UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x	Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended ~~June~~September 30, 2019

o	Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from ____ to ____

Commission File No. 000-28344

FIRST COMMUNITY CORPORATION
(Exact name of registrant as specified in its charter)

South Carolina	57-1010751
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

5455 Sunset Boulevard, Lexington, South Carolina 29072

(Address of principal executive offices) (Zip Code)

(803) 951-2265

(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
Common stock, par value $1.00 per share	FCCO	The Nasdaq Stock Market

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. Yes x Noo

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). x Yes o No

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” ,~~company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filero		Accelerated filerx
Non-accelerated filer o		Smaller reporting companyx
		Emerging growth companyo

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 No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: On ~~August 8,~~November 7, 2019, ~~7,396,419~~7,422,474 shares of the issuer’s common stock, par value $1.00 per share, were issued and outstanding.

TABLE OF CONTENTS


PART I – FINANCIAL INFORMATION		3
Item 1.	Financial Statements	3
	Consolidated Balance Sheets	3
	Consolidated Statements of Income	4
	Consolidated Statements of Comprehensive Income	6
	Consolidated Statements of Changes in Shareholders’ Equity	7
	Consolidated Statements of Cash Flows	9
	Notes to Consolidated Financial Statements	10
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	3334
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	4951
Item 4.	Controls and Procedures	4951

PART II – OTHER INFORMATION		5052
Item 1.	Legal Proceedings	5052
Item 1A.	Risk Factors	5052
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	5052
Item 3.	Defaults Upon Senior Securities	5053
Item 4.	Mine Safety Disclosures	5053
Item 5.	Other Information	5053
Item 6.	Exhibits	5153

SIGNATURES		52
~~INDEX TO EXHIBITS~~		54
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

	June 30,						September 30,
(Dollars in thousands, except par value)	2019			December 31,			2019			December 31,
	(Unaudited)			2018			(Unaudited)			2018
ASSETS
Cash and due from banks	$	14,725		$	14,328		$	20,079		$	14,328
Interest-bearing bank balances		24,898			17,883			12,861			17,883
Federal funds sold and securities purchased under agreements to resell		—			57			295			57
Investment securities - held-to-maturity		—			16,174			—			16,174
Investment securities - available-for-sale		250,310			237,893			265,068			237,893
Other investments, at cost		1,992			1,955			1,992			1,955
Loans held for sale		8,730			3,223			10,775			3,223
Loans		726,707			718,462			735,074			718,462
Less, allowance for loan losses		6,362			6,263			6,560			6,263
Net loans		720,345			712,199			728,514			712,199
Property, furniture and equipment - net		35,991			34,987			36,077			34,987
Right-of-use asset		2,805			—			3,260			—
Bank owned life insurance		26,094			25,754			26,268			25,754
Other real estate owned		1,412			1,460			1,412			1,460
Intangible assets		1,742			2,006			1,609			2,006
Goodwill		14,637			14,637			14,637			14,637
Other assets		12,287			9,039			7,143			9,039
Total assets	$	1,115,968		$	1,091,595		$	1,129,990		$	1,091,595
LIABILITIES
Deposits:
Non-interest bearing	$	263,833		$	244,686		$	268,693		$	244,686
Interest bearing		673,558			680,837			680,134			680,837
Total deposits		937,391			925,523			948,827			925,523
Securities sold under agreements to repurchase		33,889			28,022			34,321			28,022
Federal Home Loan Bank advances		221			231			216			231
Junior subordinated debt		14,964			14,964			14,964			14,964
Lease liability		2,823			—			3,291			—
Other liabilities		9,191			10,358			9,591			10,358
Total liabilities		998,479			979,098			1,011,210			979,098
SHAREHOLDERS’ EQUITY
Preferred stock, par value $1.00 per share, 10,000,000 shares authorized; none issued and outstanding		—			—			—			—
Common stock, par value $1.00 per share; 20,000,000 shares authorized; issued and outstanding 7,511,164 at June 30, 2019 7,638,681 at December 31, 2018		7,511			7,639
Common stock, par value $1.00 per share; 20,000,000 shares authorized; issued and outstanding 7,408,879 at September 30, 2019 7,638,681 at December 31, 2018								7,409			7,639
Common stock warrants issued		15			31			13			31

Nonvested restricted stock		(241	)		(149	)		(195	)		(149	)
Additional paid in capital		92,242			95,048			90,292			95,048
Retained earnings		15,957			12,262			18,024			12,262

Accumulated other comprehensive income (loss)		2,005			(2,334	)		3,237			(2,334	)
Total shareholders’ equity		117,489			112,497			118,780			112,497
Total liabilities and shareholders’ equity	$	1,115,968		$	1,091,595		$	1,129,990		$	1,091,595

See Notes to Consolidated Financial Statements

FIRST COMMUNITY CORPORATION

FIRST COMMUNITY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)

Six Six
Months Ended Months Ended
June 30, June 30,
2019 2018
(Dollars in thousands, except per share amounts) (Unaudited) (Unaudited)
Interest income:
   Loans, including fees $ 17,401 $ 15,697
   Taxable securities 2,581 2,373
   Non- taxable securities 734 899
   Federal funds sold and securities purchased under resale agreements 252 170
   Other 12 11
       Total interest income 20,980 19,150
Interest expense:
   Deposits 2,182 1,185
   Federal funds sold and securities sold under agreement to repurchase 201 101
   Other borrowed money 461 391
      Total interest expense 2,844 1,677
Net interest income 18,136 17,473
Provision for loan losses 114 231
Net interest income after provision for loan losses 18,022 17,242
Non-interest income:
   Deposit service charges 791 886
   Mortgage banking income 2,082 1,967
   Investment advisory fees and non-deposit commissions 927 784
   Gain (loss) on sale of securities 135 (10 )
   Gain (loss) on sale of other assets (3 ) 37
   Other 1,763 1,878
      Total non-interest income 5,695 5,542
Non-interest expense:
   Salaries and employee benefits 10,380 9,458
   Occupancy 1,302 1,197
   Equipment 775 779
   Marketing and public relations 605 283
   FDIC assessments 145 164
   Other real estate expense 47 49
   Amortization of intangibles 264 285
   Other 3,445 3,604
      Total non-interest expense 16,963 15,819
Net income before tax 6,754 6,965
Income taxes 1,378 1,255
Net income $ 5,376 $ 5,710

Basic earnings per common share $ 0.70 $ 0.75
Diluted earnings per common share $ 0.70 $ 0.74
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Nine Nine
Months Ended Months Ended
September 30, September 30,
(Dollars in thousands, except per share amounts) 2019 2018
Interest income:
Loans, including fees $ 26,492 $ 23,974
Taxable securities 3,840 3,623
Non-taxable securities 1,084 1,232
Federal funds sold and securities purchased under resale agreements 410 290
Other 18 16
Total interest income 31,844 29,135
Interest expense:
Deposits 3,401 2,001
Federal funds sold and securities sold under agreement to repurchase 303 197
Other borrowed money 651 581
Total interest expense 4,355 2,779
Net interest income 27,489 26,356
Provision for loan losses 139 252
Net interest income after provision for loan losses 27,350 26,104
Non-interest income:
Deposit service charges 1,212 1,320
Mortgage banking income 3,333 3,126
Investment advisory fees and non-deposit commissions 1,436 1,207
Gain (loss) on sale of securities 135 (10 )
Gain (loss) on sale of other assets (3 ) 8
Other 2,695 2,733
Total non-interest income 8,808 8,384
Non-interest expense:
Salaries and employee benefits 15,845 14,537
Occupancy 2,005 1,808
Equipment 1,140 1,167
Marketing and public relations 764 460
FDIC assessments 135 258
Other real estate expense 78 86
Amortization of intangibles 397 427
Other 5,389 5,210
Total non-interest expense 25,753 23,953
Net income before tax 10,405 10,535
Income taxes 2,131 1,992
Net income $ 8,274 $ 8,543

Basic earnings per common share $ 1.10 $ 1.13
Diluted earnings per common share $ 1.08 $ 1.11

See Notes to Consolidated Financial Statements
4

FIRST COMMUNITY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
FIRST COMMUNITY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)

Three Three
Months Ended Months Ended
June 30, June 30,
2019 2018
(Dollars in thousands, except per share amounts) (Unaudited) (Unaudited)
Interest income:
   Loans, including fees $ 8,792 $ 8,080
   Taxable securities 1,364 1,188
   Non-taxable securities 295 441
   Federal funds sold and securities purchased under resale agreements 149 104
   Other 6 6
       Total interest income 10,606 9,819
Interest expense:
   Deposits 1,181 638
   Federal funds sold and securities sold under agreement to repurchase 109 60
   Other borrowed money 200 182
      Total interest expense 1,490 880
Net interest income 9,116 8,939
Provision for loan losses 9 29
Net interest income after provision for loan losses 9,107 8,910
Non-interest income:
   Deposit service charges 380 423
   Mortgage banking income 1,238 1,016
   Investment advisory fees and non-deposit commissions 489 401
   Gain on sale of securities 165 94
   Gain (loss) on sale of other assets (3 ) 22
   Other 917 955
      Total non-interest income 3,186 2,911
Non-interest expense:
   Salaries and employee benefits 5,210 4,881
   Occupancy 647 583
   Equipment 389 398
   Marketing and public relations 430 194
   FDIC assessment 71 83
   Other real estate expense 18 31
   Amortization of intangibles 132 143
   Other 1,743 1,912
      Total non-interest expense 8,640 8,225
Net income before tax 3,653 3,596
Income taxes 772 595
Net income $ 2,881 $ 3,001

Basic earnings per common share $ 0.38 $ 0.40
Diluted earnings per common share $ 0.37 $ 0.39
Three Three
Months Ended Months Ended
September 30, September 30,
(Dollars in thousands, except per share amounts) 2019 2018
Interest income:
Loans, including fees $ 9,091 $ 8,277
Taxable securities 1,259 1,250
Non-taxable securities 350 333
Federal funds sold and securities purchased under resale agreements 158 120
Other 6 5
Total interest income 10,864 9,985
Interest expense:
Deposits 1,219 816
Federal funds sold and securities sold under agreement to repurchase 102 96
Other borrowed money 190 190
Total interest expense 1,511 1,102
Net interest income 9,353 8,883
Provision for loan losses 25 21
Net interest income after provision for loan losses 9,328 8,862
Non-interest income:
Deposit service charges 421 434
Mortgage banking income 1,251 1,159
Investment advisory fees and non-deposit commissions 509 423
Loss on sale of other assets — (29 )
Other 932 855
Total non-interest income 3,113 2,842
Non-interest expense:
Salaries and employee benefits 5,465 5,079
Occupancy 703 611
Equipment 365 388
Marketing and public relations 159 177
FDIC assessments — 94
Other real estate expense 31 37
Amortization of intangibles 133 142
Other 1,934 1,606
Total non-interest expense 8,790 8,134
Net income before tax 3,651 3,570
Income taxes 753 737
Net income $ 2,898 $ 2,833

Basic earnings per common share $ 0.39 $ 0.37
Diluted earnings per common share $ 0.39 $ 0.37

See Notes to Consolidated Financial Statements
5

FIRST COMMUNITY CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)

(Dollars in thousands)
Six months ended June 30,
2019 2018

Net income $ 5,376 $ 5,710

Other comprehensive income:
Unrealized (loss) gain during the period on available-for-sale securities, net of tax expense of $1,183 and tax benefit of $820, respectively 4,445 (3,086 )

Reclassification adjustment for loss (gain) on available-for-sale securities included in net income, net of tax expense of $29 and tax benefit $2, respectively (106 ) 8

Other comprehensive income (loss) 4,339 (3,078 )
Comprehensive income $ 9,715 $ 2,632
(Dollars in thousands)
Three months ended June 30,
2019 2018

Net income $ 2,881 $ 3,001

Other comprehensive income:
Unrealized (loss) gain during the period on available-for-sale securities, net of tax expense of $575 and tax benefit of $216, respectively 2,164 (811 )

Reclassification adjustment for gain on available-for-sale securities included in net income, net of tax expense of $35 and $19, respectively (130 ) (75 )

Other comprehensive income (loss) 2,034 (886 )
Comprehensive income $ 4,915 $ 2,115
(Dollars in thousands) Nine months ended September 30,
2019 2018

Net income $ 8,274 $ 8,543

Other comprehensive income:
Unrealized gain (loss) during the period on available-for-sale securities, net of tax expense of $1,511 and tax benefit of $1,104, respectively 5,677 (4,140 )

Less: Reclassification adjustment for loss (gain) included in net income, net of tax benefit of $29 and tax expense of $2, respectively (106 ) 8

Other comprehensive income (loss) 5,571 (4,132 )
Comprehensive income $ 13,845 $ 4,411

(Dollars in thousands) Three months ended September 30,
2019 2018

Net income $ 2,898 $ 2,833

Other comprehensive income:
Unrealized gain (loss) during the period on available-for-sale securities, net of tax expense of $271 and tax benefit of $280, respectively 1,232 (1,054 )

Other comprehensive income (loss) 1,232 (1,054 )
Comprehensive income $ 4,130 $ 1,779

See Notes to Consolidated Financial Statements
6

FIRST COMMUNITY CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Unaudited)
~~(Unaudited)~~(Dollars and shares in thousands, except per share amounts)

Accumulated Accumulated
Common Common Additional Nonvested Other Common Common Additional Nonvested Other
(Dollars and shares in thousands) Shares Common Stock Paid-in Restricted Retained Comprehensive
Issued Stock Warrants Capital Stock Earnings Income (loss) Total Shares Common Stock Paid-in Restricted Retained Comprehensive
Balance December 31, 2018 7,639 $ 7,639 $ 31 $ 95,048 $ (149 ) $ 12,262 $ (2,334 ) $ 112,497
Issued Stock Warrants Capital Stock Earnings Income (Loss) Total
Balance, December 31, 2018 7,639 $ 7,639 $ 31 $ 95,048 $ (149 ) $ 12,262 $ (2,334 ) $ 112,497
Net Income 2,495 2,495 2,495 2,495
Other comprehensive income net of tax of $601 2,305 2,305 2,305 2,305
Issuance of restricted stock 8 8 162 (170 ) — 8 8 162 (170 ) —
Amortization of compensation on restricted stock 33 33 33 33
Shares retired (8 ) (8 ) (148 ) (156 ) (8 ) (8 ) (148 ) (156 )
Exercise of warrants 21 21 (14 ) (7 ) — 21 21 (14 ) (7 ) —
Dividends: Common ($0.11 per share) (840 ) (840 ) (840 ) (840 )
Dividend reinvestment plan 5 5 95 100 5 5 95 100
Balance March 31, 2019 7,665 $ 7,665 $ 17 $ 95,150 $ (286 ) $ 13,917 $ (29 ) $ 116,434 7,665 $ 7,665 $ 17 $ 95,150 $ (286 ) $ 13,917 $ (29 ) $ 116,434
Net income 2,881 2,881
Net Income 2,881 $ 2,881
Other comprehensive income net of tax of $610 2,034 2,034 2,034 2,034
Amortization of compensation on restricted stock 45 45 45 45
Exercise of warrants 2 2 (2 ) — 2 2 (2 ) —
Stock repurchase plan (185 ) (185 ) (3,228 ) (3,413 ) (185 ) (185 ) (3,228 ) (3,413 )
Shares issued-deferred compensation 24 24 241 265 24 24 241 265
Dividends: Common ($0.11 per share) (841 ) (841 ) (841 ) (841 )
Dividend reinvestment plan 5 5 79 84 5 5 79 84
Balance June 30, 2019 7,511 $ 7,511 $ 15 $ 92,242 $ (241 ) $ 15,957 $ 2,005 $ 117,489
Balance, June 30, 2019 7,511 $ 7,511 $ 15 $ 92,242 $ (241 ) $ 15,957 $ 2,005 $ 117,489
Net Income 2,898 $ 2,898
Other comprehensive income net of tax of $271 1,232 1,232
Amortization of compensation on restricted stock 46 46
Exercise of warrants 3 3 (2 ) (1 ) —
Stock repurchase plan (115 ) (115 ) (2,110 ) (2,225 )
Shares issued-deferred compensation —
Dividends: Common ($0.11 per share) (831 ) (831 )
Dividend reinvestment plan 10 10 161 171
Balance September 30, 2019 7,409 $ 7,409 $ 13 $ 90,292 $ (195 ) $ 18,024 $ 3,237 $ 118,780

See ~~Notes~~notes to Consolidated Financial Statements
7

FIRST COMMUNITY CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Unaudited)

Accumulated
Common Common Additional Nonvested Other
(Dollars in thousands) Shares Common Stock Paid-in Restricted Retained Comprehensive
Issued Stock Warrants Capital Stock Earnings Loss Total
Balance December 31, 2017 7,588 $ 7,588 $ 46 $ 94,516 $ (109 ) $ 4,066 $ (444 ) $ 105,663
Net income 2,709 2,709
Other comprehensive loss net of tax of $587 (2,192 ) (2,192 )
Issuance of restricted stock 11 11 233 (244 ) —
Amortization of compensation on restricted stock 35 35
Shares retired (2 ) (2 ) (55 ) (57 )
Dividends-Common ($.10 per share) (757 ) (757 )
Dividend reinvestment plan 3 3 79 82
Balance March 31, 2018 7,600 $ 7,600 $ 46 $ 94,773 $ (318 ) $ 6,018 $ (2,636 ) $ 105,483
Net income 3,001 3,001
Other comprehensive loss net of tax of $235 (886 ) (886 )
Amortization of compensation on restricted stock 56 56
Dividends: Common ($0.10 per share) (756 ) (756 )
Dividend reinvestment plan 5 5 94 99
Balance June 30, 2018 7,605 $ 7,605 $ 46 $ 94,867 $ (262 ) $ 8,263 $ (3,522 ) $ 106,997

(Dollars and shares in thousands, except per share amounts)
Accumulated
Common Common Additional Nonvested Other
Shares Common Stock Paid-in Restricted Retained Comprehensive
Issued Stock Warrants Capital Stock Earnings Income (Loss) Total
Balance, December 31, 2017 7,588 $ 7,588 $ 46 $ 94,516 $ (109 ) $ 4,066 $ (444 ) $ 105,663
Net Income 2,709 2,709
Other comprehensive loss net of tax of $587 (2,192 ) (2,192 )
Issuance of restricted stock 11 11 233 (244 ) —
Amortization of compensation on restricted stock 35 35
Shares retired (2 ) (2 ) (55 ) (57 )

Dividends: Common ($0.10 per share) (757 ) (757 )
Dividend reinvestment plan 3 3 79 82
Balance March 31, 2018 7,600 $ 7,600 $ 46 $ 94,773 $ (318 ) $ 6,018 $ (2,636 ) $ 105,483
Net Income 3,001 $ 3,001
Other comprehensive loss net of tax of $235 (886 ) (886 )
Amortization of compensation on restricted stock 56 56

Dividends: Common ($0.10 per share) (756 ) (756 )
Dividend reinvestment plan 5 5 94 99
Balance, June 30, 2018 7,605 $ 7,605 $ 46 $ 94,867 $ (262 ) $ 8,263 $ (3,522 ) $ 106,997
Net Income 2,833 $ 2,833
Other comprehensive loss net of tax of $280 (1,054 ) (1,054 )
Amortization of compensation on restricted stock 57 57
Exercise of warrants 20 20 (12 ) (8 ) —
Shares issued-deferred compensation 1 1 18 19
Dividends: Common ($0.10 per share) (760 ) (760 )
Dividend reinvestment plan 4 4 90 94
Balance September 30, 2018 7,630 $ 7 ,630 $ 34 $ 94,967 $ (205 ) $ 10,336 $ (4,576 ) $ 108,186
See ~~Notes~~notes to Consolidated Financial Statements
8

FIRST COMMUNITY CORPORATION
FIRST COMMUNITY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

Six months ended
June 30,
(Dollars in thousands) 2019 2018
Cash flows from operating activities:
Net income $ 5,376 $ 5,710
Adjustments to reconcile net income to net cash provided from operating activities:
       Depreciation 649 750
       Premium amortization 1,071 1,293
       Provision for loan losses 114 231
       Loss (gain) on sale of other real estate owned 3 (37 )
       Origination of loans held-for-sale (61,358 ) (56,741 )
       Sale of loans held-for-sale 55,851 54,866
       Amortization of intangibles 264 285
       Accretion on acquired loans (272 ) (271 )
       Writedown of land held for sale — 42
       (Gain) loss on sale of securities (135 ) 10
       Gain on sale of fixed assets — (123 )
       (Increase) decrease in other assets (7,485 ) 435
       Increase in other liabilities 1,656 116
         Net cash (used) provided from operating activities (4,266 ) 6,566
Cash flows from investing activities:
    Purchase of investment securities available-for-sale (57,557 ) (37,866 )
    Purchase of other investment securities (37 ) —
Maturity/call of investment securities available-for-sale 14,805 22,075
Proceeds from sale of securities available-for-sale 51,119 19,884
Proceeds from sale of securities held-to-maturity — 655
Proceeds from sale of other securities — 603
Increase in loans (8,051 ) (37,197 )
Proceeds from sale of other real estate owned 45 180
Proceeds from sale of fixed assets 301 1,143
Purchase of property and equipment (1,954 ) (321 )
         Net cash used in investing activities (1,329 ) (30,844 )
Cash flows from financing activities:
Increase in deposit accounts 11,894 45,098
Increase in securities sold under agreements to repurchase 5,867 8,933
Advances from the Federal Home Loan Bank 65,000 —
Repayment of advances from Federal Home Loan Bank (65,010 ) (14,010 )
Shares forfeited (156 ) —
Shares retired — (57 )
Repurchase of Common Stock (3,413 ) —
Issuance of Deferred Compensation Shares 265 —
Dividends paid: Common Stock (1,681 ) (1,513 )
Dividend reinvestment plan 184 181
        Net cash provided from financing activities 12,950 38,632
Net increase in cash and cash equivalents 7,355 14,354
Cash and cash equivalents at beginning of period 32,268 30,591
Cash and cash equivalents at end of period $ 39,623 $ 44,945
Supplemental disclosure:
Cash paid during the period for:
Interest $ 2,958 $ 1,677
Income taxes $ 1,160 $ 750
Non-cash investing and financing activities:
Unrealized gain (loss) on securities $ 5,493 $ (3,078 )
Recognition of operating lease right of use asset $ 2,846 $ —
Recognition of operating lease liability $ 2,849 $ —
Transfer of loans to foreclosed property $ — $ 33
Transfer of investment securities held-to-maturity to available-for-sale $ 16,144 $ —
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine months ended
September 30,
(Dollars in thousands) 2019 2018
Cash flows from operating activities:
Net income $ 8,274 $ 8,543
Adjustments to reconcile net income to net cash provided from operating activities:
Depreciation 1,000 1,130
Premium amortization 1,658 1,873
Provision for loan losses 139 252
Loss (gain) on sale of other real estate owned 3 (8 )
Origination of loans held-for-sale (97,878 ) (89,125 )
Sale of loans held-for-sale 90,326 88,690
Amortization of intangibles 397 427
Accretion on acquired loans (402 ) (288 )
Writedown of land held for sale — 42
(Gain) loss on sale of securities (135 ) 10
Gain on sale of fixed assets — (123 )
(Increase) decrease in other assets (3,089 ) 518
Increase in other liabilities 2,522 547
Net cash (used) provided from operating activities 2,815 12,488
Cash flows from investing activities:
Purchase of investment securities available-for-sale (81,977 ) (47,668 )
Purchase of other investment securities (37 ) —
Maturity/call of investment securities available-for-sale 32,199 33,703
Proceeds from sale of securities available-for-sale 44,398 19,946
Proceeds from sale of securities held-to-maturity — 655
Proceeds from sale of other securities — 434
Increase in loans (16,322 ) (49,603 )
Proceeds from sale of other real estate owned 45 367
Proceeds from sale of fixed assets 301 1,143
Purchase of property and equipment (2,391 ) (494 )
Net cash used in investing activities (23,784 ) (41,517 )
Cash flows from financing activities:
Increase in deposit accounts 23,338 33,472
Increase in securities sold under agreements to repurchase 6,299 13,956
Advances from the Federal Home Loan Bank 65,000 4,000
Repayment of advances from Federal Home Loan Bank (65,015 ) (14,014 )
Shares retired (158 ) (57 )
Repurchase of Common Stock (5,635 ) —
Issuance of Deferred Compensation Shares 265 19
Dividends paid: Common Stock (2,512 ) (2,273 )
Dividend reinvestment plan 354 275
Net cash provided from financing activities 21,936 35,378
Net increase in cash and cash equivalents 967 6,349
Cash and cash equivalents at beginning of period 32,268 30,591
Cash and cash equivalents at end of period $ 33,235 $ 36,940
Supplemental disclosure:
Cash paid during the period for:
Interest $ 4,301 $ 2,627
Income taxes $ 2,060 $ 1,875
Non-cash investing and financing activities:
Unrealized gain (loss) on securities $ 7,053 $ (4,132 )
Recognition of operating lease right of use asset $ 3,260 $ —
Recognition of operating lease liability $ 3,291 $ —
Transfer of loans to foreclosed property $ — $ 346
Transfer of investment securities held-to-maturity to available-for-sale $ 16,144 $ —

See Notes to Consolidated Financial Statements
9

Notes to Consolidated Financial Statements (Unaudited)

Note 1—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”), present fairly in all material respects the Company’s financial position at ~~June~~September 30, 2019 and December 31, 2018, and the Company’s results of operations and cash flows for the three and ~~six~~nine months ended ~~June~~September 30, 2019 and 2018. The results of operations for the three and ~~six~~nine months ended ~~June~~September 30, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019.

