FIRST COMMUNITY CORP /SC/ - Quarter Report: 2019 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

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

Commission File No. 000-28344

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

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

5455 Sunset Boulevard, Lexington, South Carolina 29072

(Address of principal executive offices) (Zip Code)

(803) 951-2265

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of exchange on which registered
Common stock, par value $1.00 per share	FCCO	The Nasdaq Stock Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o		Accelerated filer x
Non-accelerated filer o		Smaller reporting company x
		Emerging growth company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

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

TABLE OF CONTENTS


PART I – FINANCIAL INFORMATION		3
Item 1.	Financial Statements	3
	Consolidated Balance Sheets	3
	Consolidated Statements of Income	4
	Consolidated Statements of Comprehensive Income	6
	Consolidated Statements of Changes in Shareholders’ Equity	7
	Consolidated Statements of Cash Flows	9
	Notes to Consolidated Financial Statements	10
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	34
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	51
Item 4.	Controls and Procedures	51

PART II – OTHER INFORMATION		52
Item 1.	Legal Proceedings	52
Item 1A.	Risk Factors	52
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	52
Item 3.	Defaults Upon Senior Securities	53
Item 4.	Mine Safety Disclosures	53
Item 5.	Other Information	53
Item 6.	Exhibits	53

SIGNATURES		54
EX-31.1 RULE 13A-14(A) CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
EX-31.2 RULE 13A-14(A) CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
EX-32 SECTION 1350 CERTIFICATIONS

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

FIRST COMMUNITY CORPORATION

CONSOLIDATED BALANCE SHEETS

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

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

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

See Notes to Consolidated Financial Statements

FIRST COMMUNITY CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

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

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

See Notes to Consolidated Financial Statements

FIRST COMMUNITY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)

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

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

See Notes to Consolidated Financial Statements

FIRST COMMUNITY CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)

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

Net income	$	8,274		$	8,543

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

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

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

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

Net income	$	2,898		$	2,833

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

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

See Notes to Consolidated Financial Statements

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

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

																			Accumulated
	Common						Common			Additional			Nonvested						Other
	Shares			Common			Stock			Paid-in			Restricted			Retained			Comprehensive
	Issued			Stock			Warrants			Capital			Stock			Earnings			Income (Loss)			Total
Balance, December 31, 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 $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 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 of $271																				1,232			1,232
Amortization of compensation on restricted stock														46									46
Exercise of warrants		3			3			(2	)		(1	)											—
Stock repurchase plan		(115	)		(115	)					(2,110	)											(2,225	)
Shares issued-deferred compensation																							—
Dividends: Common ($0.11 per share)																	(831	)					(831	)
Dividend reinvestment plan		10			10						161												171
Balance September 30, 2019		7,409		$	7,409		$	13		$	90,292		$	(195	)	$	18,024		$	3,237		$	118,780

See notes to Consolidated Financial Statements

FIRST COMMUNITY CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)

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

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

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

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

See notes to Consolidated Financial Statements

FIRST COMMUNITY CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

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

See Notes to Consolidated Financial Statements

Notes to Consolidated Financial Statements (Unaudited)

Note 1—Basis of Presentation

In the opinion of management, the accompanying unaudited consolidated balance sheets, and the consolidated statements of income, comprehensive income, changes in shareholders’ equity, and the cash flows of First Community Corporation (the “Company”), present fairly in all material respects the Company’s financial position at September 30, 2019 and December 31, 2018, and the Company’s results of operations and cash flows for the three and nine months ended September 30, 2019 and 2018. The results of operations for the three and nine months ended September 30, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019.

In the opinion of management, all adjustments necessary to fairly present the consolidated financial position and consolidated results of operations have been made. All such adjustments are of a normal, recurring nature. All significant intercompany accounts and transactions have been eliminated in consolidation. The consolidated financial statements and notes thereto are presented in accordance with the instructions for Form 10-Q. The information included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 should be referred to in connection with these unaudited interim financial statements.

Note 2—Earnings Per Common Share

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

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

	Nine months				Three months
	Ended September 30,				Ended September 30,
	2019		2018		2019		2018
Numerator (Net income available to common shareholders	$	8,274	$	8,543	$	2,898	$	2,833
Denominator
Weighted average common shares outstanding for:
Basic shares		7,548		7,581		7,386		7,592
Dilutive securities:
Deferred compensation		40		65		39		61
Warrants/Restricted stock-Treasury stock method		42		73		38		71
Diluted shares		7,630		7,719		7,463		7,724
Earnings per common share:
Basic	$	1.10	$	1.13	$	0.39	$	0.37
Diluted	$	1.08	$	1.11	$	0.39	$	0.37
The average market price used in calculating assumed number of shares	$	19.06	$	25.33	$	18.95	$	23.49

Note 2—Earnings Per Common Share-continued

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

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

The Company has a total of 15,129 unvested restricted shares and 5,644 restricted units under the terms of its compensation plans and employment agreements as of September 30, 2019. The employee shares and units cliff vest over a three-year period; the non-employee director shares vest one year after issuance. The unrecognized compensation cost at September 30, 2019 for nonvested shares amounts to $194.8 thousand. Each unit is convertible into one share of common stock at the time the unit vests. The related compensation cost is accrued over the vesting period and was $51.1 thousand at September 30, 2019.

In 2006, the Company established a Non-Employee Director Deferred Compensation Plan, whereby a director may elect to defer all or any part of annual retainer and monthly meeting fees payable with respect to service on the board of directors or a committee of the board. Units of common stock are credited to the director’s account at the time compensation is earned and are included in dilutive securities in the table above. At September 30, 2019 and December 31, 2018, there were 96,066 and 114,982 units in the plan, respectively. The accrued liability at September 30, 2019 and December 31, 2018 amounted to $1.1 million and $1.3 million, respectively, and is included in “Other liabilities” on the balance sheet.

Note 3—Investment Securities

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

AVAILABLE-FOR-SALE:			Gross		Gross
	Amortized		Unrealized		Unrealized
(Dollars in thousands)	Cost		Gains		Losses		Fair Value
September 30, 2019
US Treasury securities	$	7,174	$	24	$	6	$	7,192
Government Sponsored Enterprises		1,105		18		—		1,123
Mortgage-backed securities		166,558		2,090		607		168,041
Small Business Administration pools		47,564		374		285		47,653
State and local government		38,550		2,494		4		41,040
Other securities		19		—		—		19
	$	260,970	$	5,000	$	902	$	265,068

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

Note 3—Investment Securities-continued

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

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

During the nine months ended September 30, 2019 and 2018, the Company received proceeds of $44.4 million and $19.9 million, respectively, from the sale of investment securities available-for-sale. For the nine months ended September 30, 2019, gross realized gains from the sale of investment securities available-for-sale amounted to $355.6 thousand and gross realized losses amounted to $219.6 thousand. For the nine months ended September 30, 2018, gross realized gains from the sale of investment securities available-for-sale amounted to $240.7 thousand and gross realized losses amounted to $246.5 thousand. For the three months ended September 30, 2019, there were no realized gains or losses from the sale of investment securities available-for-sale. For the three months ended September 30, 2018, there were no realized gains or losses from the sale of investment securities available-for-sale.

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

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 September 30, 2019 and December 31, 2018.

