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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

(Mark One)
x | Annual Report under Section 13 or 15(d) of the Securities Exchange Act of 1934
| For the fiscal year ended December 31, 2022
Or
o | Transition Report under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to

Commission file number: 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 Blvd., |  |
Lexington, South Carolina |  | 29072
(Address of principal executive offices) |  | (Zip Code)

803-951-2265

Registrant’s telephone number, including area code

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

Title of each class |  | Trading Symbol |  | Name of each exchange on which registered
Common stock, $1.00 par value per share |  | FCCO |  | The NASDAQ Capital Market

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.
Yes o No x

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 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 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 and post such files). Yes x No o

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 o | Non-accelerated Filer x | 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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. o

If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. o

Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). 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

As of June 30, 2022, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $139,330,033 based on the closing price of $19.17 on June 30, 2022, as reported on The NASDAQ Capital Market. 7,591,095 shares of the registrant’s common stock were issued and outstanding as of March 22, 2023.

Documents Incorporated by Reference

Portions of the registrant’s Definitive Proxy Statement for its 2023 Annual Meeting of Shareholders are incorporated by reference into Part III, Items 10-14 of this Form 10-K.

TABLE OF CONTENTS

|  | Page No.
PART I |  | 7
Item 1. Business |  | 7
Item 1A. Risk Factors |  | 26
Item 1B. Unresolved Staff Comments |  | 41
Item 2. Properties |  | 41
Item 3. Legal Proceedings |  | 41
Item 4. Mine Safety Disclosures |  | 41
PART II |  | 42
Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters, and Issuer Purchases of Equity Securities |  | 42
Item 6. [Reserved] |  | 43
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations |  | 43
Item 7A. Quantitative and Qualitative Disclosures about Market Risk |  | 74
Item 8. Financial Statements and Supplementary Data |  | 74
Consolidated Balance Sheets |  | 78
Consolidated Statements of Income |  | 79
Consolidated Statements of Comprehensive Income (Loss) |  | 80
Consolidated Statements of Changes in Shareholders’ Equity |  | 81
Consolidated Statements of Cash Flows |  | 82
Notes to Consolidated Financial Statements |  | 83
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |  | 122
Item 9A. Controls and Procedures |  | 122
Item 9B. Other Information |  | 122
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections |  | 122
PART III |  | 123
Item 10. Directors, Executive Officers and Corporate Governance |  | 123
Item 11. Executive Compensation |  | 123
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters |  | 123
Item 13. Certain Relationships and Related Transactions, and Director Independence |  | 123
Item 14. Principal Accountant Fees and Services |  | 123
PART IV |  | 124
Item 15. Exhibits, Financial Statement Schedules |  | 124
SIGNATURES |  | 126

2

CAUTIONARY STATEMENT REGARDING
FORWARD-LOOKING STATEMENTS

This report, including information included or incorporated by reference in this report, contains statements which constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements may relate to, among other matters, the financial condition, results of operations, plans, objectives, future performance, and the business of our company. Forward-looking statements are based on many assumptions and estimates and are not guarantees of future performance. Our actual results may differ materially from those anticipated in any forward-looking statements, as they will depend on many factors about which we are unsure, including many factors which are beyond our control. The words “may,” “approximately,” “is likely,” “would,” “could,” “should,” “will,” “expect,” “anticipate,” “predict,” “project,” “potential,” “continue,” “assume,” “believe,” “intend,” “plan,” “forecast,” “goal,” and “estimate,” as well as similar expressions, are meant to identify such forward-looking statements. Potential risks and uncertainties that could cause our actual results to differ materially from those anticipated in our forward-looking statements include, without limitation, those described under the heading “Risk Factors” in this Annual Report on Form 10-K for the year ended December 31, 2022 as filed with the U.S. Securities and Exchange Commission (the “SEC”) and the following:

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

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

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

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

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

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

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

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

| · | changes in the interest rate environment, which are affected by many factors beyond our control, including inflation, recession, unemployment, money supply, domestic and international events and changes in the United States and other financial markets, and that could reduce anticipated or actual margins; temporarily reduce the market value of our available-for-sale investment securities and temporarily reduce accumulated other comprehensive income or increase accumulated other comprehensive loss, which temporarily could reduce shareholders’ equity;

| · | changes in political conditions or the legislative or regulatory environment, including governmental initiatives affecting the financial services industry, including as a result of the presidential administration and congressional elections;

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

| · | changes occurring in business conditions and inflation, including the impact of inflation on us, including a decrease in demand for new mortgage loan and commercial real estate loan originations and refinancings, an increase in competition for deposits, and an increase in non-interest expense, which may have an adverse impact on our financial performance;

| · | changes in access to funding or increased regulatory requirements with regard to funding, which could impair our liquidity;

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

| · | changes in deposit flows, which may be negatively affected by a number of factors, including rates paid by competitors, general interest rate levels, regulatory capital requirements, and returns available to customers on alternative investments;

| · | changes in technology;

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

| · | changes in monetary and tax policies, including potential changes in tax laws and regulations;

| · | changes in accounting standards, policies, estimates and practices as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the SEC and the Public Company Accounting Oversight Board;

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

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

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

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

| · | our ability to successfully execute our business strategy;

| · | our ability to attract and retain key personnel;

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

| · | adverse changes in asset quality and resulting credit risk-related losses and expenses;
| · | the potential effects of events beyond our control that may have a destabilizing effect on financial markets and the economy, such as epidemics and pandemics (including COVID-19), war or terrorist activities, the Russian invasion of Ukraine, disruptions in our customers’ supply chains, disruptions in transportation, essential utility outages or trade disputes and related tariffs;

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

| · | other risks and uncertainties described under “Risk Factors” below.

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 this Annual Report on Form 10-K. In addition, our past results of operations do not necessarily indicate our future results. Therefore, we caution you not to place undue reliance on our forward-looking information and statements.

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

4

Summary of Material Risks

An investment in our securities involves risks, including those summarized below. For a more complete discussion of the material risks facing our business, see Item 1A—Risk Factors.

Economic and Geographic-Related Risks

| · | Our business may be adversely affected by economic conditions.

C redit and Interest Rate Risks

| · | Our decisions regarding credit risk and reserves for loan losses may materially and adversely affect our business.

| · | We may have higher loan losses than we have allowed for in our allowance for loan losses.

| · | We have a concentration of credit exposure in commercial real estate and challenges faced by the commercial real estate market could adversely affect our business, financial condition, and results of operations.

| · | Imposition of limits by the bank regulators on commercial and multi-family real estate lending activities could curtail our growth and adversely affect our earnings.

| · | Repayment of our commercial business loans is often dependent on the cash flows of the borrower, which may be unpredictable, and the collateral securing these loans may fluctuate in value.

| · | Our focus on lending to small to mid-sized community-based businesses may increase our credit risk.

| · | Our underwriting decisions may materially and adversely affect our business.

| · | We depend on the accuracy and completeness of information about clients and counterparties and our financial condition could be adversely affected if we rely on misleading information.

| · | If we fail to effectively manage credit risk, our business and financial condition will suffer.

| · | Changes in prevailing interest rates may reduce our profitability.

