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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

 

x Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
for the quarterly period ended June 30, 2020
   
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)

 

 

(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 Capital Market

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    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 o
    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 August 10, 2020, 7,486,151 shares of the issuer’s common stock, par value $1.00 per share, were issued and outstanding.

 
 

TABLE OF CONTENTS

     
PART I – FINANCIAL INFORMATION 1
Item 1. Financial Statements 1
  Consolidated Balance Sheets 1
  Consolidated Statements of Income 2
  Consolidated Statements of Comprehensive Income 4
  Consolidated Statements of Changes in Shareholders’ Equity 5
  Consolidated Statements of Cash Flows 8
  Notes to Consolidated Financial Statements 9
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 36
Item 3. Quantitative and Qualitative Disclosures About Market Risk 59
Item 4. Controls and Procedures 59
     
PART II – OTHER INFORMATION 60
Item 1.  Legal Proceedings 60
Item 1A. Risk Factors 60
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 62
Item 3. Defaults Upon Senior Securities 62
Item 4. Mine Safety Disclosures 62
Item 5. Other Information 62
Item 6. Exhibits 62
     
SIGNATURES 63
INDEX TO EXHIBITS  
EX-31.1 RULE 13A-14(A) CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER  
EX-31.2 RULE 13A-14(A) CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER  
EX-32 SECTION 1350 CERTIFICATIONS  

 
 

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

 

FIRST COMMUNITY CORPORATION

CONSOLIDATED BALANCE SHEETS

 

   June 30,     
(Dollars in thousands, except par value)  2020   December 31, 
   (Unaudited)   2019 
ASSETS          
Cash and due from banks  $15,330   $14,951 
Interest-bearing bank balances   77,608    32,741 
Federal funds sold and securities purchased under agreements to resell   58     
Investment securities available-for-sale   295,919    286,800 
Other investments, at cost   2,053    1,992 
Loans held-for-sale   33,496    11,155 
Loans   817,372    737,028 
Less, allowance for loan losses   8,936    6,627 
Net loans   808,436    730,401 
Property, furniture and equipment - net   34,728    35,008 
Lease right-of-use asset   3,124    3,215 
Premises held-for-sale   591    591 
Bank owned life insurance   28,406    28,041 
Other real estate owned   1,449    1,410 
Intangible assets   1,283    1,483 
Goodwill   14,637    14,637 
Other assets   7,682    7,854 
Total assets  $1,324,800   $1,170,279 
LIABILITIES          
Deposits:          
Non-interest bearing  $371,585   $289,829 
Interest bearing   747,287    698,372 
Total deposits   1,118,872    988,201 
Securities sold under agreements to repurchase   45,651    33,296 
Federal Home Loan Bank advances       211 
Junior subordinated debt   14,964    14,964 
Lease liability   3,192    3,266 
Other liabilities   11,320    10,147 
Total liabilities   1,193,999    1,050,085 
SHAREHOLDERS’ EQUITY          
Preferred stock, par value $1.00 per share, 10,000,000 shares authorized; none issued and outstanding        
Common stock, par value $1.00 per share; 20,000,000 shares authorized; issued and outstanding 7,486,151 at June 30, 2020 7,440,026 at December 31, 2019   7,486    7,440 
Nonvested restricted stock   (396)   (151)
Additional paid in capital   91,184    90,488 
Retained earnings   22,155    19,927 
Accumulated other comprehensive income   10,372    2,490 
Total shareholders’ equity   130,801    120,194 
Total liabilities and shareholders’ equity  $1,324,800   $1,170,279 
           