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

US Treasury securities	$	—	$	—	$	1,507	$	6	$	1,507	$	6
Government Sponsored Enterprise mortgage-backed securities		36,200		436		13,094		171		49,294		607
Small Business Administration pools		9,011		103		13,533		182		22,544		285
State and local government		761		4		—		—		761		4
	$	47,674	$	545	$	26,441	$	357	$	74,115	$	902

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

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

(Dollars in thousands)

Less than 12 months

12 months or more

Total

December 31, 2018

Fair

Unrealized

Fair

Unrealized

Fair

Unrealized

Held-to-maturity securities:

Value

Loss

Value

Loss

Value

Loss

State and local government

2,843

4,899

7,742

Note 3—Investment Securities-continued

Government Sponsored Enterprise, Mortgage-Backed Securities: The Company owned mortgage-backed securities (“MBSs”), including collateralized mortgage obligations (“CMOs”), issued by government sponsored enterprises (“GSEs”) with an amortized cost of $166.6 million and $117.9 million and approximate fair value of $168.0 million and $115.5 million at September 30, 2019 and December 31, 2018, respectively. As of September 30, 2019, and December 31, 2018, all of the MBSs issued by GSEs were classified as “Available for Sale.” Unrealized losses on certain of these investments are not considered to be “other than temporary,” and we have the intent and ability to hold these until they mature or recover the current book value. The contractual cash flows of the investments are guaranteed by the GSE. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost of the Company’s investment. Because the Company does not intend to sell these securities and it is more likely than not that the Company will not be required sell these securities before a recovery of its amortized cost, which may be maturity, the Company does not consider the investments to be other-than-temporarily impaired at September 30, 2019.

Non-agency Mortgage Backed Securities: The Company held private label mortgage-backed securities (“PLMBSs”), including CMOs, at September 30, 2019 with an amortized cost of $123.1 thousand and approximate fair value of $122.3 thousand. The Company held PLMBSs, including CMOs, at December 31, 2018 with an amortized cost of $199.9 thousand and approximate fair value of $204.1 thousand. Management monitors each of these securities on a quarterly basis to identify any deterioration in the credit quality, collateral values and credit support underlying the investments.

State and Local Governments and Other: Management monitors these securities on a quarterly basis to identify any deterioration in the credit quality. Included in the monitoring is a review of the credit rating, a financial analysis and certain demographic data on the underlying issuer. The Company does not consider these securities to be other-than-temporarily impaired at September 30, 2019.

The following sets forth the amortized cost and fair value of investment securities at September 30, 2019 by contractual maturity. Expected maturities differ from contractual maturities because borrowers may have the right to call or prepay the obligations with or without prepayment penalties. MBSs are based on average life at estimated prepayment speeds.

September 30, 2019	Available-for-sale
	Amortized		Fair
(Dollars in thousands)	Cost		Value
Due in one year or less	$	10,823	$	10,866
Due after one year through five years		120,043		120,762
Due after five years through ten years		108,314		111,870
Due after ten years		21,790		21,570
	$	260,970	$	265,068

Note 4—Loans

Loans summarized by category as of September 30, 2019, December 31, 2018 and September 30, 2018 are as follows:

	September 30,		December 31,		September 30,
(Dollars in thousands)	2019		2018		2018
Commercial, financial and agricultural	$	55,169	$	53,933	$	50,940
Real estate:
Construction		58,737		58,440		56,568
Mortgage-residential		47,693		52,764		50,914
Mortgage-commercial		534,554		513,833		498,650
Consumer:
Home equity		29,103		29,583		29,933
Other		9,818		9,909		9,510
Total	$	735,074	$	718,462	$	696,515

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 nine months ended September 30, 2019 and September 30, 2018 and for the year ended December 31, 2018 is as follows:

(Dollars in thousands)
							Real estate		Real estate					Consumer
				Real estate			Mortgage		Mortgage					Home		Consumer
	Commercial			Construction			Residential		Commercial					equity		Other				Unallocated		Total
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
Provisions		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		4			—		538			3,541				72			—			—			4,155

Collectively evaluated for impairment	$	55,165		$	58,737	$	47,155		$	531,013			$	29,031		$	9,818		$	—		$	730,919

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

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

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

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

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

Collectively evaluated for impairment	$	50,940		$	56,568	$	50,677		$	494,184			$	29,902		$	9,510		$	—		$	691,781

Note 4—Loans-continued

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

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

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

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

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

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

Related party loans and lines of credit are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated persons and generally do not involve more than the normal risk of collectability. The following table presents related party loan transactions for the nine months ended September 30, 2019 and September 30, 2018:

(Dollars in thousands)	2019		2018
Beginning Balance January 1,	$	5,937	$	5,938
New Loans		111		2,406
Less loan repayments		1,804		1,999
Ending Balance September 30,	$	4,244	$	6,345

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

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

Note 4—Loans-continued

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

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

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

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

Note 4—Loans-continued

(Dollars in thousands)							Nine months ended				Three months ended
			Unpaid				Average		Interest		Average		Interest
September 30, 2018	Recorded		Principal		Related		Recorded		income		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized		Investment		Recognized
With no allowance recorded:
Commercial, financial, agricultural	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Real estate:
Construction		—		—		—		—		—		—		—
Mortgage-residential		198		266		—		202		16		197		2
Mortgage-commercial		3,363		6,158		—		3,753		219		3,627		75
Consumer:
Home equity		31		32		—		35		1		31		—
Other		—		—		—		—		—		—		—

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

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

Note 4—Loans-continued

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

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

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

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt, including current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis is performed on a monthly basis. The Company uses the following definitions for risk ratings:

Special Mention. Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date. Special mention assets are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification.

Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

Note 4—Loans-continued

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

(Dollars in thousands)
September 30, 2019	Pass		Special Mention		Substandard		Doubtful		Total
Commercial, financial & agricultural	$	54,975	$	194	$	—	$	—	$	55,169
Real estate:
Construction		58,737		—		—		—		58,737
Mortgage - residential		46,404		522		767		—		47,693
Mortgage - commercial		527,551		3,401		3,602		—		534,554
Consumer:
Home Equity		27,651		1,164		288		—		29,103
Other		9,778		40		—		—		9,818
Total	$	725,096	$	5,321	$	4,657	$	—	$	735,074

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

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

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

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

Acquired credit-impaired loans are accounted for under the accounting guidance for loans and debt securities acquired with deteriorated credit quality, found in FASB ASC Topic 310-30, (Receivables—Loans and Debt Securities Acquired with Deteriorated Credit Quality), and initially measured at fair value, which includes estimated future credit losses expected to be incurred over the life of the loans. Loans acquired in business combinations with evidence of credit deterioration are considered impaired. Loans acquired through business combinations that do not meet the specific criteria of FASB ASC Topic 310-30, but for which a discount is attributable, at least in part to credit quality, are also accounted for under this guidance. Certain acquired loans, including performing loans and revolving lines of credit (consumer and commercial), are accounted for in accordance with FASB ASC Topic 310-20, where the discount is accreted through earnings based on estimated cash flows over the estimated life of the loan.

Note 4—Loans-continued

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

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

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

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

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

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

Note 4—Loans-continued

The following tables are by loan category and present loans past due and on non-accrual status as of September 30, 2019 and December 31, 2018:

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

Commercial	$	33	$	306	$	—	$	4	$	343	$	54,826	$	55,169
Real estate:
Construction		—		—		—		—		—		58,737		58,737
Mortgage-residential		138		184		—		538		860		46,833		47,693
Mortgage-commercial		2,272		47		—		1,661		3,980		530,574		534,554
Consumer:
Home equity		55		91		33		72		251		28,852		29,103
Other		17		44		—		—		61		9,757		9,818
	$	2,515	$	672	$	33	$	2,275	$	5,495	$	729,579	$	735,074

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

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

The Company identifies TDRs as impaired under the guidance in ASC 310-10-35. There were no loans determined to be TDRs that were restructured during the three and nine-month periods ended September 30, 2019 and September 30, 2018.

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

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

Note 5—Recently Issued Accounting Pronouncements

In May 2014, the FASB issued guidance (ASU 2014-09) to change the recognition of revenue from contracts with customers. The core principle of the new guidance is that an entity recognize revenue to reflect the transfer of goods and services to customers in an amount equal to the consideration the entity receives or expects to receive. The guidance was effective for the Company as of January 1, 2018. The Company evaluated the overall impact on affected revenue streams and any related contracts, including asset management fees, gains and losses on the sale of real estate, deposit related fees and interchange fees. Based on this evaluation, the Company determined that ASU 2014-09 did not materially change the method in which revenue from impacted revenue streams was previously being recognized. The Company applied the guidance using a modified retrospective approach. This approach requires the application of the new guidance to uncompleted contracts at the date of adoption. Periods prior to the date of adoption were not retrospectively revised as the impact on uncompleted contracts at the date of adoption was not material.

