution of several non-accrual and accruing loans past due of 90 days or more. Non-accrual loans declined $4.2 million to $359 thousand at September 30, 2021 from $4.6 million at December 31, 2020. Accruing loans past due 90 days or more declined to $1.3 million to $0 at September 30, 2021 from $1.3 million at December 31, 2021. Loans past due 30 days or more represented 0.03% of the loan portfolio at September 30, 2021 compared to 0.23% at December 31, 2020. The ratio of classified loans plus OREO and repossessed assets declined to 6.51% of total bank regulatory risk-based capital at September 30, 2021 from 6.89% at December 31, 2020. We continue to monitor the impact of the COVID-19 pandemic on our customer base of local businesses and professionals. There were 12 loans totaling $359 thousand (0.04% of total loans) included on non-performing status (non-accrual loans and loans past due 90 days and still accruing) at September 30, 2021. All 12 of these loans were on non-accrual status. The largest loan included on non-accrual status is in the amount of $110 thousand. The average balance of the remaining 11 loans on non-accrual status is approximately $23 thousand with a range between $0 and $87 thousand, and the majority of these loans are secured by first mortgage liens. Furthermore, we had $1.5 million in accruing trouble debt restructurings, or TDRs, at September 30, 2021 compared to $1.6 million at December 31, 2020. We consider a loan impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due, including both principal and interest, according to the contractual terms of the loan agreement. Nonaccrual loans and accruing TDRs are considered impaired. At September 30, 2021, we had 14 impaired loans totaling $1.9 million compared to 23 impaired loans totaling $6.1 million at December 31, 2020. These loans were measured for impairment under the fair value of collateral method or present value of expected cash flows method. For collateral dependent loans, the fair value of collateral method is used and the fair value is determined by an independent appraisal less estimated selling costs. At September 30, 2021, we had loans totaling $267 thousand that were delinquent 30 days to 89 days representing 0.03% of total loans compared to $665 thousand or 0.08% of total loans at December 31, 2020.
During the ongoing COVID-19 pandemic and because of our proactive offering of payment deferrals, loans on which payments have been deferred declined to $4.1 million at September 30, 2021 from $4.5 million at June 30, 2021, from $8.7 million at March 31, 2021, from $16.1 million at December 31, 2020, from $27.3 million at September 30, 2020, from $175.0 million at June 30, 2020 and from $118.3 million at March 31, 2020. We had one loan, for an events/meeting center, totaling $4.1 million in continuing deferral status in which only principal is being deferred at September 30, 2021. The $16.1 million in deferrals at December 31, 2020 consisted of seven loans on which only principal was being deferred. Some of these deferments were to businesses that temporarily closed or reduced operations and some were requested as a pre-cautionary measure to conserve cash. We proactively offered initial deferrals to our customers regardless of the impact of the pandemic on their business or personal finances. We obtained additional information from customers who requested second or continuing deferrals and we performed additional analyses to justify the need for the second or continuing deferral requests. Our management continuously monitors non-performing, classified and past due loans to identify deterioration regarding the condition of these loans and given the ongoing and uncertain impact of the COVID-19 pandemic, we will continue to monitor our loan portfolio for potential risks.
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The following table summarizes the activity related to our allowance for loan losses for the periods indicated:
Allowance for Loan Losses
| Nine Months Ended | ||||||||
| September 30, | ||||||||
| (Dollars in thousands) | 2021 | 2020 | ||||||
| Average loans outstanding (including loans held-for-sale) | $ | 891,987 | $ | 792,059 | ||||
| Loans outstanding at period end (excluding loans held-for-sale) | $ | 881,520 | $ | 844,460 | ||||
| Non-performing assets: | ||||||||
| Nonaccrual loans | $ | 359 | $ | 1,656 | ||||
| Loans 90 days past due still accruing | — | 34 | ||||||
| Foreclosed real estate | 1,165 | 1,313 | ||||||
| Repossessed-other | — | — | ||||||
| Total non-performing assets | $ | 1,524 | $ | 3,003 | ||||
| Beginning balance of allowance | $ | 10,389 | $ | 6,627 | ||||
| Loans charged-off: | ||||||||
| Commercial | — | — | ||||||
| Real Estate - Construction | — | 2 | ||||||
| Real Estate Mortgage - Residential | — | — | ||||||
| Real Estate Mortgage - Commercial | 110 | 1 | ||||||
| Consumer - Home Equity | — | — | ||||||
| Consumer - Other | 57 | 70 | ||||||
| Total loans charged-off | 167 | 73 | ||||||
| Recoveries: | ||||||||
| Commercial | 25 | 121 | ||||||
| Real Estate - Construction | — | 2 | ||||||
| Real Estate Mortgage - Residential | — | — | ||||||
| Real Estate Mortgage - Commercial | 315 | 13 | ||||||
| Consumer - Home Equity | 34 | 2 | ||||||
| Consumer - Other | 35 | 34 | ||||||
| Total recoveries | 409 | 172 | ||||||
| Net loan charge offs | 242 | 99 | ||||||
| Provision for loan losses | 394 | 3,387 | ||||||
| Balance at period end | $ | 11,025 | $ | 10,113 | ||||
| Net charge offs to average loans (annualized) | -0.04 | % | 0.02 | % | ||||
| Allowance as percent of total loans | 1.25 | % | 1.20 | % | ||||
| Non-performing assets as % of total assets | 0.10 | % | 0.22 | % | ||||
| Allowance as % of non-performing loans | 3,071.03 | % | 598.40 | % | ||||
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) | September 30, 2021 | December 31, 2020 | ||||||||||||||
| % of allowance in | % of allowance in | |||||||||||||||
| Amount | Category | Amount | Category | |||||||||||||
| Commercial, Financial and Agricultural | $ | 885 | 8.0 | % | $ | 778 | 7.5 | % | ||||||||
| Real Estate – Construction | 96 | 0.9 | % | 145 | 1.4 | % | ||||||||||
| Real Estate Mortgage: | ||||||||||||||||
| Residential | 541 | 4.9 | % | 541 | 5.2 | % | ||||||||||
| Commercial | 8,436 | 76.5 | % | 7,855 | 75.6 | % | ||||||||||
| Consumer: | ||||||||||||||||
| Home Equity | 326 | 3.0 | % | 324 | 3.1 | % | ||||||||||
| Other | 118 | 1.1 | % | 125 | 1.2 | % | ||||||||||
| Unallocated | 623 | 5.6 | % | 621 | 6.0 | % | ||||||||||
| Total | $ | 11,025 | 100.0 | % | $ | 10,389 | 100.0 | % | ||||||||
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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 nine months ended September 30, 2021 was $10.3 million compared to $10.2 million during the same period in 2020. Deposit service charges declined $136 thousand during the nine months ended September 30, 2021 compared to the same period in 2020 primarily due to lower overdraft fees. Mortgage banking income declined by $677 thousand to $3.3 million during the nine months ended September 30, 2021 from $4.0 million during the same period in 2020 due to a reduction in mortgage production partially offset by an increase in the gain-on-sale margin. Mortgage production during the nine months ended September 30, 2021 was $108.6 million compared to $146.0 million during the same period in 2020. The gain on sale margin was 3.02% in the nine months ended September 30, 2021 compared to 2.71% during the same period in 2020. The gain on sale margin was 3.56% during the three months ended September 30, 2021, 3.39% during the three months ended June 30, 2021, and 2.32% during the three months ended March 31, 2021. The gain on sale margin was limited during 2020 and the first quarter of 2021 as we worked on certain loans not yet sold, in an effort to resolve processing and delivery issues. We anticipate the future gain-on-sale margin will be approximately 3.25%. Investment advisory fees increased $897 thousand to $2.9 million during the nine months ended September 30, 2021 from $2.0 million during the same period in 2020. Total assets under management increased to $588.6 million at September 30, 2021 compared to $501.6 million at December 31, 2020 and $436.0 million at September 30, 2020. Management continues to focus on increasing both the mortgage banking income as well as the investment advisory fees and commissions. We had no gain on sale of securities during the nine months ended September 30, 2021 compared to $99 thousand during the same period in 2020. We had a $13 thousand gain on the sale of bank owned land during the nine months ended 2021 compared to $0 during the prior year period. We had $77 thousand in gains on sale of other real estate owned during the nine months ended September 30, 2021 compared to $147 thousand during the prior year period. Furthermore, we recognized $311 thousand in non-recurring bank owned life insurance (BOLI) income during the nine months ended September 30, 2020. The $311 thousand in non-recurring BOLI income was due to insurance benefits on two former members of the boards of directors of acquired banks who passed away during the third quarter of 2020.