Capital and Liquidity Risks

| · | Changes in the financial markets could impair the value of our investment portfolio.

| · | The Bank is subject to strict capital requirements, which could be amended to be more stringent, in the future.

Risks Related to Our Industry

| · | Inflationary pressures and rising prices may affect our results of operations and financial condition.

| · | The transition away from LIBOR could negatively impact our net interest income and require operational work.

| · | Higher FDIC deposit insurance premiums and assessments could adversely affect our financial condition.

| · | We could experience a loss due to competition with other financial institutions or nonbank companies.

| · | We may be adversely affected by the soundness of other financial institutions.

| · | Failure to keep pace with technological changes could adversely affect our business.

| · | New lines of business or new products and services may subject us to additional risk.

| · | Consumers may decide not to use banks to complete their financial transactions.

Risks Related to Our Strategy

| · | We may be adversely affected by risks associated with future mergers and acquisitions, including execution risk, which could disrupt our business and dilute shareholder value.

| · | We may be exposed to difficulties in combining the operations of acquired businesses into our own operations, which may prevent us from achieving the expected benefits from our acquisition activities.

| · | New or acquired banking office facilities and other facilities may not be profitable.

Risks Related to Our Human Capital

| · | We are dependent on key individuals, and the loss of one or more of these key individuals could curtail our growth and adversely affect our prospects.

Operational Risks

| · | A failure in, or breach of, our systems or infrastructure, or those of our vendors, including cyber-attacks, could disrupt our businesses, result in disclosure of confidential information, damage our reputation or increase our costs and losses.

| · | We are at risk of increased losses from fraud.

| · | Our use of third party vendors and our other ongoing third party business relationships are subject to increasing regulatory requirements and attention.

| · | If we fail to maintain our reputation, our performance may be materially adversely affected.

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L egal, Accounting, Regulatory and Compliance Risks

| · | We are subject to extensive regulation that could restrict our activities, have an adverse impact on our operations, and impose financial requirements or limitations on the conduct of our business.

| · | Federal, state and local consumer lending laws may restrict our ability to originate certain mortgage loans or increase our risk of liability with respect to such loans and could increase our cost of doing business.

| · | We are subject to federal and state fair lending laws, and failure to comply with these laws could lead to material penalties.

| · | Changes in accounting standards could materially affect our financial statements.

| · | New accounting standards will likely require us to increase our allowance for loan losses and may have a material adverse effect on our financial condition and results of operations.

| · | The Federal Reserve may require us to commit capital resources to support the Bank.

| · | We face risks related to the adoption of future legislation and potential changes in federal regulatory agency leadership, policies, and priorities.

| · | We are party to various claims and lawsuits incidental to our business. Litigation is subject to many uncertainties such that the expenses and ultimate exposure with respect to many of these matters cannot be ascertained.

| · | From time to time we are, or may become, involved in suits, legal proceedings, information-gatherings, investigations and proceedings by governmental and self-regulatory agencies that may lead to adverse consequences.

| · | We could be adversely affected by changes in tax laws and regulations or the interpretations of such laws and regulations

| · | Our ability to realize deferred tax assets may be reduced, which may adversely impact our results of operation.

R isks Related to an Investment In our Common Stock

| · | Our ability to pay cash dividends is limited, and we may be unable to pay future dividends even if we desire to do so.

| · | Our stock price may be volatile, which could result in losses to our investors and litigation against us.

| · | Future sales of our stock by our shareholders or the perception that those sales could occur may cause our stock price to decline.

| · | Economic and other circumstances may require us to raise capital at times or in amounts that are unfavorable to us. If we have to issue shares of common stock, they will dilute the percentage ownership interest of existing shareholders and may dilute the book value per share of our common stock and adversely affect the terms on which we may obtain additional capital.

| · | Provisions of our articles of incorporation and bylaws, South Carolina law, and state and federal banking regulations, could delay or prevent a takeover by a third party.

| · | An investment in our common stock is not an insured deposit.

General Risks

| · | Increasing scrutiny and evolving expectations with respect to our environmental, social and governance practices may impose additional costs on us or expose us to new or additional risks.
| · | Climate change could have a material adverse impact on us and our customers.
| · | Our historical operating results may not be indicative of our future operating results.
| · | A downgrade of the U.S. credit rating could negatively impact our business, results of operations and financial condition.

6

PART I

Item 1. Business.

General

First Community Corporation, a bank holding company registered under the Bank Holding Company Act of 1956, was incorporated under the laws of South Carolina in November 1994 primarily to own and control all of the capital stock of First Community Bank, which commenced operations in August 1995. The Bank’s primary federal regulator is the Federal Deposit Insurance Corporation (the “FDIC”). The Bank is also regulated and examined by the South Carolina Board of Financial Institutions (the “S.C. Board”).

Unless otherwise mentioned or unless the context requires otherwise, references herein to “First Community,” the “Company” “we,” “us,” “our” or similar references mean First Community Corporation and its consolidated subsidiaries. References to the “Bank” means First Community Bank.

We engage in a commercial banking business from our main office in Lexington, South Carolina and our 22 full-service offices located in: the Midlands of South Carolina, which includes Lexington County (6 offices), Richland County (4 offices), Newberry County (2 offices) and Kershaw County (1 office); the Upstate of South Carolina, which includes Greenville County (2 offices), Anderson County (1 office) and Pickens County (1 office); the Piedmont Region of South Carolina, which includes York County, South Carolina (1 office) and the Central Savannah River Area, which includes Aiken County, South Carolina (1 office); and in Augusta, Georgia, which includes Richmond County (2 offices) and Columbia County (1 office). In addition, we conducted business from a mortgage loan production office in Richland County, South Carolina until January 24, 2020, after which we consolidated such operations with other existing Bank offices. At December 31, 2022, we had approximately $1.7 billion in assets, $980.9 million in loans, $1.4 billion in deposits, and $118.4 million in shareholders’ equity.

We offer a wide-range of traditional banking products and services for professionals and small-to medium-sized businesses, including consumer and commercial, mortgage, brokerage and investment, and insurance services. We also offer online banking to our customers. We have grown organically and through acquisitions.

Our stock trades on The NASDAQ Capital Market under the symbol “FCCO”.

Available Information

We provide our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”) on our website at www.firstcommunitysc.com/ under the About section, under the Investors link. These filings are made accessible as soon as reasonably practicable after they have been filed electronically with SEC. These filings are also accessible on the SEC’s website at www.sec.gov. In addition, we make available under our Investor Relations section on our website the following, among other things: (i) Code of Business Conduct and Ethics, which applies to our directors and all employees and (ii) the charters of the Audit and Compliance, Human Resources and Compensation, and Nominations and Corporate Governance Committees of our board of directors. These materials are available to the general public on our website free of charge. Printed copies of these materials are also available free of charge to shareholders who request them in writing. Please address your request to: Investor Relations, First Community Corporation, 5455 Sunset Boulevard, Lexington, South Carolina 29072. Statements of beneficial ownership of equity securities filed by directors, officers, and 10% or greater shareholders under Section 16 of the Exchange Act are also available through our website. The information on our website is not incorporated by reference into this report.