In January 2016, the FASB amended the Financial Instruments topic of the ASC (ASU 2016-01) to address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The amendments were effective for the Company on January 1, 2018. The guidance affects the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure of financial instruments. The amendments related to equity securities without readily determinable fair values were applied prospectively to equity investments that exist as of the date of adoption of the amendments. ASU 2016-01 requires the use of exit price rather than entrance price in determining the fair value of loans not measured at fair value on a non-recurring basis in the consolidated balance sheets. See Note 6 - Fair Value of Financial Instruments for information regarding the change in the valuation of these loans. The adoption of ASU 2016-01 did not have a material impact on the Company’s financial statements.

In February 2016, the FASB amended the Leases topic of the ASC to revise certain aspects of recognition, measurement, presentation, and disclosure of leasing transactions. The amendments were effective for fiscal years beginning after December 15, 2018 including interim periods within those fiscal years. The Company adopted the guidance using the modified retrospective method and practical expedients for transition. The practical expedients allow the Company to largely account for our existing leases consistent with current guidance except for the incremental balance sheet recognition of leases. The Company evaluated the new guidance and its impact on the Company’s financial statements. Based on leases outstanding at December 31, 2018, the impact of adoption on January 1, 2019 was recording a right-of-use asset and lease liability of $2.9 million. See Note 9 “Leases” to the consolidated financial statements.

In June 2016, the FASB issued guidance to change the accounting for credit losses and modify the impairment model for certain debt securities. The amendments will be effective for the Company for reporting periods beginning after December 15, 2019. Early adoption is permitted for all organizations for periods beginning after December 15, 2018. The Company is currently evaluating the effect that implementation of the new standard will have on its financial position, results of operations, and cash flows. On July 17, 2019, the FASB issued a proposal draft to extend the implementation date for certain smaller reporting companies to include SEC registrants classified as a Smaller Reporting Company. On October 16, 2019, the FASB voted to delay the implementation date for SEC registrants classified as a Smaller Reporting Company to fiscal years beginning after December 15, 2022. The FASB has directed its staff to draft an ASU that will change the implementation dates, which should be issued following a formal written ballot by the FASB, which is expected to take place in November 2019.

In January 2017, the FASB issued guidance to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The amendment to the Business Combinations Topic is intended to address concerns that the existing definition of a business has been applied too broadly and has resulted in many transactions being recorded as business acquisitions that in substance are more akin to asset acquisitions. The guidance was effective for the Company for reporting periods beginning after December 15, 2017. These amendments had no material effect on the Company’s financial statements.

Note 5—Recently Issued Accounting Pronouncements-continued

In January 2017, the FASB amended the Goodwill and Other Topic of the ASC to simplify the accounting for goodwill impairment for public business entities and other entities that have goodwill reported in their financial statements and have not elected the private company alternative for the subsequent measurement of goodwill. The amendment removes Step 2 of the goodwill impairment test. Goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The effective date and transition requirements for the technical corrections will be effective for the Company for reporting periods beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company does not expect these amendments to have a material effect on its financial statements.

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

In February 2018, the FASB amended the Income Statement—Reporting Comprehensive Income Topic of the Accounting Standards Codification. The amendments allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. The amendments became effective for the Company for interim and annual periods beginning after December 15, 2018. The amendments did not have a material impact on the Company’s financial statements.

In July 2018, the FASB amended the Leases Topic of the ASC to make narrow amendments to clarify how to apply certain aspects of the new lease standard. Additionally, amendments were made to give entities another option for transition and to provide lessors with a practical expedient. The amendments became effective for reporting periods beginning after December 15, 2018. The amendments did not have a material impact on the Company’s financial statements.

In August 2018, the FASB amended the Fair Value Measurement Topic of the ASC. The amendments remove, modify, and add certain fair value disclosure requirements based on the concepts in the FASB Concepts Statement, Conceptual Framework for Financial Reporting—Chapter 8: Notes to Financial Statements. The amendments are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted. An entity is permitted to early adopt any removed or modified disclosures upon issuance of this ASU and delay adoption of the additional disclosures until their effective date. The Company does not expect these amendments to have a material effect on its financial statements.

In August 2018, the FASB amended the Intangibles—Goodwill and Other Topic of the ASC to align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The amendments will be effective for the Company for fiscal years beginning after December 15, 2019. Early adoption is permitted. The Company does not expect these amendments to have a material effect on its financial statements.

In March 2019, the FASB issued guidance to address concerns companies had raised about an accounting exception they would lose when assessing the fair value of underlying assets under the leases standard and clarify that lessees and lessors are exempt from a certain interim disclosure requirement associated with adopting the new standard. The amendments will be effective for the Company for reporting periods beginning after December 15, 2019. Early adoption is permitted. The Company does not expect these amendments to have a material effect on its financial statements.

Note 5—Recently Issued Accounting Pronouncements-continued

In April 2019, the FASB issued guidance that clarifies and improves areas of guidance related to the recently issued standards on credit losses, hedging, and recognition and measurement of financial instruments. The amendments related to credit losses will be effective for the Company for reporting periods beginning after December 15, 2019. The amendments related to hedging will be effective for the Company for interim and annual periods beginning after December 15, 2018. The amendments related to recognition and measurement of financial instruments will be effective for the Company for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company does not expect these amendments to have a material effect on its financial statements.

In July 2019, the FASB updated various Topics of the ASC to align the guidance in various SEC sections of the ASC with the requirements of certain SEC final rules. The amendments were effective upon issuance and did not have a material effect on the financial statements.

Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

Note 6—Fair Value of Financial Instruments

The Company adopted FASB ASC Fair Value Measurement Topic 820, which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. ASC 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

Level l

Quoted prices in active markets for identical assets or liabilities.

Level 2

Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3

Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

FASB ASC 825-10-50 “Disclosure about Fair Value of Financial Instruments”, requires the Company to disclose estimated fair values for its financial instruments. Fair value estimates, methods, and assumptions are set forth below.

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

Note 6—Fair Value of Financial Instruments-continued

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

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

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

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.

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 September 30, 2019 and December 31, 2018 are as follows:

	September 30, 2019
			Fair Value
(Dollars in thousands)	Carrying Amount		Total		Level 1		Level 2		Level 3
Financial Assets:
Cash and short term investments	$	33,235	$	33,235	$	33,235	$	—	$	—
Available-for-sale securities		265,068		265,068		9		265,059		—
Other investments, at cost		1,992		1,992		—		—		1,992
Loans held for sale		10,775		10,775		—		10,775		—
Net loans receivable		728,514		723,160		—		—		723,160
Accrued interest		3,228		3,228		3,228		—		—
Financial liabilities:
Non-interest bearing demand	$	268,693	$	268,693	$	—	$	268,693	$	—
Interest bearing demand deposits and money market accounts		404,336		404,336		—		404,336		—
Savings		100,895		100,895		—		100,895		—
Time deposits		174,903		175,594		—		175,594		—
Total deposits		948,827		937,861		—		937,861		—
Federal Home Loan Bank Advances		216		216		—		216		—
Short term borrowings		34,321		34,321		—		34,321		—
Junior subordinated debentures		14,964		13,180		—		13,180		—
Accrued interest payable		1,059		1,059		1,059		—		—