Non-interest income, other increased $509 thousand during the nine months ended September 30, 2021 compared to the same period in 2020 primarily due to $147 thousand received from the collection of summary judgments related to two loans charged off at a bank we acquired and a $332 thousand increase in ATM debit card income.
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The following is a summary of the components of other non-interest income for the periods indicated:
| (Dollars in thousands) | Nine months ended September 30, | |||||||
| 2021 | 2020 | |||||||
| ATM debit card income | $ | 1,992 | $ | 1,660 | ||||
| Income on bank owned life insurance | 521 | 547 | ||||||
| Rental income | 228 | 200 | ||||||
| Other service fees and safe deposit box fees | 181 | 39 | ||||||
| Wire transfer fees | 87 | 67 | ||||||
| Other | 323 | 310 | ||||||
| Total | $ | 3,332 | $ | 2,823 | ||||
Non-interest expense increased $1.4 million during the nine months ended September 30, 2021 to $29.3 million compared to $27.9 million during the same period in 2020. Salary and benefit expense increased $726 thousand to $18.3 million during the nine months ended September 30, 2021 from $17.6 million during the same period in 2020. This increase is primarily a result of the normal salary adjustments and increased financial planning and investment advisory commissions. We had 243 full time equivalent employees at September 30, 2021 compared to 237 at September 30, 2020. Occupancy expense increased $149 thousand to $2.2 million during the nine months ended September 30, 2021 compared to $2.1 million during the same period in 2020. Marketing and public relations expense declined $94 thousand to $849 thousand during the nine months ended September 30, 2021 from $943 thousand during the same period in 2020. The timing of our planned media campaigns in 2021 impacts the recognition of marketing expense, and it is expected that the overall 2021 annual media cost will not vary substantially from the annual cost incurred in 2020. FDIC assessments increased $237 thousand due to a higher assessment rate in 2021 related to a decrease in our leverage ratio and an increase in our assessment base due to higher average assets as well as $39 thousand of small bank assessment credits utilized in the nine months ended September 30, 2020. The reduction in our leverage ratio and the increase in our assessment base were partially related to PPP loans and the excess liquidity generated from PPP loan proceeds and other stimulus funds related to the COVID-19 pandemic. Furthermore, we received FDIC small bank assessment credits during the nine months ended September 30, 2020 compared to none during the same period in 2021. The FDIC small bank assessment credits were fully utilized during the first quarter of 2020. Amortization of intangibles declined $134 thousand to $161 thousand during the nine months ended September 30, 2021 compared to $295 thousand during the same period in 2020.
Non-interest expense, other increased $553 thousand in the first nine months of 2021 as compared to the same period in 2020 primarily due to higher data processing expense of $467 thousand, which includes ATM debit card expense, higher brokerage fees of $74 thousand, higher director fees of $22 thousand, higher shareholder expense of $20 thousand, and higher other expense of $85 thousand primarily due to higher director restricted stock award expense partially offset by lower audit and accounting fees of $67 thousand, lower subscriptions and publications of $25 thousand, and lower operating errors of $44 thousand primarily due to mortgage processing issues in 2020.
The following is a summary of the components of other non-interest expense for the periods indicated:
| (Dollars in thousands) | Nine months ended September 30, | |||||||
| 2021 | 2020 | |||||||
| Data processing | $ | 2,787 | $ | 2,320 | ||||
| Telephone | 279 | 267 | ||||||
| Correspondent services | 209 | 209 | ||||||
| Insurance | 239 | 235 | ||||||
| Legal, professional, and brokerage fees | 1,048 | 1,098 | ||||||
| Director fees | 277 | 255 | ||||||
| Shareholder expense | 166 | 146 | ||||||
| Dues | 119 | 111 | ||||||
| Loan closing costs/fees | 258 | 273 | ||||||
| Other | 823 | 738 | ||||||
| Total | $ | 6,205 | $ | 5,652 | ||||
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Income Tax Expense
Our effective tax rate was 21.33% and 19.05% in the first nine months of 2021 and 2020, respectively. The effective rate in 2021, 2020, and 2019 is or was 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 September 30, 2021 to the Three Months Ended September 30, 2020
Net Income
Our net income for the three months ended September 30, 2021 was $4.7 million, or $0.63 diluted earnings per common share, as compared to $2.7 million, or $0.35 diluted earnings per common share, for the three months ended September 30, 2020. The $2.1 million increase in net income between the two periods is primarily due to a $2.3 million increase in net interest income and $1.0 million reduction in provision for loan losses partially offset by a $286 thousand decline in non-interest income, a $191 thousand increase in non-interest expense and a $720 thousand increase in income tax expense. The increase in net interest income results from an increase of $192.4 million in average earning assets and by a 19 basis point increase in the net interest margin between the two periods. The decline in non-interest income is primarily related to a decline in mortgage banking income of $256 thousand and a reduction in non-recurring income of $491 thousand partially offset by increases in deposit service charges of $15 thousand, investment advisory fees and non-deposit commissions of $368 thousand and ATM/debit card income of $73 thousand. The reduction in provision for loan losses is primarily related to net recoveries of $338 thousand during the three months ended September 30, 2021 compared to net recoveries of $115 thousand during the same period in 2020, a reduction in the qualitative factors in our allowance for loan losses methodology during 2021 related to the economic uncertainties caused by the COVID-19 pandemic and the change in total past due, rated, and non-accrual loans partially offset by an increase in the qualitative factor for the change in economic conditions and loan growth of $37.1 million. We reduced the loss emergence period assumption on our COVID-19 qualitative factor to 18 months from 24 months at June 30, 2021 due to reductions in the number of COVID-19 cases, hospitalizations, and deaths in our markets; and we reduced the qualitative factor for the change in total past due, rated, and non-accrual loans by three basis points at September 30, 2021 due to a reduction on non-performing assets. However, we partially offset these reductions by increasing our economic conditions qualitative factor by four basis points during 2021 (two basis points at June 30, 2021 and two basis points at September 30, 2021) due to higher inflation, supply chain bottlenecks, and labor shortages in certain industries. The increase in non-interest expense is primarily related to increased salaries and employee benefits expense of $307 thousand, increased FDIC assessment of $52 thousand, and increased non-interest expense other of $73 thousand partially offset by marketing and public relations of $202 thousand and lower amortization of intangibles of $43 thousand. The increase in salaries and benefits was primarily a result of the normal salary adjustments, increased financial planning and investment advisory commissions, and increased incentive plan accruals related to higher performance partially offset by lower mortgage commissions. The increase in the non-interest expense, other category included the reimbursement of $153 thousand legal expenses incurred during the second quarter of 2021 related to a loan relationship that was successfully resolved. Our effective tax rate was 21.73% during the three months ended September 30, 2021 compared to 18.40% during the same period in 2020.