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 Form 10-Q. The information included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 should be referred to in connection with these unaudited interim financial statements.

Note 2—Earnings Per Common Share

The following reconciles the numerator and denominator of the basic and diluted earnings per common share computation:

(Dollars and shares in thousands, except per share amounts)

Six months Three months Nine months Three months
Ended June 30, Ended June 30, Ended September 30, Ended September 30,
2019 2018 2019 2018 2019 2018 2019 2018

Numerator (Net income available to common shareholders) $ 5,376 $ 5,710 $ 2,881 $ 3,001
Numerator (Net income available to common shareholders $ 8,274 $ 8,543 $ 2,898 $ 2,833
Denominator
Weighted average common shares outstanding for:
Basic shares 7,629 7,575 7,627 7,573 7,548 7,581 7,386 7,592
Dilutive securities:
Deferred compensation 43 60 41 62 40 65 39 61
Warrants/Restricted stock – Treasury stock method 36 90 36 91
Warrants/Restricted stock-Treasury stock method 42 73 38 71
Diluted shares 7,708 7,725 7,704 7,726 7,630 7,719 7,463 7,724
Earnings per common share:
Basic 0.70 0.75 0.38 0.40 $ 1.10 $ 1.13 $ 0.39 $ 0.37
Diluted 0.70 0.74 0.37 0.39 $ 1.08 $ 1.11 $ 0.39 $ 0.37
The average market price used in calculating assumed number of shares $ 19.12 $ 22.76 $ 18.35 $ 23.56 $ 19.06 $ 25.33 $ 18.95 $ 23.49
10
Note 2—Earnings Per Common Share-continued

There were no options outstanding as of ~~June~~September 30, 2019 and ~~June~~September 30, 2018.

In the fourth quarter of 2011, we issued $2.5 million in 8.75% subordinated notes maturing December 16, 2019. On November 15, 2012, the subordinated notes were redeemed in full at par. Warrants for 107,500 shares of common stock at $5.90 per share were issued in connection with the issuance of the subordinated debt. There were ~~32,250~~27,950 warrants outstanding at ~~June~~September 30, 2019. These warrants expire December 16, 2019 and are included in dilutive securities in the table above.

The Company has ~~issued~~ a total of ~~15,438~~15,129 unvested restricted shares and 5,644 restricted units under the terms of its compensation plans and employment ~~agreements.~~agreements as of September 30, 2019. The employee shares and units cliff vest over a three-year period; the non-employee director shares vest one year after issuance. The unrecognized compensation cost at ~~June~~September 30, 2019 for ~~non-vested~~nonvested shares amounts to ~~$241.1~~$194.8 thousand. Each unit is convertible into one share of common stock at the time the unit vests. The related compensation cost is accrued over the vesting period and was ~~$41.2~~$51.1 thousand at ~~June~~September 30, 2019.
10
~~Note 2—Earnings Per Common Share-continued~~
In 2006, the Company established a Non-Employee Director Deferred Compensation Plan, whereby a director may elect to defer all or any part of annual retainer and monthly meeting fees payable with respect to service on the board of directors or a committee of the board. Units of common stock are credited to the director’s account at the time compensation is earned and are included in dilutive securities in the table above. At ~~June~~September 30, 2019 and December 31, 2018, there were ~~99,149~~96,066 and 114,982 units in the plan, respectively. The accrued liability at ~~June~~September 30, 2019 and December 31, 2018 amounted to $1.1 million and $1.3 million, respectively, and is included in “Other liabilities” on the balance sheet.

Note 3—Investment Securities

The amortized cost and estimated fair values of investment securities are summarized below:

AVAILABLE-FOR-SALE: Gross Gross Gross Gross
Amortized Unrealized Unrealized Amortized Unrealized Unrealized
(Dollars in thousands) Cost Gains Losses Fair Value Cost Gains Losses Fair Value
June 30, 2019
September 30, 2019
US Treasury securities $ 9,154 $ 31 $ 8 $ 9,177 $ 7,174 $ 24 $ 6 $ 7,192
Government Sponsored Enterprises 1,102 20 — 1,122 1,105 18 — 1,123
Mortgage-backed securities 147,580 1,169 577 148,172 166,558 2,090 607 168,041
Small Business Administration pools 52,021 280 394 51,907 47,564 374 285 47,653
State and local government 37,896 2,018 1 39,913 38,550 2,494 4 41,040
Other securities 19 — — 19 19 — — 19
$ 247,772 $ 3,518 $ 980 $ 250,310 $ 260,970 $ 5,000 $ 902 $ 265,068

Gross Gross
Amortized Unrealized Unrealized
(Dollars in thousands) Cost Gains Losses Fair Value
December 31, 2018
US Treasury securities $ 15,488 $ 9 $ 40 $ 15,457
Government Sponsored Enterprises 1,096 6 2 1,100
Mortgage-backed securities 117,862 73 2,460 115,475
Small Business Administration pools 55,784 247 695 55,336
State and local government 50,599 619 712 50,506
Other securities 19 — — 19
$ 240,848 $ 954 $ 3,909 $ 237,893

HELD-TO-MATURITY: Gross Gross
Amortized Unrealized Unrealized
(Dollars in thousands) Cost Gains Losses Fair Value
December 31, 2018
State and local government $ 16,174 $ 50 $ 40 $ 16,184
$ 16,174 $ 50 $ 40 $ 16,184
Gross Gross
Amortized Unrealized Unrealized
(Dollars in thousands) Cost Gains Losses Fair Value
December 31, 2018
US Treasury securities $ 15,488 $ 9 $ 40 $ 15,457
Government Sponsored Enterprises 1,096 6 2 1,100
Mortgage-backed securities 117,862 73 2,460 115,475
Small Business Administration pools 55,784 247 695 55,336
State and local government 50,599 619 712 50,506
Other securities 19 — — 19
$ 240,848 $ 954 $ 3,909 $ 237,893
11
Note 3—Investment Securities-continued
HELD-TO-MATURITY: Gross Gross
Amortized Unrealized Unrealized
(Dollars in thousands) Cost Gains Losses Fair Value
December 31, 2018
State and local government $ 16,174 $ 50 $ 40 $ 16,184
$ 16,174 $ 50 $ 40 $ 16,184

During the first quarter of 2019, the Company reclassified the portfolio of securities listed as held-to-maturity to available-for-sale. There were no investment securities listed as held-to-maturity as of ~~June~~September 30, 2019.

During the ~~six~~nine months ended ~~June~~September 30, 2019 and 2018, the Company received proceeds of ~~$51.1~~$44.4 million and $19.9 million, respectively, from the sale of investment securities available-for-sale. For the ~~six~~nine months ended ~~June~~September 30, 2019, gross realized gains from the sale of investment securities available-for-sale amounted to ~~$354.6~~$355.6 thousand and gross realized losses amounted to $219.6 thousand. For the ~~six~~nine months ended ~~June~~September 30, 2018, gross realized gains from the sale of investment securities available-for-sale amounted to $240.7 thousand and gross realized losses amounted to ~~$250.5~~$246.5 thousand. For the three months ended ~~June~~September 30, 2019, ~~gross~~there were no realized gains or losses from the sale of investment securities ~~available-for-sale amounted to $315.0 thousand and gross realized losses amounted to $149.7 thousand.~~available-for-sale. For the three months ended ~~June~~September 30, 2018, ~~gross~~there were no realized gains or losses from the sale of investment securities ~~available-for-sale amounted to $206.9 thousand and gross realized losses amounted to $112.5 thousand.~~
11
~~Note 3—Investment Securities-continued~~available-for-sale.

At ~~June~~September 30, 2019, other securities available-for-sale included the following at fair value: a mutual fund at ~~$9.3~~$9.2 thousand, and foreign debt of $10.0 thousand. As required by Accounting Standards Update (“ASU”) 2016-01-Financial Instruments-Overall (Subtopic 825-10), the Company measured its equity investments at fair value with changes in the fair value recognized through net income. For the ~~six~~nine months ended ~~June~~September 30, 2019, a ~~$2.0~~$2.1 thousand gain was recognized on a mutual fund. At December 31, 2018, corporate and other securities available-for-sale included the following at fair value: a mutual fund at $7.1 thousand, and foreign debt of $10.0 thousand. Other investments, at cost include Federal Home Loan Bank (“FHLB”) stock in the amount of $992 thousand and $955 thousand and corporate stock in the amount of $1.0 million and $1.0 million at ~~June~~September 30, 2019 and December 31, 2018, respectively.
12
Note 3—Investment Securities-continued

The following tables show gross unrealized losses and fair values, aggregated by investment category and length of time that individual securities have been in a continuous loss position, at ~~June~~September 30, 2019 and December 31, 2018.

(Dollars in thousands) Less than 12 months 12 months or more Total Less than 12 months 12 months or more Total
June 30, 2019 Fair Unrealized Fair Unrealized Fair Unrealized
September 30, 2019 Fair Unrealized Fair Unrealized Fair Unrealized
Available-for-sale securities: Value Loss Value Loss Value Loss Value Loss Value Loss Value Loss

US Treasury securities $ — $ — $ 1,507 $ 8 $ 1,507 $ 8 $ — $ — $ 1,507 $ 6 $ 1,507 $ 6
Government Sponsored Enterprise mortgage-backed securities 17,780 89 39,002 488 56,782 577 36,200 436 13,094 171 49,294 607
Small Business Administration pools 14,519 173 13,670 221 28,189 394 9,011 103 13,533 182 22,544 285
State and local government — — 434 1 434 1 761 4 — — 761 4
$ 32,299 $ 262 $ 54,613 $ 718 $ 86,912 $ 980 $ 47,674 $ 545 $ 26,441 $ 357 $ 74,115 $ 902

(Dollars in thousands) Less than 12 months 12 months or more Total
December 31, 2018 Fair Unrealized Fair Unrealized Fair Unrealized
Available-for-sale securities: Value Loss Value Loss Value Loss

US Treasury securities $ 8,355 $ 10 $ 1,488 $ 30 $ 9,843 $ 40
Government Sponsored Enterprise — — 122 2 122 2
Government Sponsored Enterprise mortgage-backed securities 13,917 120 89,870 2,339 103,787 2,459
Small Business Administration pools 16,400 211 20,330 484 36,730 695
State and local government 9,517 52 15,598 660 25,115 712
Corporate bonds and other 7 1 — — 7 1
$ 48,196 $ 394 $ 127,408 $ 3,515 $ 175,604 $ 3,909

(Dollars in thousands) Less than 12 months 12 months or more Total
December 31, 2018 Fair Unrealized Fair Unrealized Fair Unrealized
Held-to-maturity securities: Value Loss Value Loss Value Loss
State and local government $ 2,843 $ 14 $ 4,899 $ 26 $ 7,742 $ 40

(Dollars in thousands) Less than 12 months 12 months or more Total
December 31, 2018 Fair Unrealized Fair Unrealized Fair Unrealized
Available-for-sale securities: Value Loss Value Loss Value Loss

US Treasury securities $ 8,355 $ 10 $ 1,488 $ 30 $ 9,843 $ 40
Government Sponsored Enterprise — — 122 2 122 2
Government Sponsored Enterprise mortgage-backed securities 13,917 120 89,870 2,339 103,787 2,459
Small Business Administration pools 16,400 211 20,330 484 36,730 695
State and local government 9,517 52 15,598 660 25,115 712
Corporate bonds and other 7 1 — — 7 1
$ 48,196 $ 394 $ 127,408 $ 3,515 $ 175,604 $ 3,909
(Dollars in thousands) Less than 12 months 12 months or more Total
December 31, 2018 Fair Unrealized Fair Unrealized Fair Unrealized
Held-to-maturity securities: Value Loss Value Loss Value Loss
State and local government $ 2,843 $ 14 $ 4,899 $ 26 $ 7,742 $ 40
13
Note 3—Investment Securities-continued
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 ~~$147.6~~$166.6 million and $117.9 million and approximate fair value of ~~$148.1~~$168.0 million and ~~$115.4~~$115.5 million at ~~June~~September 30, 2019 and December 31, 2018, respectively. As of ~~June~~September 30, 2019, and December 31, 2018, all of the MBSs issued by GSEs were classified as “Available for Sale.” Unrealized losses on certain of these investments are not considered to be “other than temporary,” and we have the intent and ability to hold these until they mature or recover the current book value. The contractual cash flows of the investments are guaranteed by the GSE. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost of the Company’s investment. Because the Company does not intend to sell these securities and it is more likely than not that the Company will not be required sell these securities before a recovery of its amortized cost, which may be maturity, the Company does not consider the investments to be other-than-temporarily impaired at ~~June~~September 30, 2019.

Non-agency Mortgage Backed Securities: The Company held private label mortgage-backed securities (“PLMBSs”), including CMOs, at ~~June~~September 30, 2019 with an amortized cost of ~~$130.1~~$123.1 thousand and approximate fair value of ~~$130.2~~$122.3 thousand. The Company held PLMBSs, including CMOs, at December 31, 2018 with an amortized cost of $199.9 thousand and approximate fair value of $204.1 thousand. Management monitors each of these securities on a quarterly basis to identify any deterioration in the credit quality, collateral values and credit support underlying the investments.
12
~~Note 3—Investment Securities-continued~~
State and Local Governments and Other: Management monitors these securities on a quarterly basis to identify any deterioration in the credit quality. Included in the monitoring is a review of the credit rating, a financial analysis and certain demographic data on the underlying issuer. The Company does not consider these securities to be other-than-temporarily impaired at ~~June~~September 30, 2019.
The following sets forth the amortized cost and fair value of investment securities at ~~June~~September 30, 2019 by contractual maturity. Expected maturities differ from contractual maturities because borrowers may have the right to call or prepay the obligations with or without prepayment penalties. MBSs are based on average life at estimated prepayment speeds.

June 30, 2019 Available-for-sale
September 30, 2019 Available-for-sale
Amortized Fair Amortized Fair
(Dollars in thousands) Cost Value Cost Value
Due in one year or less $ 11,268 $ 11,302 $ 10,823 $ 10,866
Due after one year through five years 120,978 121,265 120,043 120,762
Due after five years through ten years 88,993 91,060 108,314 111,870
Due after ten years 26,533 26,683 21,790 21,570
$ 247,772 $ 250,310 $ 260,970 $ 265,068
Note 4—Loans

Loans summarized by category as of ~~June~~September 30, 2019, December 31, 2018 and ~~June~~September 30, 2018 are as follows:
June 30, December 31, June 30,
(Dollars in thousands) 2019 2018 2018
Commercial, financial and agricultural $ 52,641 $ 53,933 $ 47,853
Real estate:
Construction 61,284 58,440 55,479
Mortgage-residential 49,927 52,764 50,190
Mortgage-commercial 524,348 513,833 486,107
Consumer:
Home equity 28,465 29,583 32,319
Other 10,042 9,909 12,385
Total $ 726,707 $ 718,462 $ 684,333
September 30, December 31, September 30,
(Dollars in thousands) 2019 2018 2018
Commercial, financial and agricultural $ 55,169 $ 53,933 $ 50,940
Real estate:
Construction 58,737 58,440 56,568
Mortgage-residential 47,693 52,764 50,914
Mortgage-commercial 534,554 513,833 498,650
Consumer:
Home equity 29,103 29,583 29,933
Other 9,818 9,909 9,510
Total $ 735,074 $ 718,462 $ 696,515
14
Note 4—Loans-continued

The detailed activity in the allowance for loan losses and the recorded investment in loans receivable as of and for the ~~six~~nine months ended ~~June~~September 30, 2019 and ~~June~~September 30, 2018 and for the year ended December 31, 2018 is as follows:

(Dollars in thousands)
Real estate Real estate Consumer
Real estate Mortgage Mortgage Home Consumer
Commercial Construction Residential Commercial equity Other Unallocated Total
June 30, 2019
Allowance for loan losses:
Beginning balance
December 31, 2018 $ 430 $ 89 $ 431 $ 4,318 $ 261 $ 88 $ 646 $ 6,263
Charge-offs (2 ) — (7 ) — (1 ) (66 ) — (76 )
Recoveries — — — 41 — 20 — 61
Provisions 7 (12 ) (20 ) 99 (13 ) 59 (6) 114
Ending balance
June 30, 2019 $ 435 $ 77 $ 404 $ 4,458 $ 247 $ 101 $ 640 $ 6,362

Ending balances:
Individually evaluated for impairment $ — $ — $ — $ 12 $ — $ — $ — $ 12

Collectively evaluated for impairment 435 77 404 4,446 247 101 640 6,350

June 30, 2019
Loans receivable:
Ending balance-total $ 52,641 $ 61,284 $ 49,927 $ 524,348 $ 28,465 $ 10,042 $ — $ 726,707

Ending balances:
Individually evaluated for impairment — — 542 4,047 54 — — 4,643

Collectively evaluated for impairment $ 52,641 $ 61,284 $ 49,385 $ 520,301 $ 28,411 $ 10,042 $ — $ 722,064
(Dollars in thousands)
Real estate Real estate Consumer Real estate Real estate Consumer
Real estate Mortgage Mortgage Home Consumer Real estate Mortgage Mortgage Home Consumer
Commercial Construction Residential Commercial equity Other Unallocated Total Commercial Construction Residential Commercial equity Other Unallocated Total
June 30, 2018
September 30, 2019
Allowance for loan losses:
Beginning balance
December 31, 2017 $ 221 $ 101 $ 461 $ 3,077 $ 308 $ 35 $ 1,594 $ 5,797
Beginning balance
December 31, 2018 $ 430 $ 89 $ 431 $ 4,318 $ 261 $ 88 $ 646 $ 6,263
Charge-offs — — (1 ) — — (85 ) — (86 ) (8 ) — (7 ) — (1 ) (96 ) — (112 )
Recoveries 3 — 2 114 5 21 — 145 — — — 221 14 35 — 270
Provisions 48 11 210 (573 ) 716 142 (323 ) 231 37 2 (39 ) (3 ) (33 ) 68 107 139
Ending balance
June 30, 2018 $ 272 $ 112 $ 672 $ 2,618 $ 1,029 $ 113 $ 1,271 $ 6,087
Ending balance
September 30, 2019 $ 459 $ 91 $ 385 $ 4,536 $ 241 $ 95 $ 753 $ 6,560

Ending balances:
Individually evaluated for impairment $ — $ — $ 1 $ 14 $ — $ — $ — $ 15 $ 4 $ — $ — $ 10 $ — $ — $ — $ 14

Collectively evaluated for impairment 272 112 671 2,604 1,029 113 1,271 6,072 455 91 385 4,526 241 95 753 6,546

June 30, 2018
Loans receivable:
September 30, 2019
Loans receivable:
Ending balance-total $ 47,853 $ 55,479 $ 50,190 $ 486,107 $ 32,319 $ 12,38 5 $ — $ 684,333 $ 55,169 $ 58,737 $ 47,693 $ 534,554 $ 29,103 $ 9,818 $ — $ 735,074

Ending balances:
Individually evaluated for impairment — — 424 4,464 61 — — 4,949 4 — 538 3,541 72 — — 4,155

Collectively evaluated for impairment $ 47,853 $ 55,479 $ 49,766 $ 481,643 $ 32,258 $ 12,385 $ — $ 679,384 $ 55,165 $ 58,737 $ 47,155 $ 531,013 $ 29,031 $ 9,818 $ — $ 730,919

(Dollars in thousands)
Commercial Real estate
Construction Real estate
Mortgage
Residential Real estate
Mortgage
Commercial Consumer
Home
equity Consumer
Other Unallocated Total
September 30, 2018
Allowance for loan losses:
Beginning balance
December 31, 2017 $ 221 $ 101 $ 461 $ 3,077 $ 308 $ 35 $ 1,594 $ 5,797
Charge-offs — — (1 ) — — (109 ) — (110 )
Recoveries 14 — 3 219 6 31 — 273
Provisions (46 ) 4 481 (388 ) 732 108 (639 ) 252
Ending balance
September 30, 2018 $ 189 $ 105 $ 944 $ 2,908 $ 1,046 $ 65 $ 955 $ 6,212

Ending balances:
Individually evaluated for impairment $ — $ — $ 1 $ 3 $ — $ — $ — $ 4

Collectively evaluated for impairment 189 105 943 2,905 1,046 65 955 6,208

September 30, 2018
Loans receivable:
Ending balance-total $ 50,940 $ 56,568 $ 50,914 $ 498,650 $ 29,933 $ 9,510 $ — $ 696,515

Ending balances:
Individually evaluated for impairment — — 237 4,466 31 — — 4,734

Collectively evaluated for impairment $ 50,940 $ 56,568 $ 50,677 $ 494,184 $ 29,902 $ 9,510 $ — $ 691,781
15
Note 4—Loans-continued

(Dollars in thousands)
Real estate Real estate Consumer
Real estate Mortgage Mortgage Home Consumer
Commercial Construction Residential Commercial equity Other Unallocated Total
December 31, 2018
Allowance for loan losses:
Beginning balance
December 31, 2017 $ 221 $ 101 $ 461 $ 3,077 $ 308 $ 35 $ 1,594 $ 5,797
Charge-offs — — (1 ) — (23 ) (140 ) — (164 )
Recoveries 3 — 4 210 6 61 — 284
Provisions 206 (12 ) (33 ) 1,031 (30 ) 132 (948 ) 346
Ending balance
December 31, 2018 $ 430 $ 89 $ 431 $ 4,318 $ 261 $ 88 $ 646 $ 6,263

Ending balances:
Individually evaluated for impairment $ — $ — $ — $ 14 $ — $ — $ — $ 14

Collectively evaluated for impairment 430 89 431 4,304 261 88 646 6,249

December 31, 2018
Loans receivable:
Ending balance-total $ 53,933 $ 58,440 $ 52,764 $ 513,833 $ 29,583 $ 9,909 $ — $ 718,462

Ending balances:
Individually evaluated for impairment — — 322 4,030 29 — — 4,381

Collectively evaluated for impairment $ 53,933 $ 58,440 $ 52,442 $ 509,803 $ 29,554 $ 9,909 $ — $ 714,081
(Dollars in thousands)
Commercial Real estate
Construction Real estate
Mortgage
Residential Real estate
Mortgage
Commercial Consumer
Home
equity Consumer
Other Unallocated Total
December 31, 2018
Allowance for loan losses:
Beginning balance
December 31, 2017 $ 221 $ 101 $ 461 $ 3,077 $ 308 $ 35 $ 1,594 $ 5,797
Charge-offs — — (1 ) — (23 ) (140 ) — (164 )
Recoveries 3 — 4 210 6 61 — 284
Provisions 206 (12 ) (33 ) 1,031 (30 ) 132 (948 ) 346
Ending balance
December 31, 2018 $ 430 $ 89 $ 431 $ 4,318 $ 261 $ 88 $ 646 $ 6,263

Ending balances:
Individually evaluated for impairment $ — $ — $ — $ 14 $ — $ — $ — $ 14

Collectively evaluated for impairment 430 89 431 4,304 261 88 646 6,249

December 31, 2018
Loans receivable:
Ending balance-total $ 53,933 $ 58,440 $ 52,764 $ 513,833 $ 29,583 $ 9,909 $ — $ 718,462

Ending balances:
Individually evaluated for impairment — — 322 4,030 29 — — 4,381

Collectively evaluated for impairment $ 53,933 $ 58,440 $ 52,442 $ 509,803 $ 29,554 $ 9,909 $ — $ 714,081
Related party loans and lines of credit are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated persons and generally do not involve more than the normal risk of collectability. The following table presents related party loan transactions for the ~~six~~nine months ended ~~June~~September 30, 2019 and ~~June~~September 30, 2018:
(Dollars in thousands) 2019 2018 2019 2018
Beginning Balance January 1, $ 5,937 $ 5,549 $ 5,937 $ 5,938
New Loans 106 1,778 111 2,406
Less loan repayments 1,668 936 1,804 1,999
Ending Balance June 30, $ 4,375 $ 6,391
Ending Balance September 30, $ 4,244 $ 6,345

The following table presents at ~~June~~September 30, 2019 and December 31, 2018 loans individually evaluated and considered impaired under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 310 “Accounting by Creditors for Impairment of a Loan.” Impairment includes performing troubled debt restructurings (“TDRs”).

