UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

xQuarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

for the quarterly period ended March 31,September 30, 2020
oTransition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

for the transition period from ____ to ____

Commission File No. Number: 000-28344

FIRST COMMUNITY CORPORATION
(Exact name of registrant as specified in its charter)
South Carolina57-1010751

(State or other jurisdiction of incorporation

or organization)

(I.R.S. Employer Identification No.)

5455 Sunset Boulevard, Lexington, South Carolina29072

(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 classTrading Symbol(s)Name of exchange on which registered
Common stock, par value $1.00 per shareFCCOThe Nasdaq Capital 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.    Yesx   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).     xYeso 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”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated fileroAccelerated filerFilerx
Non-accelerated filer   oSmaller reporting companyReporting Company x
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 oNox

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: On May 8,November 6, 2020, 7,462,2477,492,908 shares of the issuer’s common stock, par value $1.00 per share, were issued and outstanding. 

 
 

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION1
Item 1.Financial Statements1
Consolidated Balance Sheets1
Consolidated Statements of Income2
Consolidated Statements of Comprehensive Income34
Consolidated Statements of Changes in Shareholders’ Equity45
Consolidated Statements of Cash Flows58
Notes to Consolidated Financial Statements69
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations3237
Item 3.Quantitative and Qualitative Disclosures About Market Risk4964
Item 4.Controls and Procedures4964
PART II – OTHER INFORMATION5065
Item 1. Legal Proceedings5065
Item 1A.Risk Factors5065
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds5165
Item 3.Defaults Upon Senior Securities5165
Item 4.Mine Safety Disclosures5265
Item 5.Other Information5265
Item 6.Exhibits5266
SIGNATURES5367
INDEX TO EXHIBITS
EX-31.1 RULE 13A-14(A) CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
EX-31.2 RULE 13A-14(A) CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
EX-32 SECTION 1350 CERTIFICATIONS

 
 

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

FIRST COMMUNITY CORPORATION

CONSOLIDATED BALANCE SHEETS

 

 March 31,    September 30,   
(Dollars in thousands, except par value) 2020 December 31,  2020 December 31, 
 (Unaudited) 2019  (Unaudited) 2019 
ASSETS                
Cash and due from banks $23,739  $14,951  $17,279  $14,951 
Interest-bearing bank balances  25,637   32,741   106,231   32,741 
Investment securities available-for-sale  288,881   286,800 
Investment securities - available-for-sale  293,472   286,800 
Other investments, at cost  2,062   1,992   2,053   1,992 
Loans held-for-sale  11,937   11,155   37,587   11,155 
Loans  749,529   737,028   844,460   737,028 
Less, allowance for loan losses  7,694   6,627   10,113   6,627 
Net loans  741,835   730,401   834,347   730,401 
Property, furniture and equipment - net  34,819   35,008   34,527   35,008 
Lease right-of-use assets  3,170   3,215 
Lease right-of-use asset  3,078   3,215 
Premises held-for-sale  591   591   591   591 
Bank owned life insurance  28,223   28,041   28,588   28,041 
Other real estate owned  1,481   1,410   1,313   1,410 
Intangible assets  1,378   1,483   1,188   1,483 
Goodwill  14,637   14,637   14,637   14,637 
Other assets  6,917   7,854   6,913   7,854 
Total assets $1,185,307  $1,170,279  $1,381,804  $1,170,279 
LIABILITIES                
Deposits:                
Non-interest bearing demand $291,669  $289,829 
Non-interest bearing $365,505  $289,829 
Interest bearing  694,976   698,372   808,046   698,372 
Total deposits  986,645   988,201   1,173,551   988,201 
Securities sold under agreements to repurchase  46,041   33,296   47,142   33,296 
Federal Home Loan Bank advances     211      211 
Junior subordinated debt  14,964   14,964 
Junior subordinated debentures  14,964   14,964 
Lease liability  3,229   3,266   3,154   3,266 
Other liabilities  9,814   10,147   9,749   10,147 
Total liabilities  1,060,693   1,050,085   1,248,560   1,050,085 
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 7,462,247 at March 31, 2020 7,440,026 at December 31, 2019  7,462   7,440 
Preferred stock, par value $1.00 per share, 10,000,000 shares authorized; NaN issued and outstanding      
Common stock, par value $1.00 per share; 20,000,000 shares authorized; issued and outstanding 7,492,908 at September 30, 2020 7,440,026 at December 31, 2019  7,493   7,440 
Nonvested restricted stock  (465)  (151)  (327)  (151)
Additional paid in capital  90,916   90,488   91,270   90,488 
Retained earnings  20,830   19,927   23,912   19,927 
Accumulated other comprehensive income  5,871   2,490   10,896   2,490 
Total shareholders’ equity  124,614   120,194   133,244   120,194 
Total liabilities and shareholders’ equity $1,185,307  $1,170,279  $1,381,804  $1,170,279 

See Notes to Consolidated Financial Statements

1
 

FIRST COMMUNITY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
       
(Dollars in thousands, except per share amounts) Three Months ended March 31, 
  2020  2019 
Interest income:        
Loans, including fees $8,827  $8,609 
Investment securities - taxable  1,437   1,217 
Investment securities - non taxable  289   439 
Other short term investments  152   103 
Other  5   6 
Total interest income  10,710   10,374 
Interest expense:        
Deposits  1,019   1,001 
Securities sold under agreement to repurchase  104   92 
Other borrowed money  170   261 
Total interest expense  1,293   1,354 
Net interest income  9,417   9,020 
Provision for loan losses  1,075   105 
Net interest income after provision for loan losses  8,342   8,915 
Non-interest income:        
Deposit service charges  399   411 
Mortgage banking income  982   844 
Investment advisory and non-deposit commissions  634   438 
Loss on sale of securities     (29)
Gain on sale of other assets  6    
Other  907   845 
Total non-interest income  2,928   2,509 
Non-interest expense:        
Salaries and employee benefits  5,653   5,170 
Occupancy  643   655 
Equipment  318   386 
Marketing and public relations  354   175 
FDIC Insurance assessment  42   74 
Other real estate expense  35   29 
Amortization of intangibles  105   132 
Other  1,888   1,702 
Total non-interest expense  9,038   8,323 
Net income before tax  2,232   3,101 
Income tax expense  438   606 
Net income $1,794  $2,495 
         
Basic earnings per common share $0.24  $0.33 
Diluted earnings per common share $0.24  $0.32 

FIRST COMMUNITY CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

  Nine  Nine 
  Months Ended  Months Ended 
  September 30,  September 30, 
  2020  2019 
(Dollars in thousands, except per share amounts) (Unaudited)  (Unaudited) 
Interest income:        
  Loans, including fees $27,254  $26,492 
  Taxable securities  3,797   3,840 
  Non-taxable securities  1,065   1,084 
  Other short-term investments  224   410 
  Other  12   18 
       Total interest income  32,352   31,844 
Interest expense:        
  Deposits  2,415   3,401 
  Securities sold under agreement to repurchase  166   303 
  Other borrowed money  435   651 
      Total interest expense  3,016   4,355 
Net interest income  29,336   27,489 
Provision for loan losses  3,387   139 
Net interest income after provision for loan losses  25,949   27,350 
Non-interest income:        
  Deposit service charges  851   1,212 
  Mortgage banking income  3,957   3,333 
  Investment advisory fees and non-deposit commissions  1,977   1,436 
  Gain on sale of securities  99   135 
  Gain (loss) on sale of other assets  147   (3)
  Non-recurring bank owned life insurance (BOLI) income  311    
  Other  2,823   2,695 
      Total non-interest income  10,165   8,808 
Non-interest expense:        
  Salaries and employee benefits  17,580   15,845 
  Occupancy  2,058   2,005 
  Equipment  934   1,140 
  Marketing and public relations  943   764 
  FDIC assessments  267   135 
  Other real estate expense  154   78 
  Amortization of intangibles  295   397 
  Other  5,652   5,389 
      Total non-interest expense  27,883   25,753 
Net income before tax  8,231   10,405 
Income taxes  1,568   2,131 
Net income $6,663  $8,274 
         
Basic earnings per common share $0.90  $1.10 
Diluted earnings per common share $0.89  $1.08 
         

See Notes to Consolidated Financial Statements

2
 

FIRST COMMUNITY CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

(Dollars in thousands)      
  Three months ended March 31, 
  2020  2019 
       
Net income $1,794  $2,495 
         
Other comprehensive income:        
Unrealized gain during the period on available-for-sale securities, net of tax expense of $899 and $609, respectively  3,381   2,282 
         
Reclassification adjustment for loss on available-for-sale securities included in net income, net of tax benefit of $0 and $6, respectively     23 
         
Other comprehensive income  3,381   2,305 
Comprehensive income $5,175  $4,800 
  Three  Three 
  Months Ended  Months Ended 
  September 30,  September 30, 
  2020  2019 
(Dollars in thousands, except per share amounts) (Unaudited)  (Unaudited) 
Interest income:        
  Loans, including fees $9,408  $9,091 
  Taxable securities  1,135   1,259 
  Non-taxable securities  390   350 
  Other short-term investments  40   158 
  Other  3   6 
       Total interest income  10,976   10,864 
Interest expense:        
  Deposits  659   1,219 
  Securities sold under agreement to repurchase  25   102 
  Other borrowed money  116   190 
      Total interest expense  800   1,511 
Net interest income  10,176   9,353 
Provision for loan losses  1,062   25 
Net interest income after provision for loan losses  9,114   9,328 
Non-interest income:        
  Deposit service charges  242   421 
  Mortgage banking income  1,403   1,251 
  Investment advisory fees and non-deposit commissions  672   509 
  Gain on sale of securities  99    
  Gain on sale of other assets  141    
  Non-recurring bank owned life insurance (BOLI) income  311    
  Other  982   932 
      Total non-interest income  3,850   3,113 
Non-interest expense:        
  Salaries and employee benefits  6,087   5,465 
  Occupancy  736   703 
  Equipment  318   365 
  Marketing and public relations  342   159 
  FDIC assessment  137   (10)
  Other real estate expense  79   31 
  Amortization of intangibles  95   133 
  Other  1,920   1,944 
      Total non-interest expense  9,714   8,790 
Net income before tax  3,250   3,651 
Income taxes  598   753 
Net income $2,652  $2,898 
         
Basic earnings per common share $0.36  $0.39 
Diluted earnings per common share $0.35  $0.39 
         

See Notes to Consolidated Financial Statements

3
 

FIRST COMMUNITY CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITYCOMPREHENSIVE INCOME
(Unaudited)

Three Months ended March 31, 2020 and March 31, 2019

(Dollars in thousands)      
  Nine months ended September 30, 
  2020  2019 
       
Net income $6,663  $8,274 
         
Other comprehensive income:        
Unrealized gain during the period on available-for-sale securities, net of tax expense of $2,255 and $1,511, respectively  8,484   5,677 
         
Reclassification adjustment for gain on available-for-sale securities included in net income, net of tax benefit $21 and $29, respectively  (78)  (106)
         
Other comprehensive income  8,406   5,571 
Comprehensive income $15,069  $13,845 
         
(Dollars in thousands)      
  Three months ended September 30, 
  2020  2019 
       
Net income $2,652  $2,898 
         
Other comprehensive income:        
Unrealized gain during the period on available-for-sale securities, net of tax expense of $160 and $271, respectively  602   1,232 
         
Reclassification adjustment for gain on available-for-sale securities included in net income, net of tax benefit of $21 and $0, respectively  (78)   
         
Other comprehensive income  524   1,232 
Comprehensive income $3,176  $4,130 
         

(Unaudited)

                    Accumulated    
  Common     Common  Additional  Nonvested     Other    
(Dollars in thousands) Shares  Common  Stock  Paid-in  Restricted  Retained  Comprehensive    
  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 
                                 
Other comprehensive income net of tax of $615                          2,305   2,305 
Issuance of restricted stock  8   8       162   (170)           
Amortization of compensation on restricted stock                  33           33 
Shares retired  (8)  (8)      (148)              (156)
Exercise of warrants  21   21   (14)  (7)               
Dividends: Common ($0.11 per share)                      (840)      (840)
Dividend reinvestment plan  5   5       95               100 
Balance, March 31, 2019  7,665  $7,665  $17  $95,150  $(286) $13,917  $(29) $116,434 
                                 
Balance, December 31, 2019  7,440  $7,440  $  $90,488  $(151) $19,927  $2,490  $120,194 
Net income                      1,794       1,794 
                                 
Other comprehensive income net of tax of $899                          3,381   3,381 
Issuance of common stock              4               4 
Issuance of restricted stock  18   18       348   (366)           
Amortization of compensation on restricted stock                  52           52 
Shares retired  (1)  (1)      (14)              (15)
Exercise of warrants                               
Dividends: Common ($0.12 per share)                      (891)      (891)
Dividend reinvestment plan  5   5       90               95 
Balance, March 31, 2020  7,462  $7,462  $  $90,916  $(465) $20,830  $5,871  $124,614 

See Notes to Consolidated Financial Statements

4
 

FIRST COMMUNITY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
  Three months ended
March 31,
 
(Dollars in thousands) 2020  2019 
Cash flows from operating activities:        
Net income $1,794  $2,495 
Adjustments to reconcile net income to net cash provided (used) from operating activities:        
       Depreciation  403   393 
       Net premium amortization  521   539 
       Provision for loan losses  1,075   105 
       Origination of loans held-for-sale  (34,427)  (25,345)
       Sale of loans held-for-sale  33,645   21,269 
       Amortization of intangibles  105   132 
       Accretion on acquired loans  (106)  (143)
       Loss on sale of securities     29 
       Increase in other assets  (80)  (3,273)
       (Decrease) Increase in other liabilities  (363)  1,634 
         Net cash provided (used) from operating activities  2,567   (2,165)
Cash flows from investing activities:        
    Purchase of investment securities available-for-sale  (11,882)  (5,419)
    Purchase of other investment securities  (70)  (207)
Maturity/call of investment securities available-for-sale  13,606   7,969 
Proceeds from sale of securities available-for-sale     7,137 
(Increase) decrease in loans  (12,495)  152 
Proceeds from sale of fixed assets     301 
Purchase of property and equipment  (214)  (1,178)
         Net cash (used) provided in investing activities  (11,055)  8,755 
Cash flows from financing activities:        
Decrease in deposit accounts  (1,555)  (5,735)
Increase in securities sold under agreements to repurchase  12,745   3,985 
Advances from the Federal Home Loan Bank  10,001   56,000 
Repayment of advances from Federal Home Loan Bank  (10,212)  (54,005)
Shares retired  (15)  (156)
Dividends paid:  Common Stock  (891)  (840)
Proceeds from issuance of Common Stock  4    
Dividend reinvestment plan  95   100 
        Net cash provided (used) from financing activities  10,172   (651)
Net increase in cash and cash equivalents  1,684   5,939 
Cash and cash equivalents at beginning of period  47,692   32,268 
Cash and cash equivalents at end of period $49,376  $38,207 
Supplemental disclosure:        
Cash paid during the period for:        
Interest $1,462  $1,293 
Income taxes $  $ 
Non-cash investing and financing activities:        
Unrealized gain on securities $5,871  $2,917 
Recognition of operating lease right of use asset $  $2,846 
Recognition of operating lease liability $  $2,849 
Transfer of investment securities held-to-maturity to available-for-sale $  $16,144 
Transfer of loans to foreclosed property $78    

FIRST COMMUNITY CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

Nine months ended September 30, 2020 and 2019

(Unaudited)

                 Accumulated    
  Common     Additional  Nonvested     Other    
(Dollars and shares in thousands) Shares  Common  Paid-in  Restricted  Retained  Comprehensive    
  Issued  Stock  Capital  Stock  Earnings  Income (loss)  Total 
Balance, December 31, 2019  7,440  $7,440  $90,488  $(151) $19,927  $2,490  $120,194 
Net income                  6,663       6,663 
Other comprehensive income net of tax expense of $2,234                      8,406   8,406 
Issuance of common stock          4               4 
Issuance of restricted stock  18   18   348   (366)           
Issuance of common stock-deferred compensation  18   18   182               200 
Amortization of compensation on restricted stock              190           190 
Shares retired  (1)  (1)  (14)              (15)
Dividends: Common ($0.36 per share)                  (2,678)      (2,678)
Dividend reinvestment plan  18   18   262               280 
Balance, September 30, 2020  7,493  $7,493  $91,270  $(327) $23,912  $10,896  $133,244 

                    Accumulated    
  Common     Common  Additional  Nonvested     Other    
(Dollars and shares in thousands) Shares  Common  Stock  Paid-in  Restricted  Retained  Comprehensive    
  Issued  Stock  Warrants  Capital  Stock  Earnings  Income (loss)  Total 
Balance, December 31, 2018  7,639  $7,639  $31  $95,048  $(149) $12,262  $(2,334) $112,497 
Net Income                      8,274       8,274 
Other comprehensive income net of tax expense of $1,482                          5,571   5,571 
Issuance of restricted stock  8   8       162   (170)           
Amortization of compensation on
restricted stock
                  124           124 
Shares retired  (8)  (8)      (148)              (156)
Exercise of warrants  26   26   (18)  (8)               
Stock repurchase plan  (300)  (300)      (5,338)              (5,638)
Issuance of common stock - deferred compensation  24   24       241               265 
Dividends: Common ($0.33 per share)                      (2,512)      (2,512)
Dividend reinvestment plan  20   20       335               355 
Balance, September 30, 2019  7,409  $7,409  $13  $90,292  $(195) $18,024  $3,237  $118,780 

See Notes to Consolidated Financial Statements

5
 

FIRST COMMUNITY CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)

                 Accumulated    
  Common     Additional  Nonvested     Other    
(Dollars and shares in thousands) Shares  Common  Paid-in  Restricted  Retained  Comprehensive    
  Issued  Stock  Capital  Stock  Earnings  Income (loss)  Total 
Balance, December 31, 2019  7,440  $7,440  $90,488  $(151) $19,927  $2,490  $120,194 
Net income                  1,794       1,794 
Other comprehensive income net of tax expense of $899                      3,381   3,381 
Issuance of common stock          4               4 
Issuance of restricted stock  18   18   348   (366)           
Amortization of compensation on restricted stock              52           52 
Shares retired  (1)  (1)  (14)              (15)
Dividends: Common ($0.12 per share)                  (891)      (891)
Dividend reinvestment plan  5   5   90               95 
Balance, March 31, 2020  7,462  $7,462  $90,916  $(465) $20,830  $5,871  $124,614 
                             
Net income                  2,217       2,217 
Other comprehensive income net of tax expense of $1,196                      4,501   4,501 
Issuance of common stock-Deferred Compensation  18   18   182               200 
Amortization of compensation on restricted stock              69           69 
Dividends: Common ($0.12 per share)                  (892)      (892)
Dividend reinvestment plan  6   6   86               92 
Balance, June 30, 2020  7,486  $7,486  $91,184  $(396) $22,155  $10,372  $130,801 
                             
Net income                  2,652       2,652 
Other comprehensive income net of tax expense of $139                      524   524 
Amortization of compensation on restricted stock              69           69 
Dividends: Common ($0.12 per share)                  (895)      (895)
Dividend reinvestment plan  7   7   86               93 
Balance, September 30, 2020  7,493  $7,493  $91,270  $(327) $23,912  $10,896  $133,244 

See Notes to Consolidated Financial Statements

6

FIRST COMMUNITY CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)

                    Accumulated    
  Common     Common  Additional  Nonvested     Other    
(Dollars and shares in thousands) Shares  Common  Stock  Paid-in  Restricted  Retained  Comprehensive    
  Issued  Stock  Warrants  Capital  Stock  Earnings  Income (Loss)  Total 
Balance December 31, 2018  7,639  $7,639  $31  $95,048  $(149) $12,262  $(2,334) $112,497 
Net Income                      2,495       2,495 
Other comprehensive income net of tax expense of $601                          2,305   2,305 
Issuance of restricted stock  8   8       162   (170)           
Amortization of compensation on restricted stock                  33           33 
Shares retired  (8)  (8)      (148)              (156)
Exercise of warrants  21   21   (14)  (7)               
Dividends: Common ($0.11 per share)                      (840)      (840)
Dividend reinvestment plan  5   5       95               100 
Balance March 31, 2019  7,665  $7,665  $17  $95,150  $(286) $13,917  $(29) $116,434 
Net income                      2,881       2,881 
Other comprehensive income net of tax expense of $610                          2,034   2,034 
Amortization of compensation on restricted stock                  45           45 
Exercise of warrants  2   2   (2)                   
Stock repurchase plan  (185)  (185)      (3,228)              (3,413)
Shares issued-deferred compensation  24   24       241               265 
Dividends: Common ($0.11 per share)                      (841)      (841)
Dividend reinvestment plan  5   5       79               84 
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 expense 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)
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 to Consolidated Financial Statements

7

FIRST COMMUNITY CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

         
  Nine months ended
September 30,
 
(Dollars in thousands) 2020  2019 
Cash flows from operating activities:        
Net income $6,663  $8,274 
Adjustments to reconcile net income to net cash used from operating activities:        
Depreciation  1,218   1,000 
Net premium amortization  1,694   1,658 
Provision for loan losses  3,387   139 
(Gain) Loss on sale of other real estate owned        (147)   3 
Write-downs of other real estate owned  78    
Origination of loans held-for-sale  (140,972)  (97,878)
Sale of loans held-for-sale  114,540   90,326 
Amortization of intangibles  295   397 
Accretion on acquired loans  (230)  (402)
Gain on sale of securities  (99)  (135)
Loss on fair value of equity securities  2    
Decrease in other assets  (1,704)  (3,089)
(Decrease) Increase in other liabilities  (510)   2,522 
Net cash used from operating activities  (15,785)  2,815 
Cash flows from investing activities:        
Purchase of investment securities available-for-sale  (34,059)  (81,977)
Purchase of other investment securities  (70)  (37)
Maturity/call of investment securities available-for-sale  34,429   32,199 
Proceeds from sale of securities available-for-sale  2,200   44,398 
Proceeds from sale of other securities      
Increase in loans  (107,163)  (16,322)
Proceeds from sale of other real estate owned  227   45 
Proceeds from sale of fixed assets     301 
Purchase of property and equipment  (737)  (2,391)
Net cash used in investing activities  (105,173)  (23,784)
Cash flows from financing activities:        
Increase in deposit accounts  185,350   23,338 
Increase in securities sold under agreements to repurchase  13,846   6,299 
Advances from the Federal Home Loan Bank  34,001   65,000 
Repayment of advances from Federal Home Loan Bank  (34,212)  (65,015)
Shares retired  (15)  (156)
Repurchase of common stock     (5,638)
Issuance of deferred compensation shares  200   265 
Dividends paid: Common Stock  (2,678)  (2,512)
Proceeds from issuance of Common Stock  4    
Dividend reinvestment plan  280   355 
Net cash provided from financing activities  196,776   21,936 
Net increase in cash and cash equivalents  75,818   967 
Cash and cash equivalents at beginning of period  47,692   32,268 
Cash and cash equivalents at end of period $123,510  $33,235 
         
Supplemental disclosure:        
Cash paid during the period for:        
Interest $3,429  $4,301 
Income taxes $2,688  $2,060 
Non-cash investing and financing activities:        
Unrealized gain on securities $10,640  $7,053 
Recognition of operating lease right of use asset $  $3,260 
Recognition of operating lease liability $  $3,291 
Transfer of investment securities held-to-maturity to available-for-sale $  $16,144 
Transfer of loans to foreclosed property $78  $ 
         

See Notes to Consolidated Financial Statements

8

Notes to Consolidated Financial Statements (Unaudited)

 

Note 1—Nature of Business and Basis of Presentation

Basis of Presentation

 

In the opinion of management, the accompanying unaudited consolidated balance sheets, and the consolidated statements of income, comprehensive income, changes in shareholders’ equity, and the cash flows of First Community Corporation (the “Company”) and its wholly owned subsidiary, First Community Bank (the “Bank”), present fairly in all material respects the Company’s financial position at March 31,September 30, 2020 and December 31, 2019, and the Company’s results of operations for the three and nine months ended September 30, 2020 and 2019 and cash flows for the threenine months ended March 31,September 30, 2020 and 2019. The results of operations for the three and nine months ended March 31,September 30, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020.