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 September 30, 2021 and 2020, along with average balances and the related interest income and interest expense amounts.
Net interest income increased $2.3 million, or 22.4%, to $12.5 million for the three months ended September 30, 2021 from $10.2 million for the three months ended September 30, 2020. Our net interest margin increased by 19 basis points to 3.43% during the three months ended September 30, 2021 from 3.24% during the three months ended September 30, 2020. Our net interest margin, on a taxable equivalent basis, was 3.47% for the three months ended September 30, 2021 compared to 3.28% for the three months ended September 30, 2020. Average earning assets increased $192.4 million, or 15.4%, to $1.4 billion for the three months ended September 30, 2021 compared to $1.2 billion in the same period of 2020. The increase in net interest income was due to a higher level of average earning assets and an increase in net interest margin. The increase in average earning assets was primarily due to Non-PPP loan growth, organic deposit growth, and excess liquidity from PPP loan proceeds and other stimulus funds related to the COVID-19 pandemic partially offset by a reduction in PPP loans and other short-term investments. The increase in net interest margin was primarily due to the accelerated accretion of PPP deferred loan fees related to the forgiveness of PPP loans and a $140 thousand interest recovery on a non-accrual loan that was successfully resolved during the three months ended September 30, 2021. We earned $1.6 million in PPP loan interest income on an average balance of $31.9 million during the three months ended September 30, 2021 compared to $360 thousand on an average balance of $49.2 million during the three months ended September 30, 2020. Excluding PPP loans, our net margin declined by 22 basis points to 3.04% during the three months ended September 30, 2021 from 3.26% during the three months ended September 30, 2020. Excluding PPP loans, our net interest margin, on a taxable equivalent basis, was 3.08% for the three months ended September 30, 2021 compared to 3.29% for the three months ended September 30, 2020. The decline in net interest margin excluding PPP loans was primarily due to the Federal Reserve reducing the target range of the federal funds rate two times totaling 150 basis points during the first quarter of 2020 and the excess liquidity generated from PPP loan proceeds and other stimulus funds related to the COVID-19 pandemic being deployed in lower yielding securities and other short-term investments. Lower market rates, the competitive loan pricing environment, and the COVID-19 pandemic put downward pressure on our net interest margin during 2020 and the first nine months of 2021.
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Average loans increased $25.8 million, or 3.0%, to $893.9 million for the three months ended September 30, 2021 from $868.1 million for the same period in 2020. Average PPP loans declined $17.3 million to $31.9 million and average Non-PPP loans increased $43.1 million to $862.0 million for the three months ended September 30, 2021. Average loans represented 62.0% of average earning assets during the three months ended September 30, 2021 compared to 69.5% of average earning assets during the same period in 2020. The decline in average loans as a percentage of average earning assets was primarily due to increases in deposits of $175.6 million and securities sold under agreements to repurchase of $14.5 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. The yield on loans increased 55 basis points to 4.86% during the three months ended September 30, 2021 from 4.31% during the same period in 2020. Excluding PPP loans, the yield on Non-PPP loans declined 11 basis points to 4.29% during the three months ended September 30, 2021 from 4.40% during the same period in 2020. The yield on loans during the three months ended September 30, 2021 also includes $140 thousand in interest recoveries on a non-accrual relationship that was successfully resolved during the third quarter of 2021. The yield on PPP loans was 20.45% during the three months ended September 30, 2021 compared to 2.91% during the same period in 2020. PPP loans declined to $9.1 million at September 30, 2021 from $49.8 million at September 30, 2021 due to PPP loans forgiven through the SBA PPP forgiveness process. When PPP loans are forgiven any remaining deferred fees net of deferred costs are recognized in interest income through accelerated accretion of the deferred fees net of deferred costs. Interest income on PPP loans increased $1.3 million to $1.6 thousand during the three months ended September 30, 2021 from $360 thousand during the same period in 2020. The $1.6 million in interest income on PPP loans during the three months ended September 30, 2021 includes $1.561 million in accretion of deferred fees net of deferred costs. Average securities increased $188.7 million to $488.5 million during the three months ended September 30, 2021 from $299.9 million during the prior year period. The yield on our securities portfolio declined to 1.62% for the three months ended September 30, 2021 from 2.02% for the same period in 2020. Average other short-term investments and CDs declined $22.1 million to $58.5 million during the three months ended September 30, 2021 from $80.7 million during the prior year period. The yield on our other short-term investments and CDs was 0.21% for both the three months ended September 30, 2021 and September 30, 2020. These declines in the yields on Non-PPP loan and securities were primarily related to the Federal Reserve reducing the target range of the federal funds rate as described above. The yield on earning assets for the three months ended September 30, 2021 and 2020 was 3.57% and 3.50%, respectively. The cost of interest-bearing liabilities was at 22 basis points during the three months ended September 30, 2021 compared to 38 basis points during the same period in 2020. The cost of deposits, including demand deposits, was 12 basis points during the three months ended September 30, 2021 compared to 23 basis points during the same period in 2020. The cost of funds, including demand deposits, was 15 basis points during the three months ended September 30, 2021 compared to 27 basis points during the same period in 2020.