Location and Service Area

The Bank is engaged in a general commercial and retail banking business, emphasizing the needs of small-to-medium sized businesses, professionals and individuals. We have a total of 13 full-service offices located in Richland, Lexington, Kershaw and Newberry Counties of South Carolina and the surrounding areas. We refer to these counties as the “Midlands” region of South Carolina. Lexington County is home to six of our branch offices. Richland County, in which we currently have four branches, is the second largest county in South Carolina. Columbia is located within Richland County and is South Carolina’s capital city and is geographically positioned in the center of the state between the industrialized Upstate region of South Carolina and the coastal city of Charleston, South Carolina. Intersected by three major interstate highways (I-20, I-77, and I-26), Columbia’s strategic location has contributed greatly to its commercial appeal and growth. With the acquisition of Savannah River Banking Company in 2014, we added a branch in Aiken, South Carolina and a branch in Augusta, Georgia (Richmond County). In 2016, we opened a loan production office in Greenville County, which we converted into a full-service office in February 2019. With the acquisition of Cornerstone Bancorp in 2017, we added a branch in each of Greenville, Pickens, and Anderson Counties of South Carolina. We refer to this three-county area as the “Upstate” region of South Carolina. In 2018, we opened a de novo branch in downtown Augusta, Georgia (Richmond County). In 2019, we opened a de novo branch in Evans, Georgia, a suburb of Augusta in Columbia County, Georgia. We refer to the three-county area of Aiken County (South Carolina), Richmond County (Georgia) and Columbia County (Georgia) as the “CSRA” region. On March 14, 2022, we opened a loan production office in York County, South Carolina. We converted this loan production office into a full-service banking office on October 20, 2022. We refer to York County, South Carlina and the surrounding area as the “Piedmont Region”.

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The following table shows data as to deposits, market share and population for our four market areas (deposits in thousands):

|  | Total |  |  | Estimated |  |  | Total Market Deposits(2) |  |  | Our Market Deposits(2) |  |  |  |
|  | Offices |  |  | Population(1) |  |  | June 30, 2022 |  |  | June 30, 2022 |  |  | Market Share |
Midlands Region |  | 13 |  |  | 831,330 |  |  | $ | 28,554,956 |  |  | $ | 1,108,244 |  |  |  | 3.88 | %
CSRA Region |  | 4 |  |  | 542,030 |  |  | $ | 11,183,001 |  |  | $ | 183,666 |  |  |  | 1.64 | %
Upstate Region |  | 4 |  |  | 886,885 |  |  | $ | 24,351,859 |  |  | $ | 181,521 |  |  |  | 0.75 | %
Piedmont Region(3) |  | 1 |  |  | 296,452 |  |  | $ | 4,807,062 |  |  | $ | 0 |  |  |  | 0.00 | %

(1) | Population data is 2023 total population from S&P Global Market Intelligence.
(2) | All deposit data is based on June 30, 2022 data sourced from S&P Global Market Intelligence.
(3) | Our full-service banking office in the Piedmont Region opened on October 20, 2022.

We believe that we serve attractive banking markets with long-term growth potential and a well-educated employment base that helps to support our diverse and relatively stable local economy. According to S&P Global Market Intelligence, 2023 median household incomes for each of the counties in the regions noted above were as follows:

Richland County, SC |  | $ | 62,424 |
Lexington County, SC |  | $ | 70,718 |
Newberry County, SC |  | $ | 55,766 |
Kershaw County SC |  | $ | 60,911 |
Greenville County, SC |  | $ | 72,007 |
Anderson County, SC |  | $ | 61,342 |
Pickens County SC |  | $ | 55,988 |
Aiken County SC |  | $ | 60,219 |
Richmond County, GA |  | $ | 50,229 |
Columbia County, GA |  | $ | 101,286 |
York County, SC |  | $ | 76,108 |

The county estimates noted above compare to 2023 statewide median household income estimates of $64,242 and $70,349 for South Carolina and Georgia, respectively. The principal components of the economy within our market areas are service industries, government and education, and wholesale and retail trade. The largest employers in the Midlands market area, each of which employs in excess of 3,000 people, include the State of South Carolina, Prisma Health, BlueCross BlueShield of SC, the University of South Carolina, the United States Department of the Army (Fort Jackson Army Base), Richland School District 1, Richland School District 2, Lexington Medical Center, Southeastern Freight Lines, Lexington County School District One, and Medical Services of America. The largest employers in our CSRA market area, each of which employs in excess of 3,000 people, include the U.S. Army Cyber Center of Excellence & Fort Gordon, Augusta University, NSA Augusta, Augusta University Hospitals, Richmond County School System, University Hospital, and the Department of Energy, Savannah River Site. The Upstate region major employers include, among others, Prisma Health, Greenville County Schools, BMW Manufacturing Corp., Michelin North America, Bon Secours St. Francis Health System, AnMed Health Medical Center, Clemson University, Duke Energy Corp., GE Power & Water, and the Greenville County Government. The Piedmont region major employers include, among others, Ross Stores, Inc. – Distribution, LPL Financial, Lash Group, Piedmont Medical Center, Comporium, Inc., and Schaeffler Group USA, Inc. We believe that this diversified economic base has reduced, and will likely continue to reduce, economic volatility in our market areas. Our markets have experienced economic and population growth over the past 10 years, and we expect that the area, as well as the service industry needed to support it, will continue to grow.

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Banking Services

We offer a full range of deposit services that are typically available in most banks and thrift institutions, including checking accounts, NOW accounts, savings accounts and other time deposits of various types, ranging from daily money market accounts to longer-term certificates of deposit. The transaction accounts and time certificates are tailored to our principal market area at rates competitive to those offered in the area. In addition, we offer certain retirement account services, such as individual retirement accounts (“IRAs”). All deposit accounts are insured by the FDIC up to the maximum amount allowed by law (currently, $250,000, subject to aggregation rules).

We also offer a full range of commercial and personal loans. Commercial loans include both secured and unsecured loans for working capital (including inventory and receivables), business expansion (including acquisition of real estate and improvements), and the purchase of equipment and machinery. Consumer loans include secured and unsecured loans for financing automobiles, home improvements, education, and personal investments. We also make real estate construction and acquisition loans. We originate fixed and variable rate mortgage loans, substantially all of which are sold into the secondary market. Our lending activities are subject to a variety of lending limits imposed by federal law. While differing limits apply in certain circumstances based on the type of loan or the nature of the borrower (including the borrower’s relationship to the bank), in general, we are subject to a loans-to-one-borrower limit of an amount equal to 15% of the Bank’s unimpaired capital and surplus, or 25% of the unimpaired capital and surplus if the excess over 15% is approved by the board of directors of the Bank and is fully secured by readily marketable collateral. As a result, our lending limit will increase or decrease in response to increases or decreases in the Bank’s level of capital. Based upon the capitalization of the Bank at December 31, 2022, the maximum amount we could lend to one borrower is $23.5 million. In addition, we may not make any loans to any director, officer, employee, or 10% shareholder of the Company or the Bank unless the loan is approved by our board of directors and is made on terms not more favorable to such person than would be available to a person not affiliated with the Bank.