June 30, December 31, September 30, December 31,
(Dollars in thousands) 2019 2018 2019 2018
Total loans considered impaired $ 4,643 $ 4,381 $ 4,155 $ 4,381
Loans considered impaired for which there is a related allowance for loan loss:
Outstanding loan balance $ 425 $ 453 $ 373 $ 453
Related allowance $ 12 $ 14 $ 14 $ 14
Loans considered impaired and previously written down to fair value $ 2,729 $ 3,928 $ 2,347 $ 3,928
Average impaired loans $ 4,797 $ 4,128 $ 4,354 $ 4,128
16
Note 4—Loans-continued

The following tables are by loan category and present at ~~June~~September 30, 2019, ~~June~~September 30, 2018 and December 31, 2018 loans individually evaluated and considered impaired under FASB ASC 310 “Accounting by Creditors for Impairment of a Loan.” Impairment includes performing TDRs.

(Dollars in thousands) Six months ended Three months ended
Unpaid Average Interest Average Interest
June 30, 2019 Recorded Principal Related Recorded income Recorded Income
Investment Balance Allowance Investment Recognized Investment Recognized
With no allowance recorded:
Commercial, financial, agricultural $ — $ — $ — $ — $ — $ — $ —
Real estate:
Construction — — — — — — —
Mortgage-residential 542 600 — 590 10 578 8
Mortgage-commercial 3,622 6,625 — 3,706 180 3,694 90
Consumer:
Home equity 54 56 — 57 2 57 1
Other — — — — — — —

With an allowance recorded:
Commercial, financial, agricultural — — — — — — —
Real estate:
Construction — — — — — — —
Mortgage-residential — — — — — — —
Mortgage-commercial 425 425 12 444 13 439 6
Consumer:
Home equity — — — — — — —
Other — — — — — — —

Total:
Commercial, financial, agricultural $ — $ — $ — $ — $ — $ — $ —
Real estate:
Construction — — — — — — —
Mortgage-residential 542 600 — 590 10 578 8
Mortgage-commercial 4,047 7,050 12 4,150 193 4,133 96
Consumer:
Home equity 54 56 — 57 2 57 1
Other — — — — — — —
$ 4,643 $ 7,706 $ 12 $ 4,797 $ 205 $ 4,768 $ 105
(Dollars in thousands) Nine months ended Three months ended
Unpaid Average Interest Average Interest
September 30, 2019 Recorded Principal Related Recorded income Recorded Income
Investment Balance Allowance Investment Recognized Investment Recognized
With no allowance recorded:
Commercial, financial, agricultural $ — $ — $ — $ — $ — $ — $ —
Real estate:
Construction — — — — — — —
Mortgage-residential 538 603 — 594 16 537 12
Mortgage-commercial 3,172 5,867 — 3,259 131 3,092 79
Consumer:
Home equity 72 74 — 76 2 71 1
Other — — — — — — —

With an allowance recorded:
Commercial, financial, agricultural 4 4 4 4 — 4 —
Real estate:
Construction — — — — — — —
Mortgage-residential — — — — — — —
Mortgage-commercial 369 369 10 421 19 326 6
Consumer:
Home equity — — — — — — —
Other — — — — — — —

Total:
Commercial, financial, agricultural $ 4 $ 4 $ 4 $ 4 $ — $ 4 $ —
Real estate:
Construction — — — — — — —
Mortgage-residential 538 603 — 594 16 537 12
Mortgage-commercial 3,541 6,236 10 3,680 150 3,418 85
Consumer:
Home equity 72 74 — 76 2 71 1
Other — — — — — — —
$ 4,155 $ 6,917 $ 14 $ 4,354 $ 168 $ 4,030 $ 98
17
Note 4—Loans-continued

(Dollars in thousands) Six months ended Three months ended
Unpaid Average Interest Average Interest
June 30, 2018 Recorded Principal Related Recorded income Recorded Income
Investment Balance Allowance Investment Recognized Investment Recognized
With no allowance recorded:
Commercial, financial, agricultural $ — $ — $ — $ — $ — $ — $ —
Real estate:
Construction — — — — — — —
Mortgage-residential 384 463 — 385 14 383 9
Mortgage-commercial 2,514 5,292 — 2,555 118 2,716 71
Consumer:
Home equity 61 61 — 62 1 59 1
Other — — — — — — —

With an allowance recorded:
Commercial, financial, agricultural — — — — — — —
Real estate:
Construction — — — — — — —
Mortgage-residential 40 40 1 41 1 40 1
Mortgage-commercial 1,950 1,950 14 1,987 66 1,950 33
Consumer:
Home equity — — — — — — —
Other — — — — — — —

Total:
Commercial, financial, agricultural $ — $ — $ — $ — $ — $ — $ —
Real estate:
Construction — — — — — — —
Mortgage-residential 424 503 1 426 15 423 10
Mortgage-commercial 4,464 7,242 14 4,541 184 4,666 104
Consumer:
Home equity 61 61 — 62 1 59 1
Other — — — — — — —
$ 4,949 $ 7,806 $ 15 $ 5,029 $ 200 $ 5,148 $ 115
(Dollars in thousands) Nine months ended Three months ended
Unpaid Average Interest Average Interest
September 30, 2018 Recorded Principal Related Recorded income Recorded Income
Investment Balance Allowance Investment Recognized Investment Recognized
With no allowance recorded:
Commercial, financial, agricultural $ — $ — $ — $ — $ — $ — $ —
Real estate:
Construction — — — — — — —
Mortgage-residential 198 266 — 202 16 197 2
Mortgage-commercial 3,363 6,158 — 3,753 219 3,627 75
Consumer:
Home equity 31 32 — 35 1 31 —
Other — — — — — — —

With an allowance recorded:
Commercial, financial, agricultural — — — — — — —
Real estate:
Construction — — — — — — —
Mortgage-residential 39 39 1 41 2 39 1
Mortgage-commercial 1,103 1,103 3 1,129 59 1,103 19
Consumer:
Home equity — — — — — — —
Other — — — — — — —

Total:
Commercial, financial, agricultural $ — $ — $ — $ — $ — $ — $ —
Real estate:
Construction — — — — — — —
Mortgage-residential 237 305 1 243 18 236 3
Mortgage-commercial 4,466 7,261 3 4,882 278 4,730 94
Consumer:
Home equity 31 32 — 35 1 31 —
Other — — — — — — —
$ 4,734 $ 7,598 $ 4 $ 5,160 $ 297 $ 4,997 $ 97
18
Note 4—Loans-continued

(Dollars in thousands)

December 31, 2018 Unpaid Average Interest
Recorded Principal Related Recorded Income
Investment Balance Allowance Investment Recognized
With no allowance recorded:
   Commercial $ — $ — $ — $ — $ —
   Real estate:
     Construction — — — — —
     Mortgage-residential 322 371 — 483 9
     Mortgage-commercial 3,577 6,173 — 3,232 128
   Consumer:
     Home Equity 29 30 — 33 2
     Other — — — — —

With an allowance recorded:
   Commercial — — — — —
   Real estate:
     Construction — — — — —
     Mortgage-residential — — — — —
     Mortgage-commercial 453 453 14 380 21
   Consumer:
     Home Equity — — — — —
     Other — — — — —

Total:
   Commercial — — — — —
   Real estate:
     Construction — — — — —
     Mortgage-residential 322 371 — 483 9
     Mortgage-commercial 4,030 6,626 14 3,612 149
   Consumer:
     Home Equity 29 30 — 33 2
     Other — — — — —
$ 4,381 $ 7,027 $ 14 $ 4,128 $ 160
(Dollars in thousands)
December 31, 2018 Recorded
Investment Unpaid
Principal
Balance Related
Allowance Average
Recorded
Investment Interest
Income
Recognized
With no allowance recorded:
Commercial $ — $ — $ — $ — $ —
Real estate:
Construction — — — — —
Mortgage-residential 322 371 — 483 9
Mortgage-commercial 3,577 6,173 — 3,232 128
Consumer:
Home Equity 29 30 — 33 2
Other — — — — —

With an allowance recorded:
Commercial — — — — —
Real estate:
Construction — — — — —
Mortgage-residential — — — — —
Mortgage-commercial 453 453 14 380 21
Consumer:
Home Equity — — — — —
Other — — — — —

Total:
Commercial — — — — —
Real estate:
Construction — — — — —
Mortgage-residential 322 371 — 483 9
Mortgage-commercial 4,030 6,626 14 3,612 149
Consumer:
Home Equity 29 30 — 33 2
Other — — — — —
$ 4,381 $ 7,027 $ 14 $ 4,128 $ 160

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.
1819

Note 4—Loans-continued

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered as pass rated loans. As of ~~June~~September 30, 2019 and December 31, 2018, and based on the most recent analysis performed, the risk category of loans by class of loans is shown in the table below. As of ~~June~~September 30, 2019 and December 31, 2018, no loans were classified as doubtful.

(Dollars in thousands)

June 30, 2019 Special
Pass Mention Substandard Doubtful Total
Commercial, financial & agricultural $ 52,599 $ 42 $ — $ — $ 52,641
Real estate:
   Construction 61,284 — — — 61,284
   Mortgage – residential 48,660 483 784 — 49,927
   Mortgage – commercial 516,154 3,968 4,226 — 524,348
Consumer:
  Home Equity 27,002 1,167 296 — 28,465
  Other 9,998 44 — 10,042
Total $ 715,697 $ 5,704 $ 5,306 $ — $ 726,707
(Dollars in thousands)
September 30, 2019 Pass Special
Mention Substandard Doubtful Total
Commercial, financial & agricultural $ 54,975 $ 194 $ — $ — $ 55,169
Real estate:
Construction 58,737 — — — 58,737
Mortgage - residential 46,404 522 767 — 47,693
Mortgage - commercial 527,551 3,401 3,602 — 534,554
Consumer:
Home Equity 27,651 1,164 288 — 29,103
Other 9,778 40 — — 9,818
Total $ 725,096 $ 5,321 $ 4,657 $ — $ 735,074

(Dollars in thousands)

December 31, 2018 Special
Pass Mention Substandard Doubtful Total
Commercial, financial & agricultural $ 53,709 $ 224 $ — $ — $ 53,933
Real estate:
   Construction 58,440 — — — 58,440
   Mortgage – residential 51,286 633 845 — 52,764
   Mortgage – commercial 505,493 5,176 3,164 — 513,833
Consumer:
  Home Equity 28,071 1,197 315 — 29,583
  Other 9,907 — 2 — 9,909
Total $ 706,906 $ 7,230 $ 4,326 $ — $ 718,462
(Dollars in thousands)
December 31, 2018 Pass Special
Mention Substandard Doubtful Total
Commercial, financial & agricultural $ 53,709 $ 224 $ — $ — $ 53,933
Real estate:
Construction 58,440 — — — 58,440
Mortgage - residential 51,286 633 845 — 52,764
Mortgage - commercial 505,493 5,176 3,164 — 513,833
Consumer:
Home Equity 28,071 1,197 315 — 29,583
Other 9,907 — 2 — 9,909
Total $ 706,906 $ 7,230 $ 4,326 $ — $ 718,462

At ~~June~~September 30, 2019 and December 31, 2018, non-accrual loans totaled ~~$2.7~~$2.3 million and $2.5 million, respectively.

TDRs that are still accruing and included in impaired loans at ~~June~~September 30, 2019 and at December 31, 2018 amounted to $1.9 million and $2.0 ~~million.~~million, respectively. TDRs in non-accrual status at ~~June~~September 30, 2019 and December 31, 2018 amounted to $1.1 million and $1.2 million, respectively.

Loans greater than 90 days delinquent and still accruing interest were $0$33.5 and $31.2 thousand at ~~June~~September 30, 2019 and December 31, 2018, respectively.

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.
1920

Note 4—Loans-continued

A summary of changes in the accretable yield for PCI loans for the three and ~~six~~nine months ended ~~June~~September 30, 2019 and ~~June~~September 30, 2018 follows:

(Dollars in thousands) Three Months
Ended
June 30, 2019 Three Months
Ended
June 30, 2018 Three Months
Ended
September 30,
2019 Three Months
Ended
September 30,
2018

Accretable yield, beginning of period $ 145 $ 12 $ 138 $ (2 )
Additions — — — —
Accretion (7 ) (14 ) (7 ) (8 )
Reclassification of nonaccretable difference due to improvement in expected cash flows — — — —
Other changes, net — — — —
Accretable yield, end of period $ 138 $ (2 ) $ 130 $ (10 )

(Dollars in thousands) Six Months
Ended
June 30, 2019 Six Months
Ended
June 30, 2018

Accretable yield, beginning of period $ 153 $ 22
Additions — —
Accretion (15 ) (24 )
Reclassification of nonaccretable difference due to improvement in expected cash flows — —
Other changes, net — —
Accretable yield, end of period $ 138 $ (2)
(Dollars in thousands) Nine Months
Ended
September 30,
2019 Nine Months
Ended
September 30,
2018

Accretable yield, beginning of period $ 153 $ 22
Additions — —
Accretion (23 ) (32 )
Reclassification of nonaccretable difference due to improvement in expected cash flows — —
Other changes, net — —
Accretable yield, end of period $ 130 $ (10 )

At ~~June~~September 30, 2019 and December 31, 2018, the recorded investment in purchased impaired loans was ~~$110~~$112 thousand and $112 thousand, respectively. The unpaid principal balance was ~~$197~~$193 thousand and $205 thousand at ~~June~~September 30, 2019 and December 31, 2018, respectively. At ~~June~~September 30, 2019 and December 31, 2018, these loans were all secured by commercial real estate.
2021

Note 4—Loans-continued
The following tables are by loan category and present loans past due and on non-accrual status as of ~~June~~September 30, 2019 and December 31, 2018:
(Dollars in thousands) Greater than Greater than
30-59 Days 60-89 Days 90 Days and Total 30-59 Days 60-89 Days 90 Days and Total
June 30, 2019 Past Due Past Due Accruing Nonaccrual Past Due Current Total Loans
September 30, 2019 Past Due Past Due Accruing Nonaccrual Past Due Current Total Loans

Commercial $ 37 $ 4 $ — $ — $ 41 $ 52,600 $ 52,641 $ 33 $ 306 $ — $ 4 $ 343 $ 54,826 $ 55,169
Real estate:
Construction — — — — — 61,284 61,284 — — — — — 58,737 58,737
Mortgage-residential 249 15 — 542 806 49,121 49,927 138 184 — 538 860 46,833 47,693
Mortgage-commercial 339 — — 2,094 2,433 521,915 524,348 2,272 47 — 1,661 3,980 530,574 534,554
Consumer:
Home equity 345 75 — 54 474 27,991 28,465 55 91 33 72 251 28,852 29,103
Other 43 44 — — 87 9,955 10,042 17 44 — — 61 9,757 9,818
$ 1,013 $ 138 $ — $ 2,690 $ 3,841 $ 722,866 $ 726,707 $ 2,515 $ 672 $ 33 $ 2,275 $ 5,495 $ 729,579 $ 735,074

(Dollars in thousands) Greater than
30-59 Days 60-89 Days 90 Days and Total
December 31, 2018 Past Due Past Due Accruing Nonaccrual Past Due Current Total Loans

Commercial $ 18 $ 8 $ — $ — $ 26 $ 53,907 $ 53,933
Real estate:
Construction — — — — — 58,440 58,440
Mortgage-residential 110 163 — 284 557 52,207 52,764
Mortgage-commercial 1,302 — — 2,232 3,534 510,299 513,833
Consumer:
Home equity 146 11 31 29 217 29,366 29,583
Other 14 55 — — 69 9,840 9,909
$ 1,590 $ 237 $ 31 $ 2,545 $ 4,403 $ 714,059 $ 718,462

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~~three and nine-month periods ended ~~June~~September 30, 2019 and ~~June~~September 30, 2018.

During the ~~six-month~~three and nine-month periods ended ~~June~~September 30, 2019 and ~~June~~September 30, 2018, there were no loans determined to be TDRs in the previous twelve months that had payment defaults. Defaulted loans are those loans that are greater than 89 days past due.

In the determination of the allowance for loan losses, all TDRs are reviewed to ensure that one of the three proper valuation methods (fair market value of the collateral, present value of cash flows, or observable market price) is adhered to. All non-accrual loans are written down to their corresponding collateral value. All troubled TDR accruing loans that have a loan balance that exceeds the present value of cash flows will have a specific allocation. All nonaccrual loans are considered impaired. Under ASC 310-10, a loan is impaired when it is probable that the Company will be unable to collect all amounts due including both principal and interest according to the contractual terms of the loan agreement.
22
Note 5—Recently Issued Accounting Pronouncements

In May 2014, the FASB issued guidance (ASU 2014-09) to change the recognition of revenue from contracts with customers. The core principle of the new guidance is that an entity recognize revenue to reflect the transfer of goods and services to customers in an amount equal to the consideration the entity receives or expects to receive. The guidance was effective for the Company as of January 1, 2018. The Company evaluated the overall impact on affected revenue streams and any related contracts, including asset management fees, gains and losses on the sale of real estate, deposit related fees and interchange fees. Based on this evaluation, the Company determined that ASU 2014-09 did not materially change the method in which revenue from impacted revenue streams was previously being recognized. The Company applied the guidance using a modified retrospective approach. This approach requires the application of the new guidance to uncompleted contracts at the date of adoption. Periods prior to the date of adoption were not retrospectively revised as the impact on uncompleted contracts at the date of adoption was not material.
21
~~Note 5—Recently Issued Accounting Pronouncements-continued~~
In January 2016, the FASB amended the Financial Instruments topic of the ASC (ASU 2016-01) to address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The amendments were effective for the Company on January 1, 2018. The guidance affects the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure of financial instruments. The amendments related to equity securities without readily determinable fair values were applied prospectively to equity investments that exist as of the date of adoption of the amendments. ASU 2016-01 requires the use of exit price rather than entrance price in determining the fair value of loans not measured at fair value on a non-recurring basis in the consolidated balance sheets. See Note 6 - Fair Value of Financial Instruments for information regarding the change in the valuation of these loans. The adoption of ASU 2016-01 did not have a material impact on the Company’s financial statements.
In February 2016, the FASB amended the Leases topic of the ASC to revise certain aspects of recognition, measurement, presentation, and disclosure of leasing transactions. The amendments were effective for fiscal years beginning after December 15, 2018 including interim periods within those fiscal years. The Company adopted the guidance using the modified retrospective method and practical expedients for transition. The practical expedients allow the Company to largely account for our existing leases consistent with current guidance except for the incremental balance sheet recognition of leases. The Company evaluated the new guidance and its impact on the Company’s financial statements. Based on leases outstanding at December 31, 2018, the impact of adoption on January 1, 2019 was recording a right-of-use asset and lease liability of ~~$2.8~~$2.9 million. See Note 9 “Leases” to the consolidated financial statements.
In June 2016, the FASB issued guidance to change the accounting for credit losses and modify the impairment model for certain debt securities. The amendments will be effective for the Company for reporting periods beginning after December 15, 2019. Early adoption is permitted for all organizations for periods beginning after December 15, 2018. The Company is currently evaluating the effect that implementation of the new standard will have on its financial position, results of operations, and cash flows. On July 17, 2019, the FASB issued a proposal draft to extend the implementation date for certain smaller reporting companies to include SEC registrants classified as a Smaller Reporting Company. ~~If this proposal is adopted~~On October 16, 2019, the FASB voted to delay the implementation date for SEC registrants classified as a Smaller Reporting Company to fiscal years beginning after December 15, 2022. The FASB has directed its staff to draft an ASU that will change the ~~Company will~~implementation dates, which should be ~~extended~~issued following a formal written ballot by the FASB, which is expected to ~~January 1, 2023.~~take place in November 2019.
In January 2017, the FASB issued guidance to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The amendment to the Business Combinations Topic is intended to address concerns that the existing definition of a business has been applied too broadly and has resulted in many transactions being recorded as business acquisitions that in substance are more akin to asset acquisitions. The guidance was effective for the Company for reporting periods beginning after December 15, 2017. These amendments had no material effect on the Company’s financial statements.
23
Note 5—Recently Issued Accounting Pronouncements-continued
In January 2017, the FASB amended the Goodwill and Other Topic of the ASC to simplify the accounting for goodwill impairment for public business entities and other entities that have goodwill reported in their financial statements and have not elected the private company alternative for the subsequent measurement of goodwill. The amendment removes Step 2 of the goodwill impairment test. Goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The effective date and transition requirements for the technical corrections will be effective for the Company for reporting periods beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company does not expect these amendments to have a material effect on its financial statements.
In March 2017, the FASB amended the requirements in the Receivables—Nonrefundable Fees and Other Costs Topic of the ASC related to the amortization period for certain purchased callable debt securities held at a premium. The amendments shorten the amortization period for the premium to the earliest call date. The amendments became effective for the Company for interim and annual periods beginning after December 15, 2018. The amendments did not have a material impact on the Company’s financial statements.
In ~~November 2017,~~February 2018, the FASB ~~updated~~amended the Income ~~Statement and Revenue from Contracts with Customers Topics~~Statement—Reporting Comprehensive Income Topic of the ~~ASC.~~Accounting Standards Codification. The amendments ~~incorporate into~~allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the ~~ASC recent U.S. Securities~~Tax Cuts and ~~Exchange Commission (“SEC”) guidance related to revenue recognition.~~Jobs Act. The amendments ~~were~~became effective ~~upon issuance~~for the Company for interim and annual periods beginning after December 15, 2018. The amendments did not have a material ~~effect on the Company’s financial statements.~~
22
~~Note 5—Recently Issued Accounting Pronouncements-continued~~
In March 2018, the FASB updated the Debt Securities and the Regulated Operations Topics of the ASC. The amendments incorporate into the ASC recent SEC guidance which was issued in order to make the relevant interpretive guidance consistent with current authoritative accounting and auditing guidance and SEC rules and regulations. The amendments were effective upon issuance and did not have a material effectimpact on the Company’s financial statements.
In July 2018, the FASB amended the Leases Topic of the ASC to make narrow amendments to clarify how to apply certain aspects of the new lease standard. Additionally, amendments were made to give entities another option for transition and to provide lessors with a practical expedient. The amendments became effective for reporting periods beginning after December 15, 2018. The amendments did not have a material impact on the Company’s financial statements.
In August 2018, the FASB amended the Fair Value Measurement Topic of the ASC. The amendments remove, modify, and add certain fair value disclosure requirements based on the concepts in the FASB Concepts Statement, Conceptual Framework for Financial Reporting—Chapter 8: Notes to Financial Statements. The amendments are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted. An entity is permitted to early adopt any removed or modified disclosures upon issuance of this ASU and delay adoption of the additional disclosures until their effective date. The Company does not expect these amendments to have a material effect on its financial statements.
In August 2018, the FASB amended the Intangibles—Goodwill and Other Topic of the ASC to align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The amendments will be effective for the Company for fiscal years beginning after December 15, 2019. Early adoption is permitted. The Company does not expect these amendments to have a material effect on its financial statements.
In March 2019, the FASB issued guidance to address concerns companies had raised about an accounting exception they would lose when assessing the fair value of underlying assets under the leases standard and clarify that lessees and lessors are exempt from a certain interim disclosure requirement associated with adopting the new standard. The amendments will be effective for the Company for reporting periods beginning after December 15, 2019. Early adoption is permitted. The Company does not expect these amendments to have a material effect on its financial statements.
24
Note 5—Recently Issued Accounting Pronouncements-continued
In April 2019, the FASB issued guidance that clarifies and improves areas of guidance related to the recently issued standards on credit losses, hedging, and recognition and measurement of financial instruments. The amendments related to credit losses will be effective for the Company for reporting periods beginning after December 15, 2019. The amendments related to hedging will be effective for the Company for interim and annual periods beginning after December 15, 2018. The amendments related to recognition and measurement of financial instruments will be effective for the Company for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company does not expect these amendments to have a material effect on its financial statements.
In July 2019, the FASB updated various Topics of the ASC to align the guidance in various SEC sections of the ASC with the requirements of certain SEC final rules. The amendments were effective upon issuance and did not have a material effect on the 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.
23
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. 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.
25
Note 6—Fair Value of Financial Instruments-continued

Investment Securities -Measurement is on a recurring basis based upon quoted market prices, if available. If quoted market prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for prepayment assumptions, projected credit losses, and liquidity. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, or by dealers or brokers in active over-the-counter markets. Level 2 securities include MBSs issued both by government sponsored enterprises and PLMBSs. Generally, these fair values are priced from established pricing models. Level 3 securities include corporate debt obligations and asset–backed securities that are less liquid or for which there is an inactive market.