	December 31, 2018
			Fair Value
(Dollars in thousands)	Carrying Amount		Total		Level 1		Level 2		Level 3
Financial Assets:
Cash and short term investments	$	32,268	$	32,268	$	32,268	$	—	$	—
Held-to-maturity securities		16,174		16,184		—		16,184		—
Available-for-sale securities		237,893		237,893		1,642		235,560		691
Other investments, at cost		1,955		1,955		—		—		1,955
Loans held for sale		3,223		3,223		—		3,223		—
Net loans receivable		712,199		697,432		—		—		697,432
Accrued interest		3,579		3,579		3,579		—		—
Financial liabilities:
Non-interest bearing demand	$	244,686	$	244,686	$	—	$	244,686	$	—
Interest bearing demand deposits and money market accounts		393,473		393,473		—		393,473		—
Savings		108,368		108,368		—		108,368		—
Time deposits		178,996		177,797		—		177,797		—
Total deposits		925,523		925,849		—		925,849		—
Federal Home Loan Bank Advances		231		231		—		231		—
Short term borrowings		28,022		28,022		—		28,022		—
Junior subordinated debentures		14,964		14,178		—		14,178		—
Accrued interest payable		861		861		861		—		—

Note 6—Fair Value of Financial Instruments-continued

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

(Dollars in thousands)

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

(Dollars in thousands)

Description	December 31, 2018		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Available for sale securities
US Treasury Securities	$	15,457	$	—	$	15,457	$	—
Government sponsored enterprises		1,100		—		1,100		—
Mortgage-backed securities		115,475		—		114,784		691
Small Business Administration securities		55,336		1,633		53,703		—
State and local government		50,506		—		50,506		—
Corporate and other securities		19		9		10		—
		237,893		1,642		235,560		691
Loans held for sale		3,223		—		3,223		—
Total	$	241,116	$	1,642	$	238,783	$	691

Note 6—Fair Value of Financial Instruments-continued

The following tables summarize quantitative disclosures about the fair value for each category of assets carried at fair value as of September 30, 2019 and December 31, 2018 that are measured on a non-recurring basis. There were no Level 3 financial instruments as of September 30, 2019 and September 30, 2018 measured on a recurring basis.

(Dollars in thousands)
Description	September 30, 2019		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Impaired loans:
Commercial	$	—	$	—	$	—	$	—
Real estate:
Mortgage-residential		538		—		—		538
Mortgage-commercial		3,531		—		—		3,531
Consumer:
Home equity		72		—		—		72
Other		—		—		—		—
Total impaired		4,141		—		—		4,141
Other real estate owned:
Construction		828		—		—		828
Mortgage-residential		584		—		—		584
Total other real estate owned		1,412		—		—		1,412
Total	$	5,553	$	—	$	—	$	5,553

(Dollars in thousands)
Description	December 31, 2018		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Impaired loans:
Commercial & Industrial	$	—	$	—	$	—	$	—
Real estate:
Mortgage-residential		322		—		—		322
Mortgage-commercial		4,016		—		—		4,016
Consumer:
Home equity		29		—		—		29
Other		—		—		—		—
Total impaired		4,367		—		—		4,367
Other real estate owned:
Construction		828		—		—		828
Mortgage-residential		632		—		—		632
Total other real estate owned		1,460		—		—		1,460
Total	$	6,057	$	—	$	—	$	6,057

Note 6—Fair Value of Financial Instruments-continued

The Company has a large percentage of loans with real estate serving as collateral. Loans which are deemed to be impaired are primarily valued on a nonrecurring basis at the fair value of the underlying real estate collateral. Such fair values are obtained using independent appraisals, which the Company considers to be Level 3 inputs. Third party appraisals are generally obtained when a loan is identified as being impaired or at the time it is transferred to OREO. This internal process consists of evaluating the underlying collateral to independently obtained comparable properties. With respect to less complex or smaller credits, an internal evaluation may be performed. Generally, the independent and internal evaluations are updated annually. Factors considered in determining the fair value include, among others, geographic sales trends, the value of comparable surrounding properties and the condition of the property. The aggregate amount of impaired loans was $4.1 million and $4.4 million as of September 30, 2019 and December 31, 2018, respectively.

For Level 3 assets and liabilities measured at fair value on a non-recurring basis as of September 30, 2019 and December 31, 2018, the significant unobservable inputs used in the fair value measurements were as follows:

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

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

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

Note 7—Deposits

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

	September 30,		December 31,
(Dollars in thousands)	2019		2018
Non-interest bearing demand deposits	$	268,693	$	244,686
Interest bearing demand deposits and money market accounts		404,336		393,473
Savings		100,895		108,368
Time deposits		174,903		178,996
Total deposits	$	948,827	$	925,523

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

Note 8—Reportable Segments

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

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

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

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

Corporate: This segment includes the parent company financial information, including interest on parent company debt and dividend income received from First Community Bank (the “Bank”).

Nine months ended September 30, 2019	Commercial				Investment
(Dollars in thousands)	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 (loss)	$	7,463	$	1,324	$	134	$	5,412		$	(6,059	)	$	8,274

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

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

Note 8—Reportable Segments-continued

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

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

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

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

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

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

Note 9—Leases

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

(Dollars in thousands)			Liability
Year	Cash		Lease Expense		Reduction
2019	$	208	$	133	$	24
2020		292		140		152
2021		298		133		165
2022		303		126		177
2023		309		118		191
Thereafter		3,481		900		2,582
Total	$	4,892	$	1,550	$	3,291

Note 10—Subsequent Events

Subsequent events are events or transactions that occur after the balance sheet date but before financial statements are issued. Recognized subsequent events are events or transactions that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements. Non-recognized subsequent events are events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after that date.

Management has reviewed events occurring through the date the financial statements were available to be issued and have determined that no additional subsequent events occurred requiring accrual or disclosure.

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

Cautionary Note Regarding Any Forward-Looking Statements

This report contains statements which constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements may relate to, among other matters, the financial condition, results of operations, plans, objectives, future performance, and business of our Company. Forward-looking statements are based on many assumptions and estimates and are not guarantees of future performance. Our actual results may differ materially from those anticipated in any forward-looking statements, as they will depend on many factors about which we are unsure, including many factors which are beyond our control. The words “may,” “would,” “could,” “should,” “will,” “expect,” “anticipate,” “predict,” “project,” “potential,” “continue,” “assume,” “believe,” “intend,” “plan,” “forecast,” “goal,” and “estimate,” as well as similar expressions, are meant to identify such forward-looking statements. Potential risks and uncertainties that could cause our actual results to differ materially from those anticipated in our forward-looking statements include, without limitation, those described under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2018 as filed with the SEC on March 14, 2019 and the following:

credit losses as a result of, among other potential factors, declining real estate values, increasing interest rates, increasing unemployment, changes in customer payment behavior or other factors;

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

restrictions or conditions imposed by our regulators on our operations;

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

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

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

merger and merger integration risk, including potential customer loss, higher than expected costs, loss of key employees, and business disruption associated with completed combinations, and including the potential inability to identify and successfully negotiate, complete and integrate additional potential combinations with merger or acquisition partners or to realize the benefits and cost savings sought from, and acceptably limit unexpected liabilities associated with, any business combinations;

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

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

	·	changes in political conditions or the legislative or regulatory environment, including governmental initiatives affecting the financial services industry;
	·	risks associated with actual or potential litigation or investigations by customers, regulatory agencies or others;

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

changes occurring in business conditions and inflation;

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

increased cybersecurity risk, including potential business disruptions or financial losses;

changes in deposit flows;

changes in technology;

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

changes in monetary and tax policies;

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

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

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

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

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

our ability to attract and retain key personnel;

our ability to retain our existing clients, including our deposit relationships;

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

loss of consumer confidence and economic disruptions resulting from terrorist activities;

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

other risks and uncertainties detailed from time to time in our filings with the SEC.

Because of these and other risks and uncertainties, our actual future results may be materially different from the results indicated by any forward-looking statements. For additional information with respect to factors that could cause actual results to differ from the expectations stated in the forward-looking statements, see “Risk Factors” under Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2018. In addition, our past results of operations do not necessarily indicate our future results. Therefore, we caution you not to place undue reliance on our forward-looking information and statements.