In the opinion of management, all adjustments necessary to fairly present the consolidated financial position and consolidated results of operations have been made. All such adjustments are of a normal, recurring nature. All significant intercompany accounts and transactions have been eliminated in consolidation. The consolidated financial statements and notes thereto are presented in accordance with the instructions for Quarterly Reports on Form 10-Q. The information included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 should be referred to in connection with these unaudited interim financial statements.

Risk and Uncertainties

In December 2019, a novel strain ofThe coronavirus (COVID-19) pandemic, which was reported to have surfaceddeclared a national emergency in China, and has since spread to a number of other countries, including the United States. In March 2020, the World Health Organization declared COVID-19 a global pandemic and the United States declared a National Public Health Emergency. Thein March 2020, continues to create extensive disruptions to the global economy and financial markets and to businesses and the lives of individuals throughout the world. In particular, the COVID-19 pandemic has severely restricted the level of economic activity in our markets. Federal and state governments have taken, and may continue to take, unprecedented actions to contain the Bank’s markets. In response to the COVID-19 pandemic, the governmentsspread of the states in which the Bank has retail offices, and of most other states, have taken preventative or protective actions, such as imposing restrictions ondisease, including quarantines, travel and business operations, advising or requiring individuals to limit or forego their time outside of their homes, and ordering temporarybans, shelter-in-place orders, closures of businesses thatand schools, fiscal stimulus, and legislation designed to deliver monetary aid and other relief to businesses and individuals impacted by the pandemic. Although in various locations certain activity restrictions have been deemed to be non-essential.relaxed and businesses and schools have reopened with some level of success, in many states and localities the number of individuals diagnosed with COVID-19 has increased significantly, which may cause a freezing or, in certain cases, a reversal of previously announced relaxation of activity restrictions and may prompt the need for additional aid and other forms of relief.

While the Bank’s business has been designated an essential business, which allows the Bank to continue to serve its customers, the Bank serves many customers that have been deemed, or who are employed by businesses that have been deemed, to be non-essential. And many of the Bank’s customers that have been categorized to date as essential businesses, or who are employed by businesses that have been categorized as essential businesses, have been adversely affected by the COVID-19 pandemic.

The impact of the COVID-19 pandemic is fluid and continues to evolve.evolve, adversely affecting many of the Bank’s customers. The unprecedented and rapid spread of COVID-19 pandemic and its associated impacts on trade (including supply chains and export levels), travel, employee productivity, unemployment, consumer spending, and other economic activities has resulted in less economic activity, lower equity market valuations and significant volatility and disruption in financial markets, and has had an adverse effect on the Company’s business, financial condition and results of operations. The ultimate extent of the impact of the COVID-19 pandemic on the Company’s business, financial condition and results of operations is currently uncertain and the timing and pace of recovery will depend on various developments and other factors, including, among others, the duration and scope of the pandemic, as well as governmental, regulatory and private sector responses to the pandemic, and the associated impacts on the economy, financial markets and the Company’s customers, employees and vendors.

The Company’s business, financial condition and results of operations generally rely upon the ability of the Bank’s borrowers to repay their loans, the value of collateral underlying the Bank’s secured loans, and demand for loans and other products and services the Bank offers, which are highly dependent on the business environment in the Bank’s primary markets where it operates and in the United States as a whole.

9

Note 1—Nature of Business and Basis of Presentation-continued

On March 3, 2020, the Federal Reserve reduced the target federal funds rate by 50 basis points, followed by an additional reduction of 100 basis points on March 16, 2020. These reductions in interest rates and the other effects of the COVID-19 pandemic may adversely affecthave had, and are expected to continue to have, possibly materially, an adverse effect on the Company’s business, financial condition and results of operations. AsFor instance, the pandemic has had a result ofnegative effect on the spread of COVID-19, economic uncertainties have arisen which are likely to negatively impactBank’s net interest income,margin, provision for loan losses, and noninterest income.deposit service charges, salaries and benefits, occupancy expense, and equipment expense. Other financial impactimpacts could occur though such potential impact is unknown at this time.

As of March 31,September 30, 2020, the Bank’s capital ratios were in excess of all regulatory requirements. While management believes that the Company has sufficient capital to withstand an extended economic recession brought about by the COVID-19 pandemic, the Bank’s reported and regulatory capital ratios could be adversely impacted by further credit losses.

6

We believe that we have ample liquidity to meet the needs of our customers and to manage through the COVID-19 pandemic through our low cost deposits; our ability to borrow against approved lines of credit (federal funds purchased) from correspondent banks; and our ability to obtain advances secured by certain securities and loans from the Federal Home Loan Bank. Furthermore, we are eligible to participate in the Paycheck Protection Program Liquidity Facility (“PPPLF”) to fund Paycheck Protection Program (PPP) loans if needed.

Beginning in early March 2020, the Company proactively reached out to its loan customers and offered payment deferrals for up to 90 days. Asdays to its loan customers. We continue to consider potential deferrals with respect to certain customers, which we evaluate on a case-by-case basis. Loans on which payments have been deferred declined to $27.3 million at September 30, 2020 from $175.0 million at June 30, 2020. The $27.3 million in deferrals at September 30, 2020 includes nine loans totaling $11.4 million of March 31,remaining initial deferrals of which principal and interest are being deferred, and eight loans totaling $15.9 million of second deferrals of which only principal is being deferred. At its peak, which occurred during the second quarter of 2020, the Company granted 183payment deferments on loans totaling $206.9 million. As a result of normal payments being resumed by loan customers at the conclusion of their applicable payment deferral requests totaling $118.3period, loans in which payments have been deferred decreased from the peak of $206.9 million of the Company’s loan portfolio related to the COVID-19 pandemic. As of May 4,$175.0 million at June 30, 2020, the Company has granted 383 deferrals totaling approximately $202.4to $27.3 million of the Company’s loan portfolio.at September 30, 2020, and to $14.1 million at November 5, 2020.

The Company has evaluated its exposure to certain industry segments most impacted by the COVID-19 pandemic as of March 31,September 30, 2020:

Industry Segments Outstanding % of Loan Ave. Loan Ave. Loan to  Outstanding % of Loan Avg. Loan Avg. Loan to 
(Dollars in millions) Loan Balance Portfolio Size Value  Loan Balance Portfolio Size Value 
Hotels $26.8   3.6% $1.9   67% $30.3   3.5% $2.2   71%
Restaurants $17.6   2.4% $0.6   64% $22.6 2.6% $0.7 69%
Assisted Living $9.2   1.2% $1.8   50% $8.8 1.0% $1.8 48%
Retail $75.5   10.1% $0.6   62% $79.8 9.1% $0.6 57%

Note 2—Earnings Per Common Share and Share Based Compensation

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

(In thousands except average market price)

  .           
  Nine months  Three months 
  Ended September 30,  Ended September 30, 
  2020  2019  2020  2019 
             
Numerator (Net income available to common shareholders) $6,663  $8,274  $2,652  $2,898 
Denominator                
Weighted average common shares outstanding for:                
Basic shares  7,440   7,548   7,458   7,386 
Dilutive securities:                
Deferred compensation  24   40   13   39 
                 
Warrants/Restricted stock – Treasury stock method  11   42   11   38 
Diluted shares  7,475   7,630   7,482   7,463 
Earnings per common share:                
Basic  0.90   1.10   0.36   0.39 
Diluted  0.89   1.08   0.35   0.39 
The average market price used in calculating assumed number of shares $15.87  $19.06  $13.69  $18.95 

  Three months ended 
  March 31, 
  2020  2019 
Numerator (Net income available to common shareholders) $1,794  $2,495 
Denominator        
Weighted average common shares outstanding for:        
Basic shares  7,421   7,634 
Dilutive securities:        
Deferred compensation  38   52 
Warrants/Restricted stock -Treasury stock method  9   39 
Diluted shares  7,468   7,725 
The average market price used in calculating assumed number of shares $19.03  $19.90 

There were no options outstanding as of March 31, 2020 and 2019.

In the fourth quarter of 2011, we issued $2.5$2.5 million in 8.75% subordinated notes maturing December 16, 2019. On November 15, 2012, we redeemed the subordinated notes were redeemed in full at par. In connection with the issuance of the subordinated debt, the Company issued warrants for 107,500 shares of common stock at $5.90 per share. There were 36,55027,950 warrants outstanding at March 31,September 30, 2019 and these warrants are included in dilutive securities in the table above. All warrants were exercised by their expiration date of December 16, 2019.

7

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. The non-employee director’s account balance is distributed by issuance of common stock at the time of retirement or resignation from the board of directors. At March 31,September 30, 2020 and December 31, 2019, there were 100,21586,589 and 97,104 units in the plan, respectively. The accrued liability at March 31,September 30, 2020 and December 31, 2019 amounted to $1.2$1.0 million and $1.1$1.1 million, respectively, and is included in “Other liabilities” on the balance sheet.

The Company has adopted a stock incentive plan whereby shares have been reserved for issuance by the Company upon the grant of stock options or restricted stock awards. At September 30, 2020 and December 31, 2019, the Company had 111,049 and 96,729 shares, respectively, reserved for future grants. The 350,000 shares reserved were approved by shareholders at the 2011 annual meeting. The plan provides for the grant of options to key employees and directors as determined by a stock option committee made up of at least two members of the board of directors. Options are exercisable for a period of ten years from date of grant. There were no stock options outstanding and exercisable at September 30, 2020 and December 31, 2019.

The employee restricted shares and units cliff vest over a three-year period; the non-employee director shares vest one year after issuance. The unrecognized compensation cost at September 30, 2020 and December 31, 2019 for non-vested shares amounts to $327.2 thousand and $219.7 thousand, respectively. Each unit is convertible into one share of common stock at the time the unit vests. The related compensation cost is accrued over the vesting period and was $93.3 thousand and $61.0 thousand at September 30, 2020, and December 31, 2019, respectively.

11

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 
March 31, 2020         
September 30, 2020         
US Treasury securities $ 3,498  $36  $  $3,534  $1,503  $7  $0  $1,510 
Government Sponsored Enterprises  987 28  1,015  993 17 0 1,010 
Mortgage-backed securities  176,507 5,818 1,491 180,834  171,441 7,763 154 179,050 
Small Business Administration pools  41,255 597 125 41,727  36,369 922 19 37,272 
State and local government  59,187 2,577 8 61,756  66,101 5,254 0 71,355 
Other securities   15      15 
Corporate and Other securities  3,273  10  8  3,275 
 $ 281,449 $9,056 $1,624 $288,881  $279,680 $13,973 $181 $293,472 
                  
   Gross Gross      Gross Gross   
 Amortized Unrealized Unrealized    Amortized Unrealized Unrealized   
(Dollars in thousands) Cost Gains Losses Fair Value  Cost Gains Losses Fair Value 
December 31, 2019                         
US Treasury securities $7,190 $16 $3 $7,203  $7,190  $16  $3  $7,203 
Government Sponsored Enterprises 984 17  1,001   984   17   0   1,001 
Mortgage-backed securities 182,736 1,490 640 183,586   182,736   1,490   640   183,586 
Small Business Administration pools 45,301 259 217 45,343   45,301   259   217   45,343 
State and local government 47,418 2,371 141 49,648   47,418   2,371   141   49,648 
Other securities  19      19   19   0   0   19 
 $283,648 $4,153 $1,001 $286,800  $283,648  $4,153  $1,001  $286,800 

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 March 31,September 30, 2020.

During the threenine months ended March 31,September 30, 2020 and 2019, the Company received proceeds of $0$2.2 million and $7.1$44.4 million, respectively, from the sale of investment securities available-for-sale. For the threenine months ended March 31,September 30, 2020, there were no gross realized gains from the sale of investment securities available-for-sale amounted to $99.2 thousand and there were no gross realized losses. For the threenine months ended March 31,September 30, 2019, gross realized gains from the sale of investment securities available-for-sale amounted to $41$354.6 thousand and gross realized losses amounted to $70$219.6 thousand. 

8

For the three months ended September 30, 2020, gross realized gains from the sale of investment securities available-for-sale amounted to $99.2 thousand and there were no gross realized losses. For the three months ended September 30, 2019, there were no realized gains or losses from the sale of investment securities available-for-sale.

Note 3—Investment Securities-continued

At March 31,September 30, 2020, other securities available-for-sale included the following at fair value: a mutual fund at $5.0$6.5 thousand, and foreign debt of $10.0 thousand.$10.0 thousand and corporate fixed-to-floating rate subordinated debt of $3.3 million. 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 threenine months ended March 31,September 30, 2020 and 2019, a $3.8$2.1 thousand loss and a $1.0$2.0 thousand gain were recognized on a mutual fund, respectively. For the three months ended September 30, 2020 and September 30, 2019 there were no gains or losses recognized on equity investments. At December 31, 2019, corporate and other securities available-for-sale included the following at fair value: a mutual fund at $8.8$8.9 thousand and foreign debt of $10.0$10.0 thousand. Other investments, at cost, include Federal Home Loan Bank (“FHLB”) stock in the amount of $1.1$1.1 million and corporate stock in the amount of $1.0$1.0 million at March 31,September 30, 2020. The Company held $991.4$991.4 thousand of FHLB stock and $1.0$1.0 million in corporate stock at December 31, 2019.

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 March 31,September 30, 2020 and December 31, 2019.

             
(Dollars in thousands) Less than 12 months 12 months or more Total  Less than 12 months 12 months or more Total 
March 31, 2020 Fair Unrealized Fair Unrealized Fair Unrealized 
September 30, 2020 Fair Unrealized Fair Unrealized Fair Unrealized 
Available-for-sale securities: Value Loss Value Loss Value Loss  Value Loss Value Loss Value Loss 
                          
Mortgage-backed securities $36,949  $1,432  4,062  59  41,011  1,491  $22,050  $103  $5,601  $51  $27,651  $154 
Small Business Administration pools 3,038 18 8,845 107 11,883 125  1,213 2 3,434 17 4,647 19 
State and local government  2,226  8      2,226  8  1,009    1,009  
Corporate and Other Securities  1,275  8      1,275  8 
Total  $42,213 $1,458 $12,907 $166 $55,120 $1,624  $25,547 $113 $9,035 $68 $34,582 $181 
                
(Dollars in thousands) Less than 12 months 12 months or more Total  Less than 12 months 12 months or more Total 
December 31, 2019 Fair Unrealized Fair Unrealized Fair Unrealized  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 $ $ $1,508 $3 $1,508 $3  $ $ $1,508 $3 $1,508 $3 
Mortgage-backed securities 57,175 485 12,419 155 69,594 640  57,175 485 12,419 155 69,594 640 
Small Business Administration pools 7,891 53 13,502 164 21,393 217  7,891 53 13,502 164 21,393 217 
State and local government  5,695  141      5,695  141   5,695  141      5,695  141 
Total $70,761 $679 $27,429 $322 $98,190 $1,001  $70,761 $679 $27,429 $322 $98,190 $1,001 

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 $176.5$171.4 million and $182.7$182.7 million and approximate fair value of $180.8$179.1 million and $183.6$183.6 million at March 31,September 30, 2020 and December 31, 2019, respectively. As of March 31,September 30, 2020, and December 31, 2019, 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 GSEs. 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 notmore-likely-than-not that the Company will not be required to 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 March 31,September 30, 2020. 

9

Note 3—Investment Securities-continued

Non-agency Mortgage Backed Securities: The Company held private label mortgage-backed securities (“PLMBSs”), including CMOs, at March 31,September 30, 2020 with an amortized cost of $70.9$61.5 thousand and approximate fair value of $66.2$58.6 thousand. The Company held PLMBSs, including CMOs, at December 31, 2019 with an amortized cost of $73.5$73.5 thousand and approximate fair value of $73.5$73.5 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.

State and Local Governments and Other:Governments: Management monitors these securities on a quarterly basis to identify any deterioration in the credit quality. Included in the monitoring is a review of the credit rating, a financial analysis and certain demographic data on the underlying issuer. The Company does not consider these securities to be other-than-temporarily impaired at March 31,September 30, 2020.

13

Note 3—Investment Securities-continued

The following sets forth the amortized cost and fair value of investment securities at March 31,September 30, 2020 by contractual maturity. Expected maturities differ from contractual maturities because borrowers may have the right to call or prepay the obligations with or without prepayment penalties. MBSs are based on average life at estimated prepayment speeds.

March 31, 2020 Available-for-sale 
  Amortized  Fair 
(Dollars in thousands) Cost  Value 
Due in one year or less $7,772  $7,842 
Due after one year through five years  122,950   125,292 
Due after five years through ten years  123,926   128,280 
Due after ten years  26,801   27,467 
Total $281,449  $288,881 

September 30, 2020 Available-for-sale 
  Amortized  Fair 
(Dollars in thousands) Cost  Value 
Due in one year or less $10,573  $10,661 
Due after one year through five years  131,512   136,138 
Due after five years through ten years  116,467   124,866 
Due after ten years  21,128   21,807 
Total $279,680  $293,472 

 

Note 4—Loans

 

Loans summarized by category as of March 31,September 30, 2020, December 31, 2019 and March 31,September 30, 2019 are as follows:

 March 31, December 31, March 31,  September 30, December 31, September 30, 
(Dollars in thousands) 2020 2019 2019  2020  2019  2019 
Commercial, financial and agricultural $50,313  $51,805  $52,289  $108,006  $51,805  $55,169 
Real estate:                   
Construction 83,547 73,512 56,234   89,250   73,512   58,737 
Mortgage-residential 46,471 45,357 50,732   49,215   45,357   47,693 
Mortgage-commercial 530,180 527,447 519,420   561,932   527,447   534,554 
Consumer:                   
Home equity 28,641 28,891 30,092   27,618   28,891   29,103 
Other  10,377  10,016  9,653   8,439   10,016   9,818 
Total $749,529 $737,028 $718,420  $844,460  $737,028  $735,074 

Commercial, financial, and agricultural category includes $49.8 million in PPP loans as of September 30, 2020.

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 three months ended March 31,and nine months ended September 30, 2020 and March 31,September 30, 2019 and for the year ended December 31, 2019 is as follows:

(Dollars in thousands)                        
        Real estate  Real estate  Consumer          
     Real estate  Mortgage  Mortgage  Home  Consumer       
  Commercial  Construction  Residential  Commercial  equity  Other  Unallocated  Total 
March 31, 2020                                
Allowance for loan losses:                                
Beginning balance
December 31, 2019
 $427  $111  $367  $4,602  $240  $97  $783  $6,627 
Charge-offs                 (23)     (23)
Recoveries           6   1   8      15 
Provisions  62   37   73   923   36   30   (86)  1,075 
Ending balance
March 31, 2020
 $489  $148  $440  $5,531  $277  $112  $697  $7,694 
                                 
Ending balances:                                
Individually evaluated for impairment $  $  $  $5  $  $  $  $5 
                                 
Collectively evaluated for impairment  489   148   440   5,526   277   112   697   7,689 
                                 
March 31, 2020
Loans receivable:
                                
Ending balance-total $50,313  $83,547  $46,471  $530,180  $28,641  $10,377  $  $749,529 
                                 
Ending balances:                                
Individually evaluated for impairment        340   2,966   68         3,374 
                                 
Collectively evaluated for impairment $50,313  $83,547  $46,131  $527,214  $28,573  $10,377  $  $746,155 
(Dollars in thousands)                        
        Real estate  Real estate  Consumer          
     Real estate  Mortgage  Mortgage  Home  Consumer       
  Commercial  Construction  Residential  Commercial  equity  Other  Unallocated  Total 
Three months ended September 30, 2020                        
Allowance for loan losses:                                
Beginning balance
June 30, 2020
 $769  $165  $497  $6,469  $293  $132  $611  $8,936 
Charge-offs     (2)      (1)      (22)     (25)
Recoveries  118   2      4   1   15      140 
Provision for loan losses  (59)   12   96   982   36   (2)   (3)  1,062 
Ending balance
September 30, 2020
 $828  $177  $593  $7,454  $330  $123  $608  $10,113 

Note 4—Loans-continued

(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 
March 31, 2019                               
Nine months ended September 30, 2020                               
Allowance for loan losses:                                  
Beginning balance
December 31, 2018
 $430 $89 $431 $4,318 $261 $88 $646 $6,263 
Beginning balance
December 31, 2019
 $427 $111 $367 $4,602 $240 $97 $783 $6,627 
Charge-offs (2    (1) (30)  (33)  (2)  (1)   (70)  (73)
Recoveries    10  9  19  121 2  13 2 34  172 
Provisions  (10) 7 (19) 18 8 22 79 105 
Ending balance
March 31, 2019
 $418 $96 $412 $4,346 $268 $89 $725 $6,354 
Provision for loan losses  280 66 226 2,840 88 62 (175) 3,387 
Ending balance
September 30, 2020
 $828 $177 $593 $7,454 $330 $123 $608 $10,113 
                                                
Ending balances:                                  
Individually evaluated for impairment $ $ $ $14 $ $ $ $14  $ $ $ $3 $ $ $ $3 
                                  
Collectively evaluated for impairment 418 96 412 4,332 268 89 725 6,340  828 177 593 7,451 330 123 608 10,110 
                                  
March 31, 2019
Loans receivable:
                 
September 30, 2020 Loans receivable:                 
Ending balance-total $52,289 $56,234 $50,732 $519,420 $30,092 $9,653 $ $718,420  $108,006 $89,250 $49,215 $561,932 $27,618 $8,439 $ $844,460 
                                  
