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OFFON

FIRST COMMUNITY CORPORATION

(FCCO)
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FIRST COMMUNITY : SC/ Management's Discussion and Analysis of Financial Condition and Results of Operations. (form 10-Q)

05/07/2021 | 05:34pm EDT

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This report, including information included or incorporated by reference in this
report, contains statements which constitute "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Forward-looking statements may relate to, among
other matters, the financial condition, results of operations, plans,
objectives, future performance, and business of our company. Forward-looking
statements are based on many assumptions and estimates and are not guarantees of
future performance. Our actual results may differ materially from those
anticipated in any forward-looking statements, as they will depend on many
factors about which we are unsure, including many factors which are beyond our
control. The words "may," "approximately," "is likely," "would," "could,"
"should," "will," "expect," "anticipate," "predict," "project," "potential,"
"continue," "assume," "believe," "intend," "plan," "forecast," "goal," and
"estimate," as well as similar expressions, are meant to identify such
forward-looking statements. Potential risks and uncertainties that could cause
our actual results to differ materially from those anticipated in our
forward-looking statements include, without limitation, those described under
the heading "Risk Factors" in our Annual Report on Form 10-K for the year ended
December 31, 2020 as filed with the U.S. Securities and Exchange Commission (the
"SEC") on March 12, 2021 and the following:



? The impact of the outbreak of the novel coronavirus, or COVID-19, on our

business, including the impact of the actions taken by governmental authorities

to try and contain the virus or address the impact of the virus on the United

States economy (including, without limitation, the CARES Act; the Consolidated

Appropriations Act, 2021; and the American Rescue Plan Act of 2021), and the

resulting effect of these items on our operations, liquidity and capital

position, and on the financial condition of our borrowers and other customers;

? credit losses as a result of, among other potential factors, declining real

estate values, increasing interest rates, increasing unemployment, or changes

in customer payment behavior or other factors;

? the amount of our loan portfolio collateralized by real estate and weaknesses

in the real estate market;

 ? restrictions or conditions imposed by our regulators on our operations;

? the adequacy of the level of our allowance for loan losses and the amount of

loan loss provisions required in future periods;

? examinations by our regulatory authorities, including the possibility that the

regulatory authorities may, among other things, require us to increase our

   allowance for loan losses, write-down assets, or take other actions;

? risks associated with actual or potential information gatherings,

investigations or legal proceedings by customers, regulatory agencies or

   others;



? reduced earnings due to higher other-than-temporary impairment charges

resulting from additional decline in the value of our securities portfolio,

specifically as a result of increasing default rates, and loss severities on

the underlying real estate collateral;

? increases in competitive pressure in the banking and financial services

   industries;



? changes in the interest rate environment which could reduce anticipated or

   actual margins;




? changes in political or social conditions or the legislative or regulatory

environment, including governmental initiatives affecting the financial

services industry, including as a result of the 2020 presidential and

   congressional elections;



? general economic conditions resulting in, among other things, a deterioration

   in credit quality;




? changes occurring in business conditions and inflation;

? changes in access to funding or increased regulatory requirements with regard

   to funding;


                                       28


? cybersecurity risk related to our dependence on internal computer systems and

the technology of outside service providers, as well as the potential impacts

of third party security breaches, which subject us to potential business

disruptions or financial losses resulting from deliberate attacks or

   unintentional events;




 ? changes in deposit flows;




 ? changes in technology;



? our current and future products, services, applications and functionality and

   plans to promote them;




? changes in monetary and tax policies, including potential changes in tax laws

   and regulations;




? changes in accounting standards, policies, estimates and practices;

? our assumptions and estimates used in applying critical accounting policies,

which may prove unreliable, inaccurate or not predictive of actual results;

? the rate of delinquencies and amounts of loans charged-off;

? the rate of loan growth in recent years and the lack of seasoning of a portion

   of our loan portfolio;




? our ability to maintain appropriate levels of capital, including levels of

capital required under the capital rules implementing Basel III;

? our ability to successfully execute our business strategy;

? our ability to attract and retain key personnel;

? our ability to retain our existing customers, including our deposit

   relationships;



? adverse changes in asset quality and resulting credit risk-related losses and

   expenses;




? the potential effects of events beyond our control that may have a

destabilizing effect on financial markets and the economy, such as epidemics

and pandemics (including COVID-19), war or terrorist activities, disruptions in

our customers' supply chains, disruptions in transportation, essential utility

outages or trade disputes and related tariffs;

? disruptions due to flooding, severe weather or other natural disasters; and

? other risks and uncertainties detailed in Part I, Item 1A of our Annual Report

on Form 10-K for the year ended December 31, 2020, and from time to time in our

   other filings with the SEC.




Because of these and other risks and uncertainties, our actual future results
may be materially different from the results indicated by any forward-looking
statements. For additional information with respect to factors that could cause
actual results to differ from the expectations stated in the forward-looking
statements, see "Risk Factors" under Part I, Item 1A of our Annual Report on
Form 10-K for the year ended December 31, 2020. In addition, our past results of
operations do not necessarily indicate our future results. Therefore, we caution
you not to place undue reliance on our forward-looking information and
statements.



All forward-looking statements in this report are based on information available
to us as of the date of this report. Although we believe that the expectations
reflected in our forward-looking statements are reasonable, we cannot guarantee
you that these expectations will be achieved. We undertake no obligation to
publicly update or otherwise revise any forward-looking statements, whether as a
result of new information, future events, or otherwise, except as required
by
applicable law.



Overview


The following discussion describes our results of operations for the three
months ended March 31, 2021 as compared to the three-month period ended March
31, 2020 and analyzes our financial condition as of March 31, 2021 as compared
to December 31, 2020. Like most community banks, we derive most of our income
from interest we receive on our loans and investments. Our primary source of
funds for making these loans and investments is our deposits, on which we pay
interest. Consequently, one of the key measures of our success is our amount of
net interest income, or the difference between the income on our
interest-earning assets, such as loans and investments, and the expense on our
interest-bearing liabilities, such as deposits and borrowings. Another key
measure is the spread between the yield we earn on our interest-earning assets
and the rate we pay on our interest-bearing liabilities. There are risks
inherent in all loans, so we maintain an allowance for loan losses to absorb
probable losses on existing loans that may become uncollectible. We establish
and maintain this allowance by charging a provision for loan losses against our
operating earnings. In the following section, we have included a discussion of
this process, as well as several tables describing our allowance for loan losses
and the allocation of this allowance among our various categories of loans.

                                       29



In addition to earning interest on our loans and investments, we earn income through fees and other expenses we charge to our customers. We describe the various components of this non-interest income, as well as our non-interest expense, in the following discussion.




The following discussion and analysis identify significant factors that have
affected our financial position and operating results during the periods
included in the accompanying financial statements. We encourage you to read this
discussion and analysis in conjunction with the financial statements and the
related notes and the other statistical information also included in this
report.



Unless the context requires otherwise, references to the "Company," "we," "us," "our," or similar references mean First Community Corporation and its subsidiaries.

Recent Events - COVID-19 Pandemic




Our financial performance generally, and in particular the ability of our
borrowers to repay their loans, the value of collateral securing those loans, as
well as demand for loans and other products and services we offer, is highly
dependent on the business environment in our primary markets where we operate
and in the United States as a whole. The COVID-19 pandemic continues to create
extensive disruptions to the global economy and financial markets and to
businesses and the lives of individuals throughout the world.



The impact of the COVID-19 pandemic is fluid and continues to evolve. The
unprecedented and rapid spread of COVID-19 and its associated impacts on trade
(including supply chains and export levels), travel, employee productivity,
unemployment, consumer spending, and other economic activities has resulted in
less economic activity, lower bank equity market valuations and significant
volatility and disruption in financial markets. In addition, due to the COVID-19
pandemic, market interest rates declined significantly, with the 10-year
Treasury bond falling to a low of 0.52% in early August 2020, but increasing
significantly since that time to 1.74% at March 31, 2021. In March 2020, the
Federal Open Market Committee reduced the targeted federal funds interest rate
range to 0% to 0.25% percent, and this low rate was still in effect as of March
31, 2021. Furthermore, one-month to three-year Treasury yields ranged from 0.01%
to 0.35% at March 31, 2021. These reductions in interest rates and the other
effects of the COVID-19 pandemic have had, and are expected to continue to have,
possibly materially, an adverse effect on our business, financial condition and
results of operations. For instance, the pandemic has had negative effects on
the Bank's net interest margin, provision for loan losses, deposit service
charges, salaries and benefits, occupancy expense, and equipment expense. The
ultimate extent of the impact of the COVID-19 pandemic on our business,
financial condition and results of operations is currently uncertain and will
depend on various developments and other factors, including the effect of
governmental and private sector initiatives, the effect of the recent rollout of
vaccinations for the virus, whether such vaccinations will be effective against
any resurgence of the virus, including any new strains, and the ability for
customers and businesses to return to their pre-pandemic routine.