Loans Held for Sale- The Company originates fixed rate residential loans on a servicing released basis in the secondary market. Loans closed but not yet settled with an investor are carried in the Company’s loans held for sale portfolio. These loans are fixed rate residential loans that have been originated in the Company’s name and have closed. Virtually all of these loans have commitments to be purchased by investors at a locked in price with the investors on the same day that the loan was locked in with the company’s customers. Therefore, these loans present very little market risk for the Company and are classified as Level 2. The carrying amount of these loans approximates fair value.

Loans - The fair value of loans at ~~June~~September 30, 2019 and December 31, 2018 were measured using an exit price methodology, which includes an entry price notion that uses a discounted cash flow method to calculate the present future value of expected future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. The exit price uses the entry price notion but also incorporates other assumptions such as market factors illiquidity risk and enhanced credit risk. These added assumptions are intended to approximate the fair value that a market participant would realize in a hypothetical orderly transaction. In estimating the fair value, the Company’s portfolio is segmented using the six categories in Note 4 – Loans. Loans which are deemed to be impaired are primarily valued on a nonrecurring basis at the fair value of the underlying real estate collateral. Prior to adoption of ASU 2016-01 loans other than impaired loans were classified as a Level 2 measurement, as of ~~June~~September 30, 2019 all loans are classified as a Level 3 measurement.
24
~~Note 6—Fair Value of Financial Instruments-continued~~

Other Real Estate Owned (“OREO”)-OREO is carried at the lower of carrying value or fair value on a non-recurring basis. Fair value is based upon independent appraisals or management’s estimation of the collateral and is considered a Level 3 measurement.

Accrued Interest Receivable - The fair value approximates the carrying value and is classified as Level 1.

Deposits-The fair value of demand deposits, savings accounts, and money market accounts is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposits is estimated by discounting the future cash flows using rates currently offered for deposits of similar remaining maturities. Deposits are classified as Level 2.

Federal Home Loan Bank Advances- Fair value is estimated based on discounted cash flows using current market rates for borrowings with similar terms and are classified as Level 2.

Short Term Borrowings- The carrying value of short term borrowings (securities sold under agreements to repurchase and demand notes to the Treasury) approximates fair value. These are classified as Level 2.

Junior Subordinated Debentures -The fair value of junior subordinated debentures is estimated by using discounted cash flow analyses based on incremental borrowing rates for similar types of instruments. These are classified as Level 2.

Accrued Interest Payable-The fair value approximates the carrying value and is classified as Level 1.

Commitments to Extend Credit - The fair value of these commitments is immaterial because their underlying interest rates approximate market.
26
Note 6—Fair Value of Financial Instruments-continued

The carrying amount and estimated fair value by classification level of the Company’s financial instruments as of ~~June~~September 30, 2019 and December 31, 2018 are as follows:

June 30, 2019 September 30, 2019
Fair Value Fair Value
(Dollars in thousands) Carrying
Amount Total Level 1 Level 2 Level 3 Carrying
Amount Total Level 1 Level 2 Level 3
Financial Assets:
Cash and short term investments $ 39,623 $ 39,623 $ 39,623 $ — $ — $ 33,235 $ 33,235 $ 33,235 $ — $ —
Available-for-sale securities 250,310 250,310 9 250,301 — 265,068 265,068 9 265,059 —
Other investments, at cost 1,992 1,992 — — 1,992 1,992 1,992 — — 1,992
Loans held for sale 8,730 8,730 — 8,730 — 10,775 10,775 — 10,775 —
Net loans receivable 720,345 705,837 — — 705,837 728,514 723,160 — — 723,160
Accrued interest 3,588 3,588 3,588 — — 3,228 3,228 3,228 — —
Financial liabilities:
Non-interest bearing demand $ 263,833 $ 263,833 $ — $ 263,833 $ — $ 268,693 $ 268,693 $ — $ 268,693 $ —
Interest bearing demand deposits and money market accounts 396,973 396,973 — 396,973 — 404,336 404,336 — 404,336 —
Savings 101,227 101,227 — 101,227 — 100,895 100,895 — 100,895 —
Time deposits 175,358 175,828 — 175,828 — 174,903 175,594 — 175,594 —
Total deposits 937,391 937,861 — 937,861 — 948,827 937,861 — 937,861 —
Federal Home Loan Bank Advances 221 221 — 221 — 216 216 — 216 —
Short term borrowings 33,889 33,889 — 33,889 — 34,321 34,321 — 34,321 —
Junior subordinated debentures 14,964 13,275 — 13,275 — 14,964 13,180 — 13,180 —
Accrued interest payable 949 949 949 — — 1,059 1,059 1,059 — —
December 31, 2018
Fair Value
(Dollars in thousands) Carrying
Amount Total Level 1 Level 2 Level 3
Financial Assets:
Cash and short term investments $ 32,268 $ 32,268 $ 32,268 $ — $ —
Held-to-maturity securities 16,174 16,184 — 16,184 —
Available-for-sale securities 237,893 237,893 1,642 235,560 691
Other investments, at cost 1,955 1,955 — — 1,955
Loans held for sale 3,223 3,223 — 3,223 —
Net loans receivable 712,199 697,432 — — 697,432
Accrued interest 3,579 3,579 3,579 — —
Financial liabilities:
Non-interest bearing demand $ 244,686 $ 244,686 $ — $ 244,686 $ —
Interest bearing demand deposits and money market accounts 393,473 393,473 — 393,473 —
Savings 108,368 108,368 — 108,368 —
Time deposits 178,996 177,797 — 177,797 —
Total deposits 925,523 925,849 — 925,849 —
Federal Home Loan Bank Advances 231 231 — 231 —
Short term borrowings 28,022 28,022 — 28,022 —
Junior subordinated debentures 14,964 14,178 — 14,178 —
Accrued interest payable 861 861 861 — —
27
Note 6—Fair Value of Financial Instruments-continued
December 31, 2018
Fair Value
(Dollars in thousands) Carrying
Amount Total Level 1 Level 2 Level 3
Financial Assets:
Cash and short term investments $ 32,268 $ 32,268 $ 32,268 $ — $ —
Held-to-maturity securities 16,174 16,184 — 16,184 —
Available-for-sale securities 237,893 237,893 1,642 235,560 691
Other investments, at cost 1,955 1,955 — — 1,955
Loans held for sale 3,223 3,223 — 3,223 —
Net loans receivable 712,199 697,432 — — 697,432
Accrued interest 3,579 3,579 3,579 — —
Financial liabilities:
Non-interest bearing demand $ 244,686 $ 244,686 $ — $ 244,686 $ —
Interest bearing demand deposits and money market accounts 393,473 393,473 — 393,473 —
Savings 108,368 108,368 — 108,368 —
Time deposits 178,996 177,797 — 177,797 —
Total deposits 925,523 925,849 — 925,849 —
Federal Home Loan Bank Advances 231 231 — 231 —
Short term borrowings 28,022 28,022 — 28,022 —
Junior subordinated debentures 14,964 14,178 — 14,178 —
Accrued interest payable 861 861 861 — —

The following tables summarize quantitative disclosures about the fair value for each category of assets carried at fair value as of ~~June~~September 30, 2019 and December 31, 2018 that are measured on a recurring basis. There were no liabilities carried at fair value as of ~~June~~September 30, 2019 or December 31, 2018 that are measured on a recurring basis.

(Dollars in thousands)
Description June 30,
2019 Quoted Prices
in Active
Markets for
Identical Assets
(Level 1) Significant
Other
Observable
Inputs
(Level 2) Significant
Unobservable
Inputs
(Level 3) September 30,
2019 Quoted Prices
in Active
Markets for
Identical Assets
(Level 1) Significant
Other
Observable
Inputs
(Level 2) Significant
Unobservable
Inputs
(Level 3)
Available for sale securities
US Treasury Securities $ 9,177 $ — $ 9,177 $ — $ 7,192 $ — $ 7,192 $ —
Government sponsored enterprises 1,122 — 1,122 — 1,123 — 1,123 —
Mortgage-backed securities 148,172 — 148,172 — 168,041 — 168,041 —
Small Business Administration pools 51,907 — 51,907 — 47,653 — 47,653 —
State and local government 39,913 — 39,913 — 41,040 — 41,040 —
Corporate and other securities 19 9 10 — 19 9 10 —
250,310 9 250,301 — 265,068 9 265,059 —
Loans held for sale 8,730 — 8,730 — 10,775 — 10,775 —
Total $ 259,040 $ 9 $ 259,031 $ — $ 275,843 $ 9 $ 275,834 $ —
(Dollars in thousands)
Description December 31,
2018 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 $ 15,457 $ — $ 15,457 $ —
Government sponsored enterprises 1,100 — 1,100 —
Mortgage-backed securities 115,475 — 114,784 691
Small Business Administration securities 55,336 1,633 53,703 —
State and local government 50,506 — 50,506 —
Corporate and other securities 19 9 10 —
237,893 1,642 235,560 691
Loans held for sale 3,223 — 3,223 —
Total $ 241,116 $ 1,642 $ 238,783 $ 691
28
Note 6—Fair Value of Financial Instruments-continued

~~(Dollars in thousands)~~
Description December 31,
2018 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 $ 15,457 $ — $ 15,457 $ —
Government sponsored enterprises 1,100 — 1,100 —
Mortgage-backed securities 115,475 — 114,784 691
Small Business Administration securities 55,336 1,633 53,703 —
State and local government 50,506 — 50,506 —
Corporate and other securities 19 9 10 —
237,893 1,642 235,560 691
Loans held for sale 3,223 — 3,223 —
         Total $ 241,116 $ 1,642 $ 238,783 $ 691
The following tables summarize quantitative disclosures about the fair value for each category of assets carried at fair value as of ~~June~~September 30, 2019 and December 31, 2018 that are measured on a non-recurring basis. There were no Level 3 financial instruments as of ~~June~~September 30, 2019 and ~~June~~September 30, 2018 measured on a recurring basis.

(Dollars in thousands)
Description June 30,
2019 Quoted Prices
in Active
Markets for
Identical Assets
(Level 1) Significant
Other
Observable
Inputs
(Level 2) Significant
Unobservable
Inputs
(Level 3) September 30,
2019 Quoted Prices
in Active
Markets for
Identical Assets
(Level 1) Significant
Other
Observable
Inputs
(Level 2) Significant
Unobservable
Inputs
(Level 3)
Impaired loans:
Commercial $ — $ — $ — $ — $ — $ — $ — $ —
Real estate:
Mortgage-residential 542 — — 542 538 — — 538
Mortgage-commercial 4,047 — — 4,047 3,531 — — 3,531
Consumer:
Home equity 54 — — 54 72 — — 72
Other — — — — — — — —
Total impaired 4,643 — — 4,643 4,141 — — 4,141
Other real estate owned: ��
Construction 828 — — 828 828 — — 828
Mortgage-residential 584 — — 584 584 — — 584
Total other real estate owned 1,412 — — 1,412 1,412 — — 1,412
Total $ 6,055 $ — $ — $ 6,055 $ 5,553 $ — $ — $ 5,553
(Dollars in thousands)
Description December 31,
2018 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 322 — — 322
Mortgage-commercial 4,016 — — 4,016
Consumer:
Home equity 29 — — 29
Other — — — —
Total impaired 4,367 — — 4,367
Other real estate owned:
Construction 828 — — 828
Mortgage-residential 632 — — 632
Total other real estate owned 1,460 — — 1,460
Total $ 6,057 $ — $ — $ 6,057
Note 6—Fair Value of Financial Instruments-continued
(Dollars in thousands)
Description December 31,
2018 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 322 — — 322
     Mortgage-commercial 4,016 — — 4,016
   Consumer:
     Home equity 29 — — 29
     Other — — — —
       Total impaired 4,367 — — 4,367
Other real estate owned:
   Construction 828 — — 828
   Mortgage-residential 632 — — 632
       Total other real estate owned 1,460 — — 1,460
Total $ 6,057 $ — $ — $ 6,057

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 ~~$4.6~~$4.1 million and $4.4 million as of ~~June~~September 30, 2019 and December 31, 2018, respectively.
28

~~Note 6—Fair Value of Financial Instruments-continued~~
For Level 3 assets and liabilities measured at fair value on a non-recurring basis as of ~~June~~September 30, 2019 and December 31, 2018, the significant unobservable inputs used in the fair value measurements were as follows:
~~(Dollars in thousands)~~ ~~Fair Value~~
~~as of~~
~~June 30,~~
~~2019~~ ~~Valuation Technique~~ ~~Significant~~
~~Observable Inputs~~ ~~Significant~~
~~Unobservable Inputs~~
~~OREO~~ ~~$    1,412~~ ~~Appraisal Value/Comparison Sales/Other estimates~~ ~~Appraisals and or sales of comparable properties~~ ~~Appraisals discounted 6% to 16% for sales commissions and other holding cost~~
~~Impaired loans~~ ~~$    4,631~~ ~~Appraisal Value~~ ~~Appraisals and or sales of comparable properties~~ ~~Appraisals discounted 6% to 16% for sales commissions and other holding cost~~
~~(Dollars in thousands)~~ ~~Fair Value~~
~~as of~~
~~December 31,~~
~~2018~~ ~~Valuation Technique~~ ~~Significant~~
~~Observable Inputs~~ ~~Significant~~
~~Unobservable Inputs~~
~~OREO~~ ~~$    1,460~~ ~~Appraisal Value/Comparison Sales/Other estimates~~ ~~Appraisals and or sales of comparable properties~~ ~~Appraisals discounted 6% to 16% for sales commissions and other holding cost~~
~~Impaired loans~~ ~~$    4,367~~ ~~Appraisal Value~~ ~~Appraisals and or sales of comparable properties~~ ~~Appraisals discounted 6% to 16% for sales commissions and other holding cost~~
(Dollars in thousands) Fair Value
as of
September 30,
2019 Valuation Technique Significant
Observable Inputs Significant
Unobservable Inputs
OREO $ 1,412 Appraisal Value/Comparison Sales/Other estimates Appraisals and or sales of comparable properties Appraisals discounted 6% to 16% for sales commissions and other holding cost
Impaired loans $ 4,141 Appraisal Value Appraisals and or sales of comparable properties Appraisals discounted 6% to 16% for sales commissions and other holding cost

(Dollars in thousands) Fair Value
as of
December 31,
2018 Valuation Technique Significant
Observable Inputs Significant
Unobservable Inputs
OREO $ 1,460 Appraisal Value/Comparison Sales/Other estimates Appraisals and or sales of comparable properties Appraisals discounted 6% to 16% for sales commissions and other holding cost

Impaired loans $ 4,367 Appraisal Value Appraisals and or sales of comparable properties Appraisals discounted 6% to 16% for sales commissions and other holding cost

Note 7—Deposits

The Company’s total deposits are comprised of the following at the dates indicated:

June 30, December 31, September 30, December 31,
(Dollars in thousands) 2019 2018 2019 2018
Non-interest bearing demand deposits $ 263,833 $ 244,686 $ 268,693 $ 244,686
Interest bearing demand deposits and money market accounts 396,973 393,473 404,336 393,473
Savings 101,227 108,369 100,895 108,368
Time deposits 175,358 178,995 174,903 178,996
Total deposits $ 937,391 $ 925,523 $ 948,827 $ 925,523

As of ~~June~~September 30, 2019 and December 31, 2018, the Company had time deposits greater than $250,000 of ~~$30.7~~$31.1 million and $27.8 million, respectively.
2930

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 First Community Bank (the “Bank”).

(Dollars in thousands) Commercial Investment
Six months ended June 30, 2019 and Retail Mortgage advisory and
Banking Banking non-deposit Corporate Eliminations Consolidated

Dividend and Interest Income $ 20,480 $ 488 $ — $ 3,042 $ (3,030 ) $ 20,980
Interest expense 2,449 — — 395 — 2,844
Net interest income $ 18,031 $ 488 $ — $ 2,647 $ (3,030 ) $ 18,136
Provision for loan losses 114 — — — — 114
Noninterest income 2,686 2,082 927 — — 5,695
Noninterest expense 14,170 1,755 862 176 — 16,963
Net income before taxes $ 6,433 $ 815 $ 65 $ 2,471 $ (3,030 ) $ 6,754
Income tax provision (benefit) 1,517 — — (139 ) — 1,378
Net income (loss) $ 4,916 $ 815 $ 65 $ 2,610 $ (3,030 ) $ 5,376
Nine months ended September 30, 2019 Commercial Investment
(Dollars in thousands) Commercial Investment and Retail Mortgage advisory and
Six months ended June 30, 2018 and Retail Mortgage advisory and
Banking Banking non-deposit Corporate Eliminations Consolidated Banking Banking non-deposit Corporate Eliminations Consolidated

Dividend and Interest Income $ 18,731 $ 408 $ — $ 1,831 $ (1,820 ) $ 19,150 $ 31,081 $ 745 $ — $ 6,077 $ (6,059 ) $ 31,844
Interest expense 1,337 — — 340 — 1,677 3,772 — — 583 — 4,355
Net interest income $ 17,394 $ 408 $ — $ 1,491 $ (1,820 ) $ 17,473 $ 27,309 $ 745 $ — $ 5,494 $ (6,059 ) $ 27,489
Provision for loan losses 231 — — — — 231 139 — — — — 139
Noninterest income 2,791 1,967 784 — — 5,542 4,039 3,333 1,436 — — 8,808
Noninterest expense 13,310 1,577 723 209 — 15,819 21,416 2,754 1,302 281 — 25,753
Net income before taxes $ 6,644 $ 798 $ 61 $ 1,282 $ (1,820 ) $ 6,965 $ 9,793 $ 1,324 $ 134 $ 5,213 $ (6,059 ) $ 10,405
Income tax provision (benefit) 1,382 — — (127 ) — 1,255 2,330 — — (199 ) — 2,131
Net income (loss) $ 5,262 $ 798 $ 61 $ 1,409 $ (1,820 ) $ 5,710 $ 7,463 $ 1,324 $ 134 $ 5,412 $ (6,059 ) $ 8,274

Nine months ended September 30, 2018 Commercial Investment
(Dollars in thousands) and Retail Mortgage advisory and
Banking Banking non-deposit Corporate Eliminations Consolidated

Dividend and Interest Income $ 28,513 $ 622 $ — $ 2,779 $ (2,779 ) $ 29,135
Interest expense 2,251 — — 528 — 2,779
Net interest income $ 26,262 $ 622 $ — $ 2,251 $ (2,779 ) $ 26,356
Provision for loan losses 252 — — — — 252
Noninterest income 4,051 3,126 1,207 — — 8,384
Noninterest expense 20,105 2,515 1,047 286 — 23,953
Net income before taxes $ 9,956 $ 1,233 $ 160 $ 1,965 $ (2,779 ) $ 10,535
Income tax provision (benefit) 2,173 — — (181 ) — 1,992
Net income $ 7,783 $ 1,233 $ 160 $ 2,146 $ (2,779 ) $ 8,543
3031

Note 8—Reportable Segments-continued
Three months ended September 30, 2019 Commercial Investment
(Dollars in thousands) Commercial Investment and Retail Mortgage advisory and
Three months ended June 30, 2019 and Retail Mortgage advisory and
Banking Banking non-deposit Corporate Eliminations Consolidated Banking Banking non-deposit Corporate Eliminations Consolidated

Dividend and Interest Income $ 10,355 $ 251 $ — $ 2,025 $ (2,025 ) 10,606 $ 10,600 $ 257 $ — $ 3,036 $ (3,029 ) 10,864
Interest expense 1,293 — — 197 — 1,490 1,322 — — 189 — 1,511
Net interest income $ 9,062 $ 251 $ — $ 1,828 $ (2,025 ) $ 9,116 $ 9,278 $ 257 $ — $ 2,847 $ (3,029 ) $ 9,353
Provision for loan losses 9 — — — — 9 25 — — — — 25
Noninterest income 1,458 1,238 490 — — 3,186 1,353 1,251 509 — — 3,113
Noninterest expense 7,146 951 447 96 — 8,640 7,246 999 440 105 — 8,790
Net income before taxes $ 3,365 $ 538 $ 43 $ 1,732 $ (2,025 ) $ 3,653 $ 3,360 $ 509 $ 69 $ 2,742 $ (3,029 ) $ 3,651
Income tax provision (benefit) 832 — — (60 ) — 772 813 — — (60 ) — 753
Net income $ 2,533 $ 538 $ 43 $ 1,792 $ (2,025 ) $ 2,881 $ 2,547 $ 509 $ 69 $ 2,802 $ (3,029 ) $ 2,898

Three months ended September 30, 2018 Commercial Investment
(Dollars in thousands) and Retail Mortgage advisory and
Banking Banking non-deposit Corporate Eliminations Consolidated

Dividend and Interest Income $ 9,772 $ 213 $ — $ 947 $ (947 ) 9,985
Interest expense 915 — — 187 — 1,102
Net interest income $ 8,857 $ 213 $ — $ 760 $ (947 ) $ 8,883
Provision for loan losses 21 — — — — 21
Noninterest income 1,260 1,159 423 — — 2,842
Noninterest expense 6,796 937 324 77 — 8,134
Net income before taxes $ 3,300 $ 435 $ 99 $ 683 $ (947 ) $ 3,570
Income tax provision (benefit) 791 — — (54 ) — 737
Net income $ 2,509 $ 435 $ 99 $ 737 $ (947 ) $ 2,833

Commercial Investment
(Dollars in thousands) and Retail Mortgage advisory and
Banking Banking non-deposit Corporate Eliminations Consolidated

Total Assets as of September 30, 2019 $ 1,102,804 $ 23,638 $ 2 $ 127,864 $ (124,318 ) $ 1,129,990

Total Assets as of December 31, 2018 $ 1,074,838 $ 16,078 $ 9 $ 129,992 $ (129,322 ) $ 1,091,595
(Dollars in thousands) Commercial Investment
Three months ended June 30, 2018 and Retail Mortgage advisory and
Banking Banking non-deposit Corporate Eliminations Consolidated

Dividend and Interest Income $ 9,602 $ 211 $ — $ 922 $ (916 ) $ 9,819
Interest expense 698 — — 182 — 880
Net interest income $ 8,904 $ 211 $ — $ 740 $ (916 ) $ 8,939
Provision for loan losses 29 — — — — 29
Noninterest income 1,494 1,016 401 — — 2,911
Noninterest expense 6,900 823 382 120 — 8,225
Net income before taxes $ 3,469 $ 404 $ 19 $ 620 $ (916 ) $ 3,596
Income tax provision (benefit) 657 — — (62 ) — 595
Net income $ 2,812 $ 404 $ 19 $ 682 $ (916 ) $ 3,001
Commercial Investment
(Dollars in thousands) and Retail Mortgage advisory and
Banking Banking non-deposit Corporate Eliminations Consolidated

Total Assets as of June 30, 2019 $ 1,095,563 $ 19,703 $ 4 $ 128,298 $ (127,600 ) $ 1,115,968

Total Assets as of December 31, 2018 $ 1,074,838 $ 16,078 $ 9 $ 129,992 $ (129,322 ) $ 1,091,595
3132

Note 9—Leases

Effective January 1, 2019, the Company adopted ASC 842 “Leases”. Currently, the Company has operating leases on ~~two~~three of its facilities that are accounted for under this standard. As a result of this standard, the Company recognized a right-of-use asset and a lease liability of ~~$2.8~~$3.3 million, respectively. During the ~~six-month~~nine-month period ended ~~June~~September 30, 2019, the Company made cash payments in the amount of ~~$98.0~~$147.3 thousand for operating leases and the lease liability was reduced by ~~$30.7~~$51.0 thousand. The lease expense recognized during the ~~three-~~three and ~~six-month~~nine-month periods ended ~~June~~September 30, 2019 amounted to ~~$58.1~~$62.1 thousand and ~~$116.3~~$178.8 thousand, respectively. The following table is a maturity analysis of the operating lease liabilities. The weighted average remaining lease term as of ~~June~~September 30, 2019 is ~~18.63~~16.76 years and the weighted average discount rate used is ~~4.83%~~4.41%.