Ending balances:                                  
Individually evaluated for impairment    409 4,162 57 5  4,633    327 2,850 47   3,224 
                                  
Collectively evaluated for impairment $52,289 $56,234 $50,323 $515,258 $30,035 $9,648 $ $713,787  $108,006 $89,250 $48,888 $559,082 $27,571 $8,439 $ $841,236 
16

Note 4—Loans-continued

(Dollars in thousands)                        
        Real estate  Real estate  Consumer          
     Real estate  Mortgage  Mortgage  Home  Consumer       
  Commercial  Construction  Residential  Commercial  equity  Other  Unallocated  Total 
December 31, 2019                                
Allowance for loan losses:                                
Beginning balance
December 31, 2018
 $430  $89  $431  $4,318  $261  $88  $646  $6,263 
Charge-offs  (12)     (12     (1)  (120)     (145)
Recoveries  3         307   15   45      370 
Provisions  6   22   (52  (23)   (35  84   137   139 
Ending balance
December 31, 2019
 $427  $111  $367  $4,602  $240  $97  $783  $6,627 
                                 
Ending balances:                                
Individually evaluated for impairment $  $  $  $6  $  $  $  $6 
                                 
Collectively evaluated for impairment  427   111   367   4,596   240   97   783   6,621 
                                 
December 31, 2019
Loans receivable:
                                
Ending balance-total $51,805  $73,512  $45,357  $527,447  $28,891  $10,016  $  $737,028 
                                 
Ending balances:                                
Individually evaluated for impairment  400      392   3,135   70         3,997 
                                 
Collectively evaluated for impairment $51,405  $73,512  $44,965  $524,312  $28,821  $10,016  $  $733,031 
(Dollars in thousands)                        
        Real estate  Real estate  Consumer          
     Real estate  Mortgage  Mortgage  Home  Consumer       
  Commercial  Construction  Residential  Commercial  equity  Other  Unallocated  Total 
Three months ended September 30, 2019                                
Allowance for loan losses:                                
Beginning balance
June 30, 2019
 $435  $77  $404  $4,458  $247  $101  $640  $6,362 
Charge-offs  (6)               (30)     (3)
Recoveries           180   14   15      209 
Provision for loan losses  30   14   (19)   (102)   (20)  9   (113)  25 
Ending balance
September 30, 2019
 $459  $91  $385  $4,536  $241  $95  $753  $6,560 

Note 4—Loans-continued

                         
        Real estate  Real estate  Consumer          
     Real estate  Mortgage  Mortgage  Home  Consumer       
  Commercial  Construction  Residential  Commercial  equity  Other  Unallocated  Total 
Nine months ended September 30, 2019                                
Allowance for loan losses:                                
Beginning balance
December 31, 2018
 $430  $89  $431  $4,318  $261  $88  $646  $6,263 
Charge-offs  (8)     (7)     (1)  (96)     (112)
Recoveries           221   14   35      270 
Provision for loan losses  37   2   (39)  (3)   (33)  68   107   139 
Ending balance
September 30, 2019
 $459  $91  $385  $4,536  $241  $95  $753  $6,560 
                                 
Ending balances:                                
Individually evaluated for impairment $4  $  $  $10  $  $  $  $14 
                                 
Collectively evaluated for impairment  455   91   385   4,526   241   95   753   6,546 
                                 
September 30, 2019
Loans receivable:
                                
Ending balance-total $55,169  $58,737  $47,693  $534,554  $29,103  $9,818  $  $735,074 
                                 
Ending balances:                                
Individually evaluated for impairment        538   3,541   72         4,155 
                                 
Collectively evaluated for impairment $55,165  $58,737  $47,155  $531,013  $29,031  $9,818  $  $730,919 

18

Note 4—Loans-continued

(Dollars in thousands)                        
        Real estate  Real estate  Consumer          
     Real estate  Mortgage  Mortgage  Home  Consumer       
  Commercial  Construction  Residential  Commercial  equity  Other  Unallocated  Total 
December 31, 2019                                
Allowance for loan losses:                                
Beginning balance
December 31, 2018
 $430  $89  $431  $4,318  $261  $88  $646  $6,263 
Charge-offs  (12)     (12)     (1)  (120)     (145)
Recoveries  3         307   15   45      370 
Provision for loan losses  6   22   (52)  (23)  (35)  84   137   139 
Ending balance
December 31, 2019
 $427  $111  $367  $4,602  $240  $97  $783  $6,627 
                                 
Ending balances:                                
Individually evaluated for impairment $  $  $  $6  $  $  $  $6 
                                 
Collectively evaluated for impairment  427   111   367   4,596   240   97   783   6,621 
                                 
December 31, 2019
Loans receivable:
                                
Ending balance-total $51,805  $73,512  $45,357  $527,447  $28,891  $10,016  $  $737,028 
                                 
Ending balances:                                
Individually evaluated for impairment  400      392   3,135   70         3,997 
                                 
Collectively evaluated for impairment $51,405  $73,512  $44,965  $524,312  $28,821  $10,016  $  $733,031 

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 threenine months ended March 31,September 30, 2020 and March 31,September 30, 2019:

(Dollars in thousands) 2020 2019  2020 2019 
Beginning Balance December 31, $4,109  $5,937 
Beginning Balance January 1 $4,109  $5,937 
New Loans 55   86 111 
Less loan repayments  437 85   775 1,804 
Ending Balance March 31, $3,727 $5,852 
Ending Balance September 30 $3,420 $4,244 

The following table presents at March 31,September 30, 2020 and December 31, 2019 loans individually evaluated and considered impaired under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 310 “Accounting by Creditors for Impairment of a Loan.” Impairment includes performing troubled debt restructurings (“TDRs”).

19

(Dollars in thousands) March 31,  December 31, 
  2020  2019 
Total loans considered impaired $3,374  $3,997 
Loans considered impaired for which there is a related allowance for loan loss:        
Outstanding loan balance $219  $256 
Related allowance $5  $6 
Loans considered impaired and previously written down to fair value $2,172  $2,275 
Average impaired loans $3,437  $4,431 
Amount of interest earned during period of impairment $82  $263 

Note 4—Loans-continued

 

(Dollars in thousands)

 September 30,  December 31, 
  2020  2019 
Total loans considered impaired $3,224  $3,997 
Loans considered impaired for which there is a related allowance for loan loss:        
Outstanding loan balance $144  $256 
Related allowance $3  $6 
Loans considered impaired and previously written down to fair value $2,426  $2,275 
Average impaired loans $3,524  $4,431 
Amount of interest earned during period of impairment $85  $263 

The following tables are by loan category and present at March 31,September 30, 2020, March 31,September 30, 2019 and December 31, 2019, loans individually evaluated and considered impaired under FASB ASC 310 “Accounting by Creditors for Impairment of a Loan.” Impairment includes performing TDRs. 

(Dollars in thousands)       Three months ended        Nine months ended Three months ended 
   Unpaid   Average Interest    Unpaid   Average Interest Average Interest 
March 31, 2020 Recorded Principal Related Recorded Income 
September 30, 2020 Recorded Principal Related Recorded income Recorded Income 
 Investment Balance Allowance Investment Recognized  Investment Balance Allowance Investment Recognized Investment Recognized 
With no allowance recorded:                                       
Commercial $ $ $ $ $ 
Commercial, financial, agricultural $  $  $  $  $  $  $ 
Real estate:                                       
Construction                           
Mortgage-residential  340   431      339   6   327   405      337   11   323   9 
Mortgage-commercial 2,747 5,161  2,797 72   2,706   5,450      3,071   217   3,013   73 
Consumer:                                       
Home Equity 68 72  69 1 
Home equity  47   51      50   2   46   1 
Other                           
                                       
With an allowance recorded:                                       
Commercial      
Commercial, financial, agricultural                     
Real estate:                                       
Construction                           
Mortgage-residential                           
Mortgage-commercial 219 219 5 232 3   144   144   3   200   9   142   2 
Consumer:                                       
Home Equity      
Home equity                     
Other                           
                                       
Total:                                       
Commercial      
Commercial, financial, agricultural $  $  $  $  $  $  $ 
Real estate:                                       
Construction                           
Mortgage-residential 340 431  339 6   327   405      337   11   323   9 
Mortgage-commercial 2,966 5,380 5 3,029 75   2,850   5,594   3   3,271   226   3,155   75 
Consumer:                                       
Home Equity 68 72  69 1 
Home equity  47   51      50   2   46   1 
Other                            
 $3,374 $5,883 $5 $3,437 $82  $3,224   6,050  $3  $3,658  $239  $3,524  $85 

20

Note 4—Loans-continued

(Dollars in thousands)       Three months ended        Nine months ended Three months ended 
   Unpaid   Average Interest    Unpaid   Average Interest Average Interest 
March 31, 2019 Recorded Principal Related Recorded Income 
September 30, 2019 Recorded Principal Related Recorded income Recorded Income 
 Investment Balance Allowance Investment Recognized  Investment Balance Allowance Investment Recognized Investment Recognized 
With no allowance recorded:                                       
Commercial $ $ $ $ $ 
Commercial, financial, agricultural $ $ $ $ $ $ $ 
Real estate:                          
Construction              
Mortgage-residential  409   462      413   4  538 603  594 16 537 12 
Mortgage-commercial 3,715 6,708  4,048 61  3,172 5,867  3,259 131 3,092 79 
Consumer:                          
Home Equity 57 59  59 1 
Home equity 72 74  76 2 71 1 
Other 5 5  5          
                          
With an allowance recorded:                          
Commercial      
Commercial, financial, agricultural 4 4 4 4  4  
Real estate:                          
Construction              
Mortgage-residential              
Mortgage-commercial 447 447 14 448 6  369 369 10 421 19 326 6 
Consumer:                          
Home Equity      
Home equity        
Other              
                          
Total:                          
Commercial      
Commercial, financial, agricultural $4 $4 $4 $4 $ $4 $ 
Real estate:                          
Construction              
Mortgage-residential 409 462  413 4  538 603  594 16 537 12 
Mortgage-commercial 4,162 7,155 14 4,496 67  3,541 6,236 10 3,680 150 3,418 85 
Consumer:                          
Home Equity 57 59  59 1 
Home equity 72 74  76 2 71 1 
Other  5 5  5           
 $4,633 $7,681 $14 $4,973 $72  $4,155 $6,917 $14 $4,354 $168 $4,030 $98 

Note 4—Loans-continued

(Dollars in thousands)               
December 31, 2019    Unpaid     Average  Interest 
  Recorded  Principal  Related  Recorded  Income 
  Investment  Balance  Allowance  Investment  Recognized 
With no allowance recorded:                    
Commercial $400  $400  $  $600  $49 
Real estate:                    
Construction               
Mortgage-residential  392   460      439   19 
Mortgage-commercial  2,879   5,539      2,961   170 
Consumer:                    
Home Equity  70   73      76   2 
Other               
                     
With an allowance recorded:                    
Commercial               
Real estate:                    
Construction               
Mortgage-residential               
Mortgage-commercial  256   256   6   355   23 
Consumer:                    
Home Equity               
Other               
                     
Total:                    
Commercial  400   400      600   49 
Real estate:                    
Construction               
Mortgage-residential  392   460      439   19 
Mortgage-commercial  3,135   5,795   6   3,316   193 
Consumer:                    
Home Equity  70   73      76   2 
Other               
  $3,997  $6,728  $6  $4,431  $263 

Note 4—Loans-continued

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.

22

Note 4—Loans-continued

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.

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered as passPass rated loans. As of March 31,September 30, 2020 and December 31, 2019, and based on the most recent analysis performed, the risk category of loans by class of loans is shown in the table below. As of March 31,September 30, 2020 and December 31, 2019, no loans were classified as doubtful.

(Dollars in thousands)                      
March 31, 2020   Special       
September 30, 2020   Special       
 Pass Mention Substandard Doubtful Total  Pass Mention Substandard Doubtful Total 
Commercial, financial & agricultural $50,202  $111  $  $  $50,313  $107,813  $193  $  $  $108,006 
Real estate:                      
Construction 83,547    83,547  89,250    89,250 
Mortgage – residential 45,301 285 885  46,471  48,448 197 570  49,215 
Mortgage – commercial 524,525 2,396 3,259  530,180  554,270 4,466 3,196  561,932 
Consumer:                      
Home Equity 27,192 1,127 322  28,641  26,204 98 1,316  27,618 
Other         10,346 31   10,377   8,416 23   8,439 
Total $741,113 $3,950 $4,466 $ $749,529  $834,401 $4,977 $5,082 $ $844,460 
           
(Dollars in thousands)           
December 31, 2019   Special       
 Pass Mention Substandard Doubtful Total 
Commercial, financial & agricultural $51,166  $239  $400  $  $51,805 
Real estate:                    
Construction  73,512            73,512 
Mortgage – residential  44,221   509   627      45,357 
Mortgage – commercial  521,072   2,996   3,379      527,447 
Consumer:                    
Home Equity  27,450   1,157   284      28,891 
Other  9,981   35         10,016 
Total $727,402  $4,936  $4,690  $  $737,028 

(Dollars in thousands)               
December 31, 2019    Special          
  Pass  Mention  Substandard  Doubtful  Total 
Commercial, financial & agricultural $51,166  $239  $400  $  $51,805 
Real estate:                    
Construction  73,512            73,512 
Mortgage – residential  44,221   509   627      45,357 
Mortgage – commercial  521,072   2,996   3,379      527,447 
Consumer:                    
Home Equity  27,450   1,157   284      28,891 
Other  9,981   35         10,016 
Total $727,402  $4,936  $4,690  $  $737,028 

Note 4—Loans-continued

At March 31,September 30, 2020 and December 31, 2019, non-accrual loans totaled $1.7 million and $2.3 million, respectively.

TDRs that are still accruing and included in impaired loans at March 31,September 30, 2020 and at December 31, 2019 amounted to $1.6$1.6 million and $1.7$1.7 million, respectively.

Loans greater than 90 days delinquent and still accruing interest were $168.1$33.7 thousand and $0.3$0.3 thousand at March 31,September 30, 2020 and December 31, 2019, 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—“Receivables—Loans and Debt Securities Acquired with Deteriorated Credit Quality),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.

23

Note 4—Loans-continued

A summary of changes in the accretable yield for purchased credit-impaired loans for the three months and nine months ended March 31,September 30, 2020 and March 31,September 30, 2019 follows:

(Dollars in thousands) Three Months
Ended
March 31, 2020
 Three Months
Ended
March 31, 2019
  Three Months
Ended
September 30,
2020
 Three Months
Ended
September 30,
2019
 
          
Accretable yield, beginning of period $123  $153  $108  $138 
Additions      
Accretion (7) (8) (7) (8)
Reclassification of nonaccretable difference due to improvement in expected cash flows      
Other changes, net          
Accretable yield, end of period $116 $145  $101 $130 

 

(Dollars in thousands)

 Nine Months
Ended
September 30,
2020
  Nine Months
Ended
September 30,
2019
 
         
Accretable yield, beginning of period $123  $153 
Additions      
Accretion  (22)  (23)
Reclassification of nonaccretable difference due to improvement in expected cash flows      
Other changes, net      
Accretable yield, end of period $101  $130 

At March 31,September 30, 2020 and December 31, 2019, the recorded investment in purchased impaired loans was $112 thousand.$110 thousand and $112 thousand, respectively. The unpaid principal balance was $186$176 thousand and $190$190 thousand at March 31,September 30, 2020 and December 31, 2019, respectively. At March 31,September 30, 2020 and December 31, 2019, these loans were all secured by commercial real estate.

1924
 

Note 4—Loans-continued

The following tables are by loan category and present loans past due and on non-accrual status as of March 31,September 30, 2020 and December 31, 2019: 

(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     
March 31, 2020 Past Due Past Due Accruing Nonaccrual Past Due Current Total Loans 
September 30, 2020 Past Due Past Due Accruing Nonaccrual Past Due Current Total Loans 
                              
Commercial $57  $  $  $  $57  $50,256  $50,313  $19  $  $  $1,282  $1,301  $106,705  $108,006 
Real estate:                              
Construction      83,547 83,547  158    158 89,092 89,250 
Mortgage-residential 181  168 340 689 45,782 46,471  12 412 34 327 785 48,430 49,215 
Mortgage-commercial 294   1,330 1,624 528,556 530,180       561,932 561,932 
Consumer:                            
Home equity  70  68 138 28,503 28,641  10   47 57 27,561 27,618 
Other  66 3   69 10,308 10,377   27    27 8,412 8,439 
 $598 $73 $168 $1,738 $2,577 $746,952 $749,529  $226 $412 $34 $1,656 $2,328 $842,132 $844,460 
               
(Dollars in thousands)     Greater than         
 30-59 Days 60-89 Days 90 Days and   Total     
December 31, 2019 Past Due Past Due Accruing Nonaccrual Past Due Current Total Loans 
                            
Commercial $  $99  $  $400  $499  $51,306  $51,805 
Real estate:                            
Construction  113            113   73,399   73,512 
Mortgage-residential  151         392   543   44,814   45,357 
Mortgage-commercial  39         1,467   1,506   525,941   527,447 
Consumer:                            
Home equity  2   9      70   81   28,810   28,891 
Other  40   23         63   9,953   10,016 
 $345  $131  $  $2,329  $2,805  $734,223  $737,028 

(Dollars in thousands)       Greater than             
  30-59 Days  60-89 Days  90 Days and     Total       
December 31, 2019 Past Due  Past Due  Accruing  Nonaccrual  Past Due  Current  Total Loans 
                      
Commercial $  $99  $  $400  $499  $51,306  $51,805 
Real estate:                            
Construction  113            113   73,399   73,512 
Mortgage-residential  151         392   543   44,814   45,357 
Mortgage-commercial  39         1,467   1,506   525,941   527,447 
Consumer:                           
Home equity  2   9      70   81   28,810   28,891 
Other  40   23         63   9,953   10,016 
  $345  $131  $  $2,329  $2,805  $734,223  $737,028 

The Company identifies TDRs as impaired under the guidance in ASC 310-10-35. There were no loans determined to be TDRs that were restructured during the three-month periods ended March 31,September 30, 2020 and March 31,September 30, 2019.

During the three monthnine-month periods ended March 31,September 30, 2020 and March 31,September 30, 2019, there were no loans determined to be TDRs in the previous twelve months that had payment defaults. Defaulted loans are those loans that are greater than 89 days past due.

In the determination of the allowance for loan losses, all TDRs are reviewed to ensure that one of the three proper valuation methods (fair market value of the collateral, present value of cash flows, or observable market price) is adhered to. All non-accrual loans are written down to their corresponding collateral value. All troubled TDR accruing loans that have a loan balance that exceeds the present value of cash flows will have a specific allocation. All nonaccrual loans are considered impaired. Under ASC 310-10, a loan is impaired when it is probable that the Company will be unable to collect all amounts due including both principal and interest according to the contractual terms of the loan agreement. In accordance with interagency guidance issued in March 2020, short term deferrals granted due to the COVID-19 pandemic are not considered TDRs unless the borrower was previously experiencing financial difficulty.

2025
 

Note 5—Recently Issued Accounting Pronouncements

The following is a summary of recent authoritative pronouncements: 

In February 2016, the FASB amended the Leases topic of the ASC to revise certain aspects of recognition, measurement, presentation, and disclosure of leasing transactions. The amendments were effective for fiscal years beginning after December 15, 2018 including interim periods within those fiscal years. The Company adopted the guidance using the modified retrospective method and practical expedients for transition. The practical expedients allow the Company to largely account for our existing leases consistent with current guidance except for the incremental balance sheet recognition of leases. The impact of adoption on January 1, 2019 was recording a right-of-use asset and lease liability of $2.9 million. See Note 9 “Leases” to the consolidated financial statements.

In June 2016, the FASB issued guidance to change the accounting for credit losses and modify the impairment model for certain debt securities. The amendments will be effective for the Company for reporting periods beginning after December 15, 2022. Early adoption is permitted for all organizations for periods beginning after December 15, 2018. The Company is currently evaluating the effect that implementation of the new standard will have on its financial position, results of operations, and cash flows.

In January 2017, the FASB amended the Goodwill and Other Topic of the ASC to simplify the accounting for goodwill impairment for public business entities and other entities that have goodwill reported in their financial statements and have not elected the private company alternative for the subsequent measurement of goodwill. The amendment removes Step 2 of the goodwill impairment test. Goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The effective date and transition requirements for the technical corrections arewere effective for the Company for reporting periods beginning after December 15, 2019. These amendments did not have a material impact on the Company’s financial statements.

In March 2017, the FASB amended the requirements in the Receivables—Nonrefundable Fees and Other Costs Topic of the ASC related to the amortization period for certain purchased callable debt securities held at a premium. The amendments shorten the amortization period for the premium to the earliest call date. The amendments became effective for the Company for interim and annual periods beginning after December 15, 2018. The Company did not experience a material effect on its financial statements.

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 effect on the Company’s financial statements.

In July 2018, the FASB amended the Leases Topic of the ASC to make narrow amendments to clarify how to apply certain aspects of the new leases standard. Additionally, amendments were made to give entities another option for transition and to provide lessors with a practical expedient. The amendments arewere effective for reporting periods beginning after December 15, 2018. The Company2018 and did not experiencehave a material effect on itsthe 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 arewere effective for all entities, including the Company, for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company2019 and did not experiencehave a material effect on itsthe Company’s 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 arewere effective for the Company for fiscal years beginning after December 15, 2019. The Company2019 and did not experiencehave a material effect on itsthe Company’s financial statements.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 arewere effective for the Company for reporting periods beginning after December 15, 2019. Early adoption is permitted. The Company2019 and did not experiencehave a material effect on itsthe Company’s financial statements.

2126
 

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 arewere effective for the Company for reporting periods beginning after December 15, 2019. The amendments related to hedging arewere effective for the Company for interim and annual periods beginning after December 15, 2018. The amendments related to recognition and measurement of financial instruments arewere effective for the Company for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The CompanyThese amendments did not experiencehave a material effectimpact on itsthe Company’s financial statements.

In July 2019, the FASB updated various Topicstopics of the ASC to align the guidance in various SECU.S. Securities and Exchange Commission (the “SEC”) sections of the ASC with the requirements of certain SEC final rules. The amendments were effective upon issuance and did not have a material effect on the Company’s financial statements.

In November 2019, the FASB issued guidance to defer the effective dates for private companies, not-for-profit organizations, and certain smaller reporting companies applying standards on current expected credit losses (CECL), leases, hedging. The new effective date for CECL will be fiscal years beginning after December 15, 2022 including interim periods within those fiscal years. The Company is evaluating the impact that this will have on its financial statementsstatements.