Other bank services include internet banking, cash management services, safe deposit boxes, travelers checks, direct deposit of payroll and social security checks, and automatic drafts for various accounts. We offer non-deposit investment products and other investment brokerage services through a registered representative with an affiliation through LPL Financial. We are associated with Nyce and Plus networks of automated teller machines and MasterCard debit cards that may be used by our customers throughout South Carolina, Georgia and other regions. We also offer VISA and MasterCard credit card services through a correspondent bank as our agent.

We currently do not exercise trust powers, but we can begin to do so with the prior approval of our primary banking regulators, the FDIC and the S.C. Board.

Competition

The banking business is highly competitive. We compete as a financial intermediary with other commercial banks, savings and loan associations, credit unions and money market mutual funds operating in our market areas. As of June 30, 2022, there were 25 financial institutions operating approximately 160 offices in the Midlands market, 20 financial institutions operating 93 branches in the CSRA market, 37 financial institutions operating 219 branches in the Upstate market, and 15 financial institutions operating 46 branches in the Piedmont market. The competition among the various financial institutions is based upon a variety of factors, including interest rates offered on deposit accounts, interest rates charged on loans, credit and service charges, the quality of services rendered, the convenience of banking facilities and, in the case of loans to large commercial borrowers, relative lending limits. Size gives larger banks certain advantages in competing for business from large corporations. These advantages include higher lending limits and the ability to offer services in other areas of South Carolina and Georgia. As a result, we do not generally attempt to compete for the banking relationships of large corporations, but concentrate our efforts on small-to-medium sized businesses and individuals. We believe we have competed effectively in this market by offering quality and personal service. In addition, many of our non-bank competitors are not subject to the same extensive federal regulations that govern bank holding companies and federally insured banks.

Human Capital

At December 31, 2022, the company had 254 full-time, 7 part-time, and 8 seasonal/on-call employees.

We believe that our relationships with our employees are good and our employees are not represented by any collective bargaining group or agreement. Our company’s “Why”, which is “Impacting Lives for Success and Significance”, guides our approach to our relationships with employees. The foundations of these interactions are embedded in our cultural beliefs:

Everyone Matters - We value each of our employees for the unique contribution they make to the success of our company. While there are a variety of different positions in our company, each is an important and integral part of the work that we do. Every employee brings their own unique and diverse talents and experiences that enhance the culture of our bank and our work.

Spirit of Service - The energy and enthusiasm that our employees bring to their work creates a supportive work environment in which employees are available as a resource to one another. In addition to serving our fellow co-workers, we encourage our employees to serve our local communities. We offer company sponsored volunteer activities, as well as provide Volunteer PTO to allow employees to support causes that are close to their heart.

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Honor and Integrity - Trust is at the foundation of all that we do. We have a Code of Conduct and Business Ethics that all employees and board members read and follow that sets clear expectations with regard to personal and professional behavior.

Strong Work Ethic - Our employees take pride in the quality of the work that they do. This commitment to excellence can be seen in the work that is completed and their interactions with their co-workers and customers. While we work hard, we also make time for some fun with employee events designed to offer the opportunity for relaxation and social interactions among co-workers.

Excellence with Humility - Our company is blessed with dedicated and talented employees, loyal customers, supportive communities and shareholders who invest in and believe in our vision. We are humbled by the success we have experienced and are grateful for all that we have accomplished. We approach our work with a sincere appreciation for the opportunity to serve all of our stakeholder groups and we recognize it is through our collective efforts that we have been successful.

Our ability to attract, develop and retain our strong employee base is integral to our ongoing success. We believe that a good “quality of life” at work is an important part of the overall employee experience and we are very intentional about nurturing a culture that allows employees to reach their potential and enjoy professional success while also enjoying the work that they do in a positive and supportive work environment grounded in our cultural beliefs.

While we believe that our corporate culture and work environment is a competitive advantage for our company, we also recognize that employees value and deserve competitive compensation packages. Our company offers competitive wages and benefits for our employees and we regularly benchmark our compensation to market. Our benefits package includes medical, dental, life, disability, vision and supplemental insurance options. We also offer retirement benefits with a 401(k) plan with matching and profit sharing. In addition, we offer a generous paid time off plan that includes paid holidays.

Our company encourages employees to continue on a lifelong trajectory of learning and we offer ongoing training to all employees through internal and external resources and encourage employees to continue with career development specific to their role to insure they stay current with the most up-to-date information and best practices. To develop our current and future leaders, our company created the First Community Bank Leadership Institute (FCBLI), an 18-month program that provides academic and experiential learning to teach and nurture leadership skills across our organization to support the bank now and in the future. The bank also supports the development of employees through external educational opportunities such as various bankers’ schools that offer multi-year development programs as well as short term training classes and industry conferences.

Information about the Executive Officers of First Community Corporation

Executive officers of First Community Corporation are elected by the board of directors annually and serve at the pleasure of the board of directors. The current executive officers, and persons chosen to become executive officers, and their ages, positions with us over the past five years, and terms of office as of March 22, 2023, are as follows:

Name (age) |  | Position and Five Year History with Company |  | With the Company Since
Michael C. Crapps (64) |  | Chief Executive Officer and President, Director |  | 1994
John T. Nissen (61) |  | Chief Banking Officer; formerly Chief Commercial and Retail Banking Officer |  | 1995
Robin D. Brown (55) |  | Chief Human Resources and Marketing Officer |  | 1994
Tanya A. Butts (64) |  | Chief Operations Officer/Chief Risk Officer |  | 2016
John F. (Jack) Walker (57) |  | Chief Credit Officer, formerly Senior Vice President and Loan Approval and Special Assets Officer |  | 2009
D. Shawn Jordan (55) |  | Chief Financial Officer, formerly Executive Vice President |  | 2019

None of the above officers are related and there are no arrangements or understandings between them and any other person pursuant to which any of them was elected as an officer, other than arrangements or understandings with the directors or officers of the Company acting solely in their capacities as such.

SUPERVISION AND REGULATION

Both the Company and the Bank are subject to extensive state and federal banking laws and regulations that impose specific requirements or restrictions on and provide for general regulatory oversight of virtually all aspects of our operations. These laws generally are intended primarily for the protection of customers, depositors and other consumers, the FDIC’s Deposit Insurance Fund (the “DIF”), and the banking system as a whole; not for the protection of our other creditors and shareholders.

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The following discussion is not intended to be a complete list of all the activities regulated by the banking laws or of the impact of those laws and regulations on our operations. The following summary is qualified by reference to the statutory and regulatory provisions discussed. Changes in applicable laws or regulations may have a material effect on our business and prospects. Our operations may be affected by legislative changes and the policies of various regulatory authorities. We cannot predict the effect that fiscal or monetary policies, economic control, or new federal or state legislation may have on our business and earnings in the future.