See Notes to Consolidated Financial Statements

1
 

FIRST COMMUNITY CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

   Six   Six 
   Months Ended   Months Ended 
   June 30,   June 30, 
   2020   2019 
(Dollars in thousands, except per share amounts)  (Unaudited)   (Unaudited) 
Interest income:          
Loans, including fees  $17,845   $17,401 
Taxable securities   2,662    2,511 
Non-taxable securities   675    804 
Other   194    264 
Total interest income   21,376    20,980 
Interest expense:          
Deposits   1,755    2,182 
Securities sold under agreement to repurchase   140    201 
Other borrowed money   321    461 
Total interest expense   2,216    2,844 
Net interest income   19,160    18,136 
Provision for loan losses   2,325    114 
Net interest income after provision for loan losses   16,835    18,022 
Non-interest income:          
Deposit service charges   609    791 
Mortgage banking income   2,554    2,082 
Investment advisory fees and non-deposit commissions   1,305    927 
Gain on sale of securities       135 
Gain (loss) on sale of other assets   6    (3)
Other   1,841    1,763 
Total non-interest income   6,315    5,695 
Non-interest expense:          
Salaries and employee benefits   11,493    10,380 
Occupancy   1,322    1,302 
Equipment   616    775 
Marketing and public relations   601    605 
FDIC assessments   130    145 
Other real estate expense   75    47 
Amortization of intangibles   200    264 
Other   3,732    3,445 
Total non-interest expense   18,169    16,963 
Net income before tax   4,981    6,754 
Income taxes   970    1,378 
Net income  $4,011   $5,376 
           
Basic earnings per common share  $0.54   $0.70 
Diluted earnings per common share  $0.54   $0.70 
           

See Notes to Consolidated Financial Statements

2
 

FIRST COMMUNITY CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

         
   Three   Three 
   Months Ended   Months Ended 
   June 30,   June 30, 
   2020   2019 
(Dollars in thousands, except per share amounts)  (Unaudited)   (Unaudited) 
Interest income:          
Loans, including fees  $9,018   $8,792 
Taxable securities   1,225    1,294 
Non-taxable securities   386    364 
Other   37    156 
Total interest income   10,666    10,606 
Interest expense:          
Deposits   736    1,180 
Securities sold under agreement to repurchase   36    109 
Other borrowed money   151    201 
Total interest expense   923    1,490 
Net interest income   9,743    9,116 
Provision for loan losses   1,250    9 
Net interest income after provision for loan losses   8,493    9,107 
Non-interest income:          
Deposit service charges   210    380 
Mortgage banking income   1,572    1,238 
Investment advisory fees and non-deposit commissions   671    489 
Gain on sale of securities       164 
Gain (loss) on sale of other assets       (3)
Other   934    918 
Total non-interest income   3,387    3,186 
Non-interest expense:          
Salaries and employee benefits   5,840    5,210 
Occupancy   679    647 
Equipment   298    389 
Marketing and public relations   247    430 
FDIC assessment   88    71 
Other real estate expense   40    18 
Amortization of intangibles   95    132 
Other   1,844    1,743 
Total non-interest expense   9,131    8,640 
Net income before tax   2,749    3,653 
Income taxes   532    772 
Net income  $2,217   $2,881 
           
Basic earnings per common share  $0.30   $0.38 
Diluted earnings per common share  $0.30   $0.37 
           

See Notes to Consolidated Financial Statements

3
 

FIRST COMMUNITY CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)

 

(Dollars in thousands)        
   Six months ended June 30, 
   2020   2019 
         
Net income  $4,011   $5,376 
           
Other comprehensive income:          
Unrealized (loss) gain during the period on available-for-sale securities, net of tax expense of $2,095 and $1,183, respectively   7,882    4,445 
           
Reclassification adjustment for gain on available-for-sale securities included in net income, net of tax benefit $0 and $29, respectively       (106)
           
Other comprehensive income   7,882    4,339 
Comprehensive income  $11,893   $9,715 
           
(Dollars in thousands)        
   Three months ended June 30, 
   2020   2019 
         
Net income  $2,217   $2,881 
           
Other comprehensive income:          
Unrealized gain during the period on available-for-sale securities, net of tax expense of $1,196 and $575, respectively   4,501    2,164 
           
Reclassification adjustment for gain on available-for-sale securities included in net income, net of tax expense of $0 and $34, respectively       (130)
           
Other comprehensive income   4,501    2,034 
Comprehensive income  $6,718   $4,915 
           