(Dollars in thousands) Liability
Year Cash Lease Expense Reduction
2019 $ 196 $ 135 $ 61
2020 200 133 67
2021 204 129 75
2022 208 125 83
2023 212 121 91
Thereafter 3,471 994 2,477
Total $ 4,492 $ 1,638 $ 2,854
(Dollars in thousands) Liability
Year Cash Lease Expense Reduction
2019 $ 208 $ 133 $ 24
2020 292 140 152
2021 298 133 165
2022 303 126 177
2023 309 118 191
Thereafter 3,481 900 2,582
Total $ 4,892 $ 1,550 $ 3,291

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.

In May 2019, our Board of Directors approved a stock repurchase plan whereby we could repurchase up to 300,000 shares of our common stock. As of June 30, 2019, we have repurchased 185,361 shares at an average stock price of $18.41 per share pursuant to the plan. During the month of July 2019, we have repurchased the remaining 114,639 shares available under the plan to be repurchased. The 300,000 shares were repurchased for an overall average stock price of $18.79 per share.
Management has reviewed events occurring through the date the financial statements were available to be issued and have determined that no additional subsequent events occurred requiring accrual or disclosure.
3233

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Cautionary Note Regarding Any Forward-Looking Statements

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,” “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, 2018 as filed with the SEC on March 14, 2019 and the following:
· credit losses as a result of, among other potential factors, declining real estate values, increasing interest rates, increasing unemployment, 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 or write-down assets;
· 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;
· merger and merger integration risk, including potential customer loss, higher than expected costs, loss of key employees, and business disruption associated with completed combinations, and including the potential inability to identify and successfully negotiate, complete and integrate additional potential combinations with merger or acquisition partners or to realize the benefits and cost savings sought from, and acceptably limit unexpected liabilities associated with, any business combinations;
· 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 conditions or the legislative or regulatory environment, including governmental initiatives affecting the financial services industry;
· risks associated with actual or potential litigation or investigations by customers, regulatory agencies or others;
· 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;
· increased cybersecurity risk, including potential business disruptions or financial losses;
· changes in deposit flows;
· changes in technology;
33

· our current and future products, services, applications and functionality and plans to promote them;
· changes in monetary and tax policies;
· changes in accounting standards, policies, estimates, practices and procedures;
· 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 attract and retain key personnel;
· our ability to retain our existing clients, including our deposit relationships;
· adverse changes in asset quality and resulting credit risk-related losses and expenses;
· loss of consumer confidence and economic disruptions resulting from terrorist activities;
· disruptions due to flooding, severe weather or other natural disasters; and
· other risks and uncertainties detailed from time to time in our 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, 2018. 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.
Overview
The following discussion describes our results of operations for the ~~six~~nine months and three months ended ~~June~~September 30, 2019 as compared to the ~~six~~nine months and three months ended ~~June~~September 30, 2018 and also analyzes our financial condition as of ~~June~~September 30, 2019 as compared to December 31, 2018. 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. Another key measure is the spread between the yield we earn on these interest-earning assets and the rate we pay on our interest-bearing liabilities.
35
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.
34
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.

Critical Accounting Policies

We have adopted various accounting policies that govern the application of accounting principles generally accepted in the United States and with general practices within the banking industry in the preparation of our financial statements. Our significant accounting policies are described in the footnotes to our unaudited consolidated financial statements as of ~~June~~September 30, 2019 and our notes included in the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2018 as filed with the SEC on March 14, 2019.

Certain accounting policies involve significant judgments and assumptions by us that have a material impact on the carrying value of certain assets and liabilities. We consider these accounting policies to be critical accounting policies. The judgment and assumptions we use are based on historical experience and other factors, which we believe to be reasonable under the circumstances. Because of the nature of the judgment and assumptions we make, actual results could differ from these judgments and estimates that could have a material impact on the carrying values of our assets and liabilities and our results of operations.

Allowance for Loan Losses

We believe the allowance for loan losses is the critical accounting policy that requires the most significant judgment and estimates used in preparation of our consolidated financial statements. Some of the more critical judgments supporting the amount of our allowance for loan losses include judgments about the credit worthiness of borrowers, the estimated value of the underlying collateral, the assumptions about cash flow, determination of loss factors for estimating credit losses, the impact of current events, and conditions, and other factors impacting the level of probable inherent losses. Under different conditions or using different assumptions, the actual amount of credit losses incurred by us may be different from management’s estimates provided in our consolidated financial statements. Refer to the portion of this discussion that addresses our allowance for loan losses for a more complete discussion of our processes and methodology for determining our allowance for loan losses.

Goodwill and Other Intangibles

Goodwill represents the excess of the purchase price over the sum of the estimated fair values of the tangible and identifiable intangible assets acquired less the estimated fair value of the liabilities assumed. Goodwill has an indefinite useful life and is evaluated for impairment annually or more frequently if events and circumstances indicate that the asset might be impaired. An impairment loss is recognized to the extent that the carrying amount exceeds the asset’s fair value. Qualitative factors are assessed to first determine if it is more likely than not (more than 50%) that the carrying value of goodwill is less than fair value. These qualitative factors include but are not limited to overall deterioration in general economic conditions, industry and market conditions, and overall financial performance. If determined that it is more likely than not that there has been a deterioration in the fair value of the carrying value than the first of a two-step process would be performed. The first step, used to identify potential impairment, involves comparing each reporting unit’s estimated fair value to its carrying value, including goodwill. If the estimated fair value of a reporting unit exceeds its carrying value, goodwill is considered not to be impaired. If the carrying value exceeds estimated fair value, there is an indication of potential impairment and the second step is performed to measure the amount of impairment.
36
If required, the second step involves calculating an implied fair value of goodwill for each reporting unit for which the first step indicated impairment. The implied fair value of goodwill is determined in a manner similar to the amount of goodwill calculated in a business combination, by measuring the excess of the estimated fair value of the reporting unit, as determined in the first step, over the aggregate estimated fair values of the individual assets, liabilities and identifiable intangibles as if the reporting unit was being acquired in a business combination. If the implied fair value of goodwill exceeds the carrying value of goodwill assigned to the reporting unit, there is no impairment. If the carrying value of goodwill assigned to a reporting unit exceeds the implied fair value of the goodwill, an impairment charge is recorded for the excess. An impairment loss cannot exceed the carrying value of goodwill assigned to a reporting unit, and the loss establishes a new basis in the goodwill. Subsequent reversal of goodwill impairment losses is not permitted. Management has determined that the Company has one reporting unit.

Core deposit intangibles represent the estimated value of long-term deposit relationships acquired in merger or acquisition transactions. These costs are amortized over the estimated useful lives of the deposit accounts acquired on a method that we believe reasonably approximates the anticipated benefit stream from the accounts. The estimated useful lives are periodically reviewed for reasonableness.
35
Income Taxes and Deferred Tax Assets and Liabilities

Income taxes are provided for the tax effects of the transactions reported in our consolidated financial statements and consist of taxes currently due plus deferred taxes related to differences between the tax basis and accounting basis of certain assets and liabilities, including available-for-sale securities, allowance for loan losses, write downs of OREO properties, accumulated depreciation, net operating loss carry forwards, accretion income, deferred compensation, intangible assets, and pension plan and post-retirement benefits. The deferred tax assets and liabilities represent the future tax return consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. Deferred tax assets and liabilities are reflected at income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. A valuation allowance is recorded when it is “more likely than not” that a deferred tax asset will not be realized. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. We file a consolidated federal income tax return for the Bank. At ~~June~~September 30, 2019 and December 31, 2018, we were in a net deferred tax asset position.

Other-Than-Temporary Impairment

We evaluate securities for other-than-temporary impairment at least on a quarterly basis. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) the outlook for receiving the contractual cash flows of the investments, (4) the anticipated outlook for changes in the general level of interest rates, and (5) our intent and ability to retain our investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value or for a debt security whether it is more-likely-than-not that the Company will be required to sell the debt security prior to recovering its fair value (See Note 3 to the Consolidated Financial Statements).

Business Combinations, Method of Accounting for Loans Acquired

We account for acquisitions under FASB ASC Topic 805,Business Combinations, which requires the use of the acquisition method of accounting. All identifiable assets acquired, including loans, are recorded at fair value. No allowance for loan losses related to the acquired loans is recorded on the acquisition date because the fair value of the loans acquired incorporates assumptions regarding credit risk.

Acquired credit-impaired loans are accounted for under the accounting guidance for loans and debt securities acquired with deteriorated credit quality, found in FASB ASC Topic 310-30,Receivables—Loans and Debt Securities Acquired with Deteriorated Credit Qualityand 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.
37
Comparison of Results of Operations for ~~Six~~Nine Months Ended ~~June~~September 30, 2019 to the ~~Six~~Nine Months Ended ~~June~~September 30, 2018
Net Income
Our net income for the ~~six~~nine months ended ~~June~~September 30, 2019 was ~~$5.4~~$8.3 million or ~~$0.70~~$1.08 diluted earnings per common share, as compared to ~~$5.7~~$8.5 million or ~~$0.74~~$1.11 diluted earnings per common share for the ~~six~~nine months ended ~~June~~September 30, 2018. Net interest income increased ~~$663 thousand~~$1.1 million for the ~~six~~nine months ended ~~June~~September 30, 2019 as compared to the same period in 2018. This increase is primarily a result of ~~an increase in~~a higher level of average earning assets in the first ~~half~~nine months of 2019 as compared to the same period in ~~2018.~~2018 as well as a four basis point increase in the net interest margin. Net interest margin for the ~~six~~nine months ended ~~June~~September 30, 2019 ~~improved by 2 basis points~~was 3.65% as compared to 3.61% in the same period ~~in 2018 from 3.64% to 3.66%.~~of 2018. The increase in net interest margin was offset by an increase in non-interest ~~expense. Non-interest~~ expense ~~for~~of $1.8 million in the ~~six~~nine months ~~ended June~~ending September 30 ~~2019 increased $1.1 million~~,2019 as compared to the ~~same period in~~nine months ended September 30, 2018.

Net Interest Income

Please refer to the table at the end of this Item 2 for the yield and rate data for interest-bearing balance sheet components during the ~~six~~nine months ended ~~June~~September 30, 2019 and 2018, along with average balances and the related interest income and interest expense amounts.
36
Net interest income was ~~$18.1~~$27.5 million for the ~~six~~nine months ended ~~June~~September 30, 2019 as compared to ~~$17.5~~$26.4 million for the ~~six~~nine months ended ~~June~~September 30, 2018. The ~~$663 thousand~~$1.1 million increase in net interest income was ~~primarily~~ attributable to an increase in average earning assets of ~~$31.4~~$30.8 million as well as ~~a slight~~an increase of 2four basis points in the net interest margin between the two periods. Our net interest margin was ~~3.66%~~3.65% during the ~~six~~nine months ended ~~June~~September 30, 2019 as compared to ~~3.64%~~3.61% for the same period in 2018. The yield on earning assets increased by 24 basis points in the first ~~half~~nine months of 2019 as compared to the same period in 2018. Average loans comprised ~~72.7%~~72.6% of average earning assets in the first ~~six~~nine months of 2019 as compared to ~~69.0 %~~69.4% in the same period of 2018. The yield on our loan portfolio increased 912 basis points in the ~~six-month~~nine-month period ended ~~June~~September 30, 2019 to ~~4.83%~~4.85% as compared to ~~4.74%~~4.73% during the same period in 2018. The yield on our investment portfolio for the ~~six-month~~nine-month period ended ~~June~~September 30, 2019 increased to ~~2.66%~~2.61% from ~~2.38%~~2.36% for the same period in 2018. Increases in the federal funds target rate ~~over the last year have~~in 2017 and 2018 increased the yields on certain variable rate products in both our loan and investment portfolio. In July and October of 2019, the Federal Reserve began lowering its target band for short-term interest rates by 25 basis point each time. Lower short-term interest rates along with a flat yield curve have more recently resulted in downward pressure on our net interest margin (See “Market Risk Management” below). The cost of interest-bearing liabilities during the first ~~six~~nine months of 2019 was ~~0.80%~~0.81% as compared to ~~0.47%~~0.52% in the same period in 2018. The continued focus and resulting shift in our deposit funding mix, as well as our current liquidity position, ~~has assisted~~continue to assist us in controlling our overall cost of ~~funds during this period of increasing short term interest rates.~~funds. As noted previously, recent decreases in the Federal Reserve Fed Fund target band may result in lower overall funding cost. Interest-bearing transaction accounts, money market accounts and savings deposits, which are typically our lower cost funds, represent ~~67.6%~~68.0% of our average interest-bearing liabilities during the first ~~six~~nine months of 2019 as compared to ~~66.8%~~67.1% in the same period in 2018.
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Provision and Allowance for Loan Losses

At ~~June~~September 30, 2019 and December 31, 2018, the allowance for loan losses was ~~$6.4~~$6.6 million, or ~~0.88%~~0.89% of total loans (excluding loans held for sale), and $6.3 million, or 0.87% of total loans (excluding loans held for sale), respectively. Loans that were acquired in the acquisition of Cornerstone Bancorp (“Cornerstone”) in 2017 as well as in the acquisition of Savannah River Financial Corporation (“Savannah River”) in 2014 are accounted for under FASB ASC 310-30. These acquired loans were initially measured at fair value, which includes estimated future credit losses expected to be incurred over the life of the loans. The credit component on loans related to cash flows not expected to be collected is not subsequently accreted (non-accretable difference) into interest income. Any remaining portion representing the excess of a loan’s or pool’s cash flows expected to be collected over the fair value is accreted (accretable difference) into interest income. At ~~June~~September 30, 2019 and December 31, 2018, the remaining credit component on loans attributable to acquired loans in the Cornerstone and Savannah River transactions was ~~$485~~$384 thousand and $660 thousand, respectively. Our provision for loan losses was ~~$114~~$139 thousand and ~~$231~~$252 thousand for the ~~six~~nine months ended ~~June~~September 30, 2019 and 2018, respectively. 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 a number of assumptions about future events, which we believe to be reasonable, but which may or may not prove to be accurate. Our determination of the allowance for loan losses is based on evaluations of the collectability of loans, including consideration of factors such as the balance of impaired loans, the quality, mix, and size of our overall loan portfolio, the experience ability and depth of lending personnel, economic conditions (local and national) that may affect the borrower’s ability to repay, the amount and quality of collateral securing the loans, our historical loan loss experience, and a review of specific problem loans. We also consider subjective issues 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. Periodically, we adjust the amount of the allowance based on changing circumstances. We charge recognized losses to the allowance and add subsequent recoveries back to the allowance for loan losses.

We perform an analysis quarterly to assess the risk within the loan portfolio. The portfolio is segregated into similar risk components for which historical loss ratios are calculated and adjusted for identified changes in current portfolio characteristics. Historical loss ratios are calculated by product type and by regulatory credit risk classification (See Note 4 – Loans). The annualized weighted average loss ratios over the last 36 months for all loan risk categories has been ~~approximately 0.26%, 0.10% and~~ 0.01%. 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. The U.S. economy has been in an extended period of recovery. The period at which we will reach full recovery or revert back to a slowing economy is not determinable. 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, net charge-offs have averaged less than 1one basis point annualized. We believe the unallocated portion of our allowance represents potential risk associated throughout a full economic cycle.The percentage of the unallocated portion of the allowance to the total allowance has declined over the last several years. Management does not believe it would be judicious to reduce the overall level of the allowance at this time.
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Our Company has a significant portion of its loan portfolio with real estate as the underlying collateral. At ~~June~~September 30, 2019 and December 31, 2018, approximately ~~91.3%~~91.1% and 91.1%, respectively, of the loan portfolio had real estate collateral. 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.
39
Non-performing assets were ~~$4.1~~$3.7 million ~~(0.36%~~(0.33% of total assets) at ~~June~~September 30, 2019 as compared to $4.0 million (0.37% of total assets) at December 31, 2018. 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 be concerned about the sustainability of the ~~improved~~current economic environment and the effect that an overall economic decline could have on our customer base of local businesses and professionals. There were 3132 loans totaling ~~$2.7~~$2.3 million included in non-performing status (non-accrual loans and loans past due 90 days and still accruing) at ~~June~~September 30, 2019. The largest loan included in non-accrual status is in the amount of $701 thousand and is secured by a first mortgage on developed lots to be sold for residential use. The average balance of the remaining 3031 loans is approximately ~~$66~~$52 thousand, and the majority of these are secured by first mortgage liens. At the time the loans are placed in non-accrual status, we typically obtain an updated appraisal and, if the loan balance exceeds fair value, write the balance down to the fair value. At ~~June~~September 30, 2019, we had ~~no loans~~one loan in the amount of $33 thousand delinquent 90 days or more and still accruing interest. At ~~June~~September 30, 2019, we had loans totaling ~~$1.2~~$3.2 million that were delinquent 30 days to 89 days representing ~~0.16%~~0.44% of total loans.

Our management continuously monitors non-performing, classified and past due loans to identify deterioration regarding the condition of these loans. At ~~June~~September 30, 2019, there have been no loans identified as potential problem loans.
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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

(Dollars in thousands) Six Months Ended
June 30,
2019 2018
Average loans (including loans held for sale) outstanding $ 726,398 $ 667,929
Loans outstanding at period end $ 726,707 $ 684,333
Non-performing assets:
Nonaccrual loans $ 2,690 $ 2,958
Loans 90 days past due still accruing — 959
Repossessed-other — —
Foreclosed real estate and other assets 1,412 1,824
Total non-performing assets $ 4,102 $ 5,741

Beginning balance of allowance $ 6,263 $ 5,797
Loans charged-off:
1-4 family residential mortgage 7 1
Non-residential real estate — —
Home equity 1 —
Commercial 2 —
Installment & credit card 66 85
Total loans charged-off 76 86
Recoveries:
1-4 family residential mortgage — 2
Non-residential real estate 41 114
Home equity — 5
Commercial — 3
Installment & credit card 20 21
Total recoveries 61 145
Net loan recoveries (charge offs) (15 ) 59
Provision for loan losses 114 231
Balance at period end $ 6,362 $ 6,087

Net (recoveries) charge-offs to average loans 0.00 % (0.01 %)
Allowance as percent of total loans 0.88 % 0.89 %
Non-performing assets as % of total assets 0.36 % 0.53 %
Allowance as % of non-performing loans 155.09 % 155.40 %
(Dollars in thousands) Nine Months Ended
September 30,
2019 2018
Average loans (including loans held for sale) outstanding $ 731,033 $ 677,441
Loans (including loans held for sale) outstanding at period end $ 745,849 $ 696,515
Non-performing assets:
Nonaccrual loans $ 2,275 $ 2,904
Loans 90 days past due still accruing 33 29
Repossessed-other — —
Foreclosed real estate and other assets 1,412 1,921
Total non-performing assets $ 3,720 $ 4,854

Beginning balance of allowance $ 6,263 $ 5,797
Loans charged-off:
1-4 family residential mortgage 7 1
Non-residential real estate — —
Home equity 1 —
Commercial 8 —
Installment & credit card 96 109
Total loans charged-off 112 110
Recoveries:
1-4 family residential mortgage — 3
Non-residential real estate 221 219
Home equity 14 6
Commercial — 14
Installment & credit card 35 31
Total recoveries 270 273
Net loan recoveries (charge offs) 158 (163 )
Provision for loan losses 139 252
Balance at period end $ 6,560 $ 6,212

Net (recoveries) charge-offs to average loans 0.00 % (0.02 %)
Allowance as percent of total loans 0.88 % 0.89 %
Non-performing assets as % of total assets 0.33 % 0.45 %
Allowance as % of non-performing loans 284.23 % 127.98 %
3940

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

Composition of the Allowance for Loan Losses

(Dollars in thousands) June 30, 2019 December 31, 2018
% of loans in % of loans in
Amount Category Amount Category
Commercial, Financial and Agricultural $ 435 7.2 % $ 430 �� 7.5 %
Real Estate – Construction 77 8.4 % 89 8.1 %
Real Estate Mortgage:
Residential 404 6.9 % 431 7.3 %
Commercial 4,458 72.2 % 4,318 71.6 %
Consumer:
Home Equity 247 3.9 % 261 4.1 %
Other 101 1.4 % 88 1.4 %
Unallocated 640       N/A 646 N/A
Total $ 6,362 100.0 % $ 6,263 100.0 %
(Dollars in thousands) September 30, 2019 December 31, 2018
Amount % of loans in
Category Amount % of loans in
Category
Commercial, Financial and Agricultural $ 459 7.5 % $ 430 7.5 %
Real Estate - Construction 91 8.0 % 89 8.1 %
Real Estate Mortgage:
Residential 385 6.5 % 431 7.3 %
Commercial 4,536 72.7 % 4,318 71.6 %
Consumer:
Home Equity 241 4.0 % 261 4.1 %
Other 95 1.3 % 88 1.4 %
Unallocated 753 N/A 646 N/A
Total $ 6,560 100.0 % $ 6,263 100.0 %

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 non-accrual status when it becomes 90 days or more past due. At the time a loan is placed in non-accrual status, all interest, which has been accrued on the loan but remains unpaid is reversed and deducted from earnings as a reduction of reported interest income. No additional interest is accrued on the loan balance until the collection of both principal and interest becomes reasonably certain.

Non-interest Income and Non-interest Expense

Non-interest income during the first ~~six~~nine months of 2019 was ~~$5.7~~$8.8 million as compared to ~~$5.5~~$8.4 million during the same period in 2018. Deposit service charges decreased ~~$95~~$108 thousand during the first ~~half~~nine months of 2019 as compared to the same period in 2018. Changes in the overdraft protection fee collection regulatory requirements continue to contribute to the decrease in overall deposit service charge fees. Mortgage banking income and investment advisory fees accounted for ~~$115~~$207 thousand and ~~$143~~$229 thousand, respectively, of the increase in the first ~~half~~nine months of 2019 as compared to the same period in 2018. Mortgage loan production including construction perm loans in the first ~~six~~nine months of 2019 amounted to ~~$61.3~~$100.6 million as compared to ~~$56.7~~$94.0 million during the same period of 2018. At ~~June~~September 30, 2019, we had ~~$333.9~~$339.6 million in assets under management as compared to ~~$281.9~~$306.8 million at ~~June~~September 30, 2018. Management continues to focus on increasing both the mortgage banking income as well as the investment advisory fees and commissions. During the first ~~half~~nine months of 2019, we sold investment securities for a net gain of $135 thousand as compared to a net loss on sale of investment securities of $10 thousand in the same period in 2018.