Our business, financial condition and results of operations generally rely upon
the ability of our borrowers to repay their loans, the value of collateral
underlying our secured loans, and demand for loans and other products and
services we offer, which are highly dependent on the business environment in our
primary markets where we operate and in the United States as a whole.



We are focused on servicing the financial needs of our commercial and consumer
customers with flexible loan payment arrangements, including short-term loan
modifications or forbearance payments and reducing or waiving certain fees on
deposit accounts. Future governmental actions may require these and other types
of customer-related responses. Beginning in March 2020, we proactively offered
payment deferrals for up to 90 days to our loan customers regardless of the
impact of the pandemic on their business or personal finances. We continue to
consider potential deferrals with respect to certain customers, which we
evaluate on a case-by-case basis. Loans on which payments have been deferred
declined to $8.7 million at March 31, 2021 from $16.1 million at December 31,
2020 and from $118.3 million at March 31, 2020. At its peak, which occurred
during the second quarter of 2020, we granted payment deferments on loans
totaling $206.9 million. As a result of payments being resumed at the conclusion
of their payment deferral period, loans for which payments were being deferred
decreased from the peak of $206.9 million to $175.0 million at June 30, 2020, to
$27.3 million at September 30, 2020, to $16.1 million at December 31, 2020, and
to $8.7 million at March 31, 2021. We had no loans remaining on initial deferral
status in which both principal and interest were deferred at December 31, 2020
and March 31, 2021. The $16.1 million in deferrals at December 31, 2020
consisted of seven loans on which only principal was being deferred. We had
three loans totaling $8.7 million in continuing deferral status in which only
principal is being deferred at March 31, 2021. Two of the continuing deferrals
at March 31, 2021 totaling $4.5 million are in the retail industry segment
identified by us as one of the industry segments most impacted by the COVID-19
pandemic; the other continuing deferral totaling $4.2 million is a mixed use
office space that we do not consider to be in an industry segment most impacted
by the COVID-19 pandemic. Some of these deferments were to businesses that
temporarily closed or reduced operations and some were requested as a
pre-cautionary measure to conserve cash.

                                       30



We are also a small business administration approved lender and participated in
the Paycheck Protection Program, or PPP, established under the CARES Act. We had
PPP loans totaling $64.1 million gross of deferred fees and costs and $61.8
million net of deferred fees and costs at March 31, 2021. We had PPP loans
totaling $43.3 million gross of deferred fees and costs and $42.2 million net of
deferred fees and costs at December 31, 2020. The PPP deferred fees net of
deferred costs will be recognized as interest income over the remaining life of
the PPP loans.



Our asset quality metrics as of March 31, 2021 remained sound.  The
non-performing asset ratio was 0.37% of total assets with the nominal level of
$5.6 million in non-performing assets at March 31, 2021 compared to 0.50% and
$7.0 million at December 31, 2020.  Loans past due 30 days or more represented
0.04% of the loan portfolio at March 31, 2021 compared to 0.23% at December 31,
2020.  The ratio of classified loans plus OREO and repossessed assets increased
to 9.90% of total bank regulatory risk-based capital at March 31, 2021 from
6.89% at December 31, 2020 due to one loan relationship, which was impacted by
the COVID-19 pandemic.  During the three months ended March 31, 2021, we
experienced net loan charge-offs of $8 thousand and net overdraft recoveries of
$5 thousand.



At March 31, 2021, our non-performing assets were not yet materially impacted by
the economic pressures of the COVID-19 pandemic. As we closely monitor credit
risk and our exposure to increased loan losses resulting from the impact of
COVID-19 on our customers, we evaluated and identified our exposure to certain
industry segments most impacted by the COVID-19 pandemic as of March 31, 2021:


Industry Segments Outstanding % of Loan Avg. Loan Avg. Loan to (Dollars in millions) Loan Balance Portfolio Size

  Value
Hotels                  $        33.2             3.8 %   $       2.4                69 %
Restaurants             $        22.2             2.6 %   $       0.7                72 %
Assisted Living         $         8.8             1.0 %   $       1.5                47 %
Retail                  $        82.4             9.5 %   $       0.7                57 %




We are also monitoring the impact of the COVID-19 pandemic on the operations and
value of our investments. We mark to market our publicly traded investments and
review our investment portfolio for impairment at, a minimum, quarterly. We do
not consider any securities in our investment portfolio to be
other-than-temporarily impaired at March 31, 2021. However, because of changing
economic and market conditions affecting issuers, we may be required to
recognize future impairments on the securities we hold as well as reductions in
other comprehensive income. We cannot currently determine the ultimate impact of
the pandemic on the long-term value of our portfolio.



Our capital remained strong and exceeded the well-capitalized regulatory
requirements at March 31, 2021.  Total shareholders' equity declined $3.6
million or 2.7% to $132.7 million at March 31, 2021 from $136.3 million at
December 31, 2020. The $3.6 million decline was due to a $6.2 million reduction
in accumulated other comprehensive income partially offset by a $2.4 million
increase in retention of earnings less dividends paid. The decline in
accumulated other comprehensive income was due to an increase in longer-term
market interest rates, which resulted in a reduction in the net unrealized gains
in our investment securities portfolio. In 2018, the Federal Reserve increased
the asset size to qualify as a small bank holding company.  As a result of this
change, we are generally not subject to the Federal Reserve capital requirements
unless advised otherwise.  The Bank remains subject to capital requirements
including a minimum leverage ratio and a minimum ratio of "qualifying capital"
to risk weighted assets.  These requirements are essentially the same as those
that applied to the Company prior to the change in the definition of a small
bank holding company.  Each of the regulatory capital ratios for the Bank
exceeds the well capitalized minimum levels currently required by regulatory
statute at March 31, 2021 and December 31, 2020. Refer to the Liquidity and
Capital Resources section for more details.

                                       31



                                                        Prompt Corrective Action                Excess Capital $s of
Dollars in thousands                                       (PCA) Requirements                     PCA Requirements
                                                        Well             Adequately           Well            Adequately
Capital Ratios                         Actual        Capitalized        Capitalized       Capitalized         Capitalized
March 31, 2021
Leverage Ratio                            8.73 %             5.00 %             4.00 %    $     52,529       $      66,594
Common Equity Tier 1 Capital Ratio       13.20 %             6.50 %        
    4.50 %          62,377              80,985
Tier 1 Capital Ratio                     13.20 %             8.00 %             6.00 %          48,421              67,029
Total Capital Ratio                      14.34 %            10.00 %             8.00 %          40,375              58,984
December 31, 2020
Leverage Ratio                            8.84 %             5.00 %             4.00 %    $     52,270       $      65,893
Common Equity Tier 1 Capital Ratio       12.83 %             6.50 %        
    4.50 %          59,406              78,169
Tier 1 Capital Ratio                     12.83 %             8.00 %             6.00 %          45,334              64,097
Total Capital Ratio                      13.94 %            10.00 %             8.00 %          36,961              55,723



Based on our strong capital, conservative underwriting, and internal stress
testing, we expect to remain well capitalized throughout the COVID-19 pandemic.
However, the Bank's reported regulatory capital ratios could be adversely
impacted by future credit losses related to the COVID-19 pandemic. We recognize
that we face extraordinary circumstances, and we intend to monitor developments
and potential impacts on our capital.



We believe that we have ample liquidity to meet the needs of our customers and
to manage through the COVID-19 pandemic through our low cost deposits; our
ability to borrow against approved lines of credit (federal funds purchased)
from correspondent banks; and our ability to obtain advances secured by certain
securities and loans from the Federal Home Loan Bank.



Critical Accounting Policies

We have adopted various accounting policies that govern the application of
accounting principles generally accepted in the United States and with general
practices within the banking industry in the preparation of our financial
statements. Our significant accounting policies are described in the footnotes
to our unaudited consolidated financial statements as of March 31, 2021 and our
notes included in the consolidated financial statements in our Annual Report on
Form 10-K for the year ended December 31, 2020 as filed with the SEC on March
12, 2021.