Legislative and Regulatory Developments

We experienced heightened regulatory requirements and scrutiny following the 2008 global financial crisis, and as a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) and the Economic Growth, Regulatory Reform and Consumer Protection Act (“Regulatory Relief Act”). In addition, newer regulatory developments implemented in response to the COVID-19 pandemic, including the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) and the Consolidated Appropriations Act, 2021, which enhanced and expanded certain provisions of the CARES Act, had an impact on our operations.

The CARES Act was a $2.2 trillion economic stimulus bill that was intended to provide relief in the wake of the COVID-19 pandemic. There were a number of regulatory actions intended to help mitigate the adverse economic impact of the COVID-19 pandemic on borrowers, including several mandates from the bank regulatory agencies, requiring financial institutions to work constructively with borrowers affected by the COVID-19 pandemic. Although these programs generally have expired, governmental authorities may take additional actions in the future to limit the adverse impact of any resurgence of COVID-19 on borrowers and tenants.

The CARES Act, as extended by certain provisions of the Consolidated Appropriations Act of 2021, also permitted banks to suspend requirements under GAAP for loan modifications to borrowers affected by COVID-19 that would otherwise had been characterized as troubled debt restructurings and suspended any determination related thereto if (i) the borrower was not more than 30 days past due as of December 31, 2019, (ii) the modifications were related to COVID-19, and (iii) the modification occurred between March 1, 2020 and the earlier of 60 days after the date of termination of the national emergency or January 1, 2022. Federal bank regulatory authorities also issued guidance to encourage banks to make loan modifications for borrowers affected by COVID-19.

Capital and Related Requirements.

Regulatory capital rules known as the Basel III rules or Basel III, impose minimum capital requirements for bank holding companies and banks. Basel III was released in the form of enforceable regulations by each of the applicable federal bank regulatory agencies. Basel III is applicable to all banking organizations that are subject to minimum capital requirements, including federal and state banks and savings and loan associations, as well as to bank and savings and loan holding companies, other than “small bank holding companies.” A small bank holding company is generally a qualifying bank holding company or savings and loan holding company with less than $3.0 billion in consolidated assets. More stringent requirements are imposed on “advanced approaches” banking organizations—generally those organizations with $250 billion or more in total consolidated assets or $10 billion or more in total foreign exposures.

Based on the foregoing, as a small bank holding company, we are generally not subject to the capital requirements at the holding company level unless otherwise advised by the Federal Reserve; however, our Bank remains subject to the capital requirements. Accordingly, the Bank is required to maintain the following capital levels:

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

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

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

| · | a leverage ratio of 4%.

Basel III also established a “capital conservation buffer” above the regulatory minimum capital requirements, which must consist entirely of Common Equity Tier 1 capital, which was phased in over several years. The fully phased-in capital conservation buffer of 2.500%, which became effective on January 1, 2019, resulted in the following effective minimum capital ratios for the Bank beginning in 2019: (i) a Common Equity Tier 1 capital ratio of 7.0%, (ii) a Tier 1 capital ratio of 8.5%, and (iii) a total capital ratio of 10.5%. Under Basel III, institutions are subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if their capital levels fall below the buffer amount. These limitations establish a maximum percentage of eligible retained income that could be utilized for such actions.

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Under Basel III, Tier 1 capital includes two components: Common Equity Tier 1 capital and additional Tier 1 capital. The highest form of capital, Common Equity Tier 1 capital, consists solely of common stock (plus related surplus), retained earnings, accumulated other comprehensive income, otherwise referred to as AOCI, and limited amounts of minority interests that are in the form of common stock. Additional Tier 1 capital is primarily comprised of noncumulative perpetual preferred stock, Tier 1 minority interests and grandfathered trust preferred securities. Tier 2 capital generally includes the allowance for loan losses up to 1.25% of risk-weighted assets, qualifying preferred stock, subordinated debt and qualifying Tier 2 minority interests, less any deductions in Tier 2 instruments of an unconsolidated financial institution. AOCI is presumptively included in Common Equity Tier 1 capital and often would operate to reduce this category of capital. When implemented, Basel III provided a one-time opportunity at the end of the first quarter of 2015 for covered banking organizations to opt out of a large part of this treatment of AOCI. We made this opt-out election and, as a result, retained our pre-existing treatment for AOCI.

As part of its response to the impact of the COVID-19 pandemic, in the first quarter of 2020, U.S. federal regulatory authorities issued an interim final rule that provided banking organizations that adopted the credit impairment model, the Current Expected Credit Loss, or CECL, during the 2020 calendar year with the option to delay for two years the estimated impact of CECL on regulatory capital relative to regulatory capital determined under the prior incurred loss methodology, followed by a three-year transition period to phase out the aggregate amount of the capital benefit provided during the initial two-year delay (i.e., a five-year transition in total). In connection with our adoption of CECL on January 1, 2023, we did not elect to utilize the five-year CECL transition.

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

Acquisition Activities.

The primary purpose of a bank holding company is to control and manage banks. The BHCA generally requires the prior approval of the Federal Reserve for any merger involving a bank holding company or any acquisition by a bank holding company of another bank or bank holding company. In addition, the prior approval of the FDIC is required for a bank to merge with another bank or purchase the assets or assume the deposits of another bank. In determining whether to approve a proposed bank acquisition, federal bank regulators will consider, among other factors, the effect of the acquisition on competition, the public benefits expected to be received from the acquisition, the projected capital ratios and levels on a post-acquisition basis, and the acquiring institution’s record of addressing the credit needs of the communities it serves, including the needs of low and moderate income neighborhoods, consistent with the safe and sound operation of the bank, under the CRA.

On July 9, 2021, President Biden issued an Executive Order on Promoting Competition in the American Economy. Among other initiatives, the Executive Order encouraged the federal banking agencies to review their current merger oversight practices under the BHCA and the Bank Merger Act and adopt a plan for revitalization of such practices. In December 2021, the U.S. Department of Justice (“DOJ”) (in consultation with the Federal Reserve, the OCC, and FDIC announced that it was seeking additional public comments on whether and how the DOJ should revise the 1995 Bank Merger Competitive Review Guidelines. The comment period closed on February 15, 2022. In March 2022, the FDIC published a Request for Information seeking information and comments regarding the laws, practices, rules, regulations, guidance, and statements of policy that apply to merger transactions involving one or more insured depository institutions, including the merger between an insured depository institution and a noninsured institution. In a May 2022 speech, the acting head of the OCC announced that he had asked his staff to work with DOJ and other federal banking agencies to review the agency’s frameworks to analyze bank mergers. In May 2022, the CFPB announced the establishment of an Office of Competition and Innovation.

There are many steps that must be taken by the agencies before any final changes to the framework for evaluating bank mergers can be implemented and the prospects for such action continue to be uncertain at this time; however, the adoption of more expansive or prescriptive standards may have an impact on our acquisition activities.

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Change in Control.