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

Overview

The following discussion describes our results of operations for the nine months and three months ended September 30, 2019 as compared to the nine months and three months ended September 30, 2018 and also analyzes our financial condition as of September 30, 2019 as compared to December 31, 2018. Like most community banks, we derive most of our income from interest we receive on our loans and investments. Our primary source of funds for making these loans and investments is our deposits, on which we pay interest. Consequently, one of the key measures of our success is our amount of net interest income, or the difference between the income on our interest-earning assets, such as loans and investments, and the expense on our interest-bearing liabilities, such as deposits. Another key measure is the spread between the yield we earn on these interest-earning assets and the rate we pay on our interest-bearing liabilities.

There are risks inherent in all loans, so we maintain an allowance for loan losses to absorb probable losses on existing loans that may become uncollectible. We establish and maintain this allowance by charging a provision for loan losses against our operating earnings. In the following section we have included a discussion of this process, as well as several tables describing our allowance for loan losses and the allocation of this allowance among our various categories of loans.

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

Critical Accounting Policies

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

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

Allowance for Loan Losses

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

Goodwill and Other Intangibles

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

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

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

Income Taxes and Deferred Tax Assets and Liabilities

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

Other-Than-Temporary Impairment

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

Business Combinations, Method of Accounting for Loans Acquired

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

Acquired credit-impaired loans are accounted for under the accounting guidance for loans and debt securities acquired with deteriorated credit quality, found in FASB ASC Topic 310-30, Receivables—Loans and Debt Securities Acquired with Deteriorated Credit Quality and initially measured at fair value, which includes estimated future credit losses expected to be incurred over the life of the loans. Loans acquired in business combinations with evidence of credit deterioration are considered impaired. Loans acquired through business combinations that do not meet the specific criteria of FASB ASC Topic 310-30, but for which a discount is attributable, at least in part to credit quality, are also accounted for under this guidance. Certain acquired loans, including performing loans and revolving lines of credit (consumer and commercial), are accounted for in accordance with FASB ASC Topic 310-20, where the discount is accreted through earnings based on estimated cash flows over the estimated life of the loan.

Comparison of Results of Operations for Nine Months Ended September 30, 2019 to the Nine Months Ended September 30, 2018

Net Income

Our net income for the nine months ended September 30, 2019 was $8.3 million or $1.08 diluted earnings per common share, as compared to $8.5 million or $1.11 diluted earnings per common share for the nine months ended September 30, 2018. Net interest income increased $1.1 million for the nine months ended September 30, 2019 as compared to the same period in 2018. This increase is primarily a result of a higher level of average earning assets in the first nine months of 2019 as compared to the same period in 2018 as well as a four basis point increase in the net interest margin. Net interest margin for the nine months ended September 30, 2019 was 3.65% as compared to 3.61% in the same period of 2018. The increase in net interest margin was offset by an increase in non-interest expense of $1.8 million in the nine months ending September 30 ,2019 as compared to the nine months ended September 30, 2018.

Net Interest Income

Please refer to the table at the end of this Item 2 for the yield and rate data for interest-bearing balance sheet components during the nine months ended September 30, 2019 and 2018, along with average balances and the related interest income and interest expense amounts.

Net interest income was $27.5 million for the nine months ended September 30, 2019 as compared to $26.4 million for the nine months ended September 30, 2018. The $1.1 million increase in net interest income was attributable to an increase in average earning assets of $30.8 million as well as an increase of four basis points in the net interest margin between the two periods. Our net interest margin was 3.65% during the nine months ended September 30, 2019 as compared to 3.61% for the same period in 2018. The yield on earning assets increased by 24 basis points in the first nine months of 2019 as compared to the same period in 2018. Average loans comprised 72.6% of average earning assets in the first nine months of 2019 as compared to 69.4% in the same period of 2018. The yield on our loan portfolio increased 12 basis points in the nine-month period ended September 30, 2019 to 4.85% as compared to 4.73% during the same period in 2018. The yield on our investment portfolio for the nine-month period ended September 30, 2019 increased to 2.61% from 2.36% for the same period in 2018. Increases in the federal funds target rate in 2017 and 2018 increased the yields on certain variable rate products in both our loan and investment portfolio. In July and October of 2019, the Federal Reserve began lowering its target band for short-term interest rates by 25 basis point each time. Lower short-term interest rates along with a flat yield curve have more recently resulted in downward pressure on our net interest margin (See “Market Risk Management” below). The cost of interest-bearing liabilities during the first nine months of 2019 was 0.81% as compared to 0.52% in the same period in 2018. The continued focus and resulting shift in our deposit funding mix, as well as our current liquidity position, continue to assist us in controlling our overall cost of funds. As noted previously, recent decreases in the Federal Reserve Fed Fund target band may result in lower overall funding cost. Interest-bearing transaction accounts, money market accounts and savings deposits, which are typically our lower cost funds, represent 68.0% of our average interest-bearing liabilities during the first nine months of 2019 as compared to 67.1% in the same period in 2018.

Provision and Allowance for Loan Losses

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

We perform an analysis quarterly to assess the risk within the loan portfolio. The portfolio is segregated into similar risk components for which historical loss ratios are calculated and adjusted for identified changes in current portfolio characteristics. Historical loss ratios are calculated by product type and by regulatory credit risk classification (See Note 4 – Loans). The annualized weighted average loss ratios over the last 36 months for all loan risk categories has been 0.01%. The allocated portion is determined by types and ratings of loans within the portfolio. The unallocated portion of the allowance is established for losses that exist in the remainder of the portfolio and compensates for uncertainty in estimating the loan losses. The allocated portion of the allowance is based on historical loss experience as well as certain qualitative factors as explained above. The qualitative factors have been established based on certain assumptions made as a result of the current economic conditions and are adjusted as conditions change to be directionally consistent with these changes. The unallocated portion of the allowance is composed of factors based on management’s evaluation of various conditions that are not directly measured in the estimation of probable losses through the experience formula or specific allowances. The overall risk as measured in our three-year lookback, both quantitatively and qualitatively, does not encompass a full economic cycle. The U.S. economy has been in an extended period of recovery. The period at which we will reach full recovery or revert back to a slowing economy is not determinable. Net charge-offs in the 2009 to 2011 period averaged 63 basis points annualized in our loan portfolio. Over the most recent three-year period, net charge-offs have averaged less than one basis point annualized. We believe the unallocated portion of our allowance represents potential risk associated throughout a full economic cycle. The percentage of the unallocated portion of the allowance to the total allowance has declined over the last several years. Management does not believe it would be judicious to reduce the overall level of the allowance at this time.

Our Company has a significant portion of its loan portfolio with real estate as the underlying collateral. At September 30, 2019 and December 31, 2018, approximately 91.1% and 91.1%, respectively, of the loan portfolio had real estate collateral. When loans, whether commercial or personal, are granted, they are based on the borrower’s ability to generate repayment cash flows from income sources sufficient to service the debt. Real estate is generally taken to reinforce the likelihood of the ultimate repayment and as a secondary source of repayment. We work closely with all our borrowers that experience cash flow or other economic problems, and we believe that we have the appropriate processes in place to monitor and identify problem credits. There can be no assurance that charge-offs of loans in future periods will not exceed the allowance for loan losses as estimated at any point in time or that provisions for loan losses will not be significant to a particular accounting period. The allowance is also subject to examination and testing for adequacy by regulatory agencies, which may consider such factors as the methodology used to determine adequacy and the size of the allowance relative to that of peer institutions. Such regulatory agencies could require us to adjust our allowance based on information available to them at the time of their examination.