Non-interest Income and Non-interest Expense
Non-interest income during the three months ended September 30, 2021 was $3.6 million compared to $3.9 million during the same period in 2020. Mortgage banking income declined by $256 thousand to $1.1 million during the three months ended September 30, 2021 from $1.4 million during the same period in 2020 due to a reduction in mortgage production partially offset by an increase in the gain-on-sale margin. Mortgage production during the three months ended September 30, 2021 was $32.2 million compared to $56.8 million during the same period in 2020. The gain on sale margin was 3.56% in the three months ended September 30, 2021 compared to 2.47% during the same period in 2020. The gain on sale margin was limited during 2020 and the first quarter of 2021 as we worked on certain loans not yet sold, in an effort to resolve processing and delivery issues. Investment advisory fees increased $368 thousand to $1.1 million during the three months ended September 30, 2021 from $672 thousand during the same period in 2020. Total assets under management increased to $588.6 million at September 30, 2021 compared to $501.6 million at December 31, 2020 and $436.0 million at September 30, 2020. Management continues to focus on increasing both the mortgage banking income as well as the investment advisory fees and commissions. We had no gain on sale of securities during the three months ended September 30, 2021 compared to a $99 thousand gain during the same period in 2020. We had a $13 thousand gain on the sale of bank owned land during the three months ended 2021 and we had a $141 thousand in gain on sale of other real estate owned during the three months ended September 30, 2020. Furthermore, we recognized $311 thousand in non-recurring bank owned life insurance (BOLI) income during the three months ended September 30, 2020. The $311 thousand in non-recurring BOLI income was due to insurance benefits on two former members of the boards of directors of acquired banks who passed away during the third quarter of 2020.
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Non-interest income, other increased $138 thousand during the three months ended September 30, 2021 compared to the same period in 2020 primarily due to a $73 thousand increase in ATM debit card income and $47 thousand received from the collection of a summary judgment related to a loan charged off at a bank we acquired.
The following is a summary of the components of other non-interest income for the periods indicated:
| (Dollars in thousands) | Three months ended September 30, | |||||||
| 2021 | 2020 | |||||||
| ATM debit card income | $ | 669 | $ | 596 | ||||
| Income on bank owned life insurance | 175 | 182 | ||||||
| Rental income | 80 | 74 | ||||||
| Other service fees and safe deposit box fees | 63 | 58 | ||||||
| Wire transfer fees | 31 | 25 | ||||||
| Other | 102 | 47 | ||||||
| Total | $ | 1,120 | $ | 982 | ||||
Non-interest expense increased $191 thousand during the three months ended September 30, 2021 to $9.9 million compared to $9.7 million during the same period in 2020. Salary and benefit expense increased $307 thousand to $6.4 million during the three months ended September 30, 2021 from $6.1 million during the same period in 2020. This increase is primarily a result of the normal salary adjustments, increased financial planning and investment advisory commissions, increased incentive plan accruals related to higher performance partially offset by lower mortgage commissions. We had 243 full time equivalent employees at September 30, 2021 compared to 237 at September 30, 2020. FDIC assessments increased $52 thousand due to a higher assessment rate in 2021 related to a decrease in our leverage ratio and an increase in our assessment base due to higher average assets. The reduction in our leverage ratio and the increase in our assessment base were partially related to loan growth and excess liquidity generated from organic deposit growth and PPP loan proceeds and other stimulus funds related to the COVID-19 pandemic. Marketing and public relations expense declined $202 thousand to $140 thousand during the three months ended September 30, 2021 from $342 thousand during the same period in 2020. The timing of our planned media campaigns in 2021 impacts the recognition of marketing expense, and it is expected that the overall 2021 annual media cost will not vary substantially from the annual cost incurred in 2020. Amortization of intangibles declined $43 thousand to $52 thousand during the three months ended September 30, 2021 compared to $95 thousand during the same period in 2020.
Non-interest expense, other increased $73 thousand during the three months ended September 30, 2021 as compared to the same period in 2020 primarily due to higher data processing expense of $185 thousand, which includes ATM debit card expense partially offset by lower legal, professional, and brokerage fees of $104 thousand, which includes a $153 thousand reimbursement in previously incurred legal expenses related to a loan relationship that was successfully resolved during the three months ended September 30, 2021.
The following is a summary of the components of other non-interest expense for the periods indicated:
| (Dollars in thousands) | Three months ended | |||||||
| September 30, | ||||||||
| 2021 | 2020 | |||||||
| Data processing | $ | 972 | $ | 787 | ||||
| Telephone | 89 | 97 | ||||||
| Correspondent services | 64 | 73 | ||||||
| Insurance | 80 | 79 | ||||||
| Legal, professional, and brokerage fees | 231 | 335 | ||||||
| Director fees | 87 | 83 | ||||||
| Shareholder expense | 49 | 48 | ||||||
| Dues | 39 | 38 | ||||||
| Loan closing costs/fees | 94 | 97 | ||||||
| Other | 288 | 283 | ||||||
| $ | 1,993 | $ | 1,920 | |||||
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Financial Position
Assets totaled $1.6 billion at September 30, 2021 and $1.4 billion at December 31, 2020. Loans (excluding loans held-for-sale) increased $37.4 million to $881.5 million at September 30, 2021 from $844.2 million at December 31, 2020.
Total loan production excluding PPP loans and a PPP related credit facility was $70.5 million during the three months ended September 30, 2021 and $171.8 million during the nine months ended September 30, 2021 compared to $46.1 and $118.9 million during the same periods in 2020, respectively. Loans held-for-sale declined to $6.2 million at September 30, 2021 from $45.0 million at December 31, 2020 due to an improvement in mortgage processing, which has resulted in a reduction in the numbers of days to sell loans to investors, and the movement of 30 loans totaling $7.6 million to loans held-for-investment. Mortgage production was $32.2 million during the three months ended September 30, 2021 compared to $56.8 million during the same period in 2020. Mortgage production was $108.6 million during the nine months ended September 30, 2021 compared to $146.0 million during the same period in 2020. The loan-to-deposit ratio (including loans held-for-sale) at September 30, 2021 and December 31, 2020 was 66.6% and 74.8%, respectively. The loan-to-deposit ratio (excluding loans held-for-sale) at September 30, 2021 and December 31, 2020 was 66.1% and 71.0%, respectively. Investment securities increased to $515.3 million at September 30, 2021 from $361.9 million at December 31, 2020. Other short-term investments increased to $55.3 million at September 30, 2021 from $46.1 million at December 31, 2020. The increases in investments and other short-term investments are primarily due to organic deposit growth and excess liquidity from customer’s PPP loan proceeds and other stimulus funds related to the COVID-19 pandemic.
Non-PPP loans increased $70.5 million to $872.4 million at September 30, 2021 from $801.9 million at December 31, 2020. PPP loans declined $33.1 million to $9.1 million at September 30, 2021 from $42.2 million at December 31, 2020. PPP loans totaled $9.4 million gross of deferred fees and costs and $9.3 million net of deferred fees and costs at September 30, 2021. The $0.3 million in PPP deferred fees net of deferred costs at September 30, 2021 will be recognized as interest income over the remaining life of the PPP loans.