Two statutes, the Change in Bank Control Act and the Bank Holding Company Act, together with regulations promulgated under them, require some form of regulatory review before any company may acquire “control” of a bank or a bank holding company. Under the Change in Bank Control Act, a person or company is required to file a notice with the Federal Reserve if it will, as a result of the transaction, own or control 10% or more of any class of voting securities or direct the management or policies of a bank or bank holding company and either if the bank or bank holding company has registered securities or if the acquirer would be the largest holder of that class of voting securities after the acquisition. For a change in control at the holding company level, both the Federal Reserve and the subsidiary bank’s primary federal regulator must approve the change in control; at the bank level, only the bank’s primary federal regulator is involved.

In addition, the Bank Holding Company Act prohibits any entity from acquiring 25% (5% if the acquirer is a bank holding company) or more of a bank holding company’s voting securities, or otherwise obtaining control or a controlling influence over the management or policies of a bank or bank holding company without regulatory approval. On January 30, 2020, the Federal Reserve issued a final rule (which became effective September 30, 2020) that clarified and codified the Federal Reserve’s standards for determining whether one company has control over another. The final rule established four categories of tiered presumptions of noncontrol that are based on the percentage of voting shares held by the investor (less than 5%, 5-9.9%, 10-14.9% and 15-24.9%) and the presence of other indicia of control. As the percentage of ownership increases, fewer indicia of control are permitted without falling outside of the presumption of noncontrol. These indicia of control include nonvoting equity ownership, director representation, management interlocks, business relationship and restrictive contractual covenants. Under the final rule, investors can hold up to 24.9% of the voting securities and up to 33% of the total equity of a company without necessarily having a controlling influence.

Transactions subject to the Bank Holding Company Act are exempt from Change in Control Act requirements. For state banks, state laws, including those of South Carolina, typically require approval by the state bank regulator as well.

Transactions with Affiliates and Insiders.

The Company is a legal entity separate and distinct from the Bank and its other subsidiaries. Various legal limitations restrict the Bank from lending or otherwise supplying funds to the Company or its non-bank subsidiaries. The Company and the Bank are subject to Sections 23A and 23B of the Federal Reserve Act and Federal Reserve Regulation W.

Section 23A of the Federal Reserve Act places limits on the amount of loans or extensions of credit by a bank to any affiliate, including its holding company, and on a bank’s investments in, or certain other transactions with, affiliates and on the amount of advances to third parties collateralized by the securities or obligations of any affiliates of the bank. Section 23A also applies to derivative transactions, repurchase agreements and securities lending and borrowing transactions that cause a bank to have credit exposure to an affiliate. The aggregate of all covered transactions is limited in amount, as to any one affiliate, to 10% of the Bank’s capital and surplus and, as to all affiliates combined, to 20% of the Bank’s capital and surplus. Furthermore, within the foregoing limitations as to amount, each covered transaction must meet specified collateral requirements. The Bank is forbidden to purchase low quality assets from an affiliate.

Section 23B of the Federal Reserve Act, among other things, prohibits an institution from engaging in certain transactions with certain affiliates unless the transactions are on terms substantially the same, or at least as favorable to such institution or its subsidiaries, as those prevailing at the time for comparable transactions with nonaffiliated companies. If there are no comparable transactions, a bank’s (or one of its subsidiaries’) affiliate transaction must be on terms and under circumstances, including credit standards, that in good faith would be offered to, or would apply to, nonaffiliated companies. These requirements apply to all transactions subject to Section 23A as well as to certain other transactions.

The affiliates of a bank include any holding company of the bank, any other company under common control with the bank (including any company controlled by the same shareholders who control the bank), any subsidiary of the bank that is itself a bank, any company in which the majority of the directors or trustees also constitute a majority of the directors or trustees of the bank or holding company of the bank, any company sponsored and advised on a contractual basis by the bank or an affiliate, and any mutual fund advised by a bank or any of the bank’s affiliates. Regulation W generally excludes all non-bank and non-savings association subsidiaries of banks from treatment as affiliates, except to the extent that the Federal Reserve decides to treat these subsidiaries as affiliates.

The Bank is also subject to certain restrictions on extensions of credit to executive officers, directors, certain principal shareholders, and their related interests. Extensions of credit include derivative transactions, repurchase and reverse repurchase agreements, and securities borrowing and lending transactions to the extent that such transactions cause a bank to have credit exposure to an insider. Any extension of credit to an insider (i) must be made on substantially the same terms, including interest rates and collateral requirements, as those prevailing at the time for comparable transactions with unrelated third parties and (ii) must not involve more than the normal risk of repayment or present other unfavorable features.

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On December 22, 2020, the federal banking agencies issued an interagency statement extending the temporary relief from enforcement action against banks or asset managers, which become principal stockholders of banks, with respect to certain extensions of credit by banks that otherwise would violate Regulation O, provided the asset managers and banks satisfy certain conditions designed to ensure that there is a lack of control by the asset manager over the bank.. On December 22, 2022, the federal banking agencies issued a revised interagency statement extending the temporary relief from such enforcement, which will expire on the sooner of January 1, 2024, or the effective date of a final Federal Reserve rule having a revision to Regulation O that addresses the treatment of extensions of credit by a bank to fund complex-controlled portfolio companies that are insiders of a bank.

First Community Corporation

We own 100% of the outstanding capital stock of the Bank, and, therefore, we are considered to be a bank holding company under the federal Bank Holding Company Act of 1956 (the “Bank Holding Company Act”). As a result, we are primarily subject to the supervision, examination and reporting requirements of the Federal Reserve under the Bank Holding Company Act and its regulations promulgated thereunder. Moreover, as a bank holding company of a bank located in South Carolina, we also are subject to the South Carolina Banking and Branching Efficiency Act.

Permitted Activities. Under the Bank Holding Company Act, a bank holding company is generally permitted to engage in, or acquire direct or indirect control of more than 5% of the voting shares of any company engaged in, the following activities:

| · | banking or managing or controlling banks;

| · | furnishing services to or performing services for our subsidiaries; and

| · | any activity that the Federal Reserve determines to be so closely related to banking as to be a proper incident to the business of banking;

Activities that the Federal Reserve has found to be so closely related to banking as to be a proper incident to the business of banking include:

| · | factoring accounts receivable;

| · | making, acquiring, brokering or servicing loans and usual related activities;

| · | leasing personal or real property;

| · | operating a non-bank depository institution, such as a savings association;

| · | trust company functions;

| · | financial and investment advisory activities;

| · | conducting discount securities brokerage activities;

| · | underwriting and dealing in government obligations and money market instruments;

| · | providing specified management consulting and counseling activities;

| · | performing selected data processing services and support services;

| · | acting as agent or broker in selling credit life insurance and other types of insurance in connection with credit transactions; and

| · | performing selected insurance underwriting activities.

As a bank holding company, we also can elect to be treated as a “financial holding company,” which would allow us to engage in a broader array of activities. In summary, a financial holding company can engage in activities that are financial in nature or incidental or complimentary to financial activities, including insurance underwriting, sales and brokerage activities, providing financial and investment advisory services, underwriting services and limited merchant banking activities. We have not sought financial holding company status, but may elect such status in the future as our business matures. If we were to elect in writing for financial holding company status, each insured depository institution we control would have to be well capitalized, well managed and have at least a satisfactory rating under the Community Reinvestment Act (“CRA”) (discussed below).