Certain accounting policies inherently involve a greater reliance on the use of
estimates, assumptions and judgments and, as such, have a greater possibility of
producing results that could be materially different than originally reported,
which could have a material impact on the carrying values of our assets and
liabilities and our results of operations. We consider these accounting policies
and estimates to be critical accounting policies. We have identified the
determination of the allowance for loan losses, goodwill and other intangibles,
income taxes, deferred tax assets, and deferred tax liabilities,
other-than-temporary impairment, business combinations, and method of accounting
for loans acquired to be the accounting areas that require the most subjective
or complex judgments and, as such, could be most subject to revision as new or
additional information becomes available or circumstances change, including
overall changes in the economic climate and/or market interest rates. Therefore,
management has reviewed and approved these critical accounting policies and
estimates and has discussed these policies with our Audit and Compliance
Committee. A brief discussion of each of these areas appears in our 2020 Annual
Report on Form 10-K. During the first three months of 2021, we did not
significantly alter the manner in which we applied our Critical Accounting
Policies or developed related assumptions and estimates.



There have been no significant changes to the Company's critical accounting policies as disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2020.


                                       32



Comparison of Results of Operations for Three Months Ended March 31, 2021 to the Three Months Ended March 31, 2020



Net Income


Our net income for the three months ended March 31, 2021 was $3.3 million, or
$0.43 diluted earnings per common share, as compared to $1.8 million, or $0.24
diluted earnings per common share, for the three months ended March 31, 2020.
The $1.5 million increase in net income between the two periods is primarily due
to a $1.2 million increase in net interest income, a $368 thousand increase in
non-interest income, and an $898 thousand reduction in provision for loan losses
partially offset by a $502 thousand increase in non-interest expense and $453
thousand increase in income tax expense. The increase in net interest income
results from an increase of $261.8 million in average earning assets partially
offset by a 32 basis point decline in the net interest margin between the two
periods. The increase in non-interest income is primarily related to increases
in investment advisory fees and non-deposit commissions of $243 thousand,
ATM/debit card income of $116 thousand, gains on sale of assets of $77 thousand,
and $100 thousand from the collection of a summary judgment related to a loan
charged off at a bank, which we subsequently acquired. The reduction in
provision for loan losses is primarily related to an increase in the qualitative
factors in our allowance for loan losses methodology related to the economic
uncertainties caused by the COVID-19 pandemic during the first three months of
2020. The increase in non-interest expense is primarily related to increased
salaries and employee benefits expense of $311 thousand, increased occupancy
expense of $87 thousand, and increased FDIC assessment of $127 thousand. Our
effective tax rate was 21.49% during the first quarter of 2021 compared to
19.62% during the first quarter of 2020.



Net Interest Income



Net interest income is our primary source of revenue. Net interest income is the
difference between income earned on assets and interest paid on deposits and
borrowings used to support such assets. Net interest income is determined by the
rates earned on our interest-earning assets and the rates paid on our
interest-bearing liabilities, the relative amounts of interest-earning assets
and interest-bearing liabilities, and the degree of mismatch and the maturity
and repricing characteristics of our interest-earning assets and
interest-bearing liabilities.



Please refer to the table at the end of this Item 2 (Management's Discussion and
Analysis of Financial Condition and Results of Operations) for the average
yields on assets and average rates on interest-bearing liabilities during the
three-month periods ended March 31, 2021 and 2020, along with average balances
and the related interest income and interest expense amounts.



Net interest income increased $1.2 million, or 12.2%, to $10.6 million for the
three months ended March 31, 2021 from $9.4 million for the three months ended
March 31, 2020. Our net interest margin declined by 32 basis points to 3.20%
during the three months ended March 31, 2021 from 3.52% during the three months
ended March 31, 2020. Our net interest margin, on a taxable equivalent basis,
was 3.23% for the three months ended March 31, 2021 compared to 3.55% for the
three months ended March 31, 2020. Average earning assets increased $261.8
million, or 24.3%, to $1.3 billion for the three months ended March 31, 2021
compared to $1.1 billion in the same period of 2020. The increase in net
interest income was primarily due to a higher level of average earning assets
partially offset by lower net interest margin. The increase in average earning
assets was due to increases in loans, securities, and other short-term
investments primarily due to Non-PPP loan growth, PPP loans, organic deposit
growth, and excess liquidity from PPP loan proceeds and other stimulus funds
related to the COVID-19 pandemic. The decline in net interest margin was
primarily due to the Federal Reserve reducing the target range of the federal
funds rate two times totaling 150 basis points during the first quarter of 2020
and the excess liquidity generated from PPP loan proceeds and other stimulus
funds related to the COVID-19 pandemic being deployed in lower yielding
securities and other short-term investments. Lower market rates, the competitive
loan pricing environment, and the COVID-19 pandemic put downward pressure on our
net interest margin during 2020 and the first three months of 2021.



Average loans increased $132.7 million, or 17.6%, to $886.4 million for the
three months ended March 31, 2021 from $753.7 million for the same period in
2020. Average PPP loans increased $55.5 million and average Non-PPP loans
increased $77.2 million to $55.5 million and $830.8 million, respectively, for
the three months ended March 31, 2021. We had no PPP loans at March 31, 2020.
Average loans represented 66.2% of average earning assets during the three
months ended March 31, 2021 compared to 70.0% of average earning assets during
the same period in 2020. The decline in average loans as a percentage of average
earning assets was primarily due to increases in deposits of $238.7 million and
securities sold under agreements to repurchase of $8.4 million. The growth in
our deposits and securities sold under agreements to repurchase was higher than
the growth in our loans, which resulted in the excess funds being deployed in
our securities portfolio and other short-term investments and to reduce the
amount of our Federal Home Loan Bank advances. The yield on loans declined 39
basis points to 4.32% during the three months ended March 31, 2021 from 4.71%
during the same period in 2020. The yield on PPP loans was 4.99% and the yield
on Non-PPP loans was 4.28% during the three months ended March 31, 2021. Average
securities and average other short-term investments for the three months ended
March 31, 2021 increased $87.0 million and $42.1 million, respectively, from the
prior year period. The yield on our securities portfolio declined to 1.88% for
the three months ended March 31, 2021 from 2.42% for the same period in 2020
while the yield on our other short-term investments declined to 0.17% for the
three months ended March 31, 2021 from 1.70% for the same period in 2020. These
declines were primarily related to the Federal Reserve reducing the target range
of the federal funds rate as described above. The yield on earning assets for
the three months ended March 31, 2021 and 2020 was 3.40% and 4.00%,
respectively. The cost of interest-bearing liabilities was at 29 basis points
during the three months ended March 31, 2021 compared to 69 basis points during
the same period in 2020.

                                       33



We continue to focus on growing our pure deposits (demand deposits,
interest-bearing transaction accounts, savings deposits, money market accounts,
and IRAs) as these accounts tend to be low-cost deposits and assist us in
controlling our overall cost of funds. During the three months ended March 31,
2021, these deposits averaged 89.2% of total deposits as compared to 85.6%
during the same period of 2020. This increase was due to PPP loan proceeds,
other stimulus funds related to the COVID-19 pandemic, and organic growth.

Provision and Allowance for Loan Losses

We account for our allowance for loan losses under the incurred loss model. As
discussed above, the CECL model will become effective for us on January 1, 2023.
At March 31, 2021, the allowance for loan losses was $10.6 million, or 1.22% of
total loans (excluding loans held-for-sale), compared to $10.4 million or 1.23%
of total loans (excluding loans held-for-sale) at December 31, 2020, and $7.7
million, or 1.03% of total loans (excluding loans held-for-sale), at March 31,
2020. Excluding PPP loans and loans held-for-sale, the allowance for loan losses
was 1.31% of total loans at March 31, 2021 compared to 1.30% of total loans at
December 31, 2020. The increase in the allowance for loan losses is primarily
related to an increase in the qualitative factors in our allowance for loan
losses methodology related to loan growth and economic uncertainties caused
by
the COVID-19 pandemic.