During 2020 and 2021, we originated 1,417 PPP loans totaling $88.5 million, which includes 843 PPP loans totaling $51.2 million originated in 2020 and 574 PPP loans totaling $37.3 million originated in 2021. Furthermore, during 2020, we facilitated the origination of 111 PPP loans totaling $31.2 million for our customers through a third party prior to establishing our own PPP platform. As of October 4, 2021, 1,364 PPP loans totaling $79.1 million (835 PPP loans totaling $48.9 million originated in 2020 and 529 PPP loans totaling $30.2 million originated in 2021) were forgiven through the SBA PPP forgiveness process.
One of our goals as a community bank has been, and continues to be, to grow our assets through quality loan growth by providing credit to small and mid-size businesses and individuals within the markets we serve. We remain committed to meeting the credit needs of our local markets.
The following table shows the composition of the loan portfolio by category at the dates indicated:
| (Dollars in thousands) | September 30, 2021 | December 31, 2020 | ||||||||||||||
| Amount | Percent | Amount | Percent | |||||||||||||
| Commercial, financial & agricultural | $ | 80,796 | 9.2 | % | $ | 96,688 | 11.5 | % | ||||||||
| Real estate: | ||||||||||||||||
| Construction | 100,061 | 11.4 | % | 95,282 | 11.3 | % | ||||||||||
| Mortgage – residential | 44,987 | 5.1 | % | 43,928 | 5.2 | % | ||||||||||
| Mortgage – commercial | 620,130 | 70.3 | % | 573,258 | 67.9 | % | ||||||||||
| Consumer: | ||||||||||||||||
| Home Equity | 27,233 | 3.1 | % | 26,442 | 3.1 | % | ||||||||||
| Other | 8,313 | 0.9 | % | 8,559 | 1.0 | % | ||||||||||
| Total gross loans | 881,520 | 100.0 | % | 844,157 | 100.0 | % | ||||||||||
| Allowance for loan losses | (11,025 | ) | (10,389 | ) | ||||||||||||
| Total net loans | $ | 870,495 | $ | 833,768 | ||||||||||||
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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 $144.2 million to $1.3 billion at September 30, 2021 compared to $1.2 billion at December 31, 2020. Our pure deposits, which are defined as total deposits less certificates of deposits, increased $148.7 million to $1.2 billion at September 30, 2021 from $1.1 billion at December 31, 2020. We continue to focus on growing our pure deposits as a percentage of total deposits in order to better manage our overall cost of funds. We had no brokered deposits and no listing services deposits at September 30, 2021. Our securities sold under agreements to repurchase, which are related to our customer cash management accounts, increased $18.9 million to $59.8 million at September 30, 2021 from $40.9 million at December 31, 2020.
Total shareholders’ equity increased $2.8 million or 2.0% to $139.1 million at September 30, 2021 from $136.3 million at December 31, 2020. The $2.8 million increase was due to an $8.9 million increase in retention of earnings less dividends paid, a $0.3 million increase due to employee and director stock awards, and a $0.3 million increase due to dividend reinvestment plan (DRIP) purchases partially offset by a $6.7 million reduction in accumulated other comprehensive income. The decline in accumulated other comprehensive income was due to an increase in longer-term market interest rates, which resulted in a reduction in the net unrealized gains in our investment securities portfolio. In late 2019, we obtained approval of a share repurchase plan of up to 200,000 shares of our outstanding common stock; however, no share repurchases were made under this repurchase plan prior to its expiration on December 31, 2020. On April 12, 2021, we announced that our Board of Directors approved the repurchase of up to 375,000 shares of our common stock (the “2021 repurchase plan”), which represents approximately 5% of our 7,544,374 shares outstanding as of September 30, 2021. The 2021 repurchase plan provides us with some flexibility in managing our capital going forward. No share repurchases were made during the three and nine months ended September 30, 2021 and September 30, 2020.
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.
We employ a monitoring technique that measures 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.
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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 September 30, 2021 and December 31, 2020 over the subsequent 12 months. At September 30, 2021, our modeling reflects exposure to falling and rising rates over the first 12 months subsequent to interest rate changes. The negative impact of rising rates reverses and net interest income is favorably impacted over a 24-month period. During the second 12-month period after 100 basis point and 200 basis point simultaneous and parallel increases in interest rates along the entire yield curve, our net interest income is projected to increase 3.54% and 6.67%, respectively. 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 | |||||||
| September 30, 2021 | December 31, 2020 | |||||||
| +200bp | -4.72 | % | -0.73 | % | ||||
| +100bp | -1.66 | % | +0.08 | % | ||||
| Flat | — | — | ||||||
| -100bp | -5.28 | % | -3.37 | % | ||||
| -200bp | -9.18 | % | -3.58 | % | ||||
We perform a valuation analysis projecting future cash flows from assets and liabilities to determine the Present Value of Equity (“PVE”) over a range of changes in market interest rates. The sensitivity of PVE to changes in interest rates is a measure of the sensitivity of earnings over a longer time horizon. At September 30, 2021 and December 31, 2020, the PVE exposure in a plus 100 basis point increase in market interest rates was estimated to be 3.69% and 6.94%, respectively. At September 30, 2021 and December 31, 2020, the PVE exposure in a plus 200 basis point increase in market interest rates was estimated to be 5.58% and 11.47%, respectively. The PVE exposure in a down 100 basis point decrease was estimated to be (8.94)% at September 30, 2021 compared to (14.32)% at December 31, 2020.
Liquidity and Capital Resources
Liquidity management involves monitoring sources and uses of funds in order to meet our day-to-day cash flow requirements while maximizing profits. Liquidity represents our ability to convert assets into cash or cash equivalents without significant loss and to raise additional funds by increasing liabilities. Liquidity management is made more complicated because different balance sheet components are subject to varying degrees of management control. For example, the timing of maturities of the investment portfolio is very predictable and subject to a high degree of control at the time investment decisions are made. However, net deposit inflows and outflows are far less predictable and are not subject to nearly the same degree of control. Asset liquidity is provided by cash and assets which are readily marketable, or which can be pledged, or which will mature in the near future. Liability liquidity is provided by access to core funding sources, principally the ability to generate customer deposits in our market area. In addition, liability liquidity is provided through the ability to borrow against approved lines of credit (federal funds purchased) from correspondent banks and to borrow on a secured basis through securities sold under agreements to repurchase. The Bank is a member of the FHLB and has the ability to obtain advances for various periods of time. These advances are secured by eligible securities pledged by the Bank or assignment of eligible loans within the Bank’s portfolio.
As of September 30, 2021, we have not experienced any unusual pressure on our deposit balances or our liquidity position as a result of the COVID-19 pandemic. We had no brokered deposits and no listing services deposits at September 30, 2021. We believe that we have ample liquidity to meet the needs of our customers 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 FHLB.