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The Federal Reserve has the authority to order a bank holding company or its subsidiaries to terminate any of these activities or to terminate its ownership or control of any subsidiary when it has reasonable cause to believe that the bank holding company’s continued ownership, activity or control constitutes a serious risk to the financial safety, soundness or stability of it or any of its bank subsidiaries.

Source of Strength. There are a number of obligations and restrictions imposed by law and regulatory policy on bank holding companies with regard to their depository institution subsidiaries that are designed to minimize potential loss to depositors and to the FDIC insurance funds in the event that the depository institution becomes in danger of defaulting under its obligations to repay deposits. Under a policy of the Federal Reserve, a bank holding company is required to serve as a source of financial strength to its subsidiary depository institutions and to commit resources to support such institutions in circumstances where it might not do so absent such policy. Under the Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”), to avoid receivership of its insured depository institution subsidiary, a bank holding company is required to guarantee the compliance of any insured depository institution subsidiary that may become “undercapitalized” within the terms of any capital restoration plan filed by such subsidiary with its appropriate federal banking agency up to the lesser of (i) an amount equal to 5% of the institution’s total assets at the time the institution became undercapitalized, or (ii) the amount which is necessary (or would have been necessary) to bring the institution into compliance with all applicable capital standards as of the time the institution fails to comply with such capital restoration plan.

The Federal Reserve also has the authority under the Bank Holding Company Act to require a bank holding company to terminate any activity or relinquish control of a nonbank subsidiary (other than a nonbank subsidiary of a bank) upon the Federal Reserve’s determination that such activity or control constitutes a serious risk to the financial soundness or stability of any subsidiary depository institution of the bank holding company. Further, federal law grants federal bank regulatory authorities’ additional discretion to require a bank holding company to divest itself of any bank or nonbank subsidiary if the agency determines that divestiture may aid the depository institution’s financial condition.

In addition, the “cross guarantee” provisions of the Federal Deposit Insurance Act (“FDIA”) require insured depository institutions under common control to reimburse the FDIC for any loss suffered or reasonably anticipated by the FDIC as a result of the default of a commonly controlled insured depository institution or for any assistance provided by the FDIC to a commonly controlled insured depository institution in danger of default. The FDIC’s claim for damages is superior to claims of shareholders of the insured depository institution or its holding company, but is subordinate to claims of depositors, secured creditors and holders of subordinated debt (other than affiliates) of the commonly controlled insured depository institutions.

The FDIA also provides that amounts received from the liquidation or other resolution of any insured depository institution by any receiver must be distributed (after payment of secured claims) to pay the deposit liabilities of the institution prior to payment of any other general or unsecured senior liability, subordinated liability, general creditor or shareholder. This provision would give depositors a preference over general and subordinated creditors and shareholders in the event a receiver is appointed to distribute the assets of our Bank.

Any capital loans by a bank holding company to any of its subsidiary banks are subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary bank. In the event of a bank holding company’s bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee and entitled to a priority of payment.

Capital Requirements. The Federal Reserve generally imposes certain capital requirements on a bank holding company under the Bank Holding Company Act, including a minimum leverage ratio and a minimum ratio of “qualifying” capital to risk-weighted assets. If applicable, these requirements are essentially the same as those that apply to the Bank and are described above under “Capital and Related Requirements.” However, because the Company currently qualifies as a small bank holding company, these capital requirements do not currently apply to the Company. Subject to certain restrictions, we are able to borrow money to make a capital contribution to the Bank, and these loans may be repaid from dividends paid from the Bank to the Company. Our ability to pay dividends depends on, among other things, the Bank’s ability to pay dividends to us, which is subject to regulatory restrictions as described below in “First Community Bank—Dividends.” We are also able to raise capital for contribution to the Bank by issuing securities without having to receive regulatory approval, subject to compliance with federal and state securities laws.

Dividends. As a bank holding company, the Company’s 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 banks 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 the Company’s ability to pay dividends or otherwise engage in capital distributions.

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In addition, since the Company is legal entity separate and distinct from the Bank and does not conduct stand-alone operations, its ability to pay dividends depends on the ability of the Bank to pay dividends to it, which is also subject to regulatory restrictions as described below in “First Community Bank—Dividends.”

South Carolina State Regulation. As a South Carolina bank holding company under the South Carolina Banking and Branching Efficiency Act, we are subject to limitations on any sale to, or merger with, other financial institutions. We are not required to obtain the approval of the S.C. Board prior to acquiring the capital stock of a national bank, but we must notify them at least 15 days prior to doing so. We must receive the S.C. Board’s approval prior to engaging in the acquisition of a South Carolina state-chartered bank or another South Carolina bank holding company.

First Community Bank

As a South Carolina state bank, the Bank’s primary federal regulator is the FDIC and the Bank is also regulated and examined by the S.C. Board. Deposits in the Bank are insured by the FDIC up to a maximum amount of $250,000. The FDIC insurance coverage limit applies per depositor, per insured depository institution for each account ownership category.

The S.C. Board and the FDIC regulate or monitor virtually all areas of the Bank’s operations, including:

| · | security devices and procedures;

| · | adequacy of capitalization and loss reserves;

| · | loans;

| · | investments;

| · | borrowings;

| · | deposits;

| · | mergers;

| · | issuances of securities;

| · | payment of dividends;

| · | interest rates payable on deposits;

| · | interest rates or fees chargeable on loans;

| · | establishment of branches;

| · | corporate reorganizations;

| · | maintenance of books and records; and

| · | adequacy of staff training to carry on safe lending and deposit gathering practices.

These agencies, and the federal and state laws applicable to the Bank’s operations, extensively regulate various aspects of our banking business, including, among other things, permissible types and amounts of loans, investments and other activities, capital adequacy, branching, interest rates on loans and on deposits, the maintenance of reserves on demand deposit liabilities, and the safety and soundness of our banking practices.