In November 2019, the FASB issued guidance that addresses issues raised by stakeholders during the implementation of ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The amendments affect a variety of Topicstopics in the Accounting Standards Codification.ASC. For entities that have not yet adopted the amendments in ASU 2016-13, the amendments are effective for fiscal years beginning after December 15, 2022 including interim periods within those fiscal years-all other entities. Early adoption is permitted in any interim period as long as an entity has adopted the amendments in ASU 2016-13. The Company is evaluating the impact that this will have on its financial statements.

In December 2019, the FASB issued guidance to simplify accounting for income taxes by removing specific technical exceptions that often produce information investors have a hard time understanding. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. The amendments are effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. Early adoption is permitted. The Company does not expect these amendments to have a material effect on its financial statements.

In January 2020, the FASB issued guidance to address accounting for the transition into and out of the equity method and measuring certain purchased options and forward contracts to acquire investments. The amendments are effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Early adoption is permitted, including early adoption in an interim period. The Company does not expect these amendments to have a material effect on its financial statements.

In February 2020, the FASB issued guidance to add and amend SEC paragraphs in the ASC to reflect the issuance of SEC Staff Accounting Bulletin No. 119 related to the new credit losses standard and comments by the SEC staff related to the revised effective date of the new leases standard. The amendments were effective upon issuance. These amendments did not have a material impact on the Company’s financial statements.

27

Note 5—Recently Issued Accounting Pronouncements-continued

In March 2020, the FASB issued guidance that makes narrow-scope improvements to various aspects of the financial instrument guidance, including the CECL guidance issued in 2016. The amendments related to conforming amendments: For public business entities, the amendments arewere effective upon issuance of thisthe final ASU. For all other entities, the amendments arewere effective for fiscal years beginning after December 15, 2019, and are effective for interim periods within those fiscal years beginning after December 15, 2020. Early application is permitted. The effective date of the amendments to ASU 2016-01 iswere effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. For the amendments related to ASU 2016-13, public business entities that meet the definition of an SEC filer, excluding eligible smaller reporting companies (SRCs) as(as defined by the SEC,SEC), should adopt the amendments in ASU 2016-13 during 2020. All other entities should adopt the amendments in ASU 2016-13 during 2023. Early adoption will continue to beis permitted. For entities that have not yet adopted the guidance in ASU 2016-13, the effective dates and the transition requirements for these amendments are the same as the effective date and transition requirements in ASU 2016-13. For entities that have adopted the guidance in ASU 2016-13, the amendments were effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. For those entities, the amendments should be applied on a modified-retrospective basis by means of a cumulative-effect adjustment to opening retained earnings in the statement of financial position as of the date that an entity adopted the amendments in ASU 2016-13. The Company is evaluating the impact that this will have on its financial statements statements.

In March 2020, the FASB issued guidance to provide temporary optional guidance to ease the potential burden in accounting for reference rate reform. The guidance provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. The ASU is intended to help stakeholders during the global market-wide reference rate transition period. The amendments are effective as of March 12, 2020 through December 31, 2022. The Company does not expect these amendments to have a material effect on its financial statements.

In August 2020, the FASB issued guidance to improve financial reporting associated with accounting for convertible instruments and contracts in an entity’s own equity. The amendments will be effective the Company for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020.

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. 

22

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 3Unobservable 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. FairThe Company’s fair value estimates, methods, and assumptions are set forth below.

Cash and Short Term InvestmentsInvestments—-The carrying amount of these financial instruments (cash and due from banks, interest-bearing bank balances, federal funds sold and securities purchased under agreements to resell) approximates fair value. All mature within 90 days and do not present unanticipated credit concerns and are classified as Level 1.

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

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

Loans -Loans—The valuation of loans receivable is estimated using the exit price notion which incorporates factors, such as enhanced credit risk, illiquidity risk and market factors that sometimes exist in exit prices in dislocated markets. This credit risk assumption is intended to approximate the fair value that a market participant would realize in a hypothetical orderly transaction. The Company’s loan portfolio is initially fair valued using a segmented approach. The Company divides its loan portfolio into the following categories: variable rate loans, impaired loans and all other loans. The results are then adjusted to account for credit risk as described above.

29

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.

24

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 March 31,September 30, 2020 and December 31, 2019 are as follows:

                     
  September 30, 2020 
     Fair Value 
(Dollars in thousands) Carrying
Amount
  Total  Level 1  Level 2  Level 3 
Financial Assets:                    
Cash and short term investments $123,510  $123,510  $123,510  $  $ 
Available-for-sale securities  293,472   293,472   2,280   289,530   1,662 
Other investments, at cost  2,053   2,053         2,053 
Loans held-for-sale  37,587   37,587      37,587    
Net loans receivable  844,460   823,485         823,485 
Accrued interest  3,957   3,957   3,957       
Financial liabilities:                    
Non-interest bearing demand $365,505  $365,505  $  $365,505  $ 
Interest bearing demand deposits and money market accounts  519,653   519,653      519,653    
Savings  121,865   121,865      121,865    
Time deposits  166,528   167,652      167,652    
Total deposits  1,173,551   1,174,675      1,174,675    
Short term borrowings  47,142   47,142      47,142    
Junior subordinated debentures  14,964   11,445      11,445    
Accrued interest payable  757   757   757       

  March 31, 2020 
     Fair Value 
(Dollars in thousands) Carrying
Amount
  Total  Level 1  Level 2  Level 3 
Financial Assets:                    
Cash and short term investments $49,376  $49,376  $49,376  $  $ 
Available-for-sale securities  288,881   288,881   11,887   275,345   1,649 
Other investments, at cost  2,062   2,062         2,062 
Loans held-for-sale  11,937   11,937      11,937    
Net loans receivable  741,835   717,881         717,881 
Accrued interest  3,369   3,369   3,369       
Financial liabilities:                    
Non-interest bearing demand $291,669  $291,669  $  $291,669  $ 
Interest bearing demand deposits and money market accounts  426,332   426,332      426,332    
Savings  102,171   102,171      102,171    
Time deposits  166,473   167,852      167,852    
Total deposits  986,645   986,645      986,645    
Short term borrowings  46,041   46,041      46,041    
Junior subordinated debentures  14,964   12,166      12,166    
Accrued interest payable  1,001   1,001   1,001       

Note 6—Fair Value of Financial Instruments-continued

                     
  December 31, 2019 
     Fair Value 
(Dollars in thousands) Carrying
Amount
  Total  Level 1  Level 2  Level 3 
Financial Assets:                    
Cash and short term investments $47,692  $47,692  $47,692  $  $ 
Available-for-sale securities  286,800   286,800   23,632   261,361   1,807 
Other investments, at cost  1,992   1,992         1,992 
Loans held-for-sale  11,155   11,155      11,155    
Net loans receivable  730,401   728,745         728,745 
Accrued interest  3,481   3,481   3,481       
Financial liabilities:                    
Non-interest bearing demand $289,829  $289,829  $  $289,829  $ 
Interest bearing demand deposits and money market accounts  423,256   423,256      423,256    
Savings  104,456   104,456      104,456    
Time deposits  170,660   171,558      171,558    
Total deposits  988,201   989,099      989,099    
Federal Home Loan Bank advances  211   211      211    
Short term borrowings  33,296   33,296      33,296    
Junior subordinated debentures  14,964   13,161      13,161    
Accrued interest payable  1,033   1,033   1,033       

The following tables summarize quantitative disclosures about the fair value for each category of assets carried at fair value as of March 31,September 30, 2020 and December 31, 2019 that are measured on a recurring basis. There were no liabilities carried at fair value as of March 31,September 30, 2020 or December 31, 2019 that are measured on a recurring basis.

(Dollars in thousands)

Description March 31,
2020
 Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
 Significant
Other
Observable
Inputs
(Level 2)
 Significant
Unobservable
Inputs
(Level 3)
  September 30,
2020
 Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
 Significant
Other
Observable
Inputs
(Level 2)
 Significant
Unobservable
Inputs
(Level 3)
 
Available-for-sale securities                  
US treasury securities $3,534  $  $3,534  $  $1,510  $  $1,510  $ 
Government sponsored enterprises 1,015  1,015   1,010  1,010  
Mortgage-backed securities 180,830  179,181 1,649  179,050  177,594 1,456 
Small Business Administration pools 41,727  41,727   37,272  37,066 206 
State and local government 61,756 11,882 49,874   71,355 2,280 69,075  
Corporate and other securities  19 9 10    3,275  3,275  
  288,881 11,891 275,341 1,649 
Total  293,472 2,280 289,530 1,662 
Loans held-for-sale  11,937  11,937    37,587  37,587  
Total $300,818 $11,891 $287,278 $1,649  $331,059 $2,280 $327,117 $1,662 

Note 6—Fair Value of Financial Instruments-continued

(Dollars in thousands)

Description December 31,
2019
  Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
  Significant
Other
Observable
Inputs
(Level 2)
  Significant
Unobservable
Inputs
(Level 3)
 
Available-for-sale securities                
US treasury securities $7,203  $  $7,203  $ 
Government sponsored enterprises  1,001      1,001    
Mortgage-backed securities  183,586   18,435   163,344   1,807 
Small Business Administration securities  45,343      45,343    
State and local government  49,648   5,188   44,460    
Corporate and other securities  19   9   10    
   286,800   23,632   261,361   1,807 
Loans held-for-sale  11,155      11,155    
Total $297,955  $23,632  $272,516  $1,807 

  

The following tables summarize quantitative disclosures about the fair value for each category of assets carried at fair value as of March 31,September 30, 2020 and December 31, 2019 that are measured on a non-recurring basis. There were no Level 3 financial instruments for the threenine months ended March 31,September 30, 2020 and March 31,September 30, 2019 measured on a recurring basis.

(Dollars in thousands)                  
Description March 31,
2020
 Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
 Significant
Other
Observable
Inputs
(Level 2)
 Significant
Unobservable
Inputs
(Level 3)
  September 30,
2020
 Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
 Significant
Other
Observable
Inputs
(Level 2)
 Significant
Unobservable
Inputs
(Level 3)
 
Impaired loans:                  
Commercial & Industrial $ $ $ $  $ $ $ $ 
Real estate:                  
Mortgage-residential  340         340   327         327 
Mortgage-commercial 2,961   2,961  2,847   2,847 
Consumer:                  
Home equity 68   68  47   47 
Other            
Total impaired  3,369   3,369   3,221   3,221 
Other real estate owned:                  
Construction 826   826  767   767 
Mortgage-residential  655   655 
Mortgage-commercial  546   546 
Total other real estate owned  1,481   1,481   1,313   1,313 
Total $4,850 $ $ $4,850  $4,534 $ $ $4,534 

Note 6—Fair Value of Financial Instruments-continued

 

(Dollars in thousands)            
Description December 31,
2019
  Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
  Significant
Other
Observable
Inputs
(Level 2)
  Significant
Unobservable
Inputs
(Level 3)
 
Impaired loans:                
Commercial & Industrial $400  $  $  $400 
Real estate:                
Mortgage-residential  392         392 
Mortgage-commercial  3,129         3,129 
Consumer:                
Home equity  70         70 
Other            
Total impaired  3,991         3,991 
Other real estate owned:                
Construction  826         826 
Mortgage-residential  584         584 
Total other real estate owned  1,410         1,410 
Total $5,401  $  $  $5,401 

The Company has a large percentage of loans with real estate serving as collateral. Loans which are deemed to be impaired are primarily valued on a nonrecurring basis at the fair value of the underlying real estate collateral. Such fair values are obtained using independent appraisals, which the Company considers to be Level 3 inputs. Third party appraisals are generally obtained when a loan is identified as being impaired or at the time it is transferred to OREO. With respect to less complex or smaller credits, an internal evaluation may be performed. This internal process consists of evaluating the underlying collateral to independently obtained comparable properties. 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 $3.4$3.2 million and $4.0 million as of March 31,September 30, 2020 and December 31, 2019, respectively.  

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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 March 31,September 30, 2020 and December 31, 2019, the significant unobservable inputs used in the fair value measurements were as follows:

(Dollars in thousands)Fair Value

as of
March 31,

September 30,
2020
Valuation TechniqueSignificant

Observable Inputs
Significant

Unobservable Inputs
OREO$    1,4811,313Appraisal Value/Comparison Sales/Other estimatesAppraisals and or sales of comparable propertiesAppraisals discounted 6%6% to 16%16% for sales commissions and other holding cost
Impaired loans$    3,3693,221Appraisal ValueAppraisals and or sales of comparable propertiesAppraisals discounted 6%6% to 16%16% for sales commissions and other holding cost
(Dollars in thousands)Fair Value

as of

December 31,

2019
Valuation TechniqueSignificant

Observable Inputs
Significant

Unobservable Inputs
OREO$    1,410Appraisal Value/Comparison Sales/Other estimatesAppraisals and or sales of comparable propertiesAppraisals discounted 6%6% to 16%16% for sales commissions and other holding cost
Impaired loans$    3,991Appraisal ValueAppraisals and or sales of comparable propertiesAppraisals discounted 6%6% to 16%16% for sales commissions and other holding cost

Note 7—Deposits

 

Note 7—Deposits

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

 March 31, December 31,  September 30, 

 December 31,

 
(Dollars in thousands) 2020 2019  2020 2019 
Non-interest bearing demand deposits $291,669  $289,829  $365,505  $289,829 
Interest bearing demand deposits and money market accounts 426,332 423,256  519,653 423,256 
Savings 102,171 104,456  121,865 104,456 
Time deposits  166,473  170,660   166,528  170,660 
Total deposits $986,645 $988,201  $1,173,551 $988,201 

As of March 31,September 30, 2020 and December 31, 2019, the Company had time deposits greater than $250,000 of $30.9$30.2 million and $32.2$32.2 million, respectively. 

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Note 8—Reportable Segments

 

The Company’s reportable segments represent the distinct product lines the Company offers and are viewed separately for strategic planning by management. The Company has four reportable segments:

·Commercial and retail banking: The Company’s primary business is to provide deposit and lending products and services to its commercial and retail customers.

·Mortgage banking: This segment provides mortgage origination services for loans that will be sold to investors in the secondary market.

·Investment advisory and non-deposit: This segment provides investment advisory services and non-deposit products.

·

Corporate: This segment includes the parent company financial information, including interest on parent company debt and dividend income received from the Bank.

The following tables present selected financial information for the Company’s reportable business segments for the three months ended March 31, 2020 and March 31, 2019.

The following tables present selected financial information for the Company’s reportable business segments for the three and nine months ended September 30, 2020 and September 30, 2019.

 

Three months ended March 31, 2020 Commercial   Investment       
(Dollars in thousands) and Retail Mortgage advisory and        Commercial   Investment       
Nine months ended September 30, 2020 and Retail Mortgage advisory and       
 Banking Banking non-deposit Corporate Eliminations Consolidated  Banking Banking non-deposit Corporate Eliminations Consolidated 
                                     
Dividend and Interest Income $10,404  $300  $  $1,068  $(1,062) 10,710  $31,112 $1,240 $ $3,167  $(3,167) $32,352 
Interest expense  1,125   168  1,293   2,588   428   3,016 
Net interest income $9,279 $300 $ $900 $(1,062) $9,417  $28,524 $1,240 $ $2,739  $(3,167) $29,336 
Provision for loan losses 1,075     1,075  3,387      3,387 
Noninterest income 1,312 982 634   2,928  4,231 3,957 1,977    10,165 
Noninterest expense  7,495 963 468 112  9,038   22,505 3,628 1,361 389   27,883 
Net income before taxes $2,021 $319 $166 $788 $(1,062) $2,232  $6,863 $1,569 $616 $2,350  $(3,167) $8,231 
             
Income tax provision (benefit)  497   (59)  438   1,738   (170)  1,568 
Net income $1,524 $319 $166 $847 $(1,062) $1,794  $5,125 $1,569 $616 $2,520  $(3,167) $6,663 
 
(Dollars in thousands) Commercial   Investment       
Nine months ended September 30, 2019 and Retail Mortgage advisory and       
 Banking Banking non-deposit Corporate Eliminations Consolidated 
                        
Dividend and Interest Income $31,081 $745 $ $6,077 $(6,059) $31,844 
Interest expense  3,772   583  4,355 
Net interest income $27,309 $745 $ $5,494 $(6,059) $27,489 
Provision for loan losses 139     139 
Noninterest income 4,039 3,333 1,436   8,808 
Noninterest expense  21,416 2,754 1,302 281  25,753 
Net income before taxes $9,793 $1,324 $134 $5,213 $(6,059) $10,405 
Income tax provision (benefit)  2,330   (199)  2,131 
Net income $7,463 $1,324 $134 $5,412 $(6,059) $8,274 

Three months ended March 31, 2019 Commercial     Investment          
(Dollars in thousands) and Retail  Mortgage  advisory and          
  Banking  Banking  non-deposit  Corporate  Eliminations  Consolidated 
                   
Dividend and Interest Income $10,131  $237  $  $1,017  $(1,011) 10,374 
Interest expense  1,156         198      1,354 
Net interest income $8,975  $237  $  $819  $(1,011) $9,020 
Provision for loan losses  105               105 
Noninterest income  1,227   844   438         2,509 
Noninterest expense  7,024   804   415   80      8,323 
Net income before taxes $3,073  $277  $23  $739  $(1,011) $3,101 
                         
Income tax provision (benefit)  685         (79)     606 
Net income $2,388  $277  $23  $818  $(1,011) $2,495 
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Note 8—Reportable Segments-continued

(Dollars in thousands) Commercial     Investment          
Three months ended September 30, 2020 and Retail  Mortgage  advisory and          
  Banking  Banking  non-deposit  Corporate  Eliminations  Consolidated 
                         
Dividend and Interest Income $10,468  $508  $  $1,038  $(1,038) $10,976 
Interest expense  685         115      800 
Net interest income $9,783  $508  $  $923  $(1,038) $10,176 
Provision for loan losses  1,062               1,062 
Noninterest income  1,775   1,403   672         3,850 
Noninterest expense  7,763   1,353   466   132      9,714 
Net income before taxes $2,733  $558  $206  $791  $(1,038) $3,250 
Income tax provision (benefit)  649         (51)     598 
Net income $2,084  $558  $206  $842  $(1,038) $2,652 
                         
(Dollars in thousands) Commercial     Investment          
Three months ended September 30, 2019 and Retail  Mortgage  advisory and          
  Banking  Banking  non-deposit  Corporate  Eliminations  Consolidated 
                         
Dividend and Interest Income $10,600  $257  $  $3,036  $(3,029) $10,864 
Interest expense  1,322         189      1,511 
Net interest income $9,278  $257  $  $2,847  $(3,029) $9,353 
Provision for loan losses  25               25 
Noninterest income  1,353   1,251   509         3,113 
Noninterest expense  7,246   999   440   105      8,790 
Net income before taxes $3,360  $509  $69  $2,742  $(3,029) $3,651 
Income tax provision (benefit)  813         (60)     753 
Net income $2,547  $509  $69  $2,802  $(3,029) $2,898 
                   
  Commercial     Investment          
(Dollars in thousands) and Retail  Mortgage  advisory and          
  Banking  Banking  non-deposit  Corporate  Eliminations  Consolidated 
Total Assets as of September 30, 2020 $1,323,796  $57,324  $1  $133,378  $(132,695) $1,381,804 
Total Assets as of December 31, 2019 $1,143,934  $25,673  $2  $132,890  $(132,220) $1,170,279 

 

  Commercial     Investment          
(Dollars in thousands) and Retail  Mortgage  advisory and          
  Banking  Banking  non-deposit  Corporate  Eliminations  Consolidated 
                   
Total Assets as of March 31, 2020 $1,156,598  $27,990  $4  $132,987  $(132,272) $1,185,307 
                         
Total Assets as of December 31, 2019 $1,143,934  $25,673  $2  $132,890  $(132,220) $1,170,279 

  Commercial     Investment          
(Dollars in thousands) and Retail  Mortgage  advisory and          
  Banking  Banking  non-deposit  Corporate  Eliminations  Consolidated 
                   
Total Assets as of March 31, 2019 $1,076,190  $20,486  $7  $130,121  $(129,408) $1,097,396 
                         
Total Assets as of December 31, 2018 $1,074,838  $16,078  $9  $129,992  $(129,322) $1,091,595 

Note 9—Leases

 

Note 9—Leases

During the three-month period ended March 31,September 30, 2020 and March 31,September 30, 2019, the Company made cash payments for operating leases in the amount of $72.6$73.1 thousand and $48.9$49.3 thousand, respectively. During the nine-month period ended September 30, 2020 and September 30, 2019, the Company made cash payments for operating leases in the amount of $218.4 thousand and $147.3 thousand, respectively. The lease expense recognized during this three-month period amounted to $80.8$80.8 thousand and $58.3$62.1. thousand at March 31,September 30, 2020 and March 31,September 30, 2019, respectively. The lease expense recognized during this nine-month period amounted to $242.3 thousand and $178.8 thousand at September 30, 2020 and September 30, 2019, respectively. The lease liability was reduced by $37.1$38.1 thousand and $17.2$17.0 thousand at March 31,three-month ended September 30, 2020 and March 31,September 30, 2019, respectively. The lease liability was reduced by $112.9 thousand and $51.0 thousand for the nine-month periods ended September 30, 2020 and September 30, 2019, respectively. At March 31,September 30, 2020 and March 31,September 30, 2019, the weighted average lease term was 16.315.96 years and 18.9216.76 years, respectively, and the weighted average discount rate for both years was 4.4%4.41%. The following table is a maturity analysis of the operating lease liabilities.

36

(Dollars in thousands) Liability 
Year Cash  Lease Expense  Reduction 
2020 $220  $105  $115 
2021  298   133   165 
2022  303   126   177 
2023  309   118   191 
2024  282   110   172 
Thereafter  3,199   789   2,409 
Total $4,611  $1,381  $3,229 

Note 9—Leases-continued

(Dollars in thousands)         
     Lease  Liability 
Year Cash  Expense  Reduction 
2020 $74  $35  $39 
2021  298   133   165 
2022  303   126   177 
2023  309   118   191 
2024  282   110   172 
Thereafter  3,200   790   2,410 
Total $4,466  $1,312  $3,154 

Note 10—Subsequent Events

Subsequent events are events or transactions that occur after the balance sheet date but before financial statements are issued. Recognized subsequent events are events or transactions that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements. Non-recognized subsequent events are events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after that date. Management has reviewed events occurring through the date the financial statements were available to be issued and has determined that no subsequent events occurred requiring accrual or that require disclosure and have not been disclosed in the footnotes to our unaudited consolidated financial statements as of March 31, 2020 . 

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September 30, 2020.