See Notes to Consolidated Financial Statements

4
 

FIRST COMMUNITY CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

Six months ended June 30, 2020 and 2019

(Unaudited)

 

                       Accumulated     
   Common       Additional   Nonvested       Other     
(Dollars and shares in thousands)  Shares   Common   Paid-in   Restricted   Retained   Comprehensive     
   Issued   Stock   Capital   Stock   Earnings   Income (loss)   Total 
Balance, December 31, 2019   7,440   $7,440   $90,488   $(151)  $19,927   $2,490   $120,194 
Net income                       4,011         4,011 
Other comprehensive income net of tax of $2,095                            7,882    7,882 
Issuance of common stock             4                   4 
Issuance of restricted stock   18    18    348    (366)              
Issuance of common stock-deferred compensation   18    18    182                   200 
Amortization of compensation on restricted stock                  121              121 
Shares retired   (1)   (1)   (14)                  (15)
Dividends: Common ($0.24 per share)                       (1,783)        (1,783)
Dividend reinvestment plan   11    11    176                   187 
Balance, June 30, 2020   7,486   $7,486   $91,184   $(396)  $22,155   $10,372   $130,801 

 

                           Accumulated     
   Common       Common   Additional   Nonvested       Other     
(Dollars and shares in thousands)  Shares   Common   Stock   Paid-in   Restricted   Retained   Comprehensive     
   Issued   Stock   Warrants   Capital   Stock   Earnings   Income (loss)   Total 
Balance, December 31, 2018   7,639   $7,639   $31   $95,048   $(149)  $12,262   $(2,334)  $112,497 
Net Income                            5,376         5,376 
Other comprehensive income net of tax of $1,212                                 4,339    4,339 
Issuance of restricted stock   8    8         162    (170)              
Amortization of compensation on
restricted stock
                       78              78 
Shares retired   (8)   (8)        (148)                  (156)
Exercise of warrants   23    23    (16)   (7)                   
Stock repurchase plan   (185)   (185)        (3,228)                  (3,413)
Shares issued - deferred compensation   24    24         241                   265 
Dividends: Common ($0.22 per share)                            (1,681)        (1,681)
Dividend reinvestment plan   10    10         174                   184 
Balance, June 30, 2019   7,511   $7,511   $15   $92,242   $(241)  $15,957   $2,005   $117,489 

 

See Notes to Consolidated Financial Statements

5
 

FIRST COMMUNITY CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)

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

 

See Notes to Consolidated Financial Statements

6
 

FIRST COMMUNITY CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)

 

                           Accumulated     
   Common       Common   Additional   Nonvested       Other     
(Dollars and shares in thousands)  Shares   Common   Stock   Paid-in   Restricted   Retained   Comprehensive     
   Issued   Stock   Warrants   Capital   Stock   Earnings   Income (loss)   Total 
Balance December 31, 2018   7,639   $7,639   $31   $95,048   $(149)  $12,262   $(2,334)  $112,497 
Net Income                            2,495         2,495 
Other comprehensive income net
of tax 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 

 