We generally maintain a high level of liquidity and adequate capital, which along with continued retained earnings, we believe will be sufficient to fund the operations of the Bank for at least the next 12 months. Shareholders’ equity declined to 8.9% of total assets at September 30, 2021 from 9.8% at December 31, 2020 due to total asset growth of $164.9 million compared to total shareholders’ equity growth of $2.8 million. The growth in total assets was primarily due to excess liquidity from customer’s PPP loans, other stimulus funds related to the COVID-19 pandemic, organic deposit growth, and loan growth. The $2.8 million increase was due to an $8.9 million increase in retention of earnings less dividends paid, a $0.3 million increase due to employee and director stock awards, and a $0.3 million increase due to dividend reinvestment plan (DRIP) purchases partially offset by a $6.7 million reduction in accumulated other comprehensive income. The decline in accumulated other comprehensive income was due to an increase in longer-term market interest rates, which resulted in a reduction in the net unrealized gains in our investment securities portfolio. 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 September 30, 2021 and $10 million through the Federal Reserve Discount Window. The FHLB of Atlanta has approved a line of credit of up to 25% of the Bank’s assets, which, when utilized, is collateralized by a pledge against specific investment securities and/or eligible loans.
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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 September 30, 2021, we had issued commitments to extend unused credit of $137.7 million, including $42.9 million in unused home equity lines of credit, through various types of lending arrangements. At December 31, 2020, we had issued commitments to extend unused credit of $142.6 million, including $42.3 million in unused home equity lines of credit, through various types of lending arrangements. We evaluate each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by us upon extension of credit, is based on our credit evaluation of the borrower. Collateral varies but may include accounts receivable, inventory, property, plant and equipment, commercial and residential real estate. We manage the credit risk on these commitments by subjecting them to normal underwriting and risk management processes.
We regularly review our liquidity position and have implemented internal policies establishing guidelines for sources of asset-based liquidity and evaluate and monitor the total amount of purchased funds used to support the balance sheet and funding from noncore sources. Although uncertain, we may encounter stress on liquidity management as a direct result of the COVID-19 pandemic and the Bank’s participation in the PPP as a participating lender. We had PPP loans totaling $9.4 million gross of deferred fees and costs and $9.1 million net of deferred fees and costs at September 30, 2021 compared to $43.3 million gross of deferred fees and costs and $42.2 million net of deferred fees and costs at December 31, 2020. As customers manage their own liquidity stress, we could experience an increase in the utilization of existing lines of credit.
Regulatory capital rules adopted in July 2013 and fully-phased in as of January 1, 2019, which we refer to Basel III, impose minimum capital requirements for bank holding companies and banks. In 2018, the Federal Reserve increased the asset size to qualify as a small bank holding company. As a result of this change, the Company is 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.
Specifically, the Bank is required to maintain the following minimum capital requirements:
| ● | a Common Equity Tier 1 risk-based capital ratio of 4.5%; |
| ● | a Tier 1 risk-based capital ratio of 6%; |
| ● | a total risk-based capital ratio of 8%; and |
| ● | a leverage ratio of 4%. |
Under the final Basel III rules, Tier 1 capital was redefined to include two components: Common Equity Tier 1 capital and additional Tier 1 capital. The highest form of capital, Common Equity Tier 1 capital, consists solely of common stock (plus related surplus), retained earnings, accumulated other comprehensive income, otherwise referred to as AOCI, and limited amounts of minority interests that are in the form of common stock. Additional Tier 1 capital is primarily comprised of noncumulative perpetual preferred stock, Tier 1 minority interests and grandfathered trust preferred securities (as discussed below). Tier 2 capital generally includes the allowance for loan losses up to 1.25% of risk-weighted assets, qualifying preferred stock, subordinated debt and qualifying tier 2 minority interests, less any deductions in Tier 2 instruments of an unconsolidated financial institution. Cumulative perpetual preferred stock is included only in Tier 2 capital, except that the Basel III rules permit bank holding companies with less than $15 billion in total consolidated assets to continue to include trust preferred securities and cumulative perpetual preferred stock issued before May 19, 2010 in Tier 1 Capital (but not in Common Equity Tier 1 capital), subject to certain restrictions. AOCI is presumptively included in Common Equity Tier 1 capital and often would operate to reduce this category of capital. When implemented, Basel III provided a one-time opportunity at the end of the first quarter of 2015 for covered banking organizations to opt out of much of this treatment of AOCI. We made this opt-out election and, as a result, retained our pre-existing treatment for AOCI.
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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 risk-based 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 have not elected to use the community bank leverage ratio framework but may make such an election in the future.
As outlined above, the Company is not generally subject to the Federal Reserve capital requirements unless advised otherwise because it qualifies as a small bank holding company. The Bank remains subject to capital requirements including a minimum leverage ratio and a minimum ratio of “qualifying capital” to risk weighted assets. As of September 30, 2021, the Bank met all capital adequacy requirements under the rules on a fully phased-in basis.
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| 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 | |||||||||||||||
| September 30, 2021 | ||||||||||||||||||||
| Leverage Ratio | 8.56 | % | 5.00 | % | 4.00 | % | $ | 53,921 | $ | 69,085 | ||||||||||
| Common Equity Tier 1 Capital Ratio | 13.58 | % | 6.50 | % | 4.50 | % | 67,663 | 86,764 | ||||||||||||
| Tier 1 Capital Ratio | 13.58 | % | 8.00 | % | 6.00 | % | 53,337 | 72,438 | ||||||||||||
| Total Capital Ratio | 14.74 | % | 10.00 | % | 8.00 | % | 45,261 | 64,362 | ||||||||||||
| December 31, 2020 | ||||||||||||||||||||
| Leverage Ratio | 8.84 | % | 5.00 | % | 4.00 | % | $ | 52,270 | $ | 65,893 | ||||||||||
| Common Equity Tier 1 Capital Ratio | 12.83 | % | 6.50 | % | 4.50 | % | 59,406 | 78,169 | ||||||||||||
| Tier 1 Capital Ratio | 12.83 | % | 8.00 | % | 6.00 | % | 45,334 | 64,097 | ||||||||||||
| Total Capital Ratio | 13.94 | % | 10.00 | % | 8.00 | % | 36,961 | 55,723 | ||||||||||||
The Bank’s risk-based capital ratios of leverage ratio, Tier 1, and total capital were 8.56%, 13.58% and 14.74%, respectively, at September 30, 2021 as compared to 8.84%, 12.83%, and 13.94%, respectively, at December 31, 2020. The Bank’s Common Equity Tier 1 ratio at September 30, 2021 was 13.58% and at December 31, 2020 was 12.83%. Under the Basel III rules, we anticipate that the Bank will remain a well capitalized institution for at least the next 12 months. Furthermore, based on our strong capital, conservative underwriting, and internal stress testing, we expect to remain well capitalized throughout the remainder of the COVID-19 pandemic. However, the Bank’s reported and regulatory capital ratios could be adversely impacted by future credit losses related to the COVID-19 pandemic.