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

Cautionary Note Regarding Forward-Looking Statements

This report, including information included or incorporated by reference in this report, contains statements which constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements may relate to, among other matters, the financial condition, results of operations, plans, objectives, future performance, and business of our company. Forward-looking statements are based on many assumptions and estimates and are not guarantees of future performance. Our actual results may differ materially from those anticipated in any forward-looking statements, as they will depend on many factors about which we are unsure, including many factors which are beyond our control. The words “may,” “approximately,” “is likely,” “would,” “could,” “should,” “will,” “expect,” “anticipate,” “predict,” “project,” “potential,” “continue,” “assume,” “believe,” “intend,” “plan,” “forecast,” “goal,” and “estimate,” as well as similar expressions, are meant to identify such forward-looking statements. Potential risks and uncertainties that could cause our actual results to differ materially from those anticipated in our forward-looking statements include, without limitation, those described under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019 as filed with the Securities and Exchange Commission (the “SEC”)SEC on March 13, 2020 and the following:

·the strength of the United States economy in general and the strength of the local economies in which we conduct operations may be different than expected including, but not limited to, due to the negative impacts and disruptions resulting from the recent outbreak of the novel coronavirus, or COVID-19, on the economies and communities we serve, which may have an adverse impact on our business, operations, and performance, and could have a negative impact on our credit portfolio, share price, borrowers, and on the economy as a whole both domestically and globally;

·changes in legislation, regulation, policies or administrative practices, whether by judicial, governmental, or legislative action, including, but not limited to, the Coronavirus Aid, Relief, and Economic Security Act, or the “CARES Act”;
·credit losses as a result of, among other potential factors, declining real estate values, increasing interest rates, increasing unemployment, or changes in customer payment behavior or other factors;

·the amount of our loan portfolio collateralized by real estate and weaknesses in the real estate market;

·any impairment of our goodwill or other intangible assets;

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

·the adequacy of the level of our allowance for loan losses and the amount of loan loss provisions required in future periods;

·examinations by our regulatory authorities, including the possibility that the regulatory authorities may, among other things, require us to increase our allowance for loan losses, write-down assets, or take other actions;

·risks associated with actual or potential information gatherings, investigations or legal proceedings by customers, regulatory agencies or others;

·reduced earnings due to higher other-than-temporary impairment charges resulting from additional decline in the value of our securities portfolio, specifically as a result of increasing default rates, and loss severities on the underlying real estate collateral;

·increases in competitive pressure in the banking and financial services industries;

·changes in the interest rate environment which could reduce anticipated or actual margins;

·changes in political or social conditions or the legislative or regulatory environment, including governmental initiatives affecting the financial services industry, including, but not limited to, the CARES Act;

·risks associated with our participation in the Paycheck Protection Program, otherwise the PPP, established by the CARES Act, including but not limited to, potential litigation from borrowers and agents of borrowers of the PPP loans and the failure of the borrower to qualify for loan forgiveness, which would subject us to the risk of holding these loans at unfavorable interest rates as compared to the loans to customers that we would have otherwise extended credit;

·general economic conditions resulting in, among other things, a deterioration in credit quality;

·changes occurring in business conditions and inflation;

32
·changes in access to funding or increased regulatory requirements with regard to funding;

·cybersecurity risk related to our dependence on internal computer systems and the technology of outside service providers, as well as the potential impacts of third party security breaches, which subject us to potential business disruptions or financial losses resulting from deliberate attacks or unintentional events;

·changes in deposit flows;

·changes in technology;

·our current and future products, services, applications and functionality and plans to promote them;

·changes in monetary and tax policies;
·changes in accounting standards, policies, estimates, practices or guidelines;

·our assumptions and estimates used in applying critical accounting policies, which may prove unreliable, inaccurate or not predictive of actual results;

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

·the rate of loan growth in recent years and the lack of seasoning of a portion of our loan portfolio;

·our ability to maintain appropriate levels of capital, including levels of capital required under the capital rules implementing Basel III;

·our ability to successfully execute our business strategy;

·our ability to attract and retain key personnel;

·our ability to retain our existing customers, including our deposit relationships;

·adverse changes in asset quality and resulting credit risk-related losses and expenses;

·the potential effects of events beyond our control that may have a destabilizing effect on financial markets and the economy, such as the 2020 election, epidemics and pandemics (including the potential effects of the COVID-19 pandemic on trade, including supply chains and export levels, travel, employee activity and other economic activities), war or terrorist activities, essential utility outages or trade disputes and related tariffs;

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

·other risks and uncertainties detailed in Part I, Item 1A, “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2019, in Part II, Item 1A, “Risk Factors” of thisour Quarterly Report on Form 10-Q, and from time to time in our other filings with the SEC.

Because of these and other risks and uncertainties, our actual future results may be materially different from the results indicated by any forward-looking statements. For additional information with respect to factors that could cause actual results to differ from the expectations stated in the forward-looking statements, see “Risk Factors” under Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2019 and “Risk Factors” under Part II, Item 1A of this Quarterly Report on Form 10-Q. In addition, our past results of operations do not necessarily indicate our future results. Therefore, we caution you not to place undue reliance on our forward-looking information and statements.

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

33

Overview

Overview

The following discussion describes our results of operations for the nine months and three months ended March 31,September 30, 2020 as compared to the three-month periodnine months and three months ended March 31, 2019September 30, 2019; and analyzes our financial condition as of March 31,September 30, 2020 as compared to December 31, 2019. Like most community banks, we derive most of our income from interest we receive on our loans and investments. Our primary source of funds for making these loans and investments is our deposits, on which we pay interest. Consequently, one of the key measures of our success is our amount of net interest income, or the difference between the income on our interest-earning assets, such as loans and investments, and the expense on our interest-bearing liabilities, such as deposits and borrowings. Another key measure is the spread between the yield we earn on our interest-earning assets and the rate we pay on our interest-bearing liabilities. There are risks inherent in all loans, so we maintain an allowance for loan losses to absorb probable losses on existing loans that may become uncollectible. We establish and maintain this allowance by charging a provision for loan losses against our operating earnings. In the following section, we have included a discussion of this process, as well as several tables describing our allowance for loan losses and the allocation of this allowance among our various categories of loans.loans (See Note 4 to the Consolidated Financial Statements).

39

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

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

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

Recent Events – COVID-19 Pandemic

In December 2019,The COVID-19 pandemic, which was declared a novel strain of coronavirus (COVID-19) was reported to have surfacednational emergency in China, and has since spread to a number of other countries, including the United States. In March 2020, the World Health Organization declared COVID-19 a global pandemic and the United States declared a National Public Health Emergency. Thein March 2020, continues to create extensive disruptions to the global economy and financial markets and to businesses and the lives of individuals throughout the world. In particular, the COVID-19 pandemic has severely restricted the level of economic activity in our markets. In responseFederal and state governments have taken, and may continue to take, unprecedented actions to contain the COVID-19 pandemic, the governmentsspread of the states in which we have retail offices, and of most other states, have taken preventative or protective actions, such as imposing restrictions ondisease, including quarantines, travel and business operations, advising or requiring individuals to limit or forego their time outside of their homes, and ordering temporarybans, shelter-in-place orders, closures of businesses thatand schools, fiscal stimulus, and legislation designed to deliver monetary aid and other relief to businesses and individuals impacted by the pandemic. Although in various locations certain activity restrictions have been deemed to be non-essential.relaxed and businesses and schools have reopened with some level of success, in many states and localities the number of individuals diagnosed with COVID-19 has increased significantly, which may cause a freezing or, in certain cases, a reversal of previously announced relaxation of activity restrictions and may prompt the need for additional aid and other forms of relief.

While our business has been designated an essential business, which allows us to continue to serve our customers, we serve many customers that have been deemed, or who are employed by businesses that have been deemed, to be non-essential. And many of our customers that have been categorized to date as essential businesses, or who are employed by businesses that have been categorized as essential businesses, have been adversely affected by the COVID-19 pandemic.

The impact of the COVID-19 pandemic is fluid and continues to evolve. The unprecedented and rapid spread of COVID-19 pandemic and its associated impacts on trade (including supply chains and export levels), travel, employee productivity, unemployment, consumer spending, and other economic activities has resulted in less economic activity, lower equity market valuations and significant volatility and disruption in financial markets,markets. In addition, due to the COVID-19 pandemic, market interest rates have declined significantly, with the 10-year Treasury bond falling below 1.00% on March 3, 2020, for the first time. The 10-year Treasury bond was 0.69% at September 30, 2020 compared to 0.66% at June 30, 2020 and has1.92% at December 31, 2019. On March 3, 2020, the Federal Open Market Committee reduced the targeted federal funds interest rate range by 50 basis points to 1.00% to 1.25%. This range was further reduced by 100 basis points to 0% to 0.25% on March 16, 2020. These reductions in interest rates and the other effects of the COVID-19 pandemic have had, and are expected to continue to have, possibly materially, an adverse effect on our business, financial condition and results of operations. For instance, the pandemic has had negative effects on the Bank’s net interest margin, provision for loan losses, deposit service charges, salaries and benefits, occupancy expense, and equipment expense. The ultimate extent of the impact of the COVID-19 pandemic on our business, financial condition and results of operations is currently uncertain and the timing and pace of recovery will depend on various developments and other factors, including, among others, the duration and scope of the pandemic, as well as governmental, regulatory and private sector responses to the pandemic, and the associated impacts on the economy and financial marketsmarkets; and on our customers, employees and vendors.

Our business, financial condition and results of operations generally rely upon the ability of our borrowers to repay their loans, the value of collateral underlying our secured loans, and demand for loans and other products and services we offer, which are highly dependent on the business environment in our primary markets where we operate and in the United States as a whole. The COVID-19 pandemic has begun to have an impact on our business and operations. We have a business continuity plan that covers a variety of potential impacts to business operations. These plans are periodically reviewed and tested and have been designed to protect the ongoing viability of bank operations in the event of a disruption such as a pandemic. Beginning in early March 2020, we activated our pandemic preparedness plan and began to roll it out in phases related to the COVID-19 pandemic.

3440
 

Following recommendations from the Centers for Disease Control and Prevention and the South Carolina Department of Health and Environmental Control, we implemented enhanced cleaning of bank facilities and provided guidance to employees and customers on best practices to minimize the spread of the virus. As part of our efforts to exercise social distancing, we modified our delivery channels with a shift to drive thru only service at the banking offices supplemented by appointments for service in the office lobbies. The number of branch transactions for March and through mid-April (as of April 15th) 2020 decreased 13.6% compared to the same period in 2019. We have encouraged the use of online and mobile channels and have seen the number of online banking users increase, as well as the dollar volume of bill payment, Zelle, and mobile deposit transactions trend higher. To support the health and well-being of our employees, on any given day, approximately 40%a portion of our workforce is working from home. We have enhanced our remote work capabilities by providing additional laptops and various audio and video meeting technologies. Communication channels for employees and customers were created to provide periodic updates during this rapidly changing environment. These are still in place and in use.

We are focused on servicing the financial needs of our commercial and consumer customers with flexible loan payment arrangements, including short-term loan modifications or forbearance payments and reducing or waiving certain fees on deposit accounts. Future governmental actions may require these and other types of customer-related responses.

Ourasset

Our asset quality metrics as of March 31,September 30, 2020 remained sound.  The non-performing asset ratio was 0.29%0.22% of total assets with the nominal level of $3.4$3.0 million in non-performing assets.  Loans past due 30 days or more represented only 0.11%0.08% of the loan portfolio.  The ratio of classified loans plus OREO has declined further to 4.88%was 5.00% of total bank regulatory risk-based capital.  During the first quarter,three months ended September 30, 2020, the Bank experienced net loan recoveries of $8$118 thousand and net overdraft charge-offs of $16$3 thousand. During the first nine months of 2020, the Bank experienced net loan recoveries of $121 thousand and net overdraft charge-offs of $22 thousand. However, the impact of the COVID-19 pandemic is serious and is being felt by our customers and our communities.  The ultimate impacts of this unique and evolving situation on our customers and our asset quality are too challenging to predict.  Stay-at-home orders were implemented in our markets causing many businesses to close or significantly reduce their normal operations.  While the stay-at-home orders have been lifted and there has been some recent relaxing of these restrictions in some of our markets, the timing of the return to normal is unknown.  Our focus is on serving our many local business and individual customers at this time of great need and uncertainty. 

We have

Beginning in March 2020, we proactively offered payment deferrals for up to 90 days to our loan customers. AsWe continue to consider potential deferrals with respect to certain customers, which we evaluate on a case-by-case basis. Loans on which payments have been deferred declined to $27.3 million at September 30, 2020 from $175.0 million at June 30, 2020. The $27.3 million in deferrals at September 30, 2020 include nine loans totaling $11.4 million of March 31,remaining initial deferrals of which principal and interest are being deferred, and eight loans totaling $15.9 million of second deferrals of which only principal is being deferred. At its peak, which occurred during the second quarter of 2020, we granted 183payment deferments on loans totaling $206.9 million. As a result of payments being resumed at the conclusion of their payment deferral requests totaling $118.3period, loans in which payments have been deferred decreased from the peak of $206.9 million of our loan portfolio related to the COVID-19 pandemic. As of May 4,$175.0 million at June 30, 2020, we have granted 383 deferrals totaling approximately $202.4to $27.3 million of our loan portfolio.at September 30, 2020, and to $14.1 million at November 5, 2020. Some of these deferments were to businesses that have temporarily closed or reduced operations and some were requested as a pre-cautionary measure to conserve cash.  We proactively offered deferrals to our customers regardless of the impact of the pandemic on their business or personal finances. 

We are also a small business administration approved lender and have begun processing customer applications underparticipated in the PPP, established under the CARES Act. As of May 6, 2020, we have funded 545We had 843 PPP loans totaling $42.7 million.$51.2 million gross of deferred fees and costs and $49.8 million net of deferred fees and costs at September 30, 2020 compared to 766 PPP loans totaling $49.4 million gross of deferred fees and costs and $47.9 million net of deferred fees and costs at June 30, 2020. The $1.4 million in PPP deferred fees net of deferred costs at September 30, 2020 will be recognized as interest income over the remaining life of the PPP loans. We are now in the initial stages of working with our customers through the SBA forgiveness process. None of our PPP loans have received forgiveness as of September 30, 2020. However, we anticipate the forgiveness process to accelerate later in the fourth quarter of 2020 and the first half of 2021. 

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At March 31,September 30, 2020, our non-performing assets were not yet materially impacted by the economic pressures of the COVID-19 pandemic. However, as we closely monitor credit risk and our exposure to increased loan losses resulting from the impact of COVID-19 on our customers, we evaluated and identified our exposure to certain industry segments most impacted by the COVID-19 pandemic as of March 31,September 30, 2020:

Industry Segments Outstanding % of Loan Ave. Loan Ave. Loan to  Outstanding % of Loan Avg. Loan Avg. Loan to 
(Dollars in millions) Loan Balance Portfolio Size Value  Loan Balance Portfolio Size Value 
                  
Hotels $26.8   3.6% $1.9   67% $30.3   3.5% $2.2   71%
Restaurants $17.6   2.4% $0.6   64% $22.6 2.6% $0.7 69%
Assisted Living $9.2   1.2% $1.8   50% $8.8 1.0% $1.8 48%
Retail $75.5   10.1% $0.6   62% $79.8 9.1% $0.6 57%

We are also monitoring the impact of the COVID-19 pandemic on the operations and value of our investments. We mark to market our publicly traded investments and review our investment portfolio for impairment at, a minimum, quarterly. We do not consider any securities in our investment portfolio to be other-than-temporarily impaired at March 31,September 30, 2020. However, because of changing economic and market conditions affecting issuers, we may be required to recognize future impairments on the securities we hold as well as reductions in other comprehensive income. We cannot currently determine the ultimate impact of the pandemic on the long-term value of our portfolio.

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Our capital remained strong and exceeded the well-capitalized regulatory requirements at March 31,September 30, 2020.  Total shareholders’ equity increased $4.4$13.0 million or 3.7%10.8% to $124.6$133.2 million at March 31,September 30, 2020 from $120.2 million at December 31, 2019.  In 2018, the Federal Reserve increased the asset size to qualify as a small bank holding company.  As a result of this change, we are generally not subject to the Federal Reserve capital requirements unless advised otherwise.  The bankBank remains subject to capital requirements including a minimum leverage ratio and a minimum ratio of “qualifying capital” to risk weighted assets.  These requirements are essentially the same as those that applied to the Company prior to the change in the definition of a small bank holding company.  Each of the regulatory capital ratios for the Bank exceeds the well capitalized minimum levels currently required by regulatory statute at March 31,September 30, 2020 and December 31, 2019. Refer to Capital and Liquidity section for more details.

Dollars in thousands   Prompt Corrective Action
(PCA) Requirements
 Excess Capital $s of
PCA Requirements
    Prompt Corrective Action
(PCA) Requirements
 Excess Capital $s of
PCA Requirements
 
Capital Ratios Actual Well
Capitalized
 Adequately
Capitalized
 Well
Capitalized
 Adequately
Capitalized
  Actual Well
Capitalized
 Adequately
Capitalized
 Well
Capitalized
 Adequately
Capitalized
 
March 31, 2020                    
September 30, 2020           
Leverage Ratio  9.91%  5.00%  4.00% $56,619  $68,157   8.95%  5.00%  4.00% $51,958  $65,107 
Common Equity Tier 1 Capital Ratio  13.35%  6.50%  4.50%  58,671   75,790  12.96% 6.50% 4.50% 58,688 76,846 
Tier 1 Capital Ratio  13.35%  8.00%  6.00%  45,831   62,951  12.96% 8.00% 6.00% 45,070 63,228 
Total Capital Ratio  14.25%  10.00%  8.00%  36,406   53,525   14.08%  10.00% 8.00%  37,026 55,183 
December 31, 2019                                  
Leverage Ratio  9.97%  5.00%  4.00% $56,197  $67,508  9.97% 5.00% 4.00% $56,197 $67,508 
Common Equity Tier 1 Capital Ratio  13.47%  6.50%  4.50%  58,345   75,086  13.47% 6.50% 4.50% 58,345 75,086 
Tier 1 Capital Ratio  13.47%  8.00%  6.00%  45,789   62,530  13.47% 8.00% 6.00% 45,789 62,530 
Total Capital Ratio  14.26%  10.00%  8.00%  35,675   52,416   14.26%  10.00% 8.00%  35,675 52,416 

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

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

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Critical Accounting Policies

We have adopted various accounting policies that govern the application of accounting principles generally accepted in the United States and with general practices within the banking industry in the preparation of our financial statements. Our significant accounting policies are described in the footnotes to our unaudited consolidated financial statements as of March 31,September 30, 2020 and our notes included in the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2019 as filed with the SEC on March 13, 2020.

Certain accounting policies involve significant judgments and assumptions by us that have a material impact on the carrying value of certain assets and liabilities. We consider these accounting policies to be critical accounting policies. The judgment and assumptions we use are based on historical experience and other factors, which we believe to be reasonable under the circumstances. Because of the nature of the judgment and assumptions we make, actual results could differ from these judgments and estimates that could have a material impact on the carrying values of our assets and liabilities and our results of operations. A brief discussion of each of these areas appears in our 2019 Annual Report on Form 10-K. During the first threenine months of 2020, we did not significantly alter the manner in which we applied our Critical Accounting Policies or developed related assumptions and estimates.

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Allowance for Loan Losses

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

FASB has issued a new credit impairment model, the Current Expected Credit Loss, or CECL model, which will become applicable to us in 2023. Under the CECL model, we will be required to present certain financial assets carried at amortized cost, such as loans held for investment and held-to-maturity debt securities, at the net amount expected to be collected. The measurement of expected credit losses is to be based on information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. This measurement will take place at the time the financial asset is first added to the balance sheet and periodically thereafter. This differs significantly from the “incurred loss” model currently required under GAAP, which delays recognition until it is probable a loss has been incurred. Accordingly, we expect that the adoption of the CECL model will materially affect how we determine our allowance for loan losses and could require us to significantly increase our allowance. Moreover, the CECL model may create more volatility in the level of our allowance for loan losses. If we are required to materially increase our level of allowance for loan losses for any reason, such increase could adversely affect our business, financial condition and results of operations.

The new CECL standard will become effective for us on January 1, 2023 and for interim periods within that year. We are currently evaluating the impact the CECL model will have on our accounting, but we expect to recognize a one-time cumulative-effect adjustment to our allowance for loan losses as of the beginning of the first reporting period in which the new standard is effective, consistent with regulatory expectations set forth in interagency guidance issued at the end of 2016. We cannot yet determine the magnitude of any such one-time cumulative adjustment or of the overall impact of the new standard on our business, financial condition and results of operations.

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On December 21, 2018, the federal banking agencies issued a joint final rule to revise their regulatory capital rules to (i) address the upcoming implementation of CECL; (ii) provide an optional three-year phase-in period for the day-one adverse regulatory capital effects that banking organizations are expected to experience upon adopting CECL; and (iii) require for certain banking organizations that are subject to stress testing, the use of CECL in stress tests beginning with the 2020 capital planning and stress testing cycle.

Goodwill and Other Intangibles

Goodwill represents the excess of the purchase price over the sum of the estimated fair values of the tangible and identifiable intangible assets acquired less the estimated fair value of the liabilities assumed. Goodwill has an indefinite useful life and is evaluated for impairment annually or more frequently if events and circumstances indicate that the asset might be impaired. An impairment loss is recognized to the extent that the carrying amount exceeds the asset’s fair value. Qualitative factors are assessed to first determine if it is more likely than not (more than 50%) that the carrying value of goodwill is less than fair value. These qualitative factors include but are not limited to overall deterioration in general economic conditions, industry and market conditions, and overall financial performance. If determined that it is more likely than not that there has been a deterioration in the fair value of the carrying value then the first of a two-step process would be performed. The first step, used to identify potential impairment, involves comparing each reporting unit’s estimated fair value to its carrying value, including goodwill. If the estimated fair value of a reporting unit exceeds its carrying value, goodwill is considered not to be impaired. If the carrying value exceeds estimated fair value, there is an indication of potential impairment and the second step is performed to measure the amount of impairment.

If required, the second step involves calculating an implied fair value of goodwill for each reporting unit for which the first step indicated impairment. The implied fair value of goodwill is determined in a manner similar to the amount of goodwill calculated in a business combination, by measuring the excess of the estimated fair value of the reporting unit, as determined in the first step, over the aggregate estimated fair values of the individual assets, liabilities and identifiable intangibles as if the reporting unit was being acquired in a business combination. If the implied fair value of goodwill exceeds the carrying value of goodwill assigned to the reporting unit, there is no impairment. If the carrying value of goodwill assigned to a reporting unit exceeds the implied fair value of the goodwill, an impairment charge is recorded for the excess. An impairment loss cannot exceed the carrying value of goodwill assigned to a reporting unit, and the loss establishes a new basis in the goodwill. Subsequent reversal of goodwill impairment losses is not permitted. Management has determined that the Company has four reporting units.

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In January 2017, the FASB issued ASU No. 2017-04, which simplifies the accounting for goodwill impairment for all entities by requiring impairment charges to be based on the first step in today’s two-step impairment test under ASC Topic 350 and eliminating Step 2 from the goodwill impairment test. This guidance was effective for us as of January 1, 2020.