Loans that we acquired in our acquisition of Cornerstone Bancorp, otherwise
referred to herein as Cornerstone, in 2017 as well as in our acquisition of
Savannah River Financial Corp., otherwise referred to herein as Savannah River,
in 2014 are accounted for under FASB ASC 310-30. These acquired loans were
initially measured at fair value, which includes estimated future credit losses
expected to be incurred over the life of the loans. The credit component on
loans related to cash flows not expected to be collected is not subsequently
accreted (non-accretable difference) into interest income. Any remaining portion
representing the excess of a loan's or pool's cash flows expected to be
collected over the fair value is accreted (accretable difference) into interest
income. At March 31, 2021 and December 31, 2020, the remaining credit component
on loans attributable to acquired loans in the Cornerstone and Savannah River
transactions was $229 thousand and $264 thousand, respectively.



Our provision for loan losses was $177 thousand for the three months ended March
31, 2021 compared to $1.1 million during the same period in 2020. The decline in
the provision for loan losses is primarily related to an increase during the
first three months of 2020 in the qualitative factors in our allowance for loan
losses methodology related to the deteriorating economic conditions and economic
uncertainties caused by the COVID-19 pandemic.



The allowance for loan losses represents an amount which we believe will be
adequate to absorb probable losses on existing loans that may become
uncollectible. Our judgment as to the adequacy of the allowance for loan losses
is based on assumptions about future events, which we believe to be reasonable,
but which may or may not prove to be accurate. Our determination of the
allowance for loan losses is based on evaluations of the collectability of
loans, including consideration of factors such as the balance of impaired loans,
the quality, mix, and size of our overall loan portfolio, the knowledge and
depth of lending personnel, economic conditions (local and national) that may
affect the borrower's ability to repay, the amount and quality of collateral
securing the loans, our historical loan loss experience, and a review of
specific problem loans. We also consider qualitative factors such as changes in
the lending policies and procedures, changes in the local/national economy,
changes in volume or type of credits, changes in volume/severity of problem
loans, quality of loan review and board of director oversight, and
concentrations of credit. During the first quarter of 2020, we added a new
qualitative factor related to the economic uncertainties caused by the COVID-19
pandemic. We charge recognized losses to the allowance and add subsequent
recoveries back to the allowance for loan losses. There can be no assurance that
charge-offs of loans in future periods will not exceed the allowance for loan
losses as estimated at any point in time or that provisions for loan losses will
not be significant to a particular accounting period, especially considering the
uncertainties related to the COVID-19 pandemic.



We perform an analysis quarterly to assess the risk within the loan portfolio.
The portfolio is segregated into similar risk components for which historical
loss ratios are calculated and adjusted for identified changes in current
portfolio characteristics. Historical loss ratios are calculated by product type
and by regulatory credit risk classification (See Note 4 to the Consolidated
Financial Statements). The annualized weighted average loss ratios over the last
36 months for loans classified as substandard, special mention and pass have
been approximately 0.02%, 0.02% and 0.01%, respectively. The allowance consists
of an allocated and unallocated allowance. The allocated portion is determined
by types and ratings of loans within the portfolio. The unallocated portion of
the allowance is established for losses that exist in the remainder of the
portfolio and compensates for uncertainty in estimating the loan losses. The
allocated portion of the allowance is based on historical loss experience as
well as certain qualitative factors as explained above. The qualitative factors
have been established based on certain assumptions made as a result of the
current economic conditions and are adjusted as conditions change to be
directionally consistent with these changes. The unallocated portion of the
allowance is composed of factors based on management's evaluation of various
conditions that are not directly measured in the estimation of probable losses
through the experience formula or specific allowances. The overall risk as
measured in our three-year lookback, both quantitatively and qualitatively, does
not encompass a full economic cycle. Net charge-offs in the 2009 to 2011 period
averaged 63 basis points annualized in our loan portfolio. Over the most recent
three-year period, our net charge-offs have experienced a modest net recovery.
We currently believe the unallocated portion of our allowance represents
potential risk associated throughout a full economic cycle; however, the
COVID-19 pandemic and the government and economic responses thereto may
materially affect the risk within our loan portfolios.

                                       34



We have a significant portion of our loan portfolio with real estate as the
underlying collateral. At March 31, 2021 and December 31, 2020, approximately
86.3% and 87.5%, respectively, of the loan portfolio had real estate collateral.
The reduction in the percent of our loan portfolio with real estate as the
underlying collateral is due to the increase in PPP loans, which increased to
$61.8 million at March 31, 2021 from $42.2 at December 31, 2020. When loans,
whether commercial or personal, are granted, they are based on the borrower's
ability to generate repayment cash flows from income sources sufficient to
service the debt. Real estate is generally taken to reinforce the likelihood of
the ultimate repayment and as a secondary source of repayment. We work closely
with all our borrowers that experience cash flow or other economic problems, and
we believe that we have the appropriate processes in place to monitor and
identify problem credits. There can be no assurance that charge-offs of loans in
future periods will not exceed the allowance for loan losses as estimated at any
point in time or that provisions for loan losses will not be significant to a
particular accounting period. The allowance is also subject to examination and
testing for adequacy by regulatory agencies, which may consider such factors as
the methodology used to determine adequacy and the size of the allowance
relative to that of peer institutions. Such regulatory agencies could require us
to adjust our allowance based on information available to them at the time
of
their examination.



Non-performing assets were $5.6 million (0.37% of total assets) at March 31,
2021 as compared to $7.0 million (0.50% of total assets) at December 31, 2020.
This decrease was related to a $1.3 million reduction in loans past due 90 days
and still accruing. Total loans past due declined to $317 thousand, or 0.04% of
total loans, at March 31, 2021 compared to $1.9 million, or 0.23% of total
loans, at December 31, 2020. While we believe the non-performing assets to total
assets ratios are favorable in comparison to current industry results (both
nationally and locally), we continue to monitor the impact of the COVID-19
pandemic on our customer base of local businesses and professionals. There were
19 loans totaling $4.5 million (0.52% of total loans) included in non-performing
status (non-accrual loans and loans past due 90 days and still accruing) at
March 31, 2021. The largest loan included in non-accrual status is in the amount
of $1.7 million and is secured by commercial real estate located in North
Augusta, South Carolina. The average balance of the remaining 18 loans is
approximately $158 thousand with a range between $0 and $1.2 million, and the
majority of these loans are secured by first mortgage liens. Furthermore, we had
$1.5 million in accruing trouble debt restructurings, or TDRs, at March 31, 2021
compared to $1.6 million at December 31, 2020. We consider a loan impaired when,
based on current information and events, it is probable that we will be unable
to collect all amounts due, including both principal and interest, according to
the contractual terms of the loan agreement. Nonaccrual loans and accruing TDRs
are considered impaired. At March 31, 2021, we had 21 impaired loans totaling
$6.0 million compared to 23 impaired loans totaling $6.1 million at December 31,
2020. These loans were measured for impairment under the fair value of
collateral method or present value of expected cash flows method. For collateral
dependent loans, the fair value of collateral method is used and the fair value
is determined by an independent appraisal less estimated selling costs. At March
31, 2021, we had loans totaling $317 thousand that were delinquent 30 days to 89
days representing 0.04% of total loans compared to $665 thousand or 0.08% of
total loans at December 31, 2020.



During the ongoing COVID-19 pandemic and because of our proactive offering of
payment deferrals, loans on which payments have been deferred declined to $8.7
million at March 31, 2021, from $16.1 million at December 31, 2020, from $27.3
million at September 30, 2020, from $175.0 million at June 30, 2020 and from
$118.3 million at March 31, 2020. The $16.1 million in deferrals at December 31,
2020 consist of seven loans on which only principal is being deferred. We had
three loans totaling $8.7 million in continuing deferral status in which only
principal is being deferred at March 31, 2021. Two of the continuing deferrals
at March 31, 2021 totaling $4.5 million are in the retail industry segment
identified by us as one of the industry segments most impacted by the COVID-19
pandemic; the other continuing deferral totaling $4.2 million is a mixed use
office space that we do not consider to be in an industry segment most impacted
by the COVID-19 pandemic. Some of these deferments were to businesses that
temporarily closed or reduced operations and some were requested as a
pre-cautionary measure to conserve cash.  We proactively offered initial
deferrals to our customers regardless of the impact of the pandemic on their
business or personal finances. We obtained additional information from customers
who requested second or continuing deferrals and we performed additional
analyses to justify the need for the second or continuing deferral requests. Our
management continuously monitors non-performing, classified and past due loans
to identify deterioration regarding the condition of these loans and given the
ongoing and uncertain impact of the COVID-19 pandemic, we will continue to
monitor our loan portfolio for potential risks.