See Notes to Consolidated Financial Statements

7
 

FIRST COMMUNITY CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

           
   Six months ended
June 30,
 
(Dollars in thousands)  2020   2019 
Cash flows from operating activities:          
Net income  $4,011   $5,376 
Adjustments to reconcile net income to net cash used from operating activities:          
Depreciation   807    649 
Net premium amortization   1,105    1,071 
Provision for loan losses   2,325    114 
Loss on sale of other real estate owned       3 
Writedowns of other real estate owned   38     
Origination of loans held-for-sale   (85,207)   (61,358)
Sale of loans held-for-sale   62,866    55,851 
Amortization of intangibles   200    264 
Accretion on acquired loans   (179)   (272)
Gain on sale of securities       (135)
Increase in other assets   (2,221)   (7,485)
Increase in other liabilities   4,385    1,656 
Net cash used from operating activities   (11,870)   (4,266)
Cash flows from investing activities:          
Purchase of investment securities available-for-sale   (22,077)   (57,557)
Purchase of other investment securities   (70)   (37)
Maturity/call of investment securities available-for-sale   21,948    14,805 
Proceeds from sale of securities available-for-sale       51,119 
Proceeds from sale of other securities   9     
(Increase) in loans   (83,576)   (8,051)
Proceeds from sale of other real estate owned       45 
Proceeds from sale of fixed assets       301 
Purchase of property and equipment   (527)   (1,954)
Net cash used in investing activities   (84,293)   (1,329)
Cash flows from financing activities:          
Increase in deposit accounts   130,672    11,894 
Increase in securities sold under agreements to repurchase   12,355    5,867 
Advances from the Federal Home Loan Bank   34,001    65,000 
Repayment of advances from Federal Home Loan Bank   (34,212)   (65,010)
Shares retired   (15)   (156)
Repurchase of common stock       (3,413)
Issuance of deferred compensation shares   200    265 
Dividends paid: Common Stock   (1,783)   (1,681)
Proceeds from issuance of Common Stock   4     
Dividend reinvestment plan   187    184 
Net cash provided from financing activities   141,409    12,950 
Net increase in cash and cash equivalents   45,246    7,355 
Cash and cash equivalents at beginning of period   47,692    32,268 
Cash and cash equivalents at end of period  $92,938   $39,263 
           
Supplemental disclosure:          
Cash paid during the period for:          
Interest  $3,070   $2,958 
Income taxes  $   $1,160 
Non-cash investing and financing activities:          
Unrealized gain on securities  $9,977   $5,493 
Recognition of operating lease right of use asset  $   $2,846 
Recognition of operating lease liability  $   $2,849 
Transfer of investment securities held-to-maturity to available-for-sale  $   $16,144 
Transfer of loans to foreclosed property  $78   $ 
           

See Notes to Consolidated Financial Statements

8
 

Notes to Consolidated Financial Statements (Unaudited)

 

Note 1—Nature of Business and Basis of Presentation

 

Basis of Presentation

 

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

 

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

 

Risk and Uncertainties

 

In December 2019, a novel strain of coronavirus (COVID-19) was reported to have surfaced in China,and has since spread to a number of other countries, including the United States. In March 2020, the World Health Organization declared COVID-19 a global pandemic and the United States declared a National Public Health Emergency. The COVID-19 pandemic has severely restricted the level of economic activity in the Bank’s markets. In response to the COVID-19 pandemic, the governments of the states in which the Bank has retail offices, and of most other states, have taken preventative or protective actions, such as imposing restrictions on travel and business operations, advising or requiring individuals to limit or forego their time outside of their homes, and ordering temporary closures of businesses that have been deemed to be non-essential.

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

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

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

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

9
 

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

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

 

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

 

Beginning in March 2020, the Company proactively offered payment deferrals for up to 90 days to its loan customers. We continue to consider potential deferrals with respect to certain customers, which we evaluate on a case-by-case basis. Loans on which payments have been deferred increased to $175.0 million at June 30, 2020 from $118.3 million at March 31, 2020. At its peak, which occurred during the second quarter of 2020, the Company granted payment deferments on loans totaling $206.9 million. As a result of normal payments being resumed by loan customers at the conclusion of their applicable payment deferral period, loans in which payments have been deferred decreased from the peak of $206.9 million to $175.0 million at June 30, 2020 and to $64.3 million at July 31, 2020.

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

Industry Segments  Outstanding   % of Loan   Avg. Loan   Avg. Loan to 
(Dollars in millions)  Loan Balance   Portfolio   Size   Value 
Hotels  $28.8    3.5%  $1.9    68%
Restaurants  $20.7    2.5%  $0.7    69%
Assisted Living  $9.1    1.1%  $1.8    49%
Retail  $78.7    9.6%  $0.6    60%

10
 

Note 2—Earnings Per Common Share

 

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

 

(In thousands except average market price)

 

   Six months   Three months 
   Ended June 30,   Ended June 30, 
   2020   2019   2020   2019 
                 