Core deposit intangibles represent the estimated value of long-term deposit relationships acquired in bank or branch acquisition transactions. These costs are amortized over the estimated useful lives of the deposit accounts acquired on a method that we believe reasonably approximates the anticipated benefit stream from the accounts. The estimated useful lives are periodically reviewed for reasonableness.

We performed our required annual goodwill impairment test as of December 31, 2019 and there was no impairment. Throughout 2020, financial institution stocks in general as well as our market capitalization declined because of events surrounding the COVID-19 pandemic. As a result, we performed qualitative goodwill impairment analyses as of March 31, 2020, June 30, 2020, and September 30, 2020. These qualitative analyses included a review of our earnings, pretax pre-provision earnings (PTPPE), net interest income, mortgage banking income, investment advisory fees and non-deposit commissions, non-PPP loan growth and asset quality trends, loan charge-offs and recoveries, deposit growth, capital levels, and the economic conditions in our markets. Based on our analyses, we do not believe the decline in our publicly-traded common stock is indicative of a permanent deterioration of the fundamental value of the Company. As such, we do not believe that it is more-likely-than-not a goodwill impairment exists at September, 30, 2020, June 30, 2020, and March 31, 2020. Depending on, among other things, the duration and severity of the impacts of the COVID-19 pandemic, we may have to reevaluate our financial condition and potential impairment of our goodwill.

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Income Taxes and Deferred Tax Assets and Liabilities

Income taxes are provided for the tax effects of the transactions reported in our consolidated financial statements and consist of taxes currently due plus deferred taxes related to differences between the tax basis and accounting basis of certain assets and liabilities, including available-for-sale securities, allowance for loan losses, write-downs of OREO properties, write-downs on premises held-for-sale, accumulated depreciation, net operating loss carry forwards, accretion income, deferred compensation, intangible assets, and pension plan and post-retirement benefits. The deferred tax assets and liabilities represent the future tax return consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. Deferred tax assets and liabilities are reflected at income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. A valuation allowance is recorded when it is “more likely than not” that a deferred tax asset will not be realized. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. We file a consolidated federal income tax return for the Bank. At March 31,We were in a $1.2 million net deferred tax liability position at September 30, 2020 and a $1.0 million net deferred tax asset position at December 31, 2019, we were in2019. The change to a net deferred tax liability position at September 30, 2020 from a net deferred tax asset position.position at December 31, 2020 is primarily due to the deferred tax impact related to a $10.6 million increase in our pretax unrealized gains net of unrealized losses on our available-for-sale investments to $13.8 million at September 30, 2020 from $3.2 million at December 31, 2019. The $10.6 million increase in our pretax unrealized gains net of unrealized losses on our available-for-sale securities was primarily due to a reduction in market interest rates at September 30, 2020 compared to December 31, 2019.

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). Our management has determined there are no other-than-temporary impaired securities as of September 30, 2020 and that we have the ability to hold any of the securities in which the fair value is less than cost until maturity or until these securities recover their book value.

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 QualityandQualityand 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.

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Comparison of Results of Operations for Threethe Nine Months Ended March 31,September 30, 2020 to the ThreeNine Months Ended March 31,September 30, 2019

Net Income

Our net income for the threenine months ended March 31,September 30, 2020 was $1.8$6.7 million, or $0.24$0.89 diluted earnings per common share, as compared to $2.5$8.3 million, or $0.32$1.08 diluted earnings per common share, for the threenine months ended March 31,September 30, 2019. The $1.6 million decrease in net income between the two periods is primarily due to increases in provision for loan losses expense of $970 thousand$3.2 million and non-interest expense of $715 thousand$2.1 million, partially offset by an increase in net interest income of $397 thousand,$1.8 million, an increase in non-interest income of $419 thousand,$1.4 million, and a decrease in income tax expense of $168$563 thousand. The increase in provision for loan losses is primarily related to an increase in the qualitative factors in the company’sour allowance for loan losses methodology related to the deteriorating economic conditions and economic uncertainties caused by the COVID-19 pandemic. The increase in non-interest expense is primarily related to increased salaries and employee benefits expense of $483 thousand and increased$1.7 million, marketing and public relations expense of $179 thousand, FDIC assessments of $132 thousand, and data processing expense of $312 thousand, partially offset by lower amortization of intangibles of $102 thousand. The increase in net interest income results from an increase of $83.8$158.9 million in average earning assets partially offset by a 1629 basis point decline in the net interest margin between the two periods.  The increase in non-interest income is primarily related to an increaseincreases in mortgage banking income of $138$624 thousand, and an increase in investment advisory fees and non-deposit commissions of $196 thousand.$541 thousand, gains on sale of other real estate owned of $150 thousand, non-recurring bank owned life insurance (BOLI) income of $311 thousand, and ATM debit card income of $135 thousand, partially offset by a $361 thousand decrease in deposit service charges. Our effective tax rate was 19.62%19.05% during the first quarternine months of 2020 compared to 19.54%20.48% during the first quarternine months of 2019.

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The $311 thousand in non-recurring BOLI income was recorded as non-taxable income.

Net Interest Income

Net interest income is our primary source of revenue. Net interest income is the difference between income earned on assets such as loans, securities, and other short-term investments and interest paid on deposits and borrowings used to support such assets. Net interest income is determined by rates earned on our interest-earning assets and the rates paid on our interest-bearing liabilities, the relative amounts of interest-earning assets and interest-bearing liabilities, and the degree of mismatch and the maturity and repricing characteristics of our interest-earning assets and interest-bearing liabilities. Please refer to the table at the end of this Item 2 (Management’s Discussion and Analysis of Financial Condition and Results of Operations) for the average yields on assets and average rates on interest-bearing liabilities during the three-monthnine-month periods ended March 31,September 30, 2020 and 2019, along with average balances and the related interest income and interest expense amounts.

Net interest income increased $397 thousand$1.8 million, or 4.4%6.7%, to $9.4$29.3 million for the threenine months ended March 31,September 30, 2020 from $9.0$27.5 million for the threenine months ended March 31,September 30, 2019. Our net interest margin declined by 1629 basis points to 3.52%3.36% during the first quarternine months of 2020 from 3.68%3.65% during the first quarternine months of 2019. Our net interest margin, on a taxable equivalent basis, was 3.55%3.39% for the first quarternine months of 2020 compared to 3.73%3.69% for the first quarternine months of 2019. Average earning assets increased $83.8$158.9 million, or 8.4%15.8%, to $1.077$1.2 billion for the quarternine months ended March 31,September 30, 2020 as compared to $993.5 million$1.0 billion in the same period of 2019. The increase in net interest income was primarily due to a higher level of average earning assets partially offset by lower net interest margin. The increase in average earning assets was due to an increases in loans, securities, and other short-term investments primarily due to Non-PPP loan growth, PPP loans, organic deposit growth, and excess liquidity from PPP loan proceeds and other stimulus funds related to the COVID-19 pandemic. The decline in net interest margin was primarily due to the Federal Reserve reducing the target range of the federal funds rate three times totaling 75 basis points in reductions during 2019 and two times totaling 150 basis points in reductions during the first quarter of 2020.2020, lower yields on PPP loans, and the excess liquidity generated from PPP loan proceeds and other stimulus funds related to the COVID-19 pandemic being deployed in lower yielding securities and other short-term investments. Lower market rates, a flat-to-inverted yield curve, the competitive loan pricing environment, and the COVID-19 pandemic put downward pressure on our net interest margin during the first quarternine months of 2020.

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Average loans increased $29.6$84.7 million, or 4.1%11.6%, to $753.7$815.7 million for the first threenine months of 2020 from $724.1$731.0 million for the first threenine months of 2019. Average PPP loans increased $27.1 million and average Non-PPP loans increased $57.6 million to $27.1 million and $788.6 million, respectively, for the first nine months of 2020. Average loans represented 70.0% of average earning assets during the first quarternine months of 2020 compared to 72.9%72.6% of average earning assets during the first quarternine months of 2019. The decline in average loans as a percentage of average earning assets was primarily due to increases in deposits of $60.6$131.8 million and securities sold under agreements to repurchase of $23.4$13.8 million. The growth in our deposits and securities sold under agreements to repurchase was higher than the growth in our loans, which resulted in the excess funds being deployed in our securities portfolio and other short-term investments and to reduce our Federal Home Loan Bank advances. The yield on loans declined 1139 basis points to 4.71%4.46% in the first quarternine months of 2020 from 4.82%4.85% in the first quarternine months of 2019. The yield on PPP loans was $2.85% and the yield on Non-PPP loans was 4.52% in the first nine months of 2020. Average securities and average other short-term investments for the threenine months ended March 31,September 30, 2020 increased $34.4$41.4 million and $19.8$32.8 million, respectively, from the prior year period. The yield on our securities portfolio declined to 2.42%2.21% for the threenine months ended March 31,September 30, 2020 from 2.67%2.61% for the same period in 2019;2019 while the yield on our other short-term investments declined to 1.70%0.56% for the threenine months ended March 31,September 30, 2020 from 2.53%2.41% for the same period in 2019. These declines were primarily related to the Federal Reserve reducing the target range of the federal funds rate as described above. The yield on earning assets for the threenine months ended March 31,September 30, 2020 and 2019 was 4.00%3.71% and 4.23%, respectively. The cost of interest-bearing liabilities was at 6951 basis points in the first quarternine months 2020 compared to 7681 basis points in the first quarternine months of 2019. We continue to focus on growing our pure deposits (demand deposits, interest-bearing transaction accounts, savings deposits and money market accounts). These as these accounts tend to be low-cost deposits and assist us in controlling our overall cost of funds. In the first quarternine months of 2020, these deposits averaged 82.5%84.2% of total deposits as compared to 80.2%80.8% in the same period of 2019.

Provision and Allowance for Loan Losses

We account for our allowance for loan losses under the incurred loss model. As mentioned above, the CECL model will become effective for us on January 1, 2023. At March 31,September 30, 2020, the allowance for loan losses was $10.1 million, or 1.20% of total loans (excluding loans held-for-sale), compared to $8.9 million, or 1.09% of total loans (excluding loans held-for-sale) at June 30, 2020, $7.7 million, or 1.03% of total loans (excluding loans held-for-sale), compared to at March 31, 2020, and $6.6 million, or 0.90% of total loans (excluding loans held-for-sale) at December 31, 2019 and $6.4 million, or 0.88% of total loans (excluding loans held-for-sale) at March 31, 2019. The increase in the allowance for loan losses is primarily related to an increase in the qualitative factors in our allowance for loan losses methodology related to the deteriorating economic conditions and economic uncertainties caused by the COVID-19 pandemic.

Loans that were acquired in the acquisition of Cornerstone Bancorp, otherwise referred to herein as Cornerstone, in 2017 as well as in the acquisition of Savannah River Financial Corp., otherwise referred to herein as Savannah River, in 2014 are accounted for under FASB ASC 310-30. These acquired loans were initially measured at fair value, which includes estimated future credit losses expected to be incurred over the life of the loans. The credit component on loans related to cash flows not expected to be collected is not subsequently accreted (non-accretable difference) into interest income. Any remaining portion representing the excess of a loan’s or pool’s cash flows expected to be collected over the fair value is accreted (accretable difference) into interest income. At March 31,September 30, 2020 and December 31, 2019, the remaining credit component on loans attributable to acquired loans in the Cornerstone and Savannah River transactions was $429$303 thousand and $534 thousand, respectively. Our provision for loan losses was $1.075$3.4 million and $105$139 thousand for the threenine months ended March 31,September 30, 2020 and 2019, respectively. The increase in the provision for loan losses is primarily related to an increase in the qualitative factors in our allowance for loan losses methodology related to the deteriorating economic conditions and economic uncertainties caused by the COVID-19 pandemic.

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

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We perform an analysis quarterly to assess the risk within the loan portfolio. The portfolio is segregated into similar risk components for which historical loss ratios are calculated and adjusted for identified changes in current portfolio characteristics. Historical loss ratios are calculated by product type and by regulatory credit risk classification (See Note 4 – Loans)to the Consolidated Financial Statements). The annualized weighted average loss ratios over the last 36 months for loans classified as substandard, special mention and pass have been approximately 0.54%0.13%, 0.11%0.01% and 0.01%, respectively. The allowance consists of an allocated and unallocated allowance. The allocated portion is determined by types and ratings of loans within the portfolio. The unallocated portion of the allowance is established for losses that exist in the remainder of the portfolio and compensates for uncertainty in estimating the loan losses. The allocated portion of the allowance is based on historical loss experience as well as certain qualitative factors as explained above. The qualitative factors have been established based on certain assumptions made as a result of the current economic conditions and are adjusted as conditions change to be directionally consistent with these changes. The unallocated portion of the allowance is composed of factors based on management’s evaluation of various conditions that are not directly measured in the estimation of probable losses through the experience formula or specific allowances. The overall risk as measured in our three-year lookback, both quantitatively and qualitatively, does not encompass a full economic cycle. The U.S. economy had been in an extended period of recovery leading up to the COVID-19 pandemic. The ultimate impact of the COVID-19 pandemic and the related stimulus programs is not yet 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, our net charge-offs have experienced a modest net recovery. We currently believe the unallocated portion of our allowance represents potential risk associated throughout a full economic cycle. However,cycle; however, the COVID-19 pandemic and the government and economic responses thereto may materially affect the risk within our loan portfolios.

We have a significant portion of our loan portfolio with real estate as the underlying collateral. At March 31,September 30, 2020 and December 31, 2019, approximately 91.9%86.2% and 91.6%, respectively, of the loan portfolio had real estate collateral. The reduction in the percent of our loan portfolio with real estate as the underlying collateral is due to the increase in PPP loans, which increased to $49.8 million at September 30, 2020 from $0 at December 31, 2019. When loans, whether commercial or personal, are granted, they are based on the borrower’s ability to generate repayment cash flows from income sources sufficient to service the debt. Real estate is generally taken to reinforce the likelihood of the ultimate repayment and as a secondary source of repayment. We work closely with all our borrowers that experience cash flow or other economic problems, and we believe that we have the appropriate processes in place to monitor and identify problem credits. There can be no assurance that charge-offs of loans in future periods will not exceed the allowance for loan losses as estimated at any point in time or that provisions for loan losses will not be significant to a particular accounting period. The allowance is also subject to examination and testing for adequacy by regulatory agencies, which may consider such factors as the methodology used to determine adequacy and the size of the allowance relative to that of peer institutions. Such regulatory agencies could require us to adjust our allowance based on information available to them at the time of their examination.

Non-performing assets were $3.4$3.0 million (0.29%(0.22% of total assets) at March 31,September 30, 2020 as compared to $3.7 million (0.32% of total assets) at December 31, 2019. While we believe the non-performing assets to total assets ratios are favorable in comparison to current industry results (both nationally and locally), we continue to monitor the potential impact of the COVID-19 pandemic on our customer base of local businesses and professionals. There were 2724 loans totaling $1.9$1.7 million (0.25%(0.20% of total loans) included in non-performing status (non-accrual loans and loans past due 90 days and still accruing) at March 31,September 30, 2020. The largest loan included in non-accrual status is in the amount of $629$630 thousand and is secured by commercial non-owner occupied real estate located in Aiken, South Carolina. The average balance of the remaining 2623 loans is approximately $49$46 thousand with a range between $0 and $300 thousand, and the majority of these loans are secured by first mortgage liens. Furthermore, we had $1.6 million in accruing trouble debt restructurings, or TDRs, at March 31,September 30, 2020 compared to $1.7 million at December 31, 2019. We consider a loan impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due, including both principal and interest, according to the contractual terms of the loan agreement. Nonaccrual loans and accruing trouble debt restructurings are considered impaired. At March 31,September 30, 2020, we had 3229 impaired loans totaling $3.4$3.2 million compared to 33 impaired loans totaling $4.0 million at December 31, 2019. These loans were measured for impairment under the fair value of collateral method or present value of expected cash flows method. For collateral dependent loans, the fair value of collateral method is used and the fair value is determined by an independent appraisal less estimated selling costs. At March 31,September 30, 2020, we had loans totaling $671$638 thousand that were delinquent 30 days to 89 days representing 0.09%0.08% of total loans compared to $476 thousand or 0.06% of total loans at December 31, 2019.

Our management continuously monitors non-performing, classifiedDue to the COVID-19 pandemic and past dueour proactive offering of payment deferrals, loans on which payments have been deferred declined to identify deterioration regarding the condition of these loans. As of$27.3 million at September 30, 2020 from $175.0 million at June 30, 2020 and from $118.3 million at March 31, 2020, we received 183 deferral requests totaling $118.3 million of our loan portfolio2020. We had no loans on which payments were deferred related to the COVID-19 pandemic. As of May 4,pandemic at December 31, 2019. The $27.3 million in deferrals at September 30, 2020 we have granted 383 deferralsinclude nine loans totaling approximately $202.4$11.4 million of our loan portfolio.remaining initial deferrals of which principal and interest are being deferred and eight loans totaling $15.9 million of second deferrals of which only principal is being deferred. Some of these deferments were to businesses that have temporarily closed or reduced operations and some were requested as a pre-cautionary measure to conserve cash.  We proactively offered initial deferrals to our customers regardless of the impact of the pandemic on their business or personal finances. GivenWe obtained additional information from customers who requested second deferrals and we performed additional analyses to justify the need for the second deferral requests. Our management continuously monitors non-performing, classified and past due loans to identify deterioration regarding the condition of these loans and given the on-going and uncertain impact of the COVID-19 pandemic, we will continue to monitor our loan portfolio for potential risks.

4048
 

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

Allowance for Loan Losses

 Three Months Ended  Nine Months Ended 
 March 31,  September 30, 
(Dollars in thousands) 2020 2019  2020 2019 
Average loans outstanding (including loans held-for-sale) $753,659  $724,059 
Average loans outstanding (excluding loans held-for-sale) $792,059  $723,003 
Loans outstanding at period end (excluding loans held-for-sale) $749,529  $718,420  $844,460 $735,074 
Non-performing assets:             
Nonaccrual loans $1,739  $2,641  $1,656 $2,275 
Loans 90 days past due still accruing  168   22  34 33 
Foreclosed real estate  1,481   1,460  1,313 1,412 
Repossessed-other          
Total non-performing assets $3,388  $4,123  $3,003 $3,720 
             
Beginning balance of allowance $6,627  $6,263  $6,627 $6,263 
Loans charged-off:             
Commercial     2   8 
Real Estate - Construction       2  
Real Estate Mortgage - Residential        7 
Real Estate Mortgage - Commercial       1  
Consumer - Home Equity     1   1 
Consumer - Other  23   30   70 96 
Total loans charged-off  23   33   73 112 
Recoveries:             
Commercial       121  
Real Estate - Construction       2  
Real Estate Mortgage - Residential         
Real Estate Mortgage - Commercial  6   10  13 221 
Consumer - Home Equity  1     2 14 
Consumer - Other  8   9   34 35 
Total recoveries  15   19   172 270 
Net loan charge offs (recoveries)  8   14 
Net loan recoveries / (charge offs) 99 158 
Provision for loan losses  1,075   105   3,387 139 
Balance at period end $7,694  $6,354  $10,113 $6,560 
             
Net charge offs (recoveries) to average loans (annualized)  0.00%  0.01%
Net recoveries / (charge offs) to average loans (annualized) 0.02% 0.00%
Allowance as percent of total loans  1.03%  0.88% 1.20% 0.88%
Non-performing assets as % of total assets  0.29%  0.38% 0.22% 0.33%
Allowance as % of non-performing loans  403.5%  238.6% 598.40% 284.23%

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.

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Composition of the Allowance for Loan Losses

(Dollars in thousands) March 31, 2020 December 31, 2019  September 30, 2020 December 31, 2019 
   % of loans in   % of loans in    % of loans in   % of loans in 
 Amount Category Amount Category  Amount Category Amount Category 
Commercial, Financial and Agricultural $489   7.0% $427   7.3% $828   8.7% $427   7.3%
Real Estate – Construction 148 2.1% 111 1.9% 177 1.9% 111 1.9%
Real Estate Mortgage:                  
Residential 440 6.3% 367 6.3% 593 6.2% 367 6.3%
Commercial 5,531 79.0% 4,602 78.7% 7,454 78.4% 4,602 78.7%
Consumer:                  
Home Equity 277 4.0% 240 4.1% 330 3.5% 240 4.1%
Other 112 1.6% 97 1.7% 123 1.3% 97 1.7%
Unallocated  697       N/A 783 N/A   608 N/A 783 N/A 
Total $7,694 100.0% $6,627 100.0% $10,113 100.0% $6,627 100.0%

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

Non-interest Income and Non-interest Expense

Non-interest income during the first quarternine months of 2020 was $2.9$10.2 million as compared to $2.5$8.8 million during the same period in 2019. Deposit service charges decreased $12$361 thousand during the first quarternine months of 2020 as compared to the same period in 2019.2019 primarily due to customers holding higher balances in their deposit accounts due to proceeds from PPP loans and other stimulus funds related to the COVID-19 pandemic. Mortgage banking income increased by $138$624 thousand from $844 thousand$3.3 million in the first quarternine months of 2019 to $982 thousand$4.0 million in the first quarternine months of 2020. Mortgage production including loans held-for-sale and portfolio loans in the first quarternine months of 2020 was $35.3$146.0 million as compared to $25.8$100.6 million in the same period of 2019. With the decline in mortgage interest rates, refinance activity increased during the first quarternine months of 2020 and represented 44.7%54.7% of production. Mortgage activity increased significantly during the month of March 2020 and represented 45.6% of the production and 48.0% of the fees during the first quarter of 2020. However, theThe gain on sale margin was negatively impacted by some loans, which were not saleabledeclined to 2.71% from 3.31% due to disruptions in the mortgage market during the first quarter of 2020.causing certain loans not to be sold. As capacity rebuilds, this issue will be mitigated. Investment advisory fees increased $196$541 thousand to $634 thousand$2.0 million during the first quarternine months of 2020 from $438 thousand$1.4 million during the first quarternine months of 2019. Total assets under management amounted to $320were $436 million at March 31,September 30, 2020 as compared to $330$370 million at MarchDecember 31, 2019 and $340 million at September 30, 2019. Management continues to focus on increasing both the mortgage banking income as well as the investment advisory fees and commissions. Gain on sale of securities was $0$99 thousand during the first quarternine months of 2020 compared to $135 thousand during the first nine months of 2019. Gain on sale of other assets was $147 thousand during the first nine months of 2020 compared to a $3 thousand loss on sale of securities of $29 thousandother assets during the first nine months of 2019. The $147 thousand gain on sale of other assets in the first nine months of 2020 is primarily due to the sale of an other real estate owned property. The $311 thousand in non-recurring BOLI income was due to insurance benefits on two former members of the boards of directors of acquired banks who passed away during the third quarter of 2019.2020.