                                       35



The following table summarizes the activity related to our allowance for loan losses for the periods indicated:



Allowance for Loan Losses



                                                                      Three Months Ended
                                                                          March 31,
(Dollars in thousands)                                               2021           2020
Average loans outstanding (including loans held-for-sale)          $ 886,379      $ 753,659
Loans outstanding at period end (excluding loans held-for-sale)    $ 869,066      $ 749,529
Non-performing assets:
Nonaccrual loans                                                   $   4,521      $   1,739
Loans 90 days past due still accruing                                     
-            168
Foreclosed real estate                                                 1,070          1,481
Repossessed-other                                                          7              -
Total non-performing assets                                        $   

5,598 $ 3,388


Beginning balance of allowance                                     $  10,389      $   6,627
Loans charged-off:
Commercial                                                                 -              -
Real Estate - Construction                                                 -              -
Real Estate Mortgage - Residential                                         -              -
Real Estate Mortgage - Commercial                                         
-              -
Consumer - Home Equity                                                     -              -
Consumer - Other                                                          25             23
Total loans charged-off                                                   25             23
Recoveries:
Commercial                                                                 1              -
Real Estate - Construction                                                 -              -
Real Estate Mortgage - Residential                                         -              -
Real Estate Mortgage - Commercial                                         
4              6
Consumer - Home Equity                                                     1              1
Consumer - Other                                                          16              8
Total recoveries                                                          22             15
Net loan charge offs                                                       3              8
Provision for loan losses                                                177          1,075
Balance at period end                                              $  10,563      $   7,694

Net charge offs to average loans (annualized)                           0.00 %         0.00 %
Allowance as percent of total loans                                     1.22 %         1.03 %
Non-performing assets as % of total assets                              0.37 %         0.29 %
Allowance as % of non-performing loans                                 233.6 %        403.5 %


                                       36


The following allocation of the allowance to specific components is not necessarily indicative of future losses or future allocations. The entire allowance is available to absorb losses in the portfolio.

Composition of the Allowance for Loan Losses



(Dollars in thousands)                           March 31, 2021                   December 31, 2020
                                                             % of                               % of
                                                         allowance in                       allowance in
                                           Amount          Category           Amount          Category
Commercial, Financial and Agricultural    $    758                 7.2 %    $      778                7.5 %
Real Estate - Construction                     134                 1.3 %           145                1.4 %
Real Estate Mortgage:
Residential                                    480                 4.5 %           541                5.2 %
Commercial                                   8,137                77.0 %         7,855               75.6 %
Consumer:
Home Equity                                    309                 2.9 %           324                3.1 %
Other                                          124                 1.2 %           125                1.2 %
Unallocated                                    621                 5.9 %           621                6.0 %
Total                                     $ 10,563               100.0 %    $   10,389              100.0 %




Accrual of interest is discontinued on loans when management believes, after
considering economic and business conditions and collection efforts that a
borrower's financial condition is such that the collection of interest is
doubtful. A delinquent loan is generally placed in nonaccrual status when it
becomes 90 days or more past due. At the time a loan is placed in nonaccrual
status, all interest, which has been accrued on the loan but remains unpaid is
reversed and deducted from earnings as a reduction of reported interest income.
No additional interest is accrued on the loan balance until the collection of
both principal and interest becomes reasonably certain.



Non-interest Income and Non-interest Expense




Non-interest income during the three months ended March 31, 2021 was $3.3
million compared to $2.9 million during the same period in 2020. Deposit service
charges declined $153 thousand during the three months ended March 31, 2021
compared to the same period in 2020 primarily due to lower overdraft fees.
Mortgage banking income increased by $8 thousand to $990 thousand during the
three months ended March 31, 2021 from $982 thousand during the same period in
2020. While mortgage banking income was approximately equal to last year's first
quarter result, the gain-on-sale margin of 2.32% in the first quarter of 2021
was limited as we worked on certain loans not yet sold, in an effort to resolve
processing and delivery issues. As we work to improve our mortgage processing
and delivery efficiency, we anticipate the gain-on-sale margin will recover to
more normal levels, which for the Company would be approximately 3.00% to 3.25%.
Mortgage production during the three months ended March 31, 2021 was $42.7
million compared to $35.3 million during the same period in 2020. Investment
advisory fees increased $243 thousand to $877 thousand during the three months
ended March 31, 2021 from $634 thousand during the same period in 2020. Total
assets under management increased to $519.3 million at March 31, 2021 compared
to $319.7 million at March 31, 2020. Management continues to focus on increasing
both the mortgage banking income as well as the investment advisory fees and
commissions. Gain on sale of other assets was $77 thousand during the three
months ended March 31, 2021 compared to $6 thousand during the same period
in
2020.


Non-interest income, other increased $199 thousand during the three months ended
March 31, 2021 compared to the same period in 2020 primarily due to $100
thousand received from the collection of a summary judgment related to a loan
charged off at a bank, which the company subsequently acquired and due to a $116
thousand increase in ATM debit card income, partially offset by a $29 thousand
reduction in income on bank owned life insurance.



The following is a summary of the components of other non-interest income for
the periods indicated:



                                                Three months ended
(Dollars in thousands)                               March 31,
                                                 2021           2020
ATM debit card income                         $       628       $ 512
Income on bank owned life insurance                   167         196
Rental income                                          70          66
Other service fee and safe deposit box fees            62          59
Wire transfer fees                                     26          20
Other                                                 153          54
Total                                         $     1,106       $ 907


                                       37


Non-interest expense increased $502 thousand during the three months ended March
31, 2021 to $9.5 million compared to $9.0 million during the same period in
2020. Salary and benefit expense increased $311 thousand to $6.0 million during
the three months ended March 31, 2021 from $5.7 million during the same period
in 2020. This increase is primarily a result of the normal salary adjustments
and increased mortgage and financial planning and investment advisory
commissions. We had 243 full time equivalent employees at March 31, 2021
compared to 242 at March 31, 2020. Occupancy expense increased $87 thousand to
$730 thousand during the three months ended March 31, 2021 compared to $643
thousand during the same period in 2020. FDIC assessments increased $127
thousand due to a higher assessment rate in 2021 related to a decrease in our
leverage ratio and an increase in our assessment base due to higher average
assets as well as $39 thousand of small bank assessment credits utilized in the
three months ended March 31, 2020. The reduction in our leverage ratio and the
increase in our assessment base were partially related to PPP loans and the
excess liquidity generated from PPP loan proceeds and other stimulus funds
related to the COVID-19 pandemic. Furthermore, we received FDIC small bank
assessment credits during the three months ended March 31, 2020 compared to none
during the same period in 2021. The FDIC small bank assessment credits were
fully utilized during the first quarter of 2020.



The following is a summary of the components of other non-interest expense for
the periods indicated:



(Dollars in thousands)          Three months ended
                                     March 31,
                                 2021          2020
Data processing               $      856      $   777
Telephone                             89           81
Correspondent services                70           66
Insurance                             79           78
Legal and professional fees          263          255
Director fees                         95           82
Shareholder expense                   49           50
Dues                                  40           37
Loan closing costs/fees               50           70
Other                                329          392
                              $    1,920      $ 1,888




Income Tax Expense



We incurred income tax expense of $891 thousand and $438 thousand for the three
months ended March 31, 2021 and 2020, respectively. Our effective tax rate was
21.5% and 19.6% for the three months ended March 31, 2021 and 2020,
respectively.



Financial Position


Assets totaled $1.5 billion at March 31, 2021 and $1.4 billion at December 31,
2020. Loans (excluding loans held-for-sale) increased $24.9 million to $869.1
million at March 31, 2021 from $844.2 million at December 31, 2020.



Total loan production excluding PPP loans and a PPP related credit facility was
$40.2 million during the three months ended March 31, 2021 compared to $33.5
million during the same period in 2020. Loans held-for-sale declined to $23.5
million at March 31, 2021 from $45.0 million at December 31, 2020 due to an
improvement in the number of loans purchased by investors. Mortgage production
was $42.7 million during the three months ended March 31, 2021 compared to $35.3
million during the same period in 2020. The loan-to-deposit ratio (including
loans held-for-sale) at March 31, 2021 and December 31, 2020 was 70.2% and
74.8%, respectively. The loan-to-deposit ratio (excluding loans held-for-sale)
at March 31, 2021 and December 31, 2020 was 68.4% and 71.0%, respectively.
Investment securities increased to $407.5 million at March 31, 2021 from $361.9
million at December 31, 2020. Other short-term investments increased to $88.4
million at March 31, 2021 from $46.1 million at December 31, 2020. The increases
in investments and other short-term investments are primarily due to organic
deposit growth and excess liquidity from customer's PPP loan proceeds and other
stimulus funds related to the COVID-19 pandemic.