Non-performing assets were $3.7 million (0.33% of total assets) at September 30, 2019 as compared to $4.0 million (0.37% of total assets) at December 31, 2018. While we believe the non-performing assets to total assets ratios are favorable in comparison to current industry results (both nationally and locally), we continue to be concerned about the sustainability of the current economic environment and the effect that an overall economic decline could have on our customer base of local businesses and professionals. There were 32 loans totaling $2.3 million included in non-performing status (non-accrual loans and loans past due 90 days and still accruing) at September 30, 2019. The largest loan included in non-accrual status is in the amount of $701 thousand and is secured by a first mortgage on developed lots to be sold for residential use. The average balance of the remaining 31 loans is approximately $52 thousand, and the majority of these are secured by first mortgage liens. At the time the loans are placed in non-accrual status, we typically obtain an updated appraisal and, if the loan balance exceeds fair value, write the balance down to the fair value. At September 30, 2019, we had one loan in the amount of $33 thousand delinquent 90 days or more and still accruing interest. At September 30, 2019, we had loans totaling $3.2 million that were delinquent 30 days to 89 days representing 0.44% of total loans.

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

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

Allowance for Loan Losses

(Dollars in thousands)	Nine Months Ended September 30,
	2019			2018
Average loans (including loans held for sale) outstanding	$	731,033		$	677,441
Loans (including loans held for sale) outstanding at period end	$	745,849		$	696,515
Non-performing assets:
Nonaccrual loans	$	2,275		$	2,904
Loans 90 days past due still accruing		33			29
Repossessed-other		—			—
Foreclosed real estate and other assets		1,412			1,921
Total non-performing assets	$	3,720		$	4,854

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

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

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

Composition of the Allowance for Loan Losses

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

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

Non-interest Income and Non-interest Expense

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

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

(Dollars in thousands)	Nine months ended September 30,
	2019		2018
ATM debit card income	$	1,524	$	1,375
Income on bank owned life insurance		515		519
Rental income		212		211
Loan late charges		84		72
Safe deposit fees		39		40
Wire transfer fees		60		61
Other		261		455
Total	$	2,695	$	2,733

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

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

(Dollars in thousands)	Nine months ended
	September 30,
	2019		2018
Data processing	$	2,008	$	1,681
Supplies		107		104
Telephone		323		324
Courier		107		113
Correspondent services		174		213
Insurance		185		198
Postage		37		43
Legal and professional fees		738		746
Loss on limited partnership interest		45		48
Director fees		255		284
Shareholder expense		126		136
Dues		108		113
Subscriptions		141		148
Loan closing costs/fees		250		187
Miscellaneous		785		872
	$	5,389	$	5,210

Income Tax Expense

Our effective tax rate was 20.5% and 18.9% in the first nine months of 2019 and 2018, respectively. As noted previously, the purchase of the South Carolina Rehabilitation tax credits reduced our state income tax expense by $205 thousand for the nine months ended September 30, 2018. As a result, of our current level of tax-exempt securities in our investment portfolio and our BOLI holdings, the effective tax rate is expected to be 20.5% to 21.0% throughout the remainder of 2019.

Comparison of Results of Operations for Three Months Ended September 30, 2019 to the Three Months Ended September 30, 2018

Net Income

Our net income for the three months ended September 30, 2019 was $2.9 million, or $0.39 diluted earnings per common share, as compared to $2.8 million, or $0.37 diluted earnings per common share, for the three months ended September 30, 2018. Net interest income increased $470 thousand for the three months ended September 30, 2019 as compared to the same period in 2018. Average earning assets increased by $29.6 million in the third quarter of 2019 as compared to the same period in 2018. The net interest margin increased to 3.62% during the second quarter of 2019 as compared to 3.55% during the second quarter of 2018.

Net Interest Income

Please refer to the table at the end of this Item 2 for the yield and rate data for interest-bearing balance sheet components during the three-month periods ended September 30, 2019 and 2018, along with average balances and the related interest income and interest expense amounts.

Net interest income was $9.3 million and $8.9 million for the three months ended September 30, 2019 and 2018, respectively. Our net interest margin increased by seven basis points from 3.55% for the three months ended September 30, 2018 to 3.62% for the three months ended September 30, 2019. Included in the three-month period in 2019 is a recovery of $131 thousand in non-accrual interest on a loan that paid off during this period. Without that recovery our net interest margin would have been 3.57%. As a result of several increases in the target Fed Funds rate in 2018, we began to experience rate pressure on our deposit funding cost particularly in the last half of 2018 and early 2019. As noted in the nine-month discussion the Federal Reserve began lowering the targeted short-term funds rate, which may have the impact of putting downward pressure on our net-interest margin.

Non-interest Income and Non-interest Expense

Non-interest income during the third quarter of 2019 was $3.1 million as compared to $2.8 million during the same period in 2018. Mortgage banking income increased $92 thousand for the three months ended September 30, 2019 as compared to the same period in 2018. Mortgage loan production in the second quarter of 2019 was $37.9 million as compared to $32.4 million in the third quarter of 2018. In addition, we experienced an approximate 2% increase in our margin (income before tax/revenues) in this line of business in the third quarter of 2019 as compared to the same period in 2018. The margin is significantly impacted by the product types originated during each period. Investment advisory fees increased $86 thousand in the third quarter of 2019 as compared to the same period of 2018. Assets under management at September 30, 2019 amounted to $339.6 million as compared to $306.8 million at September 30,2018. ATM/Debit card fees increased approximately $66 thousand in the third quarter of 2019 as compared to the same period in 2018.

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

(Dollars in thousands)	Three months ended September 30,
	2019		2018
ATM debit card income	$	530	$	464
Income on bank owned life insurance		174		147
Rental income		72		70
Loan late charges		35		22
Safe deposit fees		12		12
Wire transfer fees		22		20
Other		87		116
Total	$	932	$	855

Total non-interest expense increased $656 thousand in the third quarter of 2019 to $8.8 million as compared to $8.1 million in the third quarter of 2018. Salary and benefit expense increased $386 thousand to $5.5 million in the third quarter of 2019 as compared to $5.1 million in the third quarter of 2018. We opened two new full-service offices in the first half of 2019 and the additional staffing and benefit cost associated with these openings account for the majority of the increase. Occupancy expense increased $92 thousand between the two periods and the opening of the new offices resulted in substantially all of the increase. In the third quarter of 2019, the FDIC began distributing refunds for insurance assessments to certain community banks. The refund during the third quarter of 2019 eliminated our assessment for the period as compared to an assessment of $94 thousand in the third quarter of 2018. It is anticipated that these refunds will reduce our assessment for two and a half quarters. This assumes the targeted FDIC insurance fund ratio remains above a set percentage. Data processing fees increased $197 thousand in the third quarter of 2019 as compared to the same period of 2018 primarily due to an increased number of accounts serviced, increased debit card transaction volume, and additional electronic services provided.

Miscellaneous expense was $285 thousand in the third quarter of 2019 as compared to $164 thousand in the same period of 2018. In the third quarter of 2018, we received a $48 thousand refund of fees charged to us by our Investment Advisor. There was an increase in debit card and fraud losses of approximately $29 thousand in the third quarter of 2019.

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,
	2019		2018
Data processing	$	732	$	535
Supplies		24		24
Telephone		112		102
Courier		39		38
Correspondent services		53		83
Insurance		64		71
Postage		14		14
Legal and professional fees		296		248
Loss on limited partnership interest		22		26
Director fees		72		87
Shareholder expense		48		32
Dues		38		41
Subscriptions		47		48
Loan closing costs/fees		89		93
Other		284		164
	$	1,934	$	1,606

Financial Position

Assets totaled $1.1 billion at September 30, 2019 and December 31, 2018. Loans (excluding loans held for sale) at September 30, 2019 were $735.1 million as compared to $718.5 million at December 31, 2018. As a result of significant loan pay offs or pay downs, the loan portfolio excluding loans held-for-sale increased only $16.6 million from December 31, 2018 to September 30, 2019. Total loan production was $99.1 million during the first nine months of 2019. Deposits increased $23.3 million to $948.8 million at September 30, 2019 as compared to $925.5 million at December 31, 2018. Pure deposits (deposits less non-IRA time deposits) represented 84.8% of total deposits as of September 30, 2019 as compared to 84.0% at December 31, 2018. We continue to focus on growing our pure deposits as a percentage of total deposits in order to better manage our overall cost of funds. One of our goals as a community bank has been, and continues to be, to grow our assets through quality loan growth by providing credit to small and mid-size businesses and individuals within the markets we serve. We remain committed to meeting the credit needs of our local markets. A slow-down in the national or local economic conditions as well as deterioration of asset quality within our Company could significantly impact our ability to continue to grow our loan portfolio.