Numerator (Net income available to common shareholders)  $4,011   $5,376   $2,217   $2,881 
Denominator                    
Weighted average common shares outstanding for:                    
Basic shares   7,432    7,629    7,436    7,627 
Dilutive securities:                    
Deferred compensation   26    43    18    41 
                     
Warrants/Restricted stock – Treasury stock method   10    36    11    36 
Diluted shares   7,468    7,708    7,465    7,704 
Earnings per common share:                    
Basic   0.54    0.70    0.30    0.38 
Diluted   0.54    0.70    0.30    0.37 
The average market price used in calculating assumed number of shares  $16.98   $19.12   $14.97   $18.35 

 

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. In connection with the issuance of the subordinated debt, the Company issued warrants for 107,500 shares of common stock at $5.90 per share. There were 32,250 warrants outstanding at June 30, 2019 and these warrants are included in dilutive securities in the table above. All warrants were exercised by their expiration date of December 16, 2019.

 

In 2006, the Company established a Non-Employee Director Deferred Compensation Plan, whereby a director may elect to defer all or any part of annual retainer and monthly meeting fees payable with respect to service on the board of directors or a committee of the board. Units of common stock are credited to the director’s account at the time compensation is earned and are included in dilutive securities in the table above. The non-employee director’s account balance is distributed by issuance of common stock at the time of retirement or resignation from the board of directors. At June 30, 2020 and December 31, 2019, there were 84,643 and 97,104 units in the plan, respectively. The accrued liability at June 30, 2020 and December 31, 2019 amounted to $1.0 million and $1.1 million, respectively, and is included in “Other liabilities” on the balance sheet.

 

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

The employee restricted shares and units cliff vest over a three-year period; the non-employee director shares vest one year after issuance. The unrecognized compensation cost at June 30, 2020 and December 31, 2019 for non-vested shares amounts to $396.0 thousand and $219.7 thousand, respectively. Each unit is convertible into one share of common stock at the time the unit vests. The related compensation cost is accrued over the vesting period and was $79.2 thousand and $61.0 thousand at June 30, 2020, and December 31, 2019, respectively.

 

11
 

Note 3—Investment Securities

 

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

 

AVAILABLE-FOR-SALE:      Gross   Gross     
   Amortized   Unrealized   Unrealized     
(Dollars in thousands)  Cost   Gains   Losses   Fair Value 
June 30, 2020                    
US Treasury securities  $3,502   $19   $   $3,521 
Government Sponsored Enterprises   990    23        1,013 
Mortgage-backed securities   172,969    7,683    317    180,335 
Small Business Administration pools   39,289    938    11    40,216 
State and local government   64,043    4,794        68,837 
Other securities   1,997            1,997 
   $282,790   $13,457   $328   $295,919 
                     
       Gross   Gross     
   Amortized   Unrealized   Unrealized     
(Dollars in thousands)  Cost   Gains   Losses   Fair Value 
December 31, 2019                    
US Treasury securities  $7,190   $16   $3   $7,203 
Government Sponsored Enterprises   984    17        1,001 
Mortgage-backed securities   182,736    1,490    640    183,586 
Small Business Administration pools   45,301    259    217    45,343 
State and local government   47,418    2,371    141    49,648 
Other securities   19            19 
   $283,648   $4,153   $1,001   $286,800 

 

During the first quarter of 2019, the Company reclassified the portfolio of securities listed as held-to-maturity to available-for-sale. There were no investment securities listed as held-to-maturity as of June 30, 2020.

 

During the six months ended June 30, 2020 and 2019, the Company received proceeds of $0 and $51.1 million, respectively, from the sale of investment securities available-for-sale. For the three months ended June 30, 2020, there were no gross realized gains from the sale of investment securities available-for-sale and no gross realized losses. For the three months ended June 30, 2019, gross realized gains from the sale of investment securities available-for-sale amounted to $315.0 thousand and gross realized losses amounted to $149.7 thousand.  For the six months ended June 30, 2020, there were no gross realized gains from the sale of investment securities available-for-sale and no gross realized losses. For the six months ended June 30, 2019, gross realized gains from the sale of investment securities available-for-sale amounted to $354.6 thousand and gross realized losses amounted to $219.6 thousand.