                                       38



Non-PPP loans increased $5.3 million to $807.2 million at March 31, 2021 from
$801.9 million at December 31, 2020. PPP loans increased $19.6 million to $61.8
million at March 31, 2021 from $42.2 million at December 31, 2020. PPP loans
totaled $64.1 million gross of deferred fees and costs and $61.8 million net of
deferred fees and costs at March 31, 2021. During 2020, we originated 843 PPP
loans totaling $51.2 million gross of deferred fees and costs and $49.8 million
net of deferred fees and costs. Furthermore, during 2020, we facilitated the
origination of 111 PPP loans totaling $31.2 million related to our customers
with a third party prior to establishing our own PPP platform. During 2020, 159
PPP loans totaling $8.0 million were forgiven through the SBA PPP forgiveness
process. As of May 3, 2021, 552 PPP loans originated by the Company totaling
$27.3 million, gross of deferred fees, had been forgiven. An additional 208
loans totaling $5.8 million are in process of being forgiven. As of May 3, 2021,
we originated 563 PPP loans in 2021, totaling $36.7 million, gross of deferred
fees, under The Consolidated Appropriations Act, 2021. The $2.2 million in PPP
deferred fees net of deferred costs at March 31, 2021 will be recognized as
interest income over the remaining life of the PPP loans.



One of our goals as a community bank has been, and continues to be, to grow our
assets through quality loan growth by providing credit to small and mid-size
businesses and individuals within the markets we serve. We remain committed to
meeting the credit needs of our local markets.



The following table shows the composition of the loan portfolio by category at
the dates indicated:



(Dollars in thousands)                     March 31, 2021            December 31, 2020
                                        Amount       Percent        Amount       Percent
Commercial, financial & agricultural   $ 110,776         12.7 %   $   96,688         11.5 %
Real estate:
Construction                             104,065         12.0 %       95,282         11.3 %
Mortgage - residential                    38,947          4.5 %       43,928          5.2 %
Mortgage - commercial                    582,083         67.0 %      573,258         67.9 %
Consumer:
Home Equity                               25,068          2.9 %       26,442          3.1 %
Other                                      8,127          0.9 %        8,559          1.0 %
Total gross loans                        869,066        100.0 %      844,157        100.0 %
Allowance for loan losses                (10,563 )                   (10,389 )
Total net loans                        $ 858,503                  $  833,768




In the context of this discussion, a real estate mortgage loan is defined as any
loan, other than loans for construction purposes and advances on home equity
lines of credit, secured by real estate, regardless of the purpose of the loan.
Advances on home equity lines of credit are included in consumer loans. We
follow the common practice of financial institutions in our market areas of
obtaining a security interest in real estate whenever possible, in addition to
any other available collateral. This collateral is taken to reinforce the
likelihood of the ultimate repayment of the loan and tends to increase the
magnitude of the real estate loan components. We generally limit the
loan-to-value ratio to 80%.



Deposits increased $82.0 million to $1.3 billion at March 31, 2021 compared to
$1.2 billion at December 31, 2020.  Our pure deposits, which are defined as
total deposits less certificates of deposits, increased $84.1 million to $1.143
billion at March 31, 2021 from $1.059 billion at December 31, 2020.  We continue
to focus on growing our pure deposits as a percentage of total deposits in order
to better manage our overall cost of funds. We had no brokered deposits and no
listing services deposits at March 31, 2021.  Our securities sold under
agreements to repurchase, which are related to our customer cash management
accounts, increased $19.4 million to $60.3 million at March 31, 2021 from $40.9
million at December 31, 2020.  This increase was due to seasonality in our cash
management accounts.



Total shareholders' equity declined $3.6 million, or 2.7%, to $132.7 million at
March 31, 2021 from $136.3 million at December 31, 2020. The $3.6 million
decline was due to a $6.2 million reduction in accumulated other comprehensive
income partially offset by a $2.4 million increase in retention of earnings less
dividends paid. The decline in accumulated other comprehensive income was due to
an increase in longer-term market interest rates, which resulted in a reduction
in the net unrealized gains in our investment securities portfolio. In late
2019, we obtained approval of a share repurchase plan of up to 200,000 shares of
our outstanding common stock; however, no share repurchases were made under this
repurchase plan prior to its expiration on December 31, 2020. On April 12, 2021,
we announced that our Board of Directors approved the repurchase of up to
375,000 shares of our common stock (the "2021 repurchase plan"), which
represents approximately 5% of our 7,524,944 shares outstanding as of March 31,
2021. The approved 2021 repurchase plan provides us with some flexibility in
managing our capital going forward.

                                       39



Market Risk Management



Market risk reflects the risk of economic loss resulting from adverse changes in
market prices and interest rates. The risk of loss can be measured in either
diminished current market values or reduced current and potential net income.
Our primary market risk is interest rate risk. We have established an
Asset/Liability Management Committee (the "ALCO") to monitor and manage interest
rate risk. The ALCO monitors and manages the pricing and maturity of our assets
and liabilities in order to diminish the potential adverse impact that changes
in interest rates could have on our net interest income. The ALCO has
established policy guidelines and strategies with respect to interest rate
risk
exposure and liquidity.



A monitoring technique employed by us is the measurement of our interest
sensitivity "gap," which is the positive or negative dollar difference between
assets and liabilities that are subject to interest rate repricing within a
given period of time. Simulation modeling is performed to assess the impact
varying interest rates and balance sheet mix assumptions will have on net
interest income. We model the impact on net interest income for several
different changes, to include a flattening, steepening and parallel shift in the
yield curve. For each of these scenarios, we model the impact on net interest
income in an increasing and decreasing rate environment of 100 and 200 basis
points. We also periodically stress certain assumptions such as loan prepayment
rates, deposit decay rates and interest rate betas to evaluate our overall
sensitivity to changes in interest rates. Policies have been established in an
effort to maintain the maximum anticipated negative impact of these modeled
changes in net interest income at no more than 10% and 15%, respectively, in a
100 and 200 basis point change in interest rates over a 12-month period.
Interest rate sensitivity can be managed by repricing assets or liabilities,
selling securities available-for-sale, replacing an asset or liability at
maturity or by adjusting the interest rate during the life of an asset or
liability. Managing the amount of assets and liabilities repricing in the same
time interval helps to hedge the risk and minimize the impact on net interest
income of rising or falling interest rates. Neither the "gap" analysis or
asset/liability modeling are precise indicators of our interest sensitivity
position due to the many factors that affect net interest income including, the
timing, magnitude and frequency of interest rate changes as well as changes in
the volume and mix of earning assets and interest-bearing liabilities.



Based on the many factors and assumptions used in simulating the effect of
changes in interest rates, the following table estimates the hypothetical
percentage change in net interest income at March 31, 2021 and December 31, 2020
over the subsequent 12 months. At March 31, 2021 and December 31, 2020, we were
slightly liability sensitive over the first three month period and over the
balance of a 12-month period are asset sensitive on a cumulative basis. As a
result, our modeling reflects slight exposure to falling rates and our rising
rate exposure trends from neutral to slightly liability sensitive as rates move
higher over the first 12 months. This negative impact of rising rates reverses
and net interest income is favorably impacted over a 24-month period. In a
declining rate environment, the model reflects a decline in net interest income.
This primarily results from the current level of interest rates being paid on
our interest bearing transaction accounts as well as money market accounts. The
interest rates on these accounts are at a level where they cannot be repriced in
proportion to the change in interest rates. The increase and decrease of 100 and
200 basis points, respectively, reflected in the table below assume a
simultaneous and parallel change in interest rates along the entire yield
curve.



Net Interest Income Sensitivity




                                                     Hypothetical
                                                 percentage change in
Change in short-term interest rates              net interest income
                                       March 31, 2021         December 31, 2020
+200bp                                           -1.39 %                   -0.73 %
+100bp                                           -0.32 %                   +0.08 %
Flat                                                 -                         -
-100bp                                           -4.18 %                   -3.37 %
-200bp                                           -6.89 %                   -3.58 %




We perform a valuation analysis projecting future cash flows from assets and
liabilities to determine the Present Value of Equity ("PVE") over a range of
changes in market interest rates. The sensitivity of PVE to changes in interest
rates is a measure of the sensitivity of earnings over a longer time horizon. At
March 31, 2021 and December 31, 2020, the PVE exposure in a plus 200 basis point
increase in market interest rates was estimated to be 6.25% and 11.47%,
respectively. The PVE exposure in a down 100 basis point decrease was estimated
to be (9.01)% at March 31, 2021 compared to (14.32)% at December 31, 2020.