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

(Dollars in thousands)	September 30, 2019						December 31, 2018
	Amount			Percent			Amount			Percent
Commercial, financial & agricultural	$	55,169			7.5	%	$	53,933			7.5	%
Real estate:
Construction		58,737			8.0	%		58,440			8.1	%
Mortgage – residential		47,693			6.5	%		52,764			7.3	%
Mortgage – commercial		534,554			72.7	%		513,833			71.6	%
Consumer:
Home Equity		29,103			4.0	%		29,583			4.1	%
Other		9,818			1.3	%		9,909			1.4	%
Total gross loans		735,074			100.0	%		718,462			100.0	%
Allowance for loan losses		(6,560	)					(6,263	)
Total net loans	$	728,514					$	712,199

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

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

Market Risk Management

The effective management of market risk is essential to achieving our strategic financial objectives. Our most significant market risk is interest rate risk. We have established an Asset/Liability Management Committee (“ALCO”) to monitor and manage interest rate risk. The ALCO monitors and manages the pricing and maturity of assets and liabilities in order to diminish the potential adverse impact that changes in interest rates could have on net interest income. The ALCO has established policy guidelines and strategies with respect to interest rate risk exposure and liquidity.

A monitoring technique employed by the ALCO is the measurement of interest sensitivity “gap,” which is the positive or negative dollar difference between assets and liabilities that are subject to interest rate repricing within a given period of time. Simulation modeling is performed to assess the impact varying interest rates and balance sheet mix assumptions will have on net interest income. We model the impact on net interest income for several different changes, to include a flattening, steepening and parallel shift in the yield curve. For each of these scenarios, we model the impact on net interest income in an increasing and decreasing rate environment of 100 and 200 basis points. Policies have been established in an effort to maintain the maximum anticipated negative impact of these modeled changes in net interest income at no more than 10% and 15% in a 100 and 200 basis point change in interest rates, respectively, over a twelve-month period. Interest rate sensitivity can be managed by repricing assets or liabilities, selling securities available-for-sale, replacing an asset or liability at maturity or by adjusting the interest rate during the life of an asset or liability. Managing the amount of assets and liabilities repricing in the same time interval helps to hedge the risk and minimize the impact on net interest income of rising or falling interest rates.

We are currently asset sensitive within one year. However, neither the “gap” analysis nor asset/liability simulation modeling is a precise indicator of our interest sensitivity position due to the many factors that affect net interest income, including changes in the volume and mix of earning assets and interest-bearing liabilities.

Based on the many factors and assumptions used in simulating the effect of changes in interest rates, the following table estimates the percentage change in net interest income at September 30, 2019 and December 31, 2018 over twelve months.

Net Interest Income Sensitivity

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

The decrease in net interest income in a down 200 basis point environment primarily results from the current level of interest rates being paid on our interest bearing transaction accounts as well as money market accounts. The interest rates on these accounts are at a level where they may not be repriced in proportion to the change in interest rates. At the current low interest rate levels, we believe that a downward shift of 200 basis points across the entire yield curve is unlikely. The modest decrease in a rising rate environment primarily relates to the historical beta assumptions in the modeling. We are currently not repricing deposits at these levels. We have been able to control deposit pricing in the current rising rate environment primarily as a result of our current liquidity levels as well as continued core deposit growth. The two-year impact of rising rates of 100 and 200 basis points, at our historical beta levels, reflects net interest income increasing by 1.8% and 3.2%, respectively.

We also perform a valuation analysis projecting future cash flows from assets and liabilities to determine the Present Value of Equity (“PVE”) over a range of changes in market interest rates. The sensitivity of PVE to changes in interest rates is a measure of the sensitivity of earnings over a longer time horizon. At September 30, 2019, the PVE exposure in a plus 200 basis point increase in market interest rates was estimated to be 7.23% as compared to (1.56)% at December 31, 2018.

Liquidity and Capital Resources

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

Through the operations of our Bank, we have made contractual commitments to extend credit in the ordinary course of our business activities. These commitments are legally binding agreements to lend money to our customers at predetermined interest rates for a specified period of time. At September 30, 2019, we had issued commitments to extend credit of $127 million, including $40 million in unused home equity lines of credit, through various types of lending arrangements. We evaluate each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by us upon extension of credit, is based on our credit evaluation of the borrower. Collateral varies but may include accounts receivable, inventory, property, plant and equipment, commercial and residential real estate. We manage the credit risk on these commitments by subjecting them to normal underwriting and risk management processes.

Other than as described elsewhere in this report, we are not aware of any trends, events or uncertainties that we expect to result in a significant adverse effect on our liquidity position. However, no assurances can be given in this regard, as rapid growth, deterioration in loan quality, and poor earnings, or a combination of these factors, could change the liquidity position in a relatively short period of time.

We generally maintain a high level of liquidity and adequate capital, which along with continued retained earnings, we believe will be sufficient to fund the operations of the Bank for at least the next 12 months. Shareholders’ equity was 10.5% of total assets at September 30, 2019 and 10.3% at December 31, 2018. The Bank maintains federal funds purchased lines in the total amount of $20.0 million with two financial institutions, although these were not utilized in the first nine months of 2019. The FHLB of Atlanta has approved a line of credit of up to 25% of the Bank’s assets, which, when utilized, is collateralized by a pledge against specific investment securities and/or eligible loans. We regularly review our liquidity position and have implemented internal policies establishing guidelines for sources of asset-based liquidity and evaluate and monitor the total amount of purchased funds used to support the balance sheet and funding from noncore sources. We believe that our existing stable base of core deposits along with continued growth in this deposit base will enable us to meet our long-term liquidity needs successfully.

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

The regulatory capital rules became effective for the Bank on January 1, 2015 (subject to a phase-in period for certain provisions), and all of the requirements in the rules were fully phased in on January 1, 2019. In 2018, the Federal Reserve increased the asset size to qualify as a small bank holding company. As a result of this change, we generally are not subject to the Federal Reserve capital requirements unless advised otherwise. Our Bank remains subject to capital requirements including a minimum leverage ratio and a minimum ratio of “qualifying capital” to risk weighted assets. These requirements are essentially the same as those that applied to us prior to the change in the definition of a small bank holding company.

When implemented, the final Basel III rules included certain new and higher risk-based capital and leverage requirements than those previously in place. Specifically, the following minimum capital requirements apply to our Bank:

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

a Tier 1 risk-based capital ratio of 6% (increased from the former 4% requirement);

a total risk-based capital ratio of 8% (unchanged from former requirements); and

a leverage ratio of 4% (also unchanged from the former requirement).

Under the final Basel III rules, Tier 1 capital was redefined to include two components: Common Equity Tier 1 capital and additional Tier 1 capital. The new and highest form of capital, Common Equity Tier 1 capital, consists solely of common stock (plus related surplus), retained earnings, accumulated other comprehensive income, and limited amounts of minority interests that are in the form of common stock. Additional Tier 1 capital includes other perpetual instruments historically included in Tier 1 capital, such as noncumulative perpetual preferred stock. The rules permit bank holding companies with less than $15 billion in total consolidated assets to continue to include trust preferred securities and cumulative perpetual preferred stock issued before May 19, 2010 in Tier 1 capital, but not in Common Equity Tier 1 capital, subject to certain restrictions. Tier 2 capital consists of instruments that currently qualify in Tier 2 capital plus instruments that the rules have disqualified from Tier 1 capital treatment. Cumulative perpetual preferred stock, formerly includable in Tier 1 capital, is now included only in Tier 2 capital. Accumulated other comprehensive income (“AOCI”) is presumptively included in Common Equity Tier 1 capital and often would operate to reduce this category of capital. The rules provided a one-time opportunity at the end of the first quarter of 2015 for covered banking organizations to opt out of much of this treatment of AOCI. We elected to opt out from the inclusion of AOCI in Common Equity Tier 1 capital.