As a bank holding company, our ability to declare and pay dividends is dependent on certain federal and state regulatory considerations, including the guidelines of the Federal Reserve. The Federal Reserve has issued a policy statement regarding the payment of dividends by bank holding companies. In general, the Federal Reserve’s policies provide that dividends should be paid only out of current earnings and only if the prospective rate of earnings retention by the bank holding company appears consistent with the organization’s capital needs, asset quality and overall financial condition. The Federal Reserve’s policies also require that a bank holding company serve as a source of financial strength to its subsidiary bank(s) by standing ready to use available resources to provide adequate capital funds to those banks during periods of financial stress or adversity and by maintaining the financial flexibility and capital-raising capacity to obtain additional resources for assisting its subsidiary banks where necessary. In addition, under the prompt corrective action regulations, the ability of a bank holding company to pay dividends may be restricted if a subsidiary bank becomes undercapitalized. These regulatory policies could affect our ability to pay dividends or otherwise engage in capital distributions. Our Board of Directors approved a cash dividend for the third quarter of 2021 of $0.12 per common share. This dividend is payable on November 16, 2021 to shareholders of record of our common stock as of November 2, 2021.
As we are a legal entity separate and distinct from the Bank and do not conduct stand-alone operations, our ability to pay dividends depends on the ability of the Bank to pay dividends to us, which is also subject to regulatory restrictions. As a South Carolina-chartered bank, the Bank is subject to limitations on the amount of dividends that it is permitted to pay. Unless otherwise instructed by the South Carolina Board of Financial Institutions, the Bank is generally permitted under South Carolina State banking regulations to pay cash dividends of up to 100% of net income in any calendar year without obtaining the prior approval of the South Carolina Board of Financial Institutions. The FDIC also has the authority under federal law to enjoin a bank from engaging in what in its opinion constitutes an unsafe or unsound practice in conducting its business, including the payment of a dividend under certain circumstances.
| 52 |
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.
FIRST COMMUNITY CORPORATION
Yields on Average Earning Assets and
Rates on Average Interest-Bearing Liabilities
| Nine months ended September 30, 2021 | Nine months ended September 30, 2020 | |||||||||||||||||||||||
| Average | Interest | Yield/ | Average | Interest | Yield/ | |||||||||||||||||||
| Balance | Earned/Paid | Rate | Balance | Earned/Paid | Rate | |||||||||||||||||||
| Assets | ||||||||||||||||||||||||
| Earning assets | ||||||||||||||||||||||||
| Loans | ||||||||||||||||||||||||
| PPP loans | $ | 47,605 | $ | 3,086 | 8.67 | % | $ | 27,088 | $ | 577 | 2.85 | % | ||||||||||||
| Non-PPP loans | 844,382 | 27,061 | 4.28 | % | 788,636 | 26,677 | 4.52 | % | ||||||||||||||||
| Total loans | 891,987 | 30,147 | 4.52 | % | 815,724 | 27,254 | 4.46 | % | ||||||||||||||||
| Securities | 431,332 | 5,623 | 1.74 | % | 293,724 | 4,862 | 2.21 | % | ||||||||||||||||
| Other short-term investments and CD’s | 71,804 | 94 | 0.18 | % | 56,532 | 236 | 0.56 | % | ||||||||||||||||
| Total earning assets | 1,395,123 | 35,864 | 3.44 | % | 1,165,980 | 32,352 | 3.71 | % | ||||||||||||||||
| Cash and due from banks | 22,844 | 15,142 | ||||||||||||||||||||||
| Premises and equipment | 34,065 | 34,853 | ||||||||||||||||||||||
| Goodwill and other intangibles | 15,673 | 15,967 | ||||||||||||||||||||||
| Other assets | 38,581 | 39,975 | ||||||||||||||||||||||
| Allowance for loan losses | (10,629 | ) | (8,052 | ) | ||||||||||||||||||||
| Total assets | $ | 1,495,657 | $ | 1,263,865 | ||||||||||||||||||||
| Liabilities | ||||||||||||||||||||||||
| Interest-bearing liabilities | ||||||||||||||||||||||||
| Interest-bearing transaction accounts | $ | 296,430 | $ | 152 | 0.07 | % | $ | 235,346 | $ | 220 | 0.12 | % | ||||||||||||
| Money market accounts | 267,143 | 359 | 0.18 | % | 210,212 | 674 | 0.43 | % | ||||||||||||||||
| Savings deposits | 132,700 | 58 | 0.06 | % | 110,095 | 65 | 0.08 | % | ||||||||||||||||
| Time deposits | 158,969 | 801 | 0.67 | % | 167,150 | 1,456 | 1.16 | % | ||||||||||||||||
| Other borrowings | 77,179 | 379 | 0.66 | % | 67,504 | 601 | 1.19 | % | ||||||||||||||||
| Total interest-bearing liabilities | 932,421 | 1,749 | 0.25 | % | 790,307 | 3,016 | 0.51 | % | ||||||||||||||||
| Demand deposits | 413,723 | 332,975 | ||||||||||||||||||||||
| Other liabilities | 12,426 | 13,195 | ||||||||||||||||||||||
| Shareholders’ equity | 137,087 | 127,388 | ||||||||||||||||||||||
| Total liabilities and shareholders’ equity | $ | 1,495,657 | $ | 1,263,865 | ||||||||||||||||||||
| Cost of deposits, including demand deposits | 0.14 | % | 0.31 | % | ||||||||||||||||||||
| Cost of funds, including demand deposits | 0.17 | % | 0.36 | % | ||||||||||||||||||||
| Net interest spread | 3.19 | % | 3.20 | % | ||||||||||||||||||||
| Net interest income/margin | $ | 34,115 | 3.27 | % | $ | 29,336 | 3.36 | % | ||||||||||||||||
| Net interest income/margin (tax equivalent) | $ | 34,475 | 3.30 | % | $ | 29,623 | 3.39 | % | ||||||||||||||||
| 53 |
FIRST COMMUNITY CORPORATION
Yields on
Average Earning Assets and
Rates on Average Interest-Bearing Liabilities
| Three months ended September 30, 2021 | Three months ended September 30, 2020 | |||||||||||||||||||||||
| Average | Interest | Yield/ | Average | Interest | Yield/ | |||||||||||||||||||
| Balance | Earned/Paid | Rate | Balance | Earned/Paid | Rate | |||||||||||||||||||
| Assets | ||||||||||||||||||||||||
| Earning assets | ||||||||||||||||||||||||
| Loans | ||||||||||||||||||||||||
| PPP loans | $ | 31,936 | $ | 1,646 | 20.45 | % | $ | 49,203 | $ | 360 | 2.91 | % | ||||||||||||
| Non-PPP loans | 861,952 | 9,310 | 4.29 | % | 818,893 | 9,048 | 4.40 | % | ||||||||||||||||
| Total loans | 893,888 | 10,956 | 4.86 | % | 868,096 | 9,408 | 4.31 | % | ||||||||||||||||
| Securities | 488,526 | 1,995 | 1.62 | % | 299,858 | 1,525 | 2.02 | % | ||||||||||||||||
| Other short-term investments and CD’s | 58,547 | 31 | 0.21 | % | 80,653 | 43 | 0.21 | % | ||||||||||||||||
| Total earning assets | 1,440,961 | 12,982 | 3.57 | % | 1,248,607 | 10,976 | 3.50 | % | ||||||||||||||||
| Cash and due from banks | 24,903 | 15,568 | ||||||||||||||||||||||
| Premises and equipment | 33,747 | 34,721 | ||||||||||||||||||||||
| Goodwill and other intangibles | 15,621 | 15,872 | ||||||||||||||||||||||
| Other assets | 38,376 | 39,751 | ||||||||||||||||||||||
| Allowance for loan losses | (10,788 | ) | (9,410 | ) | ||||||||||||||||||||
| Total assets | $ | 1,542,820 | $ | 1,345,109 | ||||||||||||||||||||
| Liabilities | ||||||||||||||||||||||||
| Interest-bearing liabilities | ||||||||||||||||||||||||
| Interest-bearing transaction accounts | $ | 306,108 | $ | 43 | 0.06 | % | $ | 256,990 | $ | 57 | 0.09 | % | ||||||||||||