                                       40



Liquidity and Capital Resources

Liquidity management involves monitoring sources and uses of funds in order to
meet our day-to-day cash flow requirements while maximizing profits. Liquidity
represents our ability to convert assets into cash or cash equivalents without
significant loss and to raise additional funds by increasing liabilities.
Liquidity management is made more complicated because different balance sheet
components are subject to varying degrees of management control. For example,
the timing of maturities of the investment portfolio is very predictable and
subject to a high degree of control at the time investment decisions are made.
However, net deposit inflows and outflows are far less predictable and are not
subject to nearly the same degree of control. Asset liquidity is provided by
cash and assets which are readily marketable, or which can be pledged, or which
will mature in the near future. Liability liquidity is provided by access to
core funding sources, principally the ability to generate customer deposits in
our market area. In addition, liability liquidity is provided through the
ability to borrow against approved lines of credit (federal funds purchased)
from correspondent banks and to borrow on a secured basis through securities
sold under agreements to repurchase. The Bank is a member of the FHLB and has
the ability to obtain advances for various periods of time. These advances are
secured by eligible securities pledged by the Bank or assignment of eligible
loans within the Bank's portfolio.



As of March 31, 2021, we have not experienced any unusual pressure on our
deposit balances or our liquidity position as a result of the COVID-19 pandemic.
We had no brokered deposits and no listing services deposits at March 31,
2021. We believe that we have ample liquidity to meet the needs of our customers
and to manage through the COVID-19 pandemic through our low cost deposits; our
ability to borrow against approved lines of credit (federal funds purchased)
from correspondent banks; and our ability to obtain advances secured by certain
securities and loans from the Federal Home Loan Bank.



We generally maintain a high level of liquidity and adequate capital, which
along with continued retained earnings, we believe will be sufficient to fund
the operations of the Bank for at least the next 12 months.  Shareholders'
equity declined to 8.9% of total assets at March 31, 2021 from 9.8% at December
31, 2020 primarily due to PPP loans and excess liquidity from customer's PPP
loans,other stimulus funds related to the COVID-19 pandemic, and due to a $6.2
million reduction in accumulated other comprehensive income. The Bank maintains
federal funds purchased lines in the total amount of $60.0 million with two
financial institutions, although these were not utilized at March 31, 2021; and
$10 million through the Federal Reserve Discount Window. The FHLB of Atlanta has
approved a line of credit of up to 25% of the Bank's assets, which, when
utilized, is collateralized by a pledge against specific investment securities
and/or eligible loans.


Through the operations of our Bank, we have made contractual commitments to
extend credit in the ordinary course of our business activities. These
commitments are legally binding agreements to lend money to our customers at
predetermined interest rates for a specified period of time. At March 31, 2021,
we had issued commitments to extend unused credit of $141.7 million, including
$41.6 million in unused home equity lines of credit, through various types of
lending arrangements. At December 31, 2020, we had issued commitments to extend
unused credit of $142.6 million, including $42.3 million in unused home equity
lines of credit, through various types of lending arrangements. We evaluate each
customer's credit worthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by us upon extension of credit, is based on our
credit evaluation of the borrower. Collateral varies but may include accounts
receivable, inventory, property, plant and equipment, commercial and residential
real estate. We manage the credit risk on these commitments by subjecting them
to normal underwriting and risk management processes.



We regularly review our liquidity position and have implemented internal
policies establishing guidelines for sources of asset-based liquidity and
evaluate and monitor the total amount of purchased funds used to support the
balance sheet and funding from noncore sources. Although uncertain, we may
encounter stress on liquidity management as a direct result of the COVID-19
pandemic and the Bank's participation in the PPP as a participating lender. We
had PPP loans totaling $64.1 million gross of deferred fees and costs and $61.8
million net of deferred fees and costs at March 31, 2021 compared to $43.3
million gross of deferred fees and costs and $42.2 million net of deferred fees
and costs at December 31, 2020. As customers manage their own liquidity stress,
we could experience an increase in the utilization of existing lines of credit.



 Regulatory capital rules adopted in July 2013 and fully-phased in as of January
1, 2019, which we refer to Basel III, impose minimum capital requirements for
bank holding companies and banks. In 2018, the Federal Reserve increased the
asset size to qualify as a small bank holding company. As a result of this
change, we generally are not subject to the Federal Reserve capital requirements
unless advised otherwise. The Bank remains subject to capital requirements
including a minimum leverage ratio and a minimum ratio of "qualifying capital"
to risk weighted assets. These requirements are essentially the same as those
that applied to us prior to the change in the definition of a small bank holding
company.

                                       41


Specifically, the Bank is required to maintain he following minimum capital requirements:

? a Common Equity Tier 1 risk-based capital ratio of 4.5%;

? a Tier 1 risk-based capital ratio of 6%;

? a total risk-based capital ratio of 8%; and




 ? a leverage ratio of 4%.




Under the final Basel III rules, Tier 1 capital was redefined to include two
components: Common Equity Tier 1 capital and additional Tier 1 capital. The
highest form of capital, Common Equity Tier 1 capital, consists solely of common
stock (plus related surplus), retained earnings, accumulated other comprehensive
income, otherwise referred to as AOCI, and limited amounts of minority interests
that are in the form of common stock. Additional Tier 1 capital is primarily
comprised of noncumulative perpetual preferred stock, Tier 1 minority interests
and grandfathered trust preferred securities (as discussed below). Tier 2
capital generally includes the allowance for loan losses up to 1.25% of
risk-weighted assets, qualifying preferred stock, subordinated debt and
qualifying tier 2 minority interests, less any deductions in Tier 2 instruments
of an unconsolidated financial institution. Cumulative perpetual preferred stock
is included only in Tier 2 capital, except that the Basel III rules permit bank
holding companies with less than $15 billion in total consolidated assets to
continue to include trust preferred securities and cumulative perpetual
preferred stock issued before May 19, 2010 in Tier 1 Capital (but not in Common
Equity Tier 1 capital), subject to certain restrictions. AOCI is presumptively
included in Common Equity Tier 1 capital and often would operate to reduce this
category of capital. When implemented, Basel III provided a one-time opportunity
at the end of the first quarter of 2015 for covered banking organizations to opt
out of much of this treatment of AOCI. We made this opt-out election and, as a
result, retained our pre-existing treatment for AOCI.



In addition, in order to avoid restrictions on capital distributions or
discretionary bonus payments to executives, under Basel III, a covered banking
organization must maintain a "capital conservation buffer" on top of its minimum
risk-based capital requirements. This buffer must consist solely of Tier 1
Common Equity, but the buffer applies to all three measurements (Common Equity
Tier 1, Tier 1 capital and total capital). The 2.5% capital conservation buffer
was phased in incrementally over time, and became fully effective for us on
January 1, 2019, resulting in the following effective minimum capital plus
capital conservation buffer ratios: (i) a Common Equity Tier 1 capital ratio of
7.0%, (ii) a Tier 1 risk-based capital ratio of 8.5%, and (iii) a total
risk-based capital ratio of 10.5%.



In November 2019, the federal banking regulators published final rules
implementing a simplified measure of capital adequacy for certain banking
organizations that have less than $10 billion in total consolidated assets.
Under the final rules, which went into effect on January 1, 2020, depository
institutions and depository institution holding companies that have less than
$10 billion in total consolidated assets and meet other qualifying criteria,
including a leverage ratio of greater than 9%, off-balance-sheet exposures of
25% or less of total consolidated assets and trading assets plus trading
liabilities of 5% or less of total consolidated assets, are deemed "qualifying
community banking organizations" and are eligible to opt into the "community
bank leverage ratio framework." A qualifying community banking organization that
elects to use the community bank leverage ratio framework and that maintains a
leverage ratio of greater than 9% is considered to have satisfied the generally
applicable risk-based and leverage capital requirements under the Basel III
rules, discussed above, and, if applicable, is considered to have met the "well
capitalized" capital ratio requirements for purposes of its primary federal
regulator's prompt corrective action rules, outlined below. The final rules
include a two-quarter grace period during which a qualifying community banking
organization that temporarily fails to meet any of the qualifying criteria,
including the greater than 9% leverage capital ratio requirement, is generally
still deemed "well capitalized" so long as the banking organization maintains a
leverage capital ratio greater than 8%. A banking organization that fails to
maintain a leverage capital ratio greater than 8% is not permitted to use the
grace period and must comply with the generally applicable requirements under
the Basel III rules and file the appropriate regulatory reports. We did not
elect to use the community bank leverage ratio framework but may make such
an
election in the future.