Non-interest income, other increased $62$128 thousand in the first quarternine months of 2020 as compared to the same period in 2019 primarily due to higher ATM debit card income.   

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

(Dollars in thousands) Three months ended
March 31,
  Nine months ended
September 30,
 
 2020 2019  2020 2019 
ATM debit card income $512  $462  $1,660  $1,525 
Income on bank owned life insurance  196   196  547 515 
Rental income  66   70  200 212 
Loan late charges  25   26  79 84 
Safe deposit fees  15   15  39 39 
Wire transfer fees  20   18  67 60 
Other  73   58   231 260 
Total $907  $845  $2,823 $2,695 

Non-interest expense increased $715 thousand$2.1 million in the first quarternine months of 2020 to $9.0$27.9 million as compared to $8.3$25.8 million in the first quarternine months of 2019.2019 primarily due to increases in salaries and benefits expense, occupancy expense, marketing and public relations expense, FDIC assessments, other real estate owned expense, data processing expense, legal and professional fees, and COVID-19 related expenses partially offset by lower amortization of intangibles. Salary and benefit expense increased $483 thousand$1.7 million from $5.2$15.8 million in the first quarternine months of 2019 to $5.7$17.6 million in the first quarternine months of 2020. This increase is2020 primarily a resultdue to increased production and new hires in the mortgage line of thebusiness, normal salary adjustments, as well astemporary bonuses related to the COVID-19 pandemic paid to certain employees, and the opening of our full-service de novo office in June 2019 in Evans, Georgia in Columbia County, a suburb of Augusta, Georgia, which was partially offset by a reduction in Columbia County, Georgiasalaries and benefits related to deferred origination costs on PPP loans originated in June 2019.2020. We had 242237 full time equivalent employees at March 31,September 30, 2020 compared to 230242 at March 31,September 30, 2019. Furthermore, we incurred COVID-19 related expenses in occupancy expense for additional cleaning of our offices and personal protective equipment for our employees and offices and in equipment expense for laptops and other technology to promote a remote work environment. Marketing and public relations expense increased $179 thousand in the first quarternine months of 2020 as compared to the same period of 2019. The timing of our planned media campaigns in 2020, which is a presidential election year, impacts the recognition of marketing expense, and it is expected that the overall 2020 annual media cost will not vary substantially from the annual cost incurred in 2019. FDIC assessments increased $132 thousand due to a higher assessment rate in 2020 related to a reduction in our leverage ratio and an increase in our assessment base due to higher average assets. Furthermore, we received more FDIC small bank assessment credits during the first nine months in 2019 compared to the first nine months in 2020. The FDIC small bank assessment credits were fully utilized during the first quarter of 2020. Other real estate owned expense increased $76 thousand during the first nine months of 2020 compared to the first nine months of 2019 primarily due to write-downs on several other real estate owned properties.

 Non-interest expense, other increased $263 thousand in the first nine months of 2020 as compared to the same period in 2019 primarily due to higher data processing expense, which includes ATM debit card expense and legal and professional fees.  

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

(Dollars in thousands) Three months ended  Nine months ended
September 30,
 
 March 31, 
 2020 2019  2020 2019 
Data processing $777  $616  $2,320  $2,008 
Supplies  36   46  93 107 
Telephone  81   105  267 323 
Courier  42   38  117 107 
Correspondent services  66   57  209 174 
Insurance  78   57  235 185 
Postage  12   11  28 37 
Legal and professional fees  255   231  864 738 
Loss on limited partnership interest  45 
Director fees  82   87  255 255 
Shareholder expense  39   39  146 �� 126 
Dues  37   35  111 108 
Subscriptions  39   48  109 141 
Loan closing costs/fees  70   81  273 250 
Other  274   251   625  785 
 $1,888  $1,702 
Total $5,652 $5,389 

Income Tax Expense

Our effective tax rate was 19.6%19.05% and 19.5%20.48% in the first quarternine months of 2020 and 2019, respectively. The effective rate in 2020 and 2019 is impacted by the passing of the Tax Cut and Jobs Act on December 22, 2017. The federal tax rate prior to this change was 34%, and beginning January 1, 2018, the rate was lowered to 21%.

Comparison of Results of Operations for the Three Months Ended September 30, 2020 to the Three Months Ended September 30, 2019

Net Income

Our net income for the three months ended September 30, 2020 was $2.7 million, or $0.35 diluted earnings per common share, as compared to $2.9 million, or $0.39 diluted earnings per common share, for the three months ended September 30, 2019. The $246 thousand decrease in net income between the two periods is primarily due to increases in provision for loan losses expense of $1.0 million and non-interest expense of $924 thousand, partially offset by an increase in net interest income of $823 thousand, an increase in non-interest income of $737 thousand, and a decrease in income tax expense of $155 thousand. The increase in provision for loan losses is primarily related to an increase in the qualitative factors in our allowance for loan losses methodology related to the deteriorating economic conditions and economic uncertainties caused by the COVID-19 pandemic. The increase in non-interest expense is primarily related to increased salaries and employee benefits expense of $622 thousand, marketing and public relations expense of $183 thousand, and FDIC assessments of $147 thousand. The increase in net interest income results from an increase of $226.4 million in average earning assets partially offset by a 39 basis point decline in the net interest margin between the two periods.  The increase in non-interest income is primarily related to increases in mortgage banking income of $152 thousand, investment advisory fees and non-deposit commissions of $163, gains on sale of securities of $99 thousand, gains on sale of other real estate owned of $141 thousand, non-recurring BOLI income of $311 thousand, and ATM debit card income of $66 thousand, partially offset by $179 thousand in lower deposit service charges. Our effective tax rate was 18.40% during the third quarter of 2020 compared to 20.62% during the third quarter of 2019. The $311 thousand in non-recurring BOLI income was recorded as non-taxable income.

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Net Interest Income

Please refer to the table at the end of this Item 2 (Management’s Discussion and Analysis of Financial Condition and Results of Operations) for the average yields on assets and average rates on interest-bearing liabilities during the three-month periods ended September 30, 2020 and 2019, along with average balances and the related interest income and interest expense amounts.

Net interest income increased $823 thousand, or 8.8%, to $10.2 million for the three months ended September 30, 2020 from $9.4 million for the three months ended September 30, 2019. Our net interest margin declined by 39 basis points to 3.24% during the three months ended September 30, 2020 from 3.63% during the three months ended September 30, 2019. Our net interest margin, on a taxable equivalent basis, was 3.28% for the three months ended September 2020 compared to 3.66% for the three months ended September 30, 2019. Average earning assets increased $226.4 million, or 22.1%, to $1.2 billion for the three months ended September 30, 2020 as compared to $1.0 billion in the same period of 2019. The increase in net interest income was primarily due to a higher level of average earning assets partially offset by lower net interest margin. The increase in average earning assets was due to increases in loans, securities, and other short-term investments primarily due to Non-PPP loan growth, PPP loans, organic deposit growth, and excess liquidity from PPP loan proceeds and other stimulus funds related to the COVID-19 pandemic. The decline in net interest margin was primarily due to the Federal Reserve reducing the target range of the federal funds rate three times totaling 75 basis points during 2019 and two times totaling 150 basis points during the first quarter of 2020, lower yields on PPP loans, and the excess liquidity generated from PPP loan proceeds and other stimulus funds related to the COVID-19 pandemic being deployed in lower yielding securities and other short-term investments. Lower market rates, the competitive loan pricing environment, and the COVID-19 pandemic put downward pressure on our net interest margin during the three months ended September 30, 2020.

Average loans increased $127.9 million, or 17.3%, to $868.1 million for the three months ended September 30, 2020 from $740.2 million for the three months ended September 30, 2019. Average PPP loans increased $49.2 million and average Non-PPP loans increased $78.7 million to $49.2 million and $818.9 million, respectively, for the three months ended September 30, 2020. Commercial loan production was $46.1 million during the three months ended September 30, 2020 compared to $29.5 million during the same period in 2019. Average loans represented 69.5% of average earning assets during the three months ended September 30, 2020 compared to 72.4% of average earning assets during the three months ended September 30, 2019. The decline in average loans as a percentage of average earning assets was primarily due to increases in deposits of $198.4 million and securities sold under agreements to repurchase of $11.3 million. The growth in our deposits and securities sold under agreements to repurchase was higher than the growth in our loans, which resulted in the excess funds being deployed in our securities portfolio and other short-term investments and to reduce our Federal Home Loan Bank advances. The yield on loans declined 56 basis points to 4.31% in the three months ended September 30, 2020 from 4.87% in the three months ended September 30, 2019. The yield on PPP loans was 2.91% and the yield on Non-PPP loans was 4.40% in the three months ended September 30, 2020. Average securities and average other short-term investments for the three months ended September 30, 2020 increased $45.1 million and $53.4 million, respectively, from the prior year period. The yield on our securities portfolio declined to 2.02% for the three months ended September 30, 2020 from 2.51% for the same period in 2019 while the yield on our other short-term investments declined to 0.21% for the three months ended September 30, 2020 from 2.37% for the same period in 2019. These declines were primarily related to the Federal Reserve reducing the target range of the federal funds rate as described above. The yield on earning assets for the three months ended September 30, 2020 and 2019 was 3.50% and 4.22%, respectively. The cost of interest-bearing liabilities was at 38 basis points in the three months ended September 30, 2020 compared to 83 basis points in the same period in 2019. We continue to focus on growing our pure deposits (demand deposits, interest-bearing transaction accounts, savings deposits and money market accounts) as these accounts tend to be low-cost deposits and assist us in controlling our overall cost of funds. In the three months ended September 30, 2020, these deposits averaged 85.4% of total deposits as compared to 81.3% in the same period of 2019.

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Non-interest Income and Non-interest Expense

Non-interest income during the three months ended September 30, 2020 was $3.9 million as compared to $3.1 million during the same period in 2019. Deposit service charges decreased $179 thousand during the three months ended September 30, 2020 as compared to the same period in 2019 primarily due to customers holding higher balances in their deposit accounts due to proceeds from PPP loans and other stimulus funds related to the COVID-19 pandemic. Mortgage banking income increased by $152 thousand from $1.3 million in the three months ended September 30, 2019 to $1.4 million in the three months ended September 30, 2020. Mortgage production including loans held-for-sale and portfolio loans in the three months ended September 30, 2020 was $56.8 million as compared to $37.9 million in the same period of 2019. With the low mortgage interest rate environment, refinance activity represented 56.4% of production during the three months ended September 30, 2020. The gain on sale margin declined to 2.47% in the three months ended September 30, 2020 from 3.30% in the same period in 2019 due to disruptions in the mortgage market causing certain loans not to be sold. As capacity rebuilds, this issue will be mitigated. Investment advisory fees increased $163 thousand to $672 thousand during the three months ended September 30, 2020 from $509 thousand during the same period in 2019. Total assets under management were $436 million at September 30, 2020 as compared to $370 million at December 31, 2019 and $340 million at September 30, 2019. Management continues to focus on increasing both the mortgage banking income as well as the investment advisory fees and commissions. Gain on sale of securities was $99 thousand during the three months ended September 30, 2020 compared to $0 during the same period in 2019. Gain on sale of other assets was $141 thousand during the three months ended September 30, 2020 compared to $0 during the same period in 2019. The $141 thousand gain on sale of other assets in the three months ended September 30, 2020 is due to the sale on one other real estate owned property. The $311 thousand in non-recurring BOLI income was due to insurance benefits on two former members of the boards of directors of acquired banks who passed away during the third quarter of 2020.

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

(Dollars in thousands) Three months ended
September 30,
 
  2020  2019 
ATM debit card income $596  $530 
Income on bank owned life insurance  182   174 
Rental income  74   72 
Loan late charges  20   35 
Safe deposit fees  12   12 
Wire transfer fees  25   22 
Other  73   87 
Total $982  $932 

Non-interest expense increased $924 thousand during the three months ended September 30, 2020 to $9.7 million as compared to $8.8 million during the three months ended September 30, 2019 primarily due to increases in salaries and benefits expense, occupancy expense, marketing and public relations expense, FDIC assessments, other real estate owned expense, and COVID-19 related expenses partially offset by lower amortization of intangibles. Salary and benefit expense increased $622 thousand from $5.5 million during the three months ended September 30, 2019 to $6.1 million during the three months ended September 30, 2020 primarily due to increased production and new hires in the mortgage line of business and normal salary adjustments. Furthermore, we incurred COVID-19 related expenses in occupancy expense for additional cleaning of our offices and personal protective equipment for our employees and offices. Marketing and public relations expense increased $183 thousand during the three months ended September 30, 2020 as compared to the same period of 2019. The timing of our planned media campaigns in 2020, which is a presidential election year, impacts the recognition of marketing expense, and it is expected that the overall 2020 annual media cost will not vary substantially from the annual cost incurred in 2019. FDIC assessments increased $147 thousand due to a higher assessment rate in 2020 related to a reduction in our leverage ratio and an increase in our assessment base due to higher average assets. Additionally, we received FDIC small bank assessment credits during the three months September 30, 2019 compared to none during the three months ended September 30, 2020. The FDIC small bank assessment credits were fully utilized during the first quarter of 2020. Other real estate owned expense increased $48 thousand during the three months ended September 30, 2020 compared to the same period in 2019 primarily due to write-downs on several other real estate owned properties.

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

(Dollars in thousands) Three months ended 
  September 30, 
  2020  2019 
Data processing $787  $732 
Supplies  26   23 
Telephone  97   112 
Courier  34   40 
Correspondent services  73   53 
Insurance  79   64 
Postage  8   14 
Legal and professional fees  335   296 
Loss on limited partnership interest     22 
Director fees  83   72 
Shareholder expense  48   48 
Dues  38   38 
Subscriptions  34   47 
Loan closing costs/fees  97   89 
Other  181   294 
  $1,920  $1,944 

Financial Position

Assets totaled $1.2$1.4 billion at March 31,September 30, 2020 and $1.2 billion at December 31, 2019. Loans (excluding loans held-for-sale) increased $12.5$107.4 million, or 14.6%, to $749.5$844.5 million at March 31,September 30, 2020 from $737.0 million at December 31, 2019. Non-PPP loans increased $57.6 million, or 7.8%, to $794.7 million at September 30, 2020 from $737.0 million at December 31, 2019. We had 843 PPP loans totaling $51.2 million gross of deferred fees and costs and $49.8 million net of deferred fees and costs at September 30, 2020. We had no PPP loans at December 31, 2019. The $1.4 million in PPP deferred fees net of deferred costs at September 30, 2020 will be recognized as interest income over the remaining life of the PPP loans. We are now in the initial stages of working with our customers through the SBA forgiveness process. None of our PPP loans have received forgiveness as of September 30, 2020. However, we anticipate the forgiveness process to accelerate later in the fourth quarter of 2020 and the first half of 2021.  Total loan production was $33.5$46.1 million during the three months ended September 30, 2020 compared to $29.5 million during the same period in 2019 and $118.9 million during the first quarternine months of 2020. The ratio2020 compared to $99.1 million during the same period in 2019. Loans held-for-sale increased to $37.6 million at September 30, 2020 from $11.2 million at December 31, 2019 due to strong mortgage production of loan growth to loan production was 37.3%$56.8 million during the three months ended September 30, 2020 and $146.0 million during the first quarternine months of 2020. The loan-to-deposit ratio (including loans held for sale)held-for-sale) at March 31,September 30, 2020 and December 31, 2019 was 77.2%75.2% and 75.7%, respectively. The loan-to-deposit ratio (excluding loans held-for-sale) at September 30, 2020 and December 31, 2019 was 72.0% and 74.6%, respectively. Investment securities increased to $290.9$295.5 million at March 31,September 30, 2020 from $288.8 million at December 31, 2019. Other short-term investments declinedincreased to $25.6$106.2 million at March 31,September 30, 2020 from $32.7 million at December 31, 2019. The increases in investments and other short-term investments are primarily due to organic deposit growth and excess liquidity from customer’s PPP loan proceeds and other stimulus funds related to the COVID-19 pandemic.

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

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

(Dollars in thousands) March 31, 2020 December 31, 2019  September 30, 2020 December 31, 2019 
 Amount Percent Amount Percent  Amount Percent Amount Percent 
Commercial, financial & agricultural $50,313   6.7% $51,805   7.0% $108,006   12.8% $51,805   7.0%
Real estate:                  
Construction 83,547 11.1% 73,512 10.0% 89,250 10.6% 73,512 10.0%
Mortgage – residential 46,471 6.2% 45,357 6.2% 49,215 5.8% 45,357 6.2%
Mortgage – commercial 530,180 70.8% 527,447 71.5% 561,932 66.5% 527,447 71.5%
Consumer:                  
Home Equity 28,641 3.8% 28,891 3.9% 27,618 3.3% 28,891 3.9%
Other 10,377 1.4% 10,016 1.4% 8,439 1.0% 10,016 1.4%
Total gross loans 749,529 100.0% 737,028 100.0% 844,460 100.0% 737,028 100.0%
Allowance for loan losses  (7,694)    (6,627)     (10,113)    (6,627)   
Total net loans $741,835   $730,401    $834,347   $730,401   

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

Deposits decreased $1.6increased $185.4 million, or 18.8%, to $986.6 million$1.2 billion at March 31,September 30, 2020 as compared to $988.2 million at December 31, 2019.  Our pure deposits, which are defined as total deposits less certificates of deposits, increased $2.7$189.9 million, or 0.3%22.4%, to $850.0 million$1.0 billion at March 31,September 30, 2020 from $847.3 million at December 31, 2019.  The increase in pure deposits was primarily due to organic deposit growth and customer’s proceeds from PPP loans and other stimulus funds related to the COVID-19 pandemic. We had no brokered deposits and no listing services deposits at March 31,September 30, 2020.  Our securities sold under agreements to repurchase, which are related to our customer cash management accounts, increased $12.7$13.8 million, or 38.3%41.6%, to $46.0$47.1 million at March 31,September 30, 2020 from $33.3 million at December 31, 2019.  This increase was due to the seasonality of one large relationship. Historically, we typically experience a short term decrease in deposits in the first quarter of each year due to our business customers withdrawing funds primarily for bonuses and taxes.  We continue to focus on growing our pure deposits as a percentage of total deposits in order to better manage our overall cost of funds.

Total shareholders’ equity increased $4.4$13.0 million, or 3.7%10.8%, to $124.6$133.2 million at March 31,September 30, 2020 from $120.2 million at December 31, 2019.  The increase in shareholders’ equity is primarily due to an increase in retention of earnings less dividends paid of $0.9$4.0 million, and an increase in accumulated other comprehensive income of $3.4 million.$8.4 million, $0.4 thousand related to executive and director stock awards, and $0.3 thousand related to our dividend reinvestment plan.  The increase in accumulated other comprehensive income was due to a reduction in market interest rates, which resulted in an increase in the net unrealized gains in our investment securities portfolio. During 2019, we completed a repurchase plan approved in May 2019 of 300,000 shares of our outstanding common stock at a cost of approximately $5.6 million with an average price of $18.79 per share. As of June 30, 2019, we repurchased 185,361 shares of our outstanding common stock of approximately $3.4 million with an average price of $18.41 per share. The remaining 114,639 shares were repurchased in July 2019. We announced during the third quarter of 2019 the approval of a new share repurchase plan, which was the second share repurchase plan announced during 2019, of up to 200,000 shares of our outstanding common stock.  NoAlthough no share repurchases have been made under this new share repurchase plan.  This approvedsecond share repurchase plan during 2020, it provides us with some flexibility in managing our capital going forward. 

Market Risk Management

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

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

Based on the many factors and assumptions used in simulating the effect of changes in interest rates, the following table estimates the hypothetical percentage change in net interest income at March 31,September 30, 2020 and December 31, 2019 over the subsequent 12 months. At MarchSeptember 30, 2020 we were slightly asset sensitive over the first 12-months compared to slightly liability sensitive over the first 12-months at December 31, 2019. The change to the slightly asset sensitive position at September 30, 2020 andwas due to an increase in very rate sensitive interest bearing cash with the majority of funding growth occurring in less rate sensitive non-maturing deposits. At December 31, 2019, we were slightly liability sensitive over the first three month period and over the balance of a 12-month period are asset sensitive on a cumulative basis. As a result, our modeling at December 31, 2019 reflects a modest decline in our net interest income in a rising rate environment over the first 12 months. This negative impact of rising rates reverses and net interest income is favorably impacted over a 24-month period. In a declining rate environment, the model reflects a decline in net interest income. This primarily results from the current level of interest rates being paid on our interest bearing transaction accounts as well as money market accounts. The interest rates on these accounts are at a level where they cannot be repriced in proportion to the change in interest rates. The increase and decrease of 100 and 200 basis points, respectively, reflected in the table below assume a simultaneous and parallel change in interest rates along the entire yield curve. 

Net Interest Income Sensitivity

 

Change in short-term
interest rates
 Hypothetical
percentage change in
net interest income
  Hypothetical
percentage change in
net interest income
 
 March 31,
2020
 December 31,
2019
  September 30,
2020
 December 31,
2019
 
+200bp  -2.76%  -2.30%  1.03%  -2.30%
+100bp -1.03% -1.09% 0.57% -1.09%
Flat      
-100bp -0.98% -1.88% -1.31% -1.88%
-200bp -1.03% -5.08% -1.32% -5.08%

  

We perform a valuation analysis projecting future cash flows from assets and liabilities to determine the Present Value of Equity (“PVE”) over a range of changes in market interest rates. The sensitivity of PVE to changes in interest rates is a measure of the sensitivity of earnings over a longer time horizon. At March 31,September 30, 2020 and December 31, 2019, the PVE exposure in a plus 200 basis point increase in market interest rates was estimated to be 11.67%14.81% and 5.85%, respectively. The PVE exposure in a down 100 basis point decrease was estimated to be (13.64)(15.20)% at March 31,September 30, 2020 compared to (7.68)% at December 31, 2019.

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Liquidity and Capital Resources

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

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As of March 31,September 30, 2020, we have not experienced any unusual pressure on our deposit balances or our liquidity position as a result of the COVID-19 pandemic. We had no brokered deposits and no listing services deposits at March 31,September 30, 2020. We believe that we have ample liquidity to meet the needs of our customers and to manage through the COVID-19 pandemic through our low cost deposits; our ability to borrow against approved lines of credit (federal funds purchased) from correspondent banks; and our ability to obtain advances secured by certain securities and loans from the Federal Home Loan Bank.  Furthermore, we are approved to participate in the PPPLF to fund PPP loans if needed.