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

(Dollars in thousands)
Six months ended
June 30,
Nine months ended
September 30,
2019 2018 2019 2018
ATM debit card income $ 994 $ 911 $ 1,524 $ 1,375
Income on bank owned life insurance 341 372 515 519
Rental income 140 141 212 211
Loan late charges 49 50 84 72
Safe deposit fees 27 28 39 40
Wire transfer fees 38 41 60 61
Other 174 339 261 455
Total $ 1,763 $ 1,878 $ 2,695 $ 2,733
4041

Total non-interest expense increased ~~$1.2~~$1.8 million in the first ~~half~~nine months of 2019 to ~~$17.0~~$25.8 million as compared to ~~$15.8~~$24.0 million in the first ~~half~~nine months of 2018. Salary and benefit expense increased ~~$922 thousand~~$1.3 million to ~~$10.4~~$15.8 million in the first ~~half~~nine months of 2019 as compared to ~~$9.4~~$14.5 million in the first ~~half~~nine months of 2018. This increase is primarily a result of the normal salary adjustments, as well as the addition of two new full-service offices opened in the first half of 2019. We opened a downtown Greenville, South Carolina office in February 2019. In June 2019, we opened a full-service ~~branch~~office in Evans, Georgia. The hiring for positions in these ~~branches~~offices takes place prior to opening and therefore the cost for staffing and benefits impacts substantially all of the first ~~six~~nine months of 2019. At ~~June~~September 30, 2019 and 2018, we had ~~244~~242 and ~~235~~233 full time equivalent employees, respectively. The increase in occupancy expense of ~~$105~~$197 thousand in first ~~half~~nine months of 2019 as compared to same period in 2018 is primarily a result of the addition of the two new branch offices. Marketing and public relations expense increased to ~~$605~~$764 thousand in the first ~~half~~nine months of 2019 from ~~$283~~$460 thousand in the first ~~half~~nine months of 2018. The timing of a media campaign impacts the recognition of marketing expense, and it is expected that the overall 2019 annual media cost will not vary substantially from the annual cost incurred in 2018. ~~Non-interest~~Miscellaneous non-interest expense ~~“Other”~~ decreased ~~$159~~$86 thousand in first ~~six~~nine months of 2019 as compared to the same period in 2018. The 2018 period includes the cost of purchasing South Carolina Rehabilitation tax credits for $165 thousand. The amount of the tax credit received and recorded for the same period in the 2018 was $205 thousand. There were no costs related to purchasing tax credits in the ~~six~~nine months ended ~~June~~September 30, 2019.

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

(Dollars in thousands) Six months ended
June 30,
2019 2018
Data processing $ 1,276 $ 1,146
Supplies 83 80
Telephone 211 222
Courier 68 75
Correspondent services 121 130
Insurance 121 128
Postage 23 29
Legal and professional fees 442 506
Loss on limited partnership interest 23 23
Director fees 183 197
Shareholder expense 78 105
Dues 70 72
Subscriptions 94 100
Loan closing costs/fees 161 119
Other 491 672
$ 3,445 $ 3,604
(Dollars in thousands) Nine months ended
September 30,
2019 2018
Data processing $ 2,008 $ 1,681
Supplies 107 104
Telephone 323 324
Courier 107 113
Correspondent services 174 213
Insurance 185 198
Postage 37 43
Legal and professional fees 738 746
Loss on limited partnership interest 45 48
Director fees 255 284
Shareholder expense 126 136
Dues 108 113
Subscriptions 141 148
Loan closing costs/fees 250 187
Miscellaneous 785 872
$ 5,389 $ 5,210

Income Tax Expense

Our effective tax rate was ~~20.4%~~20.5% and ~~18.0%~~18.9% in the first ~~half~~nine months of 2019 and 2018, respectively. As noted previously, the purchase of the South Carolina Rehabilitation tax credits reduced our state income tax expense by $205 thousand for the ~~six~~nine months ended ~~June~~September 30, 2018. As a result, of our current level of tax-exempt securities in our investment portfolio and our BOLI holdings, the effective tax rate is expected to be 20.5% to ~~21.0 %~~21.0% throughout the remainder of 2019.
42
Comparison of Results of Operations for Three Months Ended ~~June~~September 30, 2019 to the Three Months Ended ~~June~~September 30, 2018
Net Income
Our net income for the three months ended ~~June~~September 30, 2019 was $2.9 million, or ~~$0.37~~$0.39 diluted earnings per common share, as compared to ~~$3.0~~$2.8 million, or ~~$0.39~~$0.37 diluted earnings per common share, for the three months ended ~~June~~September 30, 2018. Net interest income increased ~~$177~~$470 thousand for the three months ended ~~June~~September 30, 2019 as compared to the same period in 2018. Average earning assets increased by ~~$27.4~~$29.6 million in the ~~second~~third quarter of 2019 as compared to the same period in 2018. The net interest margin ~~decreased~~increased to ~~3.64%~~3.62% during the second quarter of 2019 as compared to ~~3.67%~~3.55% during the second quarter of 2018.
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Net Interest Income
Please refer to the table at the end of this Item 2 for the yield and rate data for interest-bearing balance sheet components during the three-month periods ended ~~June~~September 30, 2019 and 2018, along with average balances and the related interest income and interest expense amounts.

Net interest income was ~~$9.1~~$9.3 million and $8.9 million for the three months ended ~~June~~September 30, 2019 and 2018, respectively. Our net interest margin ~~decreased~~increased by 3seven basis points from ~~3.67%~~3.55% for the three months ended ~~June~~September 30, 2018 to ~~3.64%~~3.62% for the three months ended ~~June~~September 30, 2019. Included in the three-month period in 2019 is a recovery of $131 thousand in non-accrual interest on a loan that paid off during this period. Without that recovery our net interest margin would have been 3.57%. As a result of several increases in the target ~~fed funds~~Fed Funds rate in 2018, we began to experience rate pressure on our deposit funding cost particularly in the last half of 2018 and early 2019. ~~In comparing~~As noted in the ~~second quarter~~nine-month discussion the Federal Reserve began lowering the targeted short-term funds rate, which may have the impact of ~~2019 to the same period in 2018,~~putting downward pressure on our total interest-bearing liabilities cost increased by 35 basis points whereas our yield on earning assets increased by only 20 basis points. The negative impact on the decline in net interest margin was partially offset by an increase of $27.4 million in average earning assets between the two periods.net-interest margin.

Non-interest Income and Non-interest Expense

Non-interest income during the ~~second~~third quarter of 2019 was ~~$3.2~~$3.1 million as compared to ~~$2.9~~$2.8 million during the same period in 2018. Mortgage banking income increased ~~$222~~$92 thousand for the three months ended ~~June~~September 30, 2019 as compared to the same period in 2018. Mortgage loan production in the second quarter of 2019 was ~~$36.9~~$37.9 million as compared to ~~$34.4~~$32.4 million in the ~~second~~third quarter of 2018. In addition, we experienced an approximate 5%2% increase in our margin (income before tax/revenues) in this line of business in the ~~second~~third quarter of 2019 as compared to the same period in 2018. The margin is significantly impacted by the product types originated during each period. Investment advisory fees increased ~~$88~~$86 thousand in the ~~second~~third quarter of 2019 as compared to the same period of 2018. ~~As noted~~Assets under management at September 30, 2019 amounted to $339.6 million as compared to $306.8 million at September 30,2018. ATM/Debit card fees increased approximately $66 thousand in the six month results above, the increase in assets under management between the two period accounts for this increase. During the second quarter of 2018, we sold securities in the amount of $15.0 million and realized a net gain of $94 thousand. During the secondthird quarter of 2019 ~~we sold securities~~as compared to the same period in ~~the amount of $41.5 million and recognized~~2018.
The following is a ~~net gain of $165 thousand. These 2019 sales were part of a minor restructuring~~summary of the ~~portfolio to extend~~components of other non-interest income for the ~~portfolio’s average life slightly to provide for better downside interest rate protection.~~periods indicated:
(Dollars in thousands) Three months ended
September 30,
2019 2018
ATM debit card income $ 530 $ 464
Income on bank owned life insurance 174 147
Rental income 72 70
Loan late charges 35 22
Safe deposit fees 12 12
Wire transfer fees 22 20
Other 87 116
Total $ 932 $ 855
43

Total non-interest expense increased ~~$415~~$656 thousand in the ~~second~~third quarter of 2019 to ~~$8.6~~$8.8 million as compared to ~~$8.2~~$8.1 million in the ~~second~~third quarter of 2018. Salary and benefit expense increased ~~$329~~$386 thousand to ~~$5.2~~$5.5 million in the ~~second~~third quarter of 2019 as compared to ~~$4.9~~$5.1 million in the ~~second~~third quarter of 2018. ~~As previously noted, we~~We opened two new full-service offices in the first half of 2019 and the additional staffing and benefit cost associated with these openings account for the majority of the increase. Occupancy expense increased ~~$64~~$92 thousand between the two periods and the opening of the new offices resulted in substantially all of the increase. ~~The marketing expense in~~In the ~~second~~third quarter of 2019, ~~increased $236~~the FDIC began distributing refunds for insurance assessments to certain community banks. The refund during the third quarter of 2019 eliminated our assessment for the period as compared to an assessment of $94 thousand which as previously noted is impacted by the timing of various marketing campaigns. Much of this increase centered around the timing of the opening of the two new full-service offices. As noted above, the cost of South Carolina Rehabilitation tax credits of $164 thousand acquired in the ~~second~~third quarter of ~~2018 accounts~~2018. It is anticipated that these refunds will reduce our assessment for two and a half quarters. This assumes the ~~decrease in Non-interest expense “Other” of $169~~targeted FDIC insurance fund ratio remains above a set percentage. Data processing fees increased $197 thousand in ~~second~~ the third quarter of 2019 as compared to the same period of 2018 primarily due to an increased number of accounts serviced, increased debit card transaction volume, and additional electronic services provided.
Miscellaneous expense was $285 thousand in the third quarter of 2019 as compared to $164 thousand in the same period of 2018. In the third quarter of 2018, we received a $48 thousand refund of fees charged to us by our Investment Advisor. There was an increase in debit card and fraud losses of approximately $29 thousand in the third quarter of 2019.
42
The following is a summary of the components of other non-interest expense for the periods indicated:

(Dollars in thousands) Three months ended
Three months ended September 30,
(Dollars in thousands) June 30,
2019 2018 2019 2018
Data processing $ 659 $ 572 $ 732 $ 535
Supplies 38 44 24 24
Telephone 106 105 112 102
Courier 30 37 39 38
Correspondent services 65 60 53 83
Insurance 64 67 64 71
Postage 12 11 14 14
Legal and Professional fees 211 252
Director Fees 96 104
Legal and professional fees 296 248
Loss on limited partnership interest 22 26
Director fees 72 87
Shareholder expense 38 55 48 32
Dues 35 37 38 41
Subscriptions 46 50 47 48
Loan closing cost 80 68
Other Miscellaneous 263 450
Loan closing costs/fees 89 93
Other 284 164
$ 1,743 $ 1,912 $ 1,934 $ 1,606

Financial Position

Assets totaled $1.1 billion at ~~June~~September 30, 2019 and December 31, 2018. Loans ~~increased by approximately $8.2 million during the six months ended June 30, 2019. Loans~~ (excluding loans held for sale) at ~~June~~September 30, 2019 were ~~$726.7~~$735.1 million as compared to $718.5 million at December 31, 2018. As a result of significant loan pay offs or pay downs, the loan portfolio excluding loans held-for-sale increased only ~~$8.2~~$16.6 million from December 31, 2018 to ~~June~~September 30, 2019. Total loan production was ~~$64.4~~$99.1 million during the first ~~half~~nine months of 2019. Deposits increased ~~$11.9~~$23.3 million to ~~$937.4~~$948.8 million at ~~June~~September 30, 2019 as compared to $925.5 million at December 31, 2018. Pure deposits (deposits less non-IRA time deposits) represented ~~84.4%~~84.8% of total deposits as of ~~June~~September 30, 2019 as compared to 84.0% at December 31, 2018. 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. 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. A slow-down in the national or local economic conditions as well as deterioration of asset quality within our Company could significantly impact our ability to continue to grow our loan portfolio.
44
The following table shows the composition of the loan portfolio by category at the dates indicated:
(Dollars in thousands) June 30, 2019 December 31, 2018
Amount Percent Amount Percent
Commercial, financial & agricultural $ 52,641 7.2 % $ 53,933 7.5 %
Real estate:
   Construction 61,284 8.4 % 58,440 8.1 %
   Mortgage – residential 49,927 6.9 % 52,764 7.3 %
   Mortgage – commercial 524,348 72.2 % 513,833 71.6 %
Consumer:
   Home Equity 28,465 3.9 % 29,583 4.1 %
   Other 10,042 1.4 % 9,909 1.4 %
Total gross loans 726,707 100.0 % 718,462 100.0 %
Allowance for loan losses (6,362 ) (6,263 )
     Total net loans $ 720,345 $ 712,199
(Dollars in thousands) September 30, 2019 December 31, 2018
Amount Percent Amount Percent
Commercial, financial & agricultural $ 55,169 7.5 % $ 53,933 7.5 %
Real estate:
Construction 58,737 8.0 % 58,440 8.1 %
Mortgage – residential 47,693 6.5 % 52,764 7.3 %
Mortgage – commercial 534,554 72.7 % 513,833 71.6 %
Consumer:
Home Equity 29,103 4.0 % 29,583 4.1 %
Other 9,818 1.3 % 9,909 1.4 %
Total gross loans 735,074 100.0 % 718,462 100.0 %
Allowance for loan losses (6,560 ) (6,263 )
Total net loans $ 728,514 $ 712,199

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%.
43
Deposits increased by $11.9 million to $937.4 million at June 30, 2019 as compared to $925.5 million at December 31, 2018. 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.

During the first quarter of 2019, we adopted the new lease accounting standard (ASC 842 “Leases”). As a result of this change in accounting for leases, we recorded a right-of-use asset of ~~$2.8~~$2.9 million and lease liability of ~~$2.8~~$2.9 million (see Note 9 “Leases” to the consolidated financial statements). During the third quarter we entered into another operating lease and recorded an additional $403 thousand right-of-use asset and lease liability of $406 thousand.

Market Risk Management

The effective management of market risk is essential to achieving our strategic financial objectives. Our most significant market risk is interest rate risk. We have established an Asset/Liability Management Committee (“ALCO”) to monitor and manage interest rate risk. The ALCO monitors and manages the pricing and maturity of assets and liabilities in order to diminish the potential adverse impact that changes in interest rates could have on 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 the ALCO is the measurement of 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. 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% in a 100 and 200 basis point change in interest rates, respectively, over a twelve-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.

We are currently asset sensitive within one year. However, neither the “gap” analysis nor asset/liability simulation modeling is a precise indicator of our interest sensitivity position due to the many factors that affect net interest income, including 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 percentage change in net interest income at ~~June~~September 30, 2019 and December 31, 2018 over twelve months.
45
Net Interest Income Sensitivity

Change in short-term interest rates Hypothetical
percentage change in
net interest income Hypothetical
percentage change in
net interest income
June 30,
2019 December 31,
2018 September 30,
2019 December 31,
2018
+200bp -2.69 % -3.54 % -2.87 % -3.54 %
+100bp -1.23 % -1.58 % -1.22 % -1.58 %
Flat — — — —
-100bp -2.05 % -0.34 % -2.42 % -0.34 %
-200bp -5.58 % -4.37 % -5.32 % -4.37 %

The decrease in net interest income in a down 200 basis point environment 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 may not be repriced in proportion to the change in interest rates. At the current low interest rate levels, we believe that a downward shift of 200 basis points across the entire yield curve is unlikely. The modest decrease in a rising rate environment primarily relates to the historical beta assumptions in the modeling. We are currently not ~~deposit~~ repricing deposits at these levels. We have been able to control deposit pricing in the current rising rate environment primarily as a result of our current liquidity levels as well as continued core deposit growth. The two-year impact of rising rates of 100 and 200 basis points, at our historical beta levels, reflects net interest income increasing by ~~2.5%~~1.8% and ~~4.0%~~3.2%, respectively.
44
We also perform a valuation analysis projecting future cash flows from assets and liabilities to determine the Present Value of Equity (“PVE”) over a range of changes in market interest rates. The sensitivity of PVE to changes in interest rates is a measure of the sensitivity of earnings over a longer time horizon. At ~~June~~September 30, 2019, the PVE exposure in a plus 200 basis point increase in market interest rates was estimated to be ~~(5.51)%~~7.23% as compared to ~~(0.09)~~(1.56)% at December 31, 2018.

Liquidity and Capital Resources

We believe our liquidity remains adequate to meet operating and loan funding requirements. Interest-bearing bank balances, federal funds sold, and investment securities available-for-sale represent ~~22.4%~~24.6% of total assets at ~~June~~September 30, 2019. We believe that our existing stable base of core deposits along with continued growth in this deposit base will enable us to meet our long-term and short-term liquidity needs successfully. These needs include the ability to respond to short-term demand for funds caused by the withdrawal of deposits, maturity of repurchase agreements, extensions of credit and the payment of operating expenses. Other sources of liquidity, in addition to deposit gathering activities, include maturing loans and investments, purchase of federal funds from other financial institutions and selling securities under agreements to repurchase. We monitor closely the level of large certificates of deposits in amounts of $100 thousand or more as they tend to be more sensitive to interest rate changes and, thus, less reliable sources of funding for liquidity purposes. At ~~June~~September 30, 2019, the amount of time deposits of $100 thousand or more represented ~~9.2%~~9.3% of total deposits and the amount of time deposits of $250 thousand or more represented 3.3% of deposits. The majority of these deposits are issued to local customers, many of whom have other product relationships with the Bank.

Through the operations of our Bank, we have made contractual commitments to extend credit in the ordinary course of our business activities. These commitments are legally binding agreements to lend money to our customers at predetermined interest rates for a specified period of time. At ~~June~~September 30, 2019, we had issued commitments to extend credit of ~~$133~~$127 million, including ~~$37~~$40 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.

Other than as described elsewhere in this report, we are not aware of any trends, events or uncertainties that we expect to result in a significant adverse effect on our liquidity position. However, no assurances can be given in this regard, as rapid growth, deterioration in loan quality, and poor earnings, or a combination of these factors, could change the liquidity position in a relatively short period of time.
46
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 was 10.5% of total assets at ~~June~~September 30, 2019 and 10.3% at December 31, 2018. The Bank maintains federal funds purchased lines in the total amount of $20.0 million with two financial institutions, although these were not utilized in the first ~~half~~nine months of 2019. 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. 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. We believe that our existing stable base of core deposits along with continued growth in this deposit base will enable us to meet our long-term liquidity needs successfully.

Regulatory capital rules released by the federal bank regulatory agencies in July 2013 to implement capital standards, referred to as Basel III and developed by an international body known as the Basel Committee on Banking Supervision, impose higher minimum capital requirements for certain bank holding companies and banks.

The regulatory capital rules became effective for the Bank on January 1, 2015 (subject to a phase-in period for certain provisions), and all of the requirements in the rules were fully phased in on January 1, 2019. In 2018, the Federal Reserve increased the asset size to qualify as a small bank holding company. As a result of this change, we generally are not subject to the Federal Reserve capital requirements unless advised otherwise. Our 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.
45
When implemented, the final Basel III rules included certain new and higher risk-based capital and leverage requirements than those previously in place. Specifically, the following minimum capital requirements apply to our Bank:

· a Common Equity Tier 1 risk-based capital ratio of 4.5%;
· a Tier 1 risk-based capital ratio of 6% (increased from the former 4% requirement);
· a total risk-based capital ratio of 8% (unchanged from former requirements); and
· a leverage ratio of 4% (also unchanged from the former requirement).

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 new and highest form of capital, Common Equity Tier 1 capital, consists solely of common stock (plus related surplus), retained earnings, accumulated other comprehensive income, and limited amounts of minority interests that are in the form of common stock. Additional Tier 1 capital includes other perpetual instruments historically included in Tier 1 capital, such as noncumulative perpetual preferred stock. The 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. Tier 2 capital consists of instruments that currently qualify in Tier 2 capital plus instruments that the rules have disqualified from Tier 1 capital treatment. Cumulative perpetual preferred stock, formerly includable in Tier 1 capital, is now included only in Tier 2 capital. Accumulated other comprehensive income (“AOCI”) is presumptively included in Common Equity Tier 1 capital and often would operate to reduce this category of capital. The rules 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 elected to opt out from the inclusion of AOCI in Common Equity Tier 1 capital.

In addition, in order to avoid restrictions on capital distributions or discretionary bonus payments to executives, 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 capital conservation buffer was phased in incrementally over time, became fully effective on January 1, 2019, and consists of an additional amount of common equity equal to 2.5% of risk-weighted assets.
47
In general, the final Basel III rules have had the effect of increasing capital requirements by increasing the risk weights on certain assets, including high volatility commercial real estate, certain loans past due 90 days or more or in nonaccrual status, mortgage servicing rights not includable in Common Equity Tier 1 capital, equity exposures, and claims on securities firms, that are used in the denominator of the three risk-based capital ratios.

As outlined above, we are generally not subject to the Federal Reserve capital requirements unless advised otherwise because we qualify as a small bank holding company. Our Bank remains subject to capital requirements including a minimum leverage ratio and a minimum ratio of “qualifying capital” to risk weighted assets. As of ~~June~~September 30, 2019, the Bank met all capital adequacy requirements under the rules on a fully phased-in basis. The Bank’s risk-based capital ratios of leverage ratio, Tier 1, and total capital were ~~10.2%~~10.1%, ~~13.5%~~13.4% and 14.2%, respectively, at ~~June~~September 30, 2019 as compared to 10.0%, 13.2%, and 14.0%, respectively, at December 31, 2018. The Bank’s Common Equity Tier 1 ratio at ~~both June~~September 30, 2019 and December 31, 2018 was ~~13.5~~13.4 and 13.2%, respectively. Under the Basel III rules, we anticipate that the Bank will remain a well-capitalized institution for at least the next 12 months.
On September 17, 2019, the federal banking agencies issued a final rule to provide an optional simplified measure of capital adequacy for qualifying community banking organizations, including the community bank leverage ratio (“CBLR”) framework. Generally, under the CBLR framework, qualifying community banking organizations with total assets of less than $10 billion, and limited amounts of off-balance-sheet exposures and trading assets and liabilities, may elect whether to be subject to the CBLR framework if they have a CBLR of greater than 9%. Qualifying community banking organizations that elect to be subject to the CBLR framework and continue to meet all requirements under the framework would not be subject to risk-based or other leverage capital requirements and, in the case of an insured depository institution, would be considered to have met the well capitalized ratio requirements for purposes of the FDIC’s Prompt Corrective Action framework. The final rule will become effective on January 1, 2020. The Company is currently evaluating the CBLR framework and potential advantages and disadvantages that it may present for the Company.

Since the Company is a bank holding company, its 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.

In addition, since 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, our Bank is subject to limitations on the dividend 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 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.