                                       42



As outlined above, we are generally not subject to the Federal Reserve capital
requirements unless advised otherwise because we qualify as a small bank holding
company. Our Bank remains subject to capital requirements including a minimum
leverage ratio and a minimum ratio of "qualifying capital" to risk weighted
assets. As of March 31, 2021, the Bank met all capital adequacy requirements
under the rules on a fully phased-in basis.



                                                        Prompt Corrective Action                Excess Capital $s of
Dollars in thousands                                       (PCA) Requirements                     PCA Requirements
                                                        Well             Adequately           Well            Adequately
Capital Ratios                         Actual        Capitalized        Capitalized       Capitalized         Capitalized
March 31, 2021
Leverage Ratio                            8.73 %             5.00 %             4.00 %    $     52,529       $      66,594
Common Equity Tier 1 Capital Ratio       13.20 %             6.50 %        
    4.50 %          62,377              80,985
Tier 1 Capital Ratio                     13.20 %             8.00 %             6.00 %          48,421              67,029
Total Capital Ratio                      14.34 %            10.00 %             8.00 %          40,375              58,984
December 31, 2020
Leverage Ratio                            8.84 %             5.00 %             4.00 %    $     52,270       $      65,893
Common Equity Tier 1 Capital Ratio       12.83 %             6.50 %        
    4.50 %          59,406              78,169
Tier 1 Capital Ratio                     12.83 %             8.00 %             6.00 %          45,334              64,097
Total Capital Ratio                      13.94 %            10.00 %             8.00 %          36,961              55,723




The Bank's risk-based capital ratios of leverage ratio, Tier 1, and total
capital were 8.73%, 13.20% and 14.34%, respectively, at March 31, 2021 as
compared to 8.84%, 12.83%, and 13.94%, respectively, at December 31, 2020. The
Bank's Common Equity Tier 1 ratio at March 31, 2021 was 13.20% and at December
31, 2020 was 12.83%. Under the Basel III rules, we anticipate that the Bank will
remain a well capitalized institution for at least the next 12 months.
Furthermore, based on our strong capital, conservative underwriting, and
internal stress testing, we expect to remain well capitalized throughout the
COVID-19 pandemic. However, the Bank's reported and regulatory capital ratios
could be adversely impacted by future credit losses related to the COVID-19
pandemic.



As a bank holding company, our ability to declare and pay dividends is dependent
on certain federal and state regulatory considerations, including the guidelines
of the Federal Reserve. The Federal Reserve has issued a policy statement
regarding the payment of dividends by bank holding companies. In general, the
Federal Reserve's policies provide that dividends should be paid only out of
current earnings and only if the prospective rate of earnings retention by the
bank holding company appears consistent with the organization's capital needs,
asset quality and overall financial condition. The Federal Reserve's policies
also require that a bank holding company serve as a source of financial strength
to its subsidiary bank(s) by standing ready to use available resources to
provide adequate capital funds to those banks during periods of financial stress
or adversity and by maintaining the financial flexibility and capital-raising
capacity to obtain additional resources for assisting its subsidiary banks where
necessary. In addition, under the prompt corrective action regulations, the
ability of a bank holding company to pay dividends may be restricted if a
subsidiary bank becomes undercapitalized. These regulatory policies could affect
our ability to pay dividends or otherwise engage in capital distributions. Our
Board of Directors approved a cash dividend for the first quarter of 2021 of
$0.12 per common share.  This dividend is payable on May 18, 2021 to
shareholders of record of our common stock as of May 4, 2021.



As we are a legal entity separate and distinct from the Bank and do not conduct
stand-alone operations, our ability to pay dividends depends on the ability of
the Bank to pay dividends to us, which is also subject to regulatory
restrictions. As a South Carolina-chartered bank, the Bank is subject to
limitations on the amount of dividends that it is permitted to pay. Unless
otherwise instructed by the South Carolina Board of Financial Institutions, the
Bank is generally permitted under South Carolina State banking regulations to
pay cash dividends of up to 100% of net income in any calendar year without
obtaining the prior approval of the South Carolina Board of Financial
Institutions. The FDIC also has the authority under federal law to enjoin a bank
from engaging in what in its opinion constitutes an unsafe or unsound practice
in conducting its business, including the payment of a dividend under certain
circumstances.



Average Balances, Income Expenses and Rates. The following table depicts, for
the periods indicated, certain information related to our average balance sheet
and our average yields on assets and average costs of liabilities. Such yields
are derived by dividing income or expense by the average balance of the
corresponding assets or liabilities. Average balances have been derived from
daily averages.

                                       43



                          FIRST COMMUNITY CORPORATION

                      Yields on Average Earning Assets and
                 Rates on Average Interest-Bearing Liabilities



                                                      Three months ended March 31, 2021                     Three months ended March 31, 2020
                                                   Average             Interest         Yield/           Average             Interest         Yield/
                                                   Balance            Earned/Paid        Rate            Balance            Earned/Paid        Rate
Assets
Earning assets
Loans
PPP loans                                      $        55,540       $         684         4.99 %    $             -       $           -           NA
Non-PPP loans                                          830,839               8,767         4.28 %            753,659               8,827         4.71 %
Total Loans                                            886,379               9,451         4.32 %            753,659               8,827         4.71 %
Securities                                             373,340               1,734         1.88 %            286,332               1,726         2.42 %
Other short-term investments                            79,334                  33         0.17 %             37,251                 157         1.70 %
Total earning assets                                 1,339,053              11,218         3.40 %          1,077,242              10,710         4.00 %
Cash and due from banks                                 18,429                                                15,032
Premises and equipment                                  34,351                                                35,002
Goodwill and other intangibles                          15,726             
                                  16,063
Other assets                                            38,124                                                39,691
Allowance for loan losses                              (10,424 )                                              (6,680 )
Total assets                                   $     1,435,259                                       $     1,176,350

Liabilities
Interest-bearing liabilities
Interest-bearing transaction accounts          $       277,476       $     
    58         0.08 %    $       216,198       $         103         0.19 %
Money market accounts                                  254,412                 141         0.22 %            198,292                 350         0.71 %
Savings deposits                                       125,981                  19         0.06 %            103,776                  29         0.11 %
Time deposits                                          160,321                 301         0.76 %            169,397                 537         1.27 %
Other borrowings                                        78,266                 132         0.68 %             70,332                 274         1.57 %
Total interest-bearing liabilities                     896,456             
   651         0.29 %            757,995               1,293         0.69 %
Demand deposits                                        389,891                                               281,714
Other liabilities                                       13,332                                                13,178
Shareholders' equity                                   135,580                                               123,463
Total liabilities and shareholders' equity     $     1,435,259                                       $     1,176,350

Cost of deposits, including demand deposits                                                0.17 %                                                0.42 %
Cost of funds, including demand deposits                                   
               0.21 %                                                0.50 %
Net interest spread                                                                        3.11 %                                                3.31 %
Net interest income/margin                                           $      10,567         3.20 %                          $       9,417         3.52 %
Net interest income/margin (tax equivalent)                          $      10,675         3.23 %                          $       9,495         3.55 %

© Edgar Online, source Glimpses

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Financials (USD)
Sales 2021 57,6 M - -
Net income 2021 13,8 M - -
Net Debt 2021 - - -
P/E ratio 2021 11,3x
Yield 2021 2,32%
Capitalization 156 M 156 M -
Capi. / Sales 2021 2,71x
Capi. / Sales 2022 2,65x
Nbr of Employees 244
Free-Float 95,7%
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Number of Analysts 5
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Managers and Directors
Michael C. Crapps President, Chief Executive Officer & Director
Donald Shawn Jordan Chief Financial Officer
Chimin Jimmy Chao Chairman
Tanya A. Butts Chief Operating & Risk Officer, Executive VP
W. James Kitchens Vice Chairman
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