Through the operations of our Bank, we have made contractual commitments to extend credit in the ordinary course of our business activities. These commitments are legally binding agreements to lend money to our customers at predetermined interest rates for a specified period of time. At March 31,September 30, 2020, we had issued commitments to extend unused credit of $132.0$122.0 million, including $40.2$41.3 million in unused home equity lines of credit, through various types of lending arrangements. At December 31, 2019, we had issued commitments to extend unused credit of $135.7 million, including $39.8 million in unused home equity lines of credit, through various types of lending arrangements. We evaluate each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by us upon extension of credit, is based on our credit evaluation of the borrower. Collateral varies but may include accounts receivable, inventory, property, plant and equipment, commercial and residential real estate. We manage the credit risk on these commitments by subjecting them to normal underwriting and risk management processes.

We generally maintain a high level of liquidity and adequate capital, which along with continued retained earnings, we believe will be sufficient to fund the operations of the Bank for at least the next 12 months. Shareholders’ equity was 10.5%declined to 9.6% of total assets at March 31,September 30, 2020 andfrom 10.3% at December 31, 2019.2019 primarily due to PPP loans and excess liquidity from customer’s PPP loan proceeds and other stimulus funds related to the COVID-19 pandemic. The Bank maintains federal funds purchased lines in the total amount of $25.0$60.0 million with two financial institutions, although these were not utilized at March 31, 2020;September 30, 2020 and $10$10.0 million through the Federal Reserve Discount Window. The FHLB of Atlanta has approved a line of credit of up to 25% of the Bank’s assets, which, when utilized, is collateralized by a pledge against specific investment securities and/or eligible loans. We had 843 PPP loans totaling $51.2 million gross of deferred fees and costs and $49.8 million net of deferred fees and costs at September 30, 2020. Furthermore, we are eligible to participate inthe Federal Reserve provided us a lending facility, the PPPLF, that permitted us to obtain funding specifically for loans that we made under the PPP; however, the Bank had sufficient liquidity to fund PPP loans if needed. without accessing the PPPLF. The PPP program expired on August 8, 2020.

We regularly review our liquidity position and have implemented internal policies establishing guidelines for sources of asset-based liquidity and evaluate and monitor the total amount of purchased funds used to support the balance sheet and funding from noncore sources.

Although uncertain, we may encounter stress on liquidity management as a direct result of the COVID-19 pandemic and the Bank’s participation in the PPP as a participating lender. As customers manage their own liquidity stress, we could experience an increase in the utilization of existing lines of credit. As of May 6, 2020, we have funded 545 PPP loans totaling $42.7 million. The Federal Reserve has provided a lending facility, the PPPLF, that will allow us to obtain funding specifically for loans that we make under the PPP, which will allow us to retain existing sources of liquidity for our traditional operations. PPP loans will be pledged as collateral on any of the Bank’s borrowings under the Federal Reserve’s PPPLF lending facility. Currently, the Bank has sufficient liquidity to fund PPP loans without accessing the PPPLF. However, the Bank has the option to use the PPPLF if needed.

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

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

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

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

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

·a leverage ratio of 4%.

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

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

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

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As outlined above, we are generally not subject to the Federal Reserve capital requirements unless advised otherwise because we qualify as a small bank holding company. Our Bank remains subject to capital requirements including a minimum leverage ratio and a minimum ratio of “qualifying capital” to risk weighted assets. As of March 31,September 30, 2020, the Bank met all capital adequacy requirements under the rules on a fully phased-in basis.

Dollars in thousands    Prompt Corrective Action
(PCA) Requirements
  Excess Capital $s of
PCA Requirements
 
Capital Ratios Actual  Well
Capitalized
  Adequately
Capitalized
  Well
Capitalized
  Adequately
Capitalized
 
September 30, 2020               
Leverage Ratio  8.95%  5.00%  4.00% $51,958  $65,107 
Common Equity Tier 1 Capital Ratio  12.96%  6.50%  4.50%  58,688   76,846 
Tier 1 Capital Ratio  12.96%  8.00%  6.00%  45,070   63,228 
Total Capital Ratio  14.08%  10.00%  8.00%  37,026   55,183 
December 31, 2019                    
Leverage Ratio  9.97%  5.00%  4.00% $56,197  $67,508 
Common Equity Tier 1 Capital Ratio  13.47%  6.50%  4.50%  58,345   75,086 
Tier 1 Capital Ratio  13.47%  8.00%  6.00%  45,789   62,530 
Total Capital Ratio  14.26%  10.00%  8.00%  35,675   52,416 

Dollars in thousands    Prompt Corrective Action
(PCA) Requirements
  Excess Capital $s of
PCA Requirements
 
Capital Ratios Actual  Well
Capitalized
  Adequately
Capitalized
  Well
Capitalized
  Adequately
Capitalized
 
March 31, 2020                    
Leverage Ratio  9.91%  5.00%  4.00% $56,619  $68,157 
Common Equity Tier 1 Capital Ratio  13.35%  6.50%  4.50%  58,671   75,790 
Tier 1 Capital Ratio  13.35%  8.00%  6.00%  45,831   62,951 
Total Capital Ratio  14.25%  10.00%  8.00%  36,406   53,525 
December 31, 2019                    
Leverage Ratio  9.97%  5.00%  4.00% $56,197  $67,508 
Common Equity Tier 1 Capital Ratio  13.47%  6.50%  4.50%  58,345   75,086 
Tier 1 Capital Ratio  13.47%  8.00%  6.00%  45,789   62,530 
Total Capital Ratio  14.26%  10.00%  8.00%  35,675   52,416 

The Bank’s risk-based capital ratios of leverage ratio, Tier 1, and total capital were 9.91%8.95%, 13.35%12.96% and 14.25%14.08%, respectively, at March 31,September 30, 2020 as compared to 9.97%, 13.47%, and 14.26%, respectively, at December 31, 2019. The Bank’s Common Equity Tier 1 ratio at March 31,September 30, 2020 was 13.35%12.96% and at December 31, 2019 was 13.47%. Under the Basel III rules, we anticipate that the Bank will remain a well capitalized institution for at least the next 12 months. Furthermore, based on our strong capital, conservative underwriting, and internal stress testing, we expect to remain well capitalized throughout the COVID-19 pandemic. However, the Bank’s reported and regulatory capital ratios could be adversely impacted by future credit losses related to the COVID-19 pandemic. We recognize that we face extraordinary circumstances, and we intend to monitor developments and potential impacts on our capital.

As a bank holding company, our ability to declare and pay dividends is dependent on certain federal and state regulatory considerations, including the guidelines of the Federal Reserve. The Federal Reserve has issued a policy statement regarding the payment of dividends by bank holding companies. In general, the Federal Reserve’s policies provide that dividends should be paid only out of current earnings and only if the prospective rate of earnings retention by the bank holding company appears consistent with the organization’s capital needs, asset quality and overall financial condition. The Federal Reserve’s policies also require that a bank holding company serve as a source of financial strength to its subsidiary bank(s) by standing ready to use available resources to provide adequate capital funds to those banks during periods of financial stress or adversity and by maintaining the financial flexibility and capital-raising capacity to obtain additional resources for assisting its subsidiary banks where necessary. In addition, under the prompt corrective action regulations, the ability of a bank holding company to pay dividends may be restricted if a subsidiary bank becomes undercapitalized. These regulatory policies could affect our ability to pay dividends or otherwise engage in capital distributions. Our Board of Directors approved a cash dividend for the first quarter ofthree months ended September 30, 2020 of $0.12 per common share.  This dividend is payable on May 18,November 16, 2020 to shareholders of record of our common stock as of May 4,November 2, 2020. 

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Weannounced during the third quarter of 2019 the approval of a new share repurchase plan, which was the second share repurchase plan announced during 2019, of up to 200,000 shares of our outstanding common stock.  No share repurchases have been made under this new share repurchase plan.  This approved share repurchase plan provides us with some flexibility in managing our capital going forward.   

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

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

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FIRSTCOMMUNITY CORPORATION

Yields on Average Earning Assets and Rates

on Average Interest-Bearing Liabilities

 Three months ended March 31, 2020 Three months ended March 31, 2019  Nine months ended September 30, 2020 Nine months ended September 30, 2019 
 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 $753,659  $8,827   4.71% $724,059  $8,609   4.82%                        
PPP loans $27,088  $577   2.85% $  $   NA 
Non-PPP loans  788,636   26,677   4.52%  731,033   26,492   4.85%
Total loans  815,724   27,254   4.46%  731,033   26,492   4.85%
Securities 286,332 1,726 2.42% 251,920 1,656 2.67%  293,724   4,862   2.21%  252,357   4,924   2.61%
Other short-term investments  37,251 157 1.70%  17,480 109 2.53%  56,532   236   0.56%  23,736   428   2.41%
Total earning assets  1,077,242 10,710 4.00%  993,459 10,374 4.23%  1,165,980   32,352   3.71%  1,007,126   31,844   4.23%
Cash and due from banks 15,032     13,359       15,142           13,983         
Premises and equipment 35,002     35,524       34,853           35,832         
Goodwill and other intangibles 16,063     16,576       15,967           16,442         
Other assets 39,691     36,713       39,975           37,331         
Allowance for loan losses  (6,680)      (6,313)       (8,052)          (6,372)        
Total assets $1,176,350     $1,089,318      $1,263,865          $1,104,342         
                        
Liabilities                                     
Interest-bearing liabilities                                     
Interest-bearing transaction accounts 216,198 103 0.19% 194,401 149 0.31% $235,346   220   0.12% $204,300   443   0.29%
Money market accounts 198,292 350 0.71% 179,376 341 0.77%  210,212   674   0.43%  179,063   1,283   0.96%
Savings deposits 103,776 29 0.11% 107,921 35 0.13%  110,095   65   0.08%  105,054   104   0.13%
Time deposits 169,397 537 1.27% 180,152 476 1.07%  167,150   1,456   1.16%  177,415   1,571   1.18%
Other borrowings  70,332 274 1.57%  56,604 353 2.53%  67,504   601   1.19%  52,861   954   2.41%
Total interest-bearing liabilities  757,995 1,293 0.69%  718,454 1,354 0.76%  790,307   3,016   0.51%  718,693   4,355   0.81%
Demand deposits 281,714     246,890       332,975           258,124         
Other liabilities 13,178     10,190       13,195           11,422         
Shareholders’ equity  123,463      113,784       127,388           116,103         
Total liabilities and shareholders’ equity $1,176,350     $1,089,318      $1,263,865          $1,104,342         
                                     
Cost of deposits, including demand deposits     0.42%     0.45%          0.31%          0.49%
Cost of funds, including demand deposits     0.50%     0.57%          0.36%          0.60%
Net interest spread     3.31%     3.47%          3.20%          3.42%
Net interest income/margin   $9,417 3.52%   $9,020 3.68%
Net interest income/margin (taxable equivalent)   $9,495 3.55%   $9,134 3.73%
Net interest income margin - excluding PPP loans     $28,759   3.37%     $27,489   3.65%
Net interest income/margin - including PPP loans      29,336   3.36%      27,489   3.65%
Net interest income/margin (tax equivalent) - excl. PPP loans     $29,046   3.41%     $27,772   3.69%
Net interest income/margin (tax equivalent) - incl. PPP loans     $29,623   3.39%     $27,772   3.69%

62

FIRST COMMUNITY CORPORATION

Yields on Average Earning Assets and Rates

on Average Interest-Bearing Liabilities

  Three months ended September 30, 2020  Three months ended September 30, 2019 
  Average  Interest  Yield/  Average  Interest  Yield/ 
  Balance  Earned/Paid  Rate  Balance  Earned/Paid  Rate 
Assets                        
Earning assets                        
Loans                        
PPP loans $49,203  $360   2.91% $  $   NA 
Non-PPP loans  818,893   9,048   4.40%  740,150   9,092   4.87%
Total loans  868,096   9,408   4.31%  740,150   9,092   4.87%
Securities  299,858   1,525   2.02%  254,801   1,609   2.51%
Other short-term investments  80,653   43   0.21%  27,248   163   2.37%
Total earning assets  1,248,607   10,976   3.50%  1,022,199   10,864   4.22%
Cash and due from banks  15,568           14,578         
Premises and equipment  34,721           36,198         
Goodwill and other intangibles  15,872           16,311         
Other assets  39,751           37,185         
Allowance for loan losses  (9,410)          (6,447)        
Total Assets $1,345,109          $1,120,024         
                         
Liabilities                        
Interest-bearing liabilities                        
Interest-bearing transaction accounts $256,990  $57   0.09% $216,163  $158   0.29%
Money market accounts  228,502   146   0.25%  180,758   461   1.01%
Savings deposits  117,818   18   0.06%  99,693   33   0.13%
Time deposits  166,070   438   1.05%  175,430   567   1.28%
Other borrowings  63,312   141   0.89%  52,020   292   2.23%
Total interest-bearing liabilities  832,692   800   0.38%  724,064   1,511   0.83%
Demand deposits  367,597           266,555         
Other liabilities  13,083           12,175         
Shareholders’ equity  131,737           117,230         
Total liabilities and shareholders’ equity $1,345,109          $1,120,024         
                         
Cost of deposits, including demand deposits          0.23%          0.52%
Cost of funds, including demand deposits          0.27%          0.61%
Net interest spread          3.12%          3.39%
Net interest income/margin - excluding PPP loans     $9,816   3.26%     $9,353   3.63%
Net interest income/margin - including PPP loans     $10,176   3.24%     $9,353   3.63%
Net interest income/margin (tax equivalent) - excl. PPP loans     $9,922   3.29%     $9,428   3.66%
Net interest income/margin (tax equivalent) - incl. PPP loans     $10,282   3.28%     $9,428   3.66%

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 threenine months ended March 31,September 30, 2020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.  

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PART II -

OTHER INFORMATION

Item 1. Legal Proceedings.

We are a party to claims and lawsuits arising in the course of normal business activities. Management is not aware of any material pending legal proceedings against us which we believe, if determined adversely, would have a material adverse impact on the Company’sour financial position, results of operations or cash flows.

Item 1A. Risk Factors.

Investing in shares of our common stock involves certain risks, including those identified and described in Item 1A. of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, our Quarterly Report on Form 10-Q for the period ended March 31, 2020, our Quarterly Report on Form 10-Q for the period ended June 30, 2020, as well as cautionary statements contained in this Quarterly Report on Form 10-Q, including those under the caption “Cautionary Note Regarding Forward-Looking Statements” set forth in Part I, Item 2 of this Quarterly Report on Form 10-Q, risks and matters described elsewhere in this Quarterly Report on Form 10-Q and in our other filings with the SEC.

We are providing this additional risk factor to supplement the risk factors contained in Item 1A. of our Annual Report on Form 10-K for the year ended December 31, 2019.

The COVID-19 pandemic has adversely affected our business, financial condition and results of operations, and the ultimate impacts of the pandemic on our business, financial condition and results of operations will depend on future developments and other factors that are highly uncertain and will be impacted by the scope and duration of the pandemic and actions taken by governmental authorities in response to the pandemic.

The ongoing COVID-19 global and national health emergency has caused significant disruption in the international and United States economies and financial markets and has had an adverse effect on our business, financial condition and results of operations. The spread of COVID-19 has caused illness, quarantines, cancellation of events and travel, business and school shutdowns, reduction in business activity and financial transactions, supply chain interruptions and overall economic and financial market instability. In response to the COVID-19 pandemic, the governments of the states in which we have retail offices, and of most other states, have taken preventative or protective actions, such as imposing restrictions on travel and business operations, advising or requiring individuals to limit or forego their time outside of their homes, and ordering temporary closures of businesses that have been deemed to be non-essential. These restrictions and other consequences of the pandemic have resulted in significant adverse effects for many different types of businesses, including, among others, those in the travel, hospitality and food and beverage industries, and have resulted in a significant number of layoffs and furloughs of employees nationwide and in the regions in which we operate.

The ultimate effects of COVID-19 on the broader economy and the markets that we serve are not known nor is the ultimate length of the restrictions described above and any accompanying effects. Moreover, the Federal Reserve has taken action to lower the Federal Funds rate, which may negatively affect our interest income and, therefore, earnings, financial condition and results of operation. Additional impacts of COVID-19 on our business could be widespread and material, and may include, or exacerbate, among other consequences, the following:

·employees contracting COVID-19;
·reductions in our operating effectiveness as our employees work from home;
·a work stoppage, forced quarantine, or other interruption of our business;
·unavailability of key personnel necessary to conduct our business activities;
·effects on key employees, including operational management personnel and those charged with preparing, monitoring and evaluating our financial reporting and internal controls;
·sustained closures of our branch lobbies or the offices of our customers;
·declines in demand for loans and other banking services and products;
·reduced consumer spending due to both job losses and other effects attributable to the COVID-19 pandemic;
·unprecedented volatility in United States financial markets;
·volatile performance of our investment securities portfolio;
·decline in the credit quality of our loan portfolio, owing to the effects of the COVID-19 pandemic in the markets we serve, leading to a need to increase our allowance for loan losses;
·declines in value of collateral for loans, including real estate collateral;
·declines in the net worth and liquidity of borrowers and loan guarantors, impairing their ability to honor commitments to us; and
·declines in demand resulting from businesses being deemed to be “non-essential” by governments in the markets we serve, and from “non-essential” and “essential” businesses suffering adverse effects from reduced levels of economic activity in our markets.

These factors, together or in combination with other events or occurrences that may not yet be known or anticipated, may materially and adversely affect our business, financial condition and results of operations.

The ongoing COVID-19 pandemic has resulted in meaningfully lower stock prices for many companies, as well as the trading prices for many other securities. The further spread of the COVID-19 outbreak, as well as ongoing or new governmental, regulatory and private sector responses to the pandemic, may materially disrupt banking and other economic activity generally and in the areas in which we operate. This could result in further decline in demand for our banking products and services, and could negatively impact, among other things, our liquidity, regulatory capital and our growth strategy. Any one or more of these developments could have a material adverse effect on our business, financial condition and results of operations.

We are taking precautions to protect the safety and well-being of our employees and customers. However, no assurance can be given that the steps being taken will be adequate or deemed to be appropriate, nor can we predict the level of disruption which will occur to our employee’s ability to provide customer support and service. If we are unable to recover from a business disruption on a timely basis, our business, financial condition and results of operations could be materially and adversely affected. We may also incur additional costs to remedy damages caused by such disruptions, which could further adversely affect our business, financial condition and results of operations.

As a participating lender in the SBA Paycheck Protection Program, or PPP, the Company and the Bank are subject to additional risks of litigation from the Bank’s clients or other parties regarding the Bank’s processing of loans for the PPP and risks that the SBA may not fund some or all PPP loan guaranties.

On March 27, 2020, President Trump signed the CARES Act, which included a $349 billion loan program administered through the SBA referred to as the PPP. Under the PPP, small businesses and other entities and individuals can apply for loans from existing SBA lenders and other approved regulated lenders that enroll in the program, subject to numerous limitations and eligibility criteria. The Bank is participating as a lender in the PPP. The PPP opened on April 3, 2020; however, because of the short timeframe between the passing of the CARES Act and the opening of the PPP, there is some ambiguity in the laws, rules and guidance regarding the operation of the PPP, which exposes the Company to risks relating to noncompliance with the PPP. On or about April 16, 2020, the SBA notified lenders that the $349 billion earmarked for the PPP was exhausted. Congress has approved additional funding for the PPP and President Trump signed the new legislation on April 24, 2020 with the funding opening back up on April 27, 2020. Since the opening of the PPP, several other larger banks have been subject to litigation regarding the process and procedures that such banks used in processing applications for the PPP. The Company and the Bank may be exposed to the risk of litigation, from both clients and non-clients that approached the Bank regarding PPP loans, regarding its process and procedures used in processing applications for the PPP. If any such litigation is filed against the Company or the Bank and is not resolved in a manner favorable to the Company or the Bank, it may result in significant financial liability or adversely affect the Company’s reputation. In addition, litigation can be costly, regardless of outcome. Any financial liability, litigation costs or reputational damage caused by PPP related litigation could have a material adverse impact on our business, financial condition and results of operations.

The Bank also has credit risk on PPP loans if a determination is made by the SBA that there is a deficiency in the manner in which the loan was originated, funded, or serviced by the Bank, such as an issue with the eligibility of a borrower to receive a PPP loan, which may or may not be related to the ambiguity in the laws, rules and guidance regarding the operation of the PPP. In the event of a loss resulting from a default on a PPP loan and a determination by the SBA that there was a deficiency in the manner in which the PPP loan was originated, funded, or serviced by the Company, the SBA may deny its liability under the guaranty, reduce the amount of the guaranty, or, if it has already paid under the guaranty, seek recovery of any loss related to the deficiency from the Company.

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

(a)Not Applicable.

(b)Not Applicable.

(c)Although we have an authorized repurchase plan to repurchase up to 200,000 share of our common stock, no share repurchases were made in the three months ended September 30, 2020 and no share repurchases were made during the first quarternine months of 2020.

Item 3. Defaults Upon Senior Securities.

Not Applicable.

Item 4. Mine Safety Disclosures.

Not Applicable.

Item 5. Other Information.

None.

5165
 

Item 4. Mine Safety Disclosures.

Not Applicable.

Item 5. Other Information.

None.

Item 6. Exhibits.

Exhibit Description
3.1Restated Articles of Incorporation (incorporated by reference to Exhibit 3.1 to the Company’s Form 8-K filed on June 27, 2011).
3.2Articles of Amendment (incorporated by reference to Exhibit 3.1 to the Company’s Form 8-K filed on May 23, 2019).
3.3Amended and Restated Bylaws dated May 21, 2019 (incorporated by reference to Exhibit 3.1 to the Company’s Form 8-K filed on May 22, 2019).
31.1Rule 13a-14(a) Certification of the Principal Executive Officer.
31.2Rule 13a-14(a) Certification of the Principal Financial Officer.
32Section 1350 Certifications
101The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31,September 30, 2020, formatted in iXBRL (Inline eXtensible Business Reporting Language (XBRL)Language); (i) Consolidated Balance Sheets at March 31,September 30, 2020 and December 31, 2019, (ii) Consolidated Statements of Income for the three and nine months ended March 31,September 30, 2020 and 2019, (iii) Consolidated Statements of Comprehensive Income for the three and nine months ended March 31,September 30, 2020 and 2019 (iv) Consolidated Statements of Changes in Shareholders’ Equity for the three and nine months ended March 31,September 30, 2020 and 2019, (v) Consolidated Statements of Cash Flows for the threenine months ended March 31,September 30, 2020 and 2019, and (vi) Notes to Consolidated Financial Statements. Cover Page Interactive Data File.
104Cover Page Interactive Data File (the cover page XBRL tags are embedded within the Inline XBRL document).

SIGNATURES

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

FIRST COMMUNITY CORPORATION
(REGISTRANT)
Date:May 8,November 6, 2020By: /s/ Michael C. Crapps
Michael C. Crapps
President and Chief Executive Officer
(Principal Executive Officer)
Date:May 8,November 6, 2020By: /s/ D. Shawn Jordan
D. Shawn Jordan
Executive Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
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