 

At June 30, 2020, other securities available-for-sale included the following at fair value: a mutual fund at $6.7 thousand, and foreign debt of $10.0 thousand. As required by Accounting Standards Update (“ASU”) 2016-01-Financial Instruments-Overall (Subtopic 825-10), the Company measured its equity investments at fair value with changes in the fair value recognized through net income. For the six months ended June 30, 2020 and 2019, a $2.1 thousand loss and a $2.0 thousand gain were recognized on a mutual fund, respectively. At December 31, 2019, corporate and other securities available-for-sale included the following at fair value: a mutual fund at $8.8 thousand and foreign debt of $10.0 thousand. Other investments, at cost, include Federal Home Loan Bank (“FHLB”) stock in the amount of $1.1 million and corporate stock in the amount of $1.0 million at June 30, 2020. The Company held $991.4 thousand of FHLB stock and $1.0 million in corporate stock at December 31, 2019.

12
 

Note 3—Investment Securities-continued

 

The following tables show gross unrealized losses and fair values, aggregated by investment category and length of time that individual securities have been in a continuous loss position, at June 30, 2020 and December 31, 2019.

  

                              
(Dollars in thousands)  Less than 12 months   12 months or more   Total 
June 30, 2020  Fair   Unrealized   Fair   Unrealized   Fair   Unrealized 
Available-for-sale securities:  Value   Loss   Value   Loss   Value   Loss 
                         
Mortgage-backed securities  $23,967   $264   $3,639   $53   $27,606   $317 
Small Business Administration pools   194        5,693    11    5,887    11 
Total  $24,161   $264   $9,332   $64   $33,493   $328 
                              
(Dollars in thousands)  Less than 12 months   12 months or more   Total 
December 31, 2019  Fair   Unrealized   Fair   Unrealized   Fair   Unrealized 
Available-for-sale securities:  Value   Loss   Value   Loss   Value   Loss 
                         
US Treasury securities  $   $   $1,508   $3   $1,508   $3 
Mortgage-backed securities   57,175    485    12,419    155    69,594    640 
Small Business Administration pools   7,891    53    13,502    164    21,393    217 
State and local government   5,695    141            5,695    141 
Total  $70,761   $679   $27,429   $322   $98,190   $1,001 

 

Government Sponsored Enterprise, Mortgage-Backed Securities: The Company owned mortgage-backed securities (“MBSs”), including collateralized mortgage obligations (“CMOs”), issued by government sponsored enterprises (“GSEs”) with an amortized cost of $172.9 million and $182.7 million and approximate fair value of $180.3 million and $183.6 million at June 30, 2020 and December 31, 2019, respectively. As of June 30, 2020, and December 31, 2019, all of the MBSs issued by GSEs were classified as “Available-for-Sale.” Unrealized losses on certain of these investments are not considered to be “other than temporary,” and we have the intent and ability to hold these until they mature or recover the current book value. The contractual cash flows of the investments are guaranteed by the GSEs. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost of the Company’s investment. Because the Company does not intend to sell these securities and it is more likely than not that the Company will not be required sell these securities before a recovery of its amortized cost, which may be maturity, the Company does not consider the investments to be other-than-temporarily impaired at June 30, 2020. 

 

Non-agency Mortgage Backed Securities: The Company held private label mortgage-backed securities (“PLMBSs”), including CMOs, at June 30, 2020 with an amortized cost of $66.4 thousand and approximate fair value of $63.3 thousand. The Company held PLMBSs, including CMOs, at December 31, 2019 with an amortized cost of $73.5 thousand and approximate fair value of $73.5 thousand. Management monitors each of these securities on a quarterly basis to identify any deterioration in the credit quality, collateral values and credit support underlying the investments.

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

13
 

Note 3—Investment Securities-continued

 

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

 

June 30, 2020  Available-for-sale 
   Amortized   Fair 
(Dollars in thousands)  Cost   Value 
Due in one year or less  $12,438   $12,566