| Money market accounts | 278,958 | 109 | 0.16 | % | 228,502 | 146 | 0.25 | % | ||||||||||||||||
| Savings deposits | 139,540 | 20 | 0.06 | % | 117,818 | 18 | 0.06 | % | ||||||||||||||||
| Time deposits | 157,485 | 231 | 0.58 | % | 166,070 | 438 | 1.05 | % | ||||||||||||||||
| Other borrowings | 77,840 | 123 | 0.63 | % | 63,312 | 141 | 0.89 | % | ||||||||||||||||
| Total interest-bearing liabilities | 959,931 | 526 | 0.22 | % | 832,692 | 800 | 0.38 | % | ||||||||||||||||
| Demand deposits | 430,474 | 367,597 | ||||||||||||||||||||||
| Other liabilities | 12,011 | 13,083 | ||||||||||||||||||||||
| Shareholders’ equity | 140,404 | 131,737 | ||||||||||||||||||||||
| Total liabilities and shareholders’ equity | $ | 1,542,820 | $ | 1,345,109 | ||||||||||||||||||||
| Cost of deposits, including demand deposits | 0.12 | % | 0.23 | % | ||||||||||||||||||||
| Cost of funds, including demand deposits | 0.15 | % | 0.27 | % | ||||||||||||||||||||
| Net interest spread | 3.35 | % | 3.12 | % | ||||||||||||||||||||
| Net interest income/margin | $ | 12,456 | 3.43 | % | $ | 10,176 | 3.24 | % | ||||||||||||||||
| Net interest income/margin (tax equivalent) | $ | 12,585 | 3.47 | % | $ | 10,282 | 3.28 | % | ||||||||||||||||
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
| 54 |
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Management, including our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports we file and submit under the Exchange Act is (i) recorded, processed, summarized and reported as and when required and (ii) accumulated and communicated to our management, including our Chief Executive Officer and the Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
The design of any system of controls and procedures is based in part upon certain assumptions about the likelihood of future events. There can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.
Changes in Internal Control over Financial Reporting
There has been no change in our internal control over financial reporting during the three months ended September 30, 2021 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
| 55 |
PART II -
OTHER INFORMATION
Item 1. Legal Proceedings.
We are a party to claims and lawsuits arising in the course of normal business activities. Management is not aware of any material pending legal proceedings against us which we believe, if determined adversely, would have a material adverse impact on our financial position, results of operations or cash flows.
Item 1A. Risk Factors.
Investing in shares of our common stock involves certain risks, including those identified and described in Item 1A. of our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, as well as cautionary statements contained in this Quarterly Report on Form 10-Q, including those under the caption “Cautionary Statement Regarding Forward-Looking Statements” set forth in Part I, Item 2 of this Quarterly Report on Form 10-Q, risks and matters described elsewhere in this Quarterly Report on Form 10-Q and in our other filings with the SEC.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
| (a) | Under the Company’s Non-Employee Director Deferred Compensation Plan, as amended and restated effective as of January 1, 2021, during the three months period ended September 30, 2021, we credited an aggregate of 1,367 deferred stock units to accounts for directors who elected to defer monthly fees. These deferred stock units include dividend equivalents in the form of additional stock units. The deferred stock units were issued pursuant to an exemption from registration under the Securities Act of 1933 in reliance upon Section 4(a)(2) of the Securities Act of 1933. |
| (b) | Not Applicable. |
| (c) | On April 12, 2021, we announced that our Board of Directors approved the repurchase of up to 375,000 shares of our common stock, which represents approximately 5% of our 7,544,374 shares outstanding as of September 30, 2021. No share repurchases were made during the three months ended September 30, 2021. |
Item 3. Defaults Upon Senior Securities.
Not Applicable.
| 56 |
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 September 30, 2021, formatted in iXBRL (inline eXtensible Business Reporting Language; (i) Consolidated Balance Sheets at September 30, 2021 and December 31, 2020, (ii) Consolidated Statements of Income for the three and nine months ended September 30, 2021 and 2020, (iii) Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2021 and 2020 (iv) Consolidated Statements of Changes in Shareholders’ Equity for the three months and nine months ended September 30, 2021 and 2020, (v) Consolidated Statements of Cash Flows for the nine months ended September 30, 2021 and 2020, and (vi) Notes to Consolidated Financial Statements. | |
| 104 | Cover Page Interactive Data File (the cover page XBRL tags are embedded within the iXBRL document). |
| 57 |
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: November 9, 2021 | By: | /s/ Michael C. Crapps |
| Michael C. Crapps | ||
| President and Chief Executive Officer | ||
| (Principal Executive Officer) | ||
| Date: November 9, 2021 | By: | /s/ D. Shawn Jordan |
| D. Shawn Jordan | ||
| Executive Vice President and Chief Financial Officer | ||
| (Principal Financial and Accounting Officer) | ||
| 58 |
Exhibit 31.1
Rule 13a-14(a) Certification of the Principal Executive Officer.
I, Michael C. Crapps, certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q of First Community Corporation; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| (b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| (c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| (d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: November 9, 2021
| /s/ Michael C. Crapps | ||
| Michael C. Crapps, President and Chief Executive Officer | ||
| (Principal Executive Officer) |
Exhibit 31.2
Rule 13a-14(a) Certification of the Principal Financial Officer.
I, D. Shawn Jordan, certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q of First Community Corporation; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| (b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| (c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| (d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: November 9, 2021
| /s/ D. Shawn Jordan | ||
| D. Shawn Jordan, Chief Financial Officer | ||
| (Principal Financial and Accounting Officer) |
Exhibit 32
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
The undersigned, the President and Chief Executive Officer and the Chief Financial Officer of First Community Corporation (the “Company”), each certify that, to his knowledge on the date of this certification:
| 1. | The quarterly report of the Company for the period ended September 30, 2021 as filed with the Securities and Exchange Commission on this date (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
| 2. | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
| /s/ Michael C. Crapps | ||
| Michael C. Crapps | ||
| President and Chief Executive Officer | ||
| November 9, 2021 | ||
| /s/ D. Shawn Jordan | ||
| D. Shawn Jordan | ||
| Chief Financial Officer | ||
| November 9, 2021 |