In May 2019, our Board of Directors approved a stock repurchase plan whereby we could repurchase up to 300,000 shares of our common stock. As of ~~June~~September 30, 2019, we have repurchased ~~185,361~~all 300,000 shares at an average stock price of ~~$18.41~~$18.79 per share pursuant to ~~the~~this plan. During the month of July 2019, we have repurchased the remaining 114,639 shares available under the plan to be repurchased. The 300,000 shares were repurchased for an overall average stock price of $18.79 per share. After completion of the repurchase plan, the Bank continues to exceed all capital adequacy requirements under the rules on a fully phased-in basis. In September of 2019, our Board of Directors approved a new stock repurchase plan whereby we can repurchase up to 200,000 additional shares of our common stock. As of September 30, 2019, no shares from the new plan have been repurchased.
4648

FIRST COMMUNITY CORPORATION
Yields on Average Earning Assets and Rates
on Average Interest-Bearing Liabilities

(Dollars in Thousands) Six months ended June 30, 2019 Six months ended June 30, 2018
Average Interest Yield/ Average Interest Yield/
Balance Earned/Paid Rate Balance Earned/Paid Rate
Assets
Earning assets
Loans $ 726,398 $ 17,401 4.83 % $ 667,929 $ 15,697 4.74 %
Securities: 251,114 3,315 2.66 % 277,182 3,272 2.38 %
Federal funds sold and securities purchased under agreements to resell 21,951 264 2.43 % 22,921 181 1.59 %
Total earning assets 999,463 20,980 4.23 % 968,032 19,150 3.99 %
Cash and due from banks 13,680 13,503
Premises and equipment 35,645 35,173
Intangibles 16,511 17,011
Other assets 37,406 36,192
Allowance for loan losses (6,334 ) (5,957 )
Total assets $ 1,096,371 $ 1,063,954
Liabilities
Interest-bearing liabilities
Interest-bearing transaction accounts $ 198,270 283 0.29 % $ 190,302 139 0.15 %
Money market accounts 178,201 822 0.93 % 181,830 338 0.37 %
Savings deposits 107,778 72 0.13 % 106,532 73 0.14 %
Time deposits 178,424 1,005 1.14 % 193,429 634 0.66 %
Other borrowings 53,290 662 2.51 % 44,267 493 2.25 %
Total interest-bearing liabilities 715,963 2,844 0.80 % 716,360 1,677 0.47 %
Demand deposits 253,839 234,225
Other liabilities 11,040 7,556
Shareholders’ equity 115,529 105,813
Total liabilities and shareholders’ equity $ 1,096,371 $ 1,063,954

Cost of funds, including demand deposits 0.59 % 0.36 %
Net interest spread 3.43 % 3.52 %
Net interest income/margin $ 18,136 3.66 % $ 17,473 3.64 %
Net interest income/margin FTE basis $ 208 $ 18,344 3.70 % $ 231 $ 17,704 3.69 %
Nine months ended September 30, 2019 Nine months ended September 30, 2018
Average Interest Yield/ Average Interest Yield/
Balance Earned/Paid Rate Balance Earned/Paid Rate
Assets
Earning assets
Loans $ 731,033 $ 26,492 4.85 % $ 677,441 $ 23,974 4.73 %
Securities: 252,357 4,924 2.61 % 275,216 4,855 2.36 %
Federal funds sold and securities purchased under agreements to resell 23,736 428 2.41 % 23,669 306 1.73 %
Total earning assets 1,007,126 31,844 4.23 % 976,326 29,135 3.99 %
Cash and due from banks 13,983 13,398
Premises and equipment 35,832 34,972
Other assets 53,773 53,099
Allowance for loan losses (6,372 ) (6,023 )
Total assets $ 1,104,342 $ 1,071,772
Liabilities
Interest-bearing liabilities
Interest-bearing transaction accounts $ 204,300 $ 442 0.29 % $ 191,528 $ 292 0.20 %
Money market accounts 179,063 1,283 0.96 % 183,211 578 0.42 %
Savings deposits 105,054 104 0.13 % 106,581 109 0.14 %
Time deposits 177,415 1,572 1.18 % 190,877 1,022 0.72 %
Other borrowings 52,861 954 2.41 % 45,194 778 2.30 %
Total interest-bearing liabilities 718,693 4,355 0.81 % 717,391 2,779 0.52 %
Demand deposits 258,124 239,981
Other liabilities 11,423 7,886
Shareholders’ equity 116,102 106,514
Total liabilities and shareholders’ equity $ 1,104,342 $ 1,071,772

Cost of funds, including demand deposits 0.60 % 0.39 %
Net interest spread 3.42 % 3.47 %
Net interest income/margin $ 27,489 3.65 % $ 26,356 3.61 %
Net interest income/margin FTE basis $ 283 $ 27,772 3.69 % $ 346 $ 26,702 3.66 %
4749

FIRST COMMUNITY CORPORATION
Yields on Average Earning Assets and Rates
on Average Interest-Bearing Liabilities

(Dollars in Thousands) Three months ended June 30, 2019 Three months ended June 30, 2018
Three months ended September 30, 2019 Three months ended September 30, 2018
Average Interest Yield/ Average Interest Yield/ Average Interest Yield/ Average Interest Yield/
Balance Earned/Paid Rate Balance Earned/Paid Rate Balance Earned/Paid Rate Balance Earned/Paid Rate
Assets
Earning assets
Loans $ 728,709 $ 8,792 4.84 % $ 677,524 $ 8,080 4.78 % $ 740,152 $ 9,091 4.87 % $ 696,157 $ 8,277 4.72 %
Securities: 250,316 1,659 2.66 % 275,714 1,629 2.37 % 254,802 1,593 2.48 % 271,348 1,583 2.31 %
Federal funds sold and securities purchased 26,376 155 2.36 % 24,803 110 1.78 % 27,248 164 2.37 % 25,139 125 1.97 %
Total earning assets 1,005,401 10,606 4.23 % 978,041 9,819 4.03 % 1,022,202 10,848 4.21 % 992,644 9,985 3.99 %
Cash and due from banks 13,998 13,336 14,578 13,192
Premises and equipment 35,765 34,784 36,197 34,576
Intangibles 16,442 16,941
Other assets 38,095 36,241 53,494 52,895
Allowance for loan losses (6,355 ) (6,044 ) (6,447 ) (6,154 )
Total assets $ 1,103,346 $ 1,073,299 $ 1,120,024 $ 1,087,153

Liabilities
Interest-bearing liabilities
Interest-bearing transaction accounts $ 202,095 $ 134 0.27 % $ 194,514 $ 72 0.15 % $ 216,163 $ 159 0.29 % $ 193,941 $ 154 0.32 %
Money market accounts 177,039 481 1.09 % 185,922 194 0.42 % 180,758 461 1.01 % 185,928 240 0.51 %
Savings deposits 107,638 36 0.13 % 106,523 34 0.13 % 99,693 32 0.13 % 106,677 35 0.13 %
Time deposits 176,715 530 1.20 % 193,635 338 0.70 % 175,431 567 1.28 % 185,857 387 0.83 %
Other borrowings 50,012 309 2.48 % 38,510 242 2.52 % 52,020 292 2.23 % 47,018 286 2.41 %
Total interest-bearing liabilities 713,499 1,490 0.84 % 719,104 880 0.49 % 724,065 1,511 0.83 % 719,421 1,102 0.61 %
Demand deposits 260,712 240,594 266,555 251,305
Other liabilities 11,880 7,569 12,174 8,535
Shareholders’ equity 117,255 106,032 117,230 107,892
Total liabilities and shareholders’ equity $ 1,103,346 $ 1,073,299 $ 1,120,024 $ 1,087,153

Cost of funds, including demand deposits 0.61 % 0.37 % 0.61 % 0.45 %
Net interest spread 3.39 % 3.54 % 3.38 % 3.38 %
Net interest income/margin $ 9,116 3.64 % $ 8,939 3.67 % $ 9,337 3.62 % $ 8,883 3.55 %
Net interest income/margin FTE basis $ 95 $ 9,211 3.67 % $ 113 $ 9,052 3.71 % $ 75 $ 9,412 3.65 % $ 115 $ 8,998 3.60 %
4850

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Not applicable.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Management, including our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports we file and submit under the Exchange Act is (i) recorded, processed, summarized and reported as and when required and (ii) accumulated and communicated to our management, including our Chief Executive Officer and the Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

The design of any system of controls and procedures is based in part upon certain assumptions about the likelihood of future events. There can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.

Changes in Internal Control over Financial Reporting

There has been no change in our internal control over financial reporting during the three months ended ~~June~~September 30, 2019 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
4951

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 the Company which, if determined adversely, the Company believes would have a material adverse impact on the Company’s financial position, results of operations or cash flows.

Item 1A. Risk Factors.

There have not been any material changes to the risk factors disclosed in our 2018 Annual Report on Form 10-K.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

(a) Not applicable
(b) Not applicable
(c) Issuer Purchases of Registered Equity Securities

~~In May~~On September 18, 2019, we announced that ~~the~~our Board of Directors approved the repurchase of up to 200,000 additional shares of our common stock (the “New Repurchase Plan”), which are in addition to the shares repurchased under the repurchase program we announced in May 2019 for 300,000 shares of our common stock ~~which represents less than 4%~~(the “Prior Repurchase Plan”). As mentioned above, the Company has completed the repurchase of all 300,000 shares covered by the ~~shares outstanding as of March 31, 2019.~~ Prior Repurchase Plan. There have been no repurchases under the New Repurchase Plan.
Under the ~~repurchase plan, we~~New Repurchase Plan, the Company may repurchase shares from time to time by means of, among other means, open market purchases and in solicited and unsolicited privately negotiated transactions. The actual means and timing of any purchases, quantity of purchased shares and prices ~~is,~~will be, subject to certain limitations, at the discretion of management during a period of up to two years and will depend on a number of factors, including the market price of ~~our~~the Company’s common stock, share issuances under ~~our~~Company equity plans, general market and economic conditions, and applicable legal and regulatory requirements. ~~Our~~
The Company’s management believes the ~~repurchase plan,~~New Repurchase Plan, depending upon market and business conditions, may, among other things, provide capital management opportunities for the Company. We are not obligated to repurchase any such shares under the ~~repurchase plan.~~New Repurchase Plan. The ~~repurchase plan~~New Repurchase Plan may be discontinued, suspended or restarted at any time.
The following table reflects share repurchase activity during the ~~second~~third quarter of ~~2019:~~2019 for the Prior Repurchase Plan announced in May of 2019. There have been no repurchases under the new Repurchase Plan.

Period (a) Total
Number of
Shares
(or Units)
Purchased (b) Average
Price Paid
per Share
(or Unit) (c) Total Number
of Shares (or Units)
Purchased as Part
of Publicly
Announced Plans
or Programs (d) Maximum Number
(or Approximate
Dollar Value)
of Shares (or Units)
that May Yet Be
Purchased Under
the Plans or Programs
April 1-April 30 — — — —
May 1-May 31 — — — —
June 1-June 30 185,361 $ 18.41 185,361 114,639
Total 185,361 $ 18.41 185,361 114,639 ⁽¹⁾
Period (a) Total
Number of
Shares
(or Units)
Purchased (b) Average
Price Paid
per Share
(or Unit) (c) Total Number
of Shares (or Units)
Purchased as Part
of Publicly
Announced Plans
or Programs (d) Maximum Number
(or Approximate
Dollar Value)
of Shares (or Units)
that May Yet Be
Purchased Under
the Plans or Programs
July 1-July 31 114,639 $ 19.40 300,000 200,000
August 1-August 31 — — — —
September 1-September 30 — — — —
Total 114,639 $ 19.40 300,000 200,000
~~(1)~~ ~~As of the date of this filing, we have repurchased the total 300,000 shares of common stock authorized to be repurchased under the plan.~~52
Item 3. Defaults Upon Senior Securities.

Not Applicable.

Item 4. Mine Safety Disclosures.

Not Applicable.

Item 5. Other Information.

~~None~~None.
50
Item 6. Exhibits.

Exhibit Description

31.1 Rule 13a-14(a) Certification of the Principal Executive Officer.

31.2 Rule 13a-14(a) Certification of the Principal Financial Officer.

32 Section 1350 Certifications

101 The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended ~~June~~September 30, 2019, formatted in eXtensible Business Reporting Language (XBRL); (i) Consolidated Balance Sheets at ~~June~~September 30, 2019 and December 31, 2018, (ii) Consolidated Statements of Income for the three and ~~six~~nine months ended ~~June~~September 30, 2019 and 2018, (iii) Consolidated Statements of Comprehensive Income for the three and ~~six~~nine months ended ~~June~~September 30, 2019 and 2018 (iv) Consolidated Statements of Changes in Shareholders’ Equity for the ~~six~~nine months ended ~~June~~September 30, 2019 and 2018, (v) Consolidated Statements of Cash Flows for the ~~six~~nine months ended ~~June~~September 30, 2019 and 2018, and (vi) Notes to Consolidated Financial Statements.
5153

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

FIRST COMMUNITY CORPORATION
(REGISTRANT)

Date:~~August 8,~~November 7, 2019 By: /s/ Michael C. Crapps
Michael C. Crapps
President and Chief Executive Officer
(Principal Executive Officer)

Date:~~August 8,~~November 7, 2019 By: /s/ Joseph G. Sawyer
Joseph G. Sawyer
Executive Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
5254

FIRST COMMUNITY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)

	Six			Six
	Months Ended			Months Ended
	June 30,			June 30,
	2019			2018
(Dollars in thousands, except per share amounts)	(Unaudited)			(Unaudited)
Interest income:
Loans, including fees	$	17,401		$	15,697
Taxable securities		2,581			2,373
Non- taxable securities		734			899
Federal funds sold and securities purchased under resale agreements		252			170
Other		12			11
Total interest income		20,980			19,150
Interest expense:
Deposits		2,182			1,185
Federal funds sold and securities sold under agreement to repurchase		201			101
Other borrowed money		461			391
Total interest expense		2,844			1,677
Net interest income		18,136			17,473
Provision for loan losses		114			231
Net interest income after provision for loan losses		18,022			17,242
Non-interest income:
Deposit service charges		791			886
Mortgage banking income		2,082			1,967
Investment advisory fees and non-deposit commissions		927			784
Gain (loss) on sale of securities		135			(10	)
Gain (loss) on sale of other assets		(3	)		37
Other		1,763			1,878
Total non-interest income		5,695			5,542
Non-interest expense:
Salaries and employee benefits		10,380			9,458
Occupancy		1,302			1,197
Equipment		775			779
Marketing and public relations		605			283
FDIC assessments		145			164
Other real estate expense		47			49
Amortization of intangibles		264			285
Other		3,445			3,604
Total non-interest expense		16,963			15,819
Net income before tax		6,754			6,965
Income taxes		1,378			1,255
Net income	$	5,376		$	5,710

Basic earnings per common share	$	0.70		$	0.75
Diluted earnings per common share	$	0.70		$	0.74

	Nine			Nine
	Months Ended			Months Ended
	September 30,			September 30,
(Dollars in thousands, except per share amounts)	2019			2018
Interest income:
Loans, including fees	$	26,492		$	23,974
Taxable securities		3,840			3,623
Non-taxable securities		1,084			1,232
Federal funds sold and securities purchased under resale agreements		410			290
Other		18			16
Total interest income		31,844			29,135
Interest expense:
Deposits		3,401			2,001
Federal funds sold and securities sold under agreement to repurchase		303			197
Other borrowed money		651			581
Total interest expense		4,355			2,779
Net interest income		27,489			26,356
Provision for loan losses		139			252
Net interest income after provision for loan losses		27,350			26,104
Non-interest income:
Deposit service charges		1,212			1,320
Mortgage banking income		3,333			3,126
Investment advisory fees and non-deposit commissions		1,436			1,207
Gain (loss) on sale of securities		135			(10	)
Gain (loss) on sale of other assets		(3	)		8
Other		2,695			2,733
Total non-interest income		8,808			8,384
Non-interest expense:
Salaries and employee benefits		15,845			14,537
Occupancy		2,005			1,808
Equipment		1,140			1,167
Marketing and public relations		764			460
FDIC assessments		135			258
Other real estate expense		78			86
Amortization of intangibles		397			427
Other		5,389			5,210
Total non-interest expense		25,753			23,953
Net income before tax		10,405			10,535
Income taxes		2,131			1,992
Net income	$	8,274		$	8,543

Basic earnings per common share	$	1.10		$	1.13
Diluted earnings per common share	$	1.08		$	1.11

	Three		Three
	Months Ended		Months Ended
	September 30,		September 30,
(Dollars in thousands, except per share amounts)	2019		2018
Interest income:
Loans, including fees	$	9,091	$	8,277
Taxable securities		1,259		1,250
Non-taxable securities		350		333
Federal funds sold and securities purchased under resale agreements		158		120
Other		6		5
Total interest income		10,864		9,985
Interest expense:
Deposits		1,219		816
Federal funds sold and securities sold under agreement to repurchase		102		96
Other borrowed money		190		190
Total interest expense		1,511		1,102
Net interest income		9,353		8,883
Provision for loan losses		25		21
Net interest income after provision for loan losses		9,328		8,862
Non-interest income:
Deposit service charges		421		434
Mortgage banking income		1,251		1,159
Investment advisory fees and non-deposit commissions		509		423
Loss on sale of other assets		—		(29	)
Other		932		855
Total non-interest income		3,113		2,842
Non-interest expense:
Salaries and employee benefits		5,465		5,079
Occupancy		703		611
Equipment		365		388
Marketing and public relations		159		177
FDIC assessments		—		94
Other real estate expense		31		37
Amortization of intangibles		133		142
Other		1,934		1,606
Total non-interest expense		8,790		8,134
Net income before tax		3,651		3,570
Income taxes		753		737
Net income	$	2,898	$	2,833

Basic earnings per common share	$	0.39	$	0.37
Diluted earnings per common share	$	0.39	$	0.37

(Dollars in thousands)
	Six months ended June 30,
	2019			2018

Net income	$	5,376		$	5,710

Other comprehensive income:
Unrealized (loss) gain during the period on available-for-sale securities, net of tax expense of $1,183 and tax benefit of $820, respectively		4,445			(3,086	)

Reclassification adjustment for loss (gain) on available-for-sale securities included in net income, net of tax expense of $29 and tax benefit $2, respectively		(106	)		8

Other comprehensive income (loss)		4,339			(3,078	)
Comprehensive income	$	9,715		$	2,632

(Dollars in thousands)
	Three months ended June 30,
	2019			2018

Net income	$	2,881		$	3,001

Other comprehensive income:
Unrealized (loss) gain during the period on available-for-sale securities, net of tax expense of $575 and tax benefit of $216, respectively		2,164			(811	)

Reclassification adjustment for gain on available-for-sale securities included in net income, net of tax expense of $35 and $19, respectively		(130	)		(75	)

Other comprehensive income (loss)		2,034			(886	)
Comprehensive income	$	4,915		$	2,115

(Dollars in thousands)	Nine months ended September 30,
	2019			2018

Net income	$	8,274		$	8,543

Other comprehensive income:
Unrealized gain (loss) during the period on available-for-sale securities, net of tax expense of $1,511 and tax benefit of $1,104, respectively		5,677			(4,140	)

Less: Reclassification adjustment for loss (gain) included in net income, net of tax benefit of $29 and tax expense of $2, respectively		(106	)		8

Other comprehensive income (loss)		5,571			(4,132	)
Comprehensive income	$	13,845		$	4,411

(Dollars in thousands)	Three months ended September 30,
	2019			2018

Net income	$	2,898		$	2,833

Other comprehensive income:
Unrealized gain (loss) during the period on available-for-sale securities, net of tax expense of $271 and tax benefit of $280, respectively		1,232			(1,054	)

Other comprehensive income (loss)		1,232			(1,054	)
Comprehensive income	$	4,130		$	1,779

																			Accumulated																								Accumulated
	Common						Common			Additional			Nonvested						Other						Common						Common			Additional			Nonvested						Other
(Dollars and shares in thousands)	Shares			Common			Stock			Paid-in			Restricted			Retained			Comprehensive
	Issued			Stock			Warrants			Capital			Stock			Earnings			Income (loss)			Total			Shares			Common			Stock			Paid-in			Restricted			Retained			Comprehensive
Balance December 31, 2018		7,639		$	7,639		$	31		$	95,048		$	(149	)	$	12,262		$	(2,334	)	$	112,497
																									Issued			Stock			Warrants			Capital			Stock			Earnings			Income (Loss)			Total
Balance, December 31, 2018																										7,639		$	7,639		$	31		$	95,048		$	(149	)	$	12,262		$	(2,334	)	$	112,497
Net Income																	2,495						2,495																		2,495						2,495
Other comprehensive income net of tax of $601																				2,305			2,305																					2,305			2,305
Issuance of restricted stock		8			8						162			(170	)								—			8			8						162			(170	)								—
Amortization of compensation on restricted stock														33									33															33									33
Shares retired		(8	)		(8	)					(148	)											(156	)		(8	)		(8	)					(148	)											(156	)
Exercise of warrants		21			21			(14	)		(7	)											—			21			21			(14	)		(7	)											—
Dividends: Common ($0.11 per share)																	(840	)					(840	)																	(840	)					(840	)
Dividend reinvestment plan		5			5						95												100			5			5						95												100
Balance March 31, 2019		7,665		$	7,665		$	17		$	95,150		$	(286	)	$	13,917		$	(29	)	$	116,434			7,665		$	7,665		$	17		$	95,150		$	(286	)	$	13,917		$	(29	)	$	116,434
Net income																	2,881						2,881
Net Income																																									2,881					$	2,881
Other comprehensive income net of tax of $610																				2,034			2,034																					2,034			2,034
Amortization of compensation on restricted stock														45									45															45									45
Exercise of warrants		2			2			(2	)														—			2			2			(2	)														—
Stock repurchase plan		(185	)		(185	)					(3,228	)											(3,413	)		(185	)		(185	)					(3,228	)											(3,413	)
Shares issued-deferred compensation		24			24						241												265			24			24						241												265
Dividends: Common ($0.11 per share)																	(841	)					(841	)																	(841	)					(841	)
Dividend reinvestment plan		5			5						79												84			5			5						79												84
Balance June 30, 2019		7,511		$	7,511		$	15		$	92,242		$	(241	)	$	15,957		$	2,005		$	117,489
Balance, June 30, 2019																										7,511		$	7,511		$	15		$	92,242		$	(241	)	$	15,957		$	2,005		$	117,489
Net Income																																									2,898					$	2,898
Other comprehensive income net of tax of $271																																												1,232			1,232
Amortization of compensation on restricted stock																																						46									46
Exercise of warrants																										3			3			(2	)		(1	)											—
Stock repurchase plan																										(115	)		(115	)					(2,110	)											(2,225	)
Shares issued-deferred compensation																																															—
Dividends: Common ($0.11 per share)																																									(831	)					(831	)
Dividend reinvestment plan																										10			10						161												171
Balance September 30, 2019																										7,409		$	7,409		$	13		$	90,292		$	(195	)	$	18,024		$	3,237		$	118,780

	Nine months ended September 30,
(Dollars in thousands)	2019			2018
Cash flows from operating activities:
Net income	$	8,274		$	8,543
Adjustments to reconcile net income to net cash provided from operating activities:
Depreciation		1,000			1,130
Premium amortization		1,658			1,873
Provision for loan losses		139			252
Loss (gain) on sale of other real estate owned		3			(8	)
Origination of loans held-for-sale		(97,878	)		(89,125	)
Sale of loans held-for-sale		90,326			88,690
Amortization of intangibles		397			427
Accretion on acquired loans		(402	)		(288	)
Writedown of land held for sale		—			42
(Gain) loss on sale of securities		(135	)		10
Gain on sale of fixed assets		—			(123	)
(Increase) decrease in other assets		(3,089	)		518
Increase in other liabilities		2,522			547
Net cash (used) provided from operating activities		2,815			12,488
Cash flows from investing activities:
Purchase of investment securities available-for-sale		(81,977	)		(47,668	)
Purchase of other investment securities		(37	)		—
Maturity/call of investment securities available-for-sale		32,199			33,703
Proceeds from sale of securities available-for-sale		44,398			19,946
Proceeds from sale of securities held-to-maturity		—			655
Proceeds from sale of other securities		—			434
Increase in loans		(16,322	)		(49,603	)
Proceeds from sale of other real estate owned		45			367
Proceeds from sale of fixed assets		301			1,143
Purchase of property and equipment		(2,391	)		(494	)
Net cash used in investing activities		(23,784	)		(41,517	)
Cash flows from financing activities:
Increase in deposit accounts		23,338			33,472
Increase in securities sold under agreements to repurchase		6,299			13,956
Advances from the Federal Home Loan Bank		65,000			4,000
Repayment of advances from Federal Home Loan Bank		(65,015	)		(14,014	)
Shares retired		(158	)		(57	)
Repurchase of Common Stock		(5,635	)		—
Issuance of Deferred Compensation Shares		265			19
Dividends paid: Common Stock		(2,512	)		(2,273	)
Dividend reinvestment plan		354			275
Net cash provided from financing activities		21,936			35,378
Net increase in cash and cash equivalents		967			6,349
Cash and cash equivalents at beginning of period		32,268			30,591
Cash and cash equivalents at end of period	$	33,235		$	36,940
Supplemental disclosure:
Cash paid during the period for:
Interest	$	4,301		$	2,627
Income taxes	$	2,060		$	1,875
Non-cash investing and financing activities:
Unrealized gain (loss) on securities	$	7,053		$	(4,132	)
Recognition of operating lease right of use asset	$	3,260		$	—
Recognition of operating lease liability	$	3,291		$	—
Transfer of loans to foreclosed property	$	—		$	346
Transfer of investment securities held-to-maturity to available-for-sale	$	16,144		$	—

	Six months				Three months				Nine months				Three months
	Ended June 30,				Ended June 30,				Ended September 30,				Ended September 30,
	2019		2018		2019		2018		2019		2018		2019		2018