In addition, in order to avoid restrictions on capital distributions or discretionary bonus payments to executives, a covered banking organization must maintain a “capital conservation buffer” on top of its minimum risk-based capital requirements. This buffer must consist solely of Tier 1 Common Equity, but the buffer applies to all three measurements (Common Equity Tier 1, Tier 1 capital and total capital). The capital conservation buffer was phased in incrementally over time, became fully effective on January 1, 2019, and consists of an additional amount of common equity equal to 2.5% of risk-weighted assets.

In general, the final Basel III rules have had the effect of increasing capital requirements by increasing the risk weights on certain assets, including high volatility commercial real estate, certain loans past due 90 days or more or in nonaccrual status, mortgage servicing rights not includable in Common Equity Tier 1 capital, equity exposures, and claims on securities firms, that are used in the denominator of the three risk-based capital ratios.

As outlined above, we are generally not subject to the Federal Reserve capital requirements unless advised otherwise because we qualify as a small bank holding company. Our Bank remains subject to capital requirements including a minimum leverage ratio and a minimum ratio of “qualifying capital” to risk weighted assets. As of September 30, 2019, the Bank met all capital adequacy requirements under the rules on a fully phased-in basis. The Bank’s risk-based capital ratios of leverage ratio, Tier 1, and total capital were 10.1%, 13.4% and 14.2%, respectively, at September 30, 2019 as compared to 10.0%, 13.2%, and 14.0%, respectively, at December 31, 2018. The Bank’s Common Equity Tier 1 ratio at September 30, 2019 and December 31, 2018 was 13.4 and 13.2%, respectively. Under the Basel III rules, we anticipate that the Bank will remain a well-capitalized institution for at least the next 12 months.

On September 17, 2019, the federal banking agencies issued a final rule to provide an optional simplified measure of capital adequacy for qualifying community banking organizations, including the community bank leverage ratio (“CBLR”) framework. Generally, under the CBLR framework, qualifying community banking organizations with total assets of less than $10 billion, and limited amounts of off-balance-sheet exposures and trading assets and liabilities, may elect whether to be subject to the CBLR framework if they have a CBLR of greater than 9%. Qualifying community banking organizations that elect to be subject to the CBLR framework and continue to meet all requirements under the framework would not be subject to risk-based or other leverage capital requirements and, in the case of an insured depository institution, would be considered to have met the well capitalized ratio requirements for purposes of the FDIC’s Prompt Corrective Action framework. The final rule will become effective on January 1, 2020. The Company is currently evaluating the CBLR framework and potential advantages and disadvantages that it may present for the Company.

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

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

In May 2019, our Board of Directors approved a stock repurchase plan whereby we could repurchase up to 300,000 shares of our common stock. As of September 30, 2019, we have repurchased all 300,000 shares at an average stock price of $18.79 per share pursuant to this plan. After completion of the repurchase plan, the Bank continues to exceed all capital adequacy requirements under the rules on a fully phased-in basis. In September of 2019, our Board of Directors approved a new stock repurchase plan whereby we can repurchase up to 200,000 additional shares of our common stock. As of September 30, 2019, no shares from the new plan have been repurchased.

FIRST COMMUNITY CORPORATION

Yields on Average Earning Assets and Rates

on Average Interest-Bearing Liabilities

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

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

FIRST COMMUNITY CORPORATION

Yields on Average Earning Assets and Rates

on Average Interest-Bearing Liabilities

	Three months ended September 30, 2019								Three months ended September 30, 2018
	Average			Interest		Yield/			Average			Interest		Yield/
	Balance			Earned/Paid		Rate			Balance			Earned/Paid		Rate
Assets
Earning assets
Loans	$	740,152		$	9,091		4.87	%	$	696,157		$	8,277		4.72	%
Securities:		254,802			1,593		2.48	%		271,348			1,583		2.31	%
Federal funds sold and securities purchased		27,248			164		2.37	%		25,139			125		1.97	%
Total earning assets		1,022,202			10,848		4.21	%		992,644			9,985		3.99	%
Cash and due from banks		14,578								13,192
Premises and equipment		36,197								34,576
Other assets		53,494								52,895
Allowance for loan losses		(6,447	)							(6,154	)
Total assets	$	1,120,024							$	1,087,153

Liabilities
Interest-bearing liabilities
Interest-bearing transaction accounts	$	216,163		$	159		0.29	%	$	193,941		$	154		0.32	%
Money market accounts		180,758			461		1.01	%		185,928			240		0.51	%
Savings deposits		99,693			32		0.13	%		106,677			35		0.13	%
Time deposits		175,431			567		1.28	%		185,857			387		0.83	%
Other borrowings		52,020			292		2.23	%		47,018			286		2.41	%
Total interest-bearing liabilities		724,065			1,511		0.83	%		719,421			1,102		0.61	%
Demand deposits		266,555								251,305
Other liabilities		12,174								8,535
Shareholders’ equity		117,230								107,892
Total liabilities and shareholders’ equity	$	1,120,024							$	1,087,153

Cost of funds, including demand deposits							0.61	%							0.45	%
Net interest spread							3.38	%							3.38	%
Net interest income/margin				$	9,337		3.62	%				$	8,883		3.55	%
Net interest income/margin FTE basis	$	75		$	9,412		3.65	%	$	115		$	8,998		3.60	%

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Not applicable.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

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

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

Changes in Internal Control over Financial Reporting

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

PART II
OTHER INFORMATION

Item 1. Legal Proceedings.

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

Item 1A. Risk Factors.

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

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

(a)

Not applicable

(b)

Not applicable

(c)

Issuer Purchases of Registered Equity Securities

On September 18, 2019, we announced that our Board of Directors approved the repurchase of up to 200,000 additional shares of our common stock (the “New Repurchase Plan”), which are in addition to the shares repurchased under the repurchase program we announced in May 2019 for 300,000 shares of our common stock (the “Prior Repurchase Plan”). As mentioned above, the Company has completed the repurchase of all 300,000 shares covered by the Prior Repurchase Plan. There have been no repurchases under the New Repurchase Plan.

Under the New Repurchase Plan, the Company may repurchase shares from time to time by means of, among other means, open market purchases and in solicited and unsolicited privately negotiated transactions. The actual means and timing of any purchases, quantity of purchased shares and prices will be, subject to certain limitations, at the discretion of management during a period of up to two years and will depend on a number of factors, including the market price of the Company’s common stock, share issuances under Company equity plans, general market and economic conditions, and applicable legal and regulatory requirements.

The Company’s management believes the New Repurchase Plan, depending upon market and business conditions, may, among other things, provide capital management opportunities for the Company. We are not obligated to repurchase any such shares under the New Repurchase Plan. The New Repurchase Plan may be discontinued, suspended or restarted at any time.

The following table reflects share repurchase activity during the third quarter of 2019 for the Prior Repurchase Plan announced in May of 2019. There have been no repurchases under the new Repurchase Plan.

Period	(a) Total Number of Shares (or Units) Purchased		(b) Average Price Paid per Share (or Unit)		(c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs		(d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs
July 1-July 31		114,639	$	19.40		300,000		200,000
August 1-August 31		—		—		—		—
September 1-September 30		—		—		—		—
Total		114,639	$	19.40		300,000		200,000

Item 3. Defaults Upon Senior Securities.

Not Applicable.

Item 4. Mine Safety Disclosures.

Not Applicable.

Item 5. Other Information.

None.

Item 6. Exhibits.

Exhibit		Description

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

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

32		Section 1350 Certifications

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

SIGNATURES

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

	FIRST COMMUNITY CORPORATION
		(REGISTRANT)

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

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