Numerator (Net income available to common shareholders)	$	5,376	$	5,710	$	2,881	$	3,001
Numerator (Net income available to common shareholders									$	8,274	$	8,543	$	2,898	$	2,833
Denominator
Weighted average common shares outstanding for:
Basic shares		7,629		7,575		7,627		7,573		7,548		7,581		7,386		7,592
Dilutive securities:
Deferred compensation		43		60		41		62		40		65		39		61
Warrants/Restricted stock – Treasury stock method		36		90		36		91
Warrants/Restricted stock-Treasury stock method										42		73		38		71
Diluted shares		7,708		7,725		7,704		7,726		7,630		7,719		7,463		7,724
Earnings per common share:
Basic		0.70		0.75		0.38		0.40	$	1.10	$	1.13	$	0.39	$	0.37
Diluted		0.70		0.74		0.37		0.39	$	1.08	$	1.11	$	0.39	$	0.37
The average market price used in calculating assumed number of shares	$	19.12	$	22.76	$	18.35	$	23.56	$	19.06	$	25.33	$	18.95	$	23.49

AVAILABLE-FOR-SALE:			Gross		Gross						Gross		Gross
	Amortized		Unrealized		Unrealized				Amortized		Unrealized		Unrealized
(Dollars in thousands)	Cost		Gains		Losses		Fair Value		Cost		Gains		Losses		Fair Value
June 30, 2019
September 30, 2019
US Treasury securities	$	9,154	$	31	$	8	$	9,177	$	7,174	$	24	$	6	$	7,192
Government Sponsored Enterprises		1,102		20		—		1,122		1,105		18		—		1,123
Mortgage-backed securities		147,580		1,169		577		148,172		166,558		2,090		607		168,041
Small Business Administration pools		52,021		280		394		51,907		47,564		374		285		47,653
State and local government		37,896		2,018		1		39,913		38,550		2,494		4		41,040
Other securities		19		—		—		19		19		—		—		19
	$	247,772	$	3,518	$	980	$	250,310	$	260,970	$	5,000	$	902	$	265,068

			Gross		Gross
	Amortized		Unrealized		Unrealized
(Dollars in thousands)	Cost		Gains		Losses		Fair Value
December 31, 2018
US Treasury securities	$	15,488	$	9	$	40	$	15,457
Government Sponsored Enterprises		1,096		6		2		1,100
Mortgage-backed securities		117,862		73		2,460		115,475
Small Business Administration pools		55,784		247		695		55,336
State and local government		50,599		619		712		50,506
Other securities		19		—		—		19
	$	240,848	$	954	$	3,909	$	237,893

HELD-TO-MATURITY:			Gross		Gross
	Amortized		Unrealized		Unrealized
(Dollars in thousands)	Cost		Gains		Losses		Fair Value
December 31, 2018
State and local government	$	16,174	$	50	$	40	$	16,184
	$	16,174	$	50	$	40	$	16,184

(Dollars in thousands)	Less than 12 months				12 months or more				Total				Less than 12 months				12 months or more				Total
June 30, 2019	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
September 30, 2019													Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
Available-for-sale securities:	Value		Loss		Value		Loss		Value		Loss		Value		Loss		Value		Loss		Value		Loss

US Treasury securities	$	—	$	—	$	1,507	$	8	$	1,507	$	8	$	—	$	—	$	1,507	$	6	$	1,507	$	6
Government Sponsored Enterprise mortgage-backed securities		17,780		89		39,002		488		56,782		577		36,200		436		13,094		171		49,294		607
Small Business Administration pools		14,519		173		13,670		221		28,189		394		9,011		103		13,533		182		22,544		285
State and local government		—		—		434		1		434		1		761		4		—		—		761		4
	$	32,299	$	262	$	54,613	$	718	$	86,912	$	980	$	47,674	$	545	$	26,441	$	357	$	74,115	$	902

(Dollars in thousands)	Less than 12 months				12 months or more				Total
December 31, 2018	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
Available-for-sale securities:	Value		Loss		Value		Loss		Value		Loss

US Treasury securities	$	8,355	$	10	$	1,488	$	30	$	9,843	$	40
Government Sponsored Enterprise		—		—		122		2		122		2
Government Sponsored Enterprise mortgage-backed securities		13,917		120		89,870		2,339		103,787		2,459
Small Business Administration pools		16,400		211		20,330		484		36,730		695
State and local government		9,517		52		15,598		660		25,115		712
Corporate bonds and other		7		1		—		—		7		1
	$	48,196	$	394	$	127,408	$	3,515	$	175,604	$	3,909

(Dollars in thousands)	Less than 12 months				12 months or more				Total
December 31, 2018	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
Held-to-maturity securities:	Value		Loss		Value		Loss		Value		Loss
State and local government	$	2,843	$	14	$	4,899	$	26	$	7,742	$	40

June 30, 2019	Available-for-sale
September 30, 2019					Available-for-sale
	Amortized		Fair		Amortized		Fair
(Dollars in thousands)	Cost		Value		Cost		Value
Due in one year or less	$	11,268	$	11,302	$	10,823	$	10,866
Due after one year through five years		120,978		121,265		120,043		120,762
Due after five years through ten years		88,993		91,060		108,314		111,870
Due after ten years		26,533		26,683		21,790		21,570
	$	247,772	$	250,310	$	260,970	$	265,068

(Dollars in thousands)
							Real estate			Real estate		Consumer
				Real estate			Mortgage			Mortgage		Home			Consumer
	Commercial			Construction			Residential			Commercial		equity			Other			Unallocated		Total
June 30, 2019
Allowance for loan losses:
Beginning balance December 31, 2018	$	430		$	89		$	431		$	4,318	$	261		$	88		$	646	$	6,263
Charge-offs		(2	)		—			(7	)		—		(1	)		(66	)		—		(76	)
Recoveries		—			—			—			41		—			20			—		61
Provisions		7			(12	)		(20	)		99		(13	)		59			(6)		114
Ending balance June 30, 2019	$	435		$	77		$	404		$	4,458	$	247		$	101		$	640	$	6,362

Ending balances:
Individually evaluated for impairment	$	—		$	—		$	—		$	12	$	—		$	—		$	—	$	12

Collectively evaluated for impairment		435			77			404			4,446		247			101			640		6,350

June 30, 2019 Loans receivable:
Ending balance-total	$	52,641		$	61,284		$	49,927		$	524,348	$	28,465		$	10,042		$	—	$	726,707

Ending balances:
Individually evaluated for impairment		—			—			542			4,047		54			—			—		4,643

Collectively evaluated for impairment	$	52,641		$	61,284		$	49,385		$	520,301	$	28,411		$	10,042		$	—	$	722,064

(Dollars in thousands)
	Commercial		Real estate Construction			Real estate Mortgage Residential			Real estate Mortgage Commercial		Consumer Home equity			Consumer Other			Unallocated			Total
December 31, 2018
Allowance for loan losses:
Beginning balance
December 31, 2017	$	221	$	101		$	461		$	3,077	$	308		$	35		$	1,594		$	5,797
Charge-offs		—		—			(1	)		—		(23	)		(140	)		—			(164	)
Recoveries		3		—			4			210		6			61			—			284
Provisions		206		(12	)		(33	)		1,031		(30	)		132			(948	)		346
Ending balance
December 31, 2018	$	430	$	89		$	431		$	4,318	$	261		$	88		$	646		$	6,263

Ending balances:
Individually evaluated for impairment	$	—	$	—		$	—		$	14	$	—		$	—		$	—		$	14

Collectively evaluated for impairment		430		89			431			4,304		261			88			646			6,249

December 31, 2018
Loans receivable:
Ending balance-total	$	53,933	$	58,440		$	52,764		$	513,833	$	29,583		$	9,909		$	—		$	718,462

Ending balances:
Individually evaluated for impairment		—		—			322			4,030		29			—			—			4,381

Collectively evaluated for impairment	$	53,933	$	58,440		$	52,442		$	509,803	$	29,554		$	9,909		$	—		$	714,081

(Dollars in thousands)							Six months ended				Three months ended
			Unpaid				Average		Interest		Average		Interest
June 30, 2019	Recorded		Principal		Related		Recorded		income		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized		Investment		Recognized
With no allowance recorded:
Commercial, financial, agricultural	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Real estate:
Construction		—		—		—		—		—		—		—
Mortgage-residential		542		600		—		590		10		578		8
Mortgage-commercial		3,622		6,625		—		3,706		180		3,694		90
Consumer:
Home equity		54		56		—		57		2		57		1
Other		—		—		—		—		—		—		—

With an allowance recorded:
Commercial, financial, agricultural		—		—		—		—		—		—		—
Real estate:
Construction		—		—		—		—		—		—		—
Mortgage-residential		—		—		—		—		—		—		—
Mortgage-commercial		425		425		12		444		13		439		6
Consumer:
Home equity		—		—		—		—		—		—		—
Other		—		—		—		—		—		—		—

Total:
Commercial, financial, agricultural	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Real estate:
Construction		—		—		—		—		—		—		—
Mortgage-residential		542		600		—		590		10		578		8
Mortgage-commercial		4,047		7,050		12		4,150		193		4,133		96
Consumer:
Home equity		54		56		—		57		2		57		1
Other		—		—		—		—		—		—		—
	$	4,643	$	7,706	$	12	$	4,797	$	205	$	4,768	$	105

(Dollars in thousands)							Nine months ended				Three months ended
			Unpaid				Average		Interest		Average		Interest
September 30, 2019	Recorded		Principal		Related		Recorded		income		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized		Investment		Recognized
With no allowance recorded:
Commercial, financial, agricultural	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Real estate:
Construction		—		—		—		—		—		—		—
Mortgage-residential		538		603		—		594		16		537		12
Mortgage-commercial		3,172		5,867		—		3,259		131		3,092		79
Consumer:
Home equity		72		74		—		76		2		71		1
Other		—		—		—		—		—		—		—

With an allowance recorded:
Commercial, financial, agricultural		4		4		4		4		—		4		—
Real estate:
Construction		—		—		—		—		—		—		—
Mortgage-residential		—		—		—		—		—		—		—
Mortgage-commercial		369		369		10		421		19		326		6
Consumer:
Home equity		—		—		—		—		—		—		—
Other		—		—		—		—		—		—		—

Total:
Commercial, financial, agricultural	$	4	$	4	$	4	$	4	$	—	$	4	$	—
Real estate:
Construction		—		—		—		—		—		—		—
Mortgage-residential		538		603		—		594		16		537		12
Mortgage-commercial		3,541		6,236		10		3,680		150		3,418		85
Consumer:
Home equity		72		74		—		76		2		71		1
Other		—		—		—		—		—		—		—
	$	4,155	$	6,917	$	14	$	4,354	$	168	$	4,030	$	98

(Dollars in thousands)
December 31, 2018	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no allowance recorded:
Commercial	$	—	$	—	$	—	$	—	$	—
Real estate:
Construction		—		—		—		—		—
Mortgage-residential		322		371		—		483		9
Mortgage-commercial		3,577		6,173		—		3,232		128
Consumer:
Home Equity		29		30		—		33		2
Other		—		—		—		—		—

With an allowance recorded:
Commercial		—		—		—		—		—
Real estate:
Construction		—		—		—		—		—
Mortgage-residential		—		—		—		—		—
Mortgage-commercial		453		453		14		380		21
Consumer:
Home Equity		—		—		—		—		—
Other		—		—		—		—		—

Total:
Commercial		—		—		—		—		—
Real estate:
Construction		—		—		—		—		—
Mortgage-residential		322		371		—		483		9
Mortgage-commercial		4,030		6,626		14		3,612		149
Consumer:
Home Equity		29		30		—		33		2
Other		—		—		—		—		—
	$	4,381	$	7,027	$	14	$	4,128	$	160

(Dollars in thousands)

June 30, 2019			Special
	Pass		Mention		Substandard		Doubtful		Total
Commercial, financial & agricultural	$	52,599	$	42	$	—	$	—	$	52,641
Real estate:
Construction		61,284		—		—		—		61,284
Mortgage – residential		48,660		483		784		—		49,927
Mortgage – commercial		516,154		3,968		4,226		—		524,348
Consumer:
Home Equity		27,002		1,167		296		—		28,465
Other		9,998		44		—				10,042
Total	$	715,697	$	5,704	$	5,306	$	—	$	726,707

(Dollars in thousands)	Three Months Ended June 30, 2019			Three Months Ended June 30, 2018			Three Months Ended September 30, 2019			Three Months Ended September 30, 2018

Accretable yield, beginning of period	$	145		$	12		$	138		$	(2	)
Additions		—			—			—			—
Accretion		(7	)		(14	)		(7	)		(8	)
Reclassification of nonaccretable difference due to improvement in expected cash flows		—			—			—			—
Other changes, net		—			—			—			—
Accretable yield, end of period	$	138		$	(2	)	$	130		$	(10	)

(Dollars in thousands)	Six Months Ended June 30, 2019			Six Months Ended June 30, 2018

Accretable yield, beginning of period	$	153		$	22
Additions		—			—
Accretion		(15	)		(24	)
Reclassification of nonaccretable difference due to improvement in expected cash flows		—			—
Other changes, net		—			—
Accretable yield, end of period	$	138		$	(2)

(Dollars in thousands)	Nine Months Ended September 30, 2019			Nine Months Ended September 30, 2018

Accretable yield, beginning of period	$	153		$	22
Additions		—			—
Accretion		(23	)		(32	)
Reclassification of nonaccretable difference due to improvement in expected cash flows		—			—
Other changes, net		—			—
Accretable yield, end of period	$	130		$	(10	)

(Dollars in thousands)					Greater than														Greater than
	30-59 Days		60-89 Days		90 Days and				Total						30-59 Days		60-89 Days		90 Days and				Total
June 30, 2019	Past Due		Past Due		Accruing		Nonaccrual		Past Due		Current		Total Loans
September 30, 2019															Past Due		Past Due		Accruing		Nonaccrual		Past Due		Current		Total Loans

Commercial	$	37	$	4	$	—	$	—	$	41	$	52,600	$	52,641	$	33	$	306	$	—	$	4	$	343	$	54,826	$	55,169
Real estate:
Construction		—		—		—		—		—		61,284		61,284		—		—		—		—		—		58,737		58,737
Mortgage-residential		249		15		—		542		806		49,121		49,927		138		184		—		538		860		46,833		47,693
Mortgage-commercial		339		—		—		2,094		2,433		521,915		524,348		2,272		47		—		1,661		3,980		530,574		534,554
Consumer:
Home equity		345		75		—		54		474		27,991		28,465		55		91		33		72		251		28,852		29,103
Other		43		44		—		—		87		9,955		10,042		17		44		—		—		61		9,757		9,818
	$	1,013	$	138	$	—	$	2,690	$	3,841	$	722,866	$	726,707	$	2,515	$	672	$	33	$	2,275	$	5,495	$	729,579	$	735,074

Description	June 30, 2019		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		September 30, 2019		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Available for sale securities
US Treasury Securities	$	9,177	$	—	$	9,177	$	—	$	7,192	$	—	$	7,192	$	—
Government sponsored enterprises		1,122		—		1,122		—		1,123		—		1,123		—
Mortgage-backed securities		148,172		—		148,172		—		168,041		—		168,041		—
Small Business Administration pools		51,907		—		51,907		—		47,653		—		47,653		—
State and local government		39,913		—		39,913		—		41,040		—		41,040		—
Corporate and other securities		19		9		10		—		19		9		10		—
		250,310		9		250,301		—		265,068		9		265,059		—
Loans held for sale		8,730		—		8,730		—		10,775		—		10,775		—
Total	$	259,040	$	9	$	259,031	$	—	$	275,843	$	9	$	275,834	$	—

Description	December 31, 2018		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	$	15,457	$	—	$	15,457	$	—
Government sponsored enterprises		1,100		—		1,100		—
Mortgage-backed securities		115,475		—		114,784		691
Small Business Administration securities		55,336		1,633		53,703		—
State and local government		50,506		—		50,506		—
Corporate and other securities		19		9		10		—
		237,893		1,642		235,560		691
Loans held for sale		3,223		—		3,223		—
Total	$	241,116	$	1,642	$	238,783	$	691

Description	December 31, 2018		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	$	15,457	$	—	$	15,457	$	—
Government sponsored enterprises		1,100		—		1,100		—
Mortgage-backed securities		115,475		—		114,784		691
Small Business Administration securities		55,336		1,633		53,703		—
State and local government		50,506		—		50,506		—
Corporate and other securities		19		9		10		—
		237,893		1,642		235,560		691
Loans held for sale		3,223		—		3,223		—
Total	$	241,116	$	1,642	$	238,783	$	691

~~(Dollars in thousands)~~	~~Fair Value~~ ~~as of~~ ~~June 30,~~ ~~2019~~	~~Valuation Technique~~	~~Significant~~ ~~Observable Inputs~~	~~Significant~~ ~~Unobservable Inputs~~
~~OREO~~	~~$ 1,412~~	~~Appraisal Value/Comparison Sales/Other estimates~~	~~Appraisals and or sales of comparable properties~~	~~Appraisals discounted 6% to 16% for sales commissions and other holding cost~~
~~Impaired loans~~	~~$ 4,631~~	~~Appraisal Value~~	~~Appraisals and or sales of comparable properties~~	~~Appraisals discounted 6% to 16% for sales commissions and other holding cost~~

~~(Dollars in thousands)~~	~~Fair Value~~ ~~as of~~ ~~December 31,~~ ~~2018~~	~~Valuation Technique~~	~~Significant~~ ~~Observable Inputs~~	~~Significant~~ ~~Unobservable Inputs~~
~~OREO~~	~~$ 1,460~~	~~Appraisal Value/Comparison Sales/Other estimates~~	~~Appraisals and or sales of comparable properties~~	~~Appraisals discounted 6% to 16% for sales commissions and other holding cost~~

~~Impaired loans~~	~~$ 4,367~~	~~Appraisal Value~~	~~Appraisals and or sales of comparable properties~~	~~Appraisals discounted 6% to 16% for sales commissions and other holding cost~~

(Dollars in thousands)	Fair Value as of September 30, 2019		Valuation Technique	Significant Observable Inputs	Significant Unobservable Inputs
OREO	$	1,412	Appraisal Value/Comparison Sales/Other estimates	Appraisals and or sales of comparable properties	Appraisals discounted 6% to 16% for sales commissions and other holding cost
Impaired loans	$	4,141	Appraisal Value	Appraisals and or sales of comparable properties	Appraisals discounted 6% to 16% for sales commissions and other holding cost

(Dollars in thousands)	Fair Value as of December 31, 2018		Valuation Technique	Significant Observable Inputs	Significant Unobservable Inputs
OREO	$	1,460	Appraisal Value/Comparison Sales/Other estimates	Appraisals and or sales of comparable properties	Appraisals discounted 6% to 16% for sales commissions and other holding cost

Impaired loans	$	4,367	Appraisal Value	Appraisals and or sales of comparable properties	Appraisals discounted 6% to 16% for sales commissions and other holding cost

Nine months ended September 30, 2019															Commercial				Investment
(Dollars in thousands)	Commercial				Investment										and Retail		Mortgage		advisory and
Six months ended June 30, 2018	and Retail		Mortgage		advisory and
	Banking		Banking		non-deposit		Corporate			Eliminations			Consolidated		Banking		Banking		non-deposit		Corporate			Eliminations			Consolidated

Dividend and Interest Income	$	18,731	$	408	$	—	$	1,831		$	(1,820	)	$	19,150	$	31,081	$	745	$	—	$	6,077		$	(6,059	)	$	31,844
Interest expense		1,337		—		—		340			—			1,677		3,772		—		—		583			—			4,355
Net interest income	$	17,394	$	408	$	—	$	1,491		$	(1,820	)	$	17,473	$	27,309	$	745	$	—	$	5,494		$	(6,059	)	$	27,489
Provision for loan losses		231		—		—		—			—			231		139		—		—		—			—			139
Noninterest income		2,791		1,967		784		—			—			5,542		4,039		3,333		1,436		—			—			8,808
Noninterest expense		13,310		1,577		723		209			—			15,819		21,416		2,754		1,302		281			—			25,753
Net income before taxes	$	6,644	$	798	$	61	$	1,282		$	(1,820	)	$	6,965	$	9,793	$	1,324	$	134	$	5,213		$	(6,059	)	$	10,405
Income tax provision (benefit)		1,382		—		—		(127	)		—			1,255		2,330		—		—		(199	)		—			2,131
Net income (loss)	$	5,262	$	798	$	61	$	1,409		$	(1,820	)	$	5,710	$	7,463	$	1,324	$	134	$	5,412		$	(6,059	)	$	8,274

Nine months ended September 30, 2018															Commercial				Investment
(Dollars in thousands)															and Retail		Mortgage		advisory and
															Banking		Banking		non-deposit		Corporate			Eliminations			Consolidated

Dividend and Interest Income															$	28,513	$	622	$	—	$	2,779		$	(2,779	)	$	29,135
Interest expense																2,251		—		—		528			—			2,779
Net interest income															$	26,262	$	622	$	—	$	2,251		$	(2,779	)	$	26,356
Provision for loan losses																252		—		—		—			—			252
Noninterest income																4,051		3,126		1,207		—			—			8,384
Noninterest expense																20,105		2,515		1,047		286			—			23,953
Net income before taxes															$	9,956	$	1,233	$	160	$	1,965		$	(2,779	)	$	10,535
Income tax provision (benefit)																2,173		—		—		(181	)		—			1,992
Net income															$	7,783	$	1,233	$	160	$	2,146		$	(2,779	)	$	8,543

Three months ended September 30, 2019															Commercial				Investment
(Dollars in thousands)	Commercial				Investment										and Retail		Mortgage		advisory and
Three months ended June 30, 2019	and Retail		Mortgage		advisory and
	Banking		Banking		non-deposit		Corporate			Eliminations			Consolidated		Banking		Banking		non-deposit		Corporate			Eliminations			Consolidated

Dividend and Interest Income	$	10,355	$	251	$	—	$	2,025		$	(2,025	)		10,606	$	10,600	$	257	$	—	$	3,036		$	(3,029	)		10,864
Interest expense		1,293		—		—		197			—			1,490		1,322		—		—		189			—			1,511
Net interest income	$	9,062	$	251	$	—	$	1,828		$	(2,025	)	$	9,116	$	9,278	$	257	$	—	$	2,847		$	(3,029	)	$	9,353
Provision for loan losses		9		—		—		—			—			9		25		—		—		—			—			25
Noninterest income		1,458		1,238		490		—			—			3,186		1,353		1,251		509		—			—			3,113
Noninterest expense		7,146		951		447		96			—			8,640		7,246		999		440		105			—			8,790
Net income before taxes	$	3,365	$	538	$	43	$	1,732		$	(2,025	)	$	3,653	$	3,360	$	509	$	69	$	2,742		$	(3,029	)	$	3,651
Income tax provision (benefit)		832		—		—		(60	)		—			772		813		—		—		(60	)		—			753
Net income	$	2,533	$	538	$	43	$	1,792		$	(2,025	)	$	2,881	$	2,547	$	509	$	69	$	2,802		$	(3,029	)	$	2,898

Three months ended September 30, 2018															Commercial				Investment
(Dollars in thousands)															and Retail		Mortgage		advisory and
															Banking		Banking		non-deposit		Corporate			Eliminations			Consolidated

Dividend and Interest Income															$	9,772	$	213	$	—	$	947		$	(947	)		9,985
Interest expense																915		—		—		187			—			1,102
Net interest income															$	8,857	$	213	$	—	$	760		$	(947	)	$	8,883
Provision for loan losses																21		—		—		—			—			21
Noninterest income																1,260		1,159		423		—			—			2,842
Noninterest expense																6,796		937		324		77			—			8,134
Net income before taxes															$	3,300	$	435	$	99	$	683		$	(947	)	$	3,570
Income tax provision (benefit)																791		—		—		(54	)		—			737
Net income															$	2,509	$	435	$	99	$	737		$	(947	)	$	2,833

															Commercial				Investment
(Dollars in thousands)															and Retail		Mortgage		advisory and
															Banking		Banking		non-deposit		Corporate			Eliminations			Consolidated

Total Assets as of September 30, 2019															$	1,102,804	$	23,638	$	2	$	127,864		$	(124,318	)	$	1,129,990

Total Assets as of December 31, 2018															$	1,074,838	$	16,078	$	9	$	129,992		$	(129,322	)	$	1,091,595

(Dollars in thousands)	Liability
Year	Cash		Lease Expense		Reduction
2019	$	196	$	135	$	61
2020		200		133		67
2021		204		129		75
2022		208		125		83
2023		212		121		91
Thereafter		3,471		994		2,477
Total	$	4,492	$	1,638	$	2,854