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Prompt Corrective Action. The FDICIA established a “prompt corrective action” program in which every bank is placed in one of five regulatory categories, depending primarily on its regulatory capital levels. The FDIC and the other federal banking regulators are permitted to take increasingly severe action as a bank’s capital position or financial condition declines below the “Adequately Capitalized” level described below. Regulators are also empowered to place in receivership or require the sale of a bank to another depository institution when a bank’s leverage ratio reaches two percent. Better capitalized institutions are generally subject to less onerous regulation and supervision than banks with lesser amounts of capital. The FDIC’s regulations set forth five capital categories, each with specific regulatory consequences. The categories are:

| · | Well Capitalized—The institution exceeds the required minimum level for each relevant capital measure. A well capitalized institution (i) has a total risk-based capital ratio of 10% or greater, (ii) has a Tier 1 risk-based capital ratio of 8% or greater, (iii) has a common equity Tier 1 risk-based capital ratio of 6.5% or greater, (iv) has a leverage capital ratio of 5% or greater, and (v) is not subject to any order or written directive to meet and maintain a specific capital level for any capital measure.
| · | Adequately Capitalized—The institution meets the required minimum level for each relevant capital measure. No capital distribution may be made that would result in the institution becoming undercapitalized. An adequately capitalized institution (i) has a total risk-based capital ratio of 8% or greater, (ii) has a Tier 1 risk-based capital ratio of 6% or greater, (iii) has a common equity Tier 1 risk-based capital ratio of 4.5% or greater, and (iv) has a leverage capital ratio of 4% or greater.
| · | Undercapitalized—The institution fails to meet the required minimum level for any relevant capital measure. An undercapitalized institution (i) has a total risk-based capital ratio of less than 8%, (ii) has a Tier 1 risk-based capital ratio of less than 6%, (iii) has a common equity Tier 1 risk-based capital ratio of less than 4.5%, or (iv) has a leverage capital ratio of less than 4%.
| · | Significantly Undercapitalized—The institution is significantly below the required minimum level for any relevant capital measure. A significantly undercapitalized institution (i) has a total risk-based capital ratio of less than 6%, (ii) has a Tier 1 risk-based capital ratio of less than 4%, (iii) has a common equity Tier 1 risk-based capital ratio of less than 3%, or (iv) has a leverage capital ratio of less than 3%.
| · | Critically Undercapitalized—The institution fails to meet a critical capital level set by the appropriate federal banking agency. A critically undercapitalized institution has a ratio of tangible equity to total assets that is equal to or less than 2%.

If the FDIC determines, after notice and an opportunity for hearing, that the bank is in an unsafe or unsound condition, the regulator is authorized to reclassify the bank to the next lower capital category (other than critically undercapitalized) and require the submission of a plan to correct the unsafe or unsound condition.

If a bank is not well capitalized, it cannot accept brokered deposits without prior regulatory approval. In addition, a bank that is not well capitalized cannot offer an effective yield in excess of 75 basis points over interest paid on deposits of comparable size and maturity in such institution’s normal market area for deposits accepted from within its normal market area, or national rate paid on deposits of comparable size and maturity for deposits accepted outside the bank’s normal market area. Moreover, the FDIC generally prohibits a depository institution from making any capital distributions (including payment of a dividend) or paying any management fee to its parent holding company if the depository institution would thereafter be categorized as undercapitalized. Undercapitalized institutions are subject to growth limitations (an undercapitalized institution may not acquire another institution, establish additional branch offices or engage in any new line of business unless determined by the appropriate federal banking agency to be consistent with an accepted capital restoration plan, or unless the FDIC determines that the proposed action will further the purpose of prompt corrective action) and are required to submit a capital restoration plan. The agencies may not accept a capital restoration plan without determining, among other things, that the plan is based on realistic assumptions and is likely to succeed in restoring the depository institution’s capital. In addition, for a capital restoration plan to be acceptable, the depository institution’s parent holding company must guarantee that the institution will comply with the capital restoration plan. The aggregate liability of the parent holding company is limited to the lesser of an amount equal to 5.0% of the depository institution’s total assets at the time it became categorized as undercapitalized or the amount that is necessary (or would have been necessary) to bring the institution into compliance with all capital standards applicable with respect to such institution as of the time it fails to comply with the plan. If a depository institution fails to submit an acceptable plan, it is categorized as significantly undercapitalized.

Significantly undercapitalized categorized depository institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become categorized as adequately capitalized, requirements to reduce total assets, and cessation of receipt of deposits from correspondent banks. The appropriate federal banking agency may take any action authorized for a significantly undercapitalized institution if an undercapitalized institution fails to submit an acceptable capital restoration plan or fails in any material respect to implement a plan accepted by the agency. A critically undercapitalized institution is subject to having a receiver or conservator appointed to manage its affairs and for loss of its charter to conduct banking activities.

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An insured depository institution may not pay a management fee to a bank holding company controlling that institution or any other person having control of the institution if, after making the payment, the institution, would be undercapitalized. In addition, an institution cannot make a capital distribution, such as a dividend or other distribution that is in substance a distribution of capital to the owners of the institution if following such a distribution the institution would be undercapitalized. Thus, if payment of such a management fee or the making of such would cause a bank to become undercapitalized, it could not pay a management fee or dividend to the bank holding company.

As of December 31, 2022, the Bank was deemed to be “well capitalized.”

Standards for Safety and Soundness. The FDIA also requires the federal banking regulatory agencies to prescribe, by regulation or guideline, operational and managerial standards for all insured depository institutions relating to: (i) internal controls, information systems and internal audit systems; (ii) loan documentation; (iii) credit underwriting; (iv) interest rate risk exposure; and (v) asset growth. The agencies also must prescribe standards for asset quality, earnings, and stock valuation, as well as standards for compensation, fees and benefits. The federal banking agencies have adopted regulations and Interagency Guidelines Prescribing Standards for Safety and Soundness to implement these required standards. These guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. Under the regulations, if the FDIC determines that the Bank fails to meet any standards prescribed by the guidelines, the agency may require the Bank to submit to the agency an acceptable plan to achieve compliance with the standard, as required by the FDIC. The final regulations establish deadlines for the submission and review of such safety and soundness compliance plans.

Regulatory Examination. The FDIC also requires the Bank to prepare annual reports on the Bank’s financial condition and to conduct an annual audit of its financial affairs in compliance with its minimum standards and procedures.

All insured institutions must undergo regular on-site examinations by their appropriate banking agency. The cost of examinations of insured depository institutions and any affiliates may be assessed by the appropriate federal banking agency against each institution or affiliate as it deems necessary or appropriate. Insured institutions are required to submit annual reports to the FDIC, their federal regulatory agency, and state supervisor when applicable. The FDIC has developed a method for insured depository institutions to provide supplemental disclosure of the estimated fair market value of assets and liabilities, to the extent feasible and practicable, in any balance sheet, financial statement, report of condition or any other report of any insured depository institution. The federal banking regulatory agencies prescribe, by regulation, standards for all insured depository institutions and depository institution holding companies relating, among other things, to the following:

| · | internal controls;
| · | information systems and audit systems;
| · | loan documentation;
| · | credit underwriting;
| · | interest rate risk exposure; and
| · | asset quality.

Dividends. The Company’s principal source of cash flow, including cash flow to pay dividends to its shareholders, is dividends it receives from the Bank. Statutory and regulatory limitations apply to the Bank’s payment of dividends to the Company. As a South Carolina chartered bank, the Bank is subject to limitations on the amount of dividends that it is permitted to pay. Unless otherwise instructed by the S.C. Board, the Bank is generally permitted under South Carolina state banking regulations to pay cash dividends of up to 100% of net income in any calendar year without obtaining the prior approval of the S.C. Board. 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. The Bank must also maintain the Common Equity Tier 1 capital conservation buffer of 2.5%, in excess of its minimum regulatory risk-based capital ratios, to avoid becoming subject to restrictions on capital distributions, including dividends, as described above.

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Branching. Federal legislation permits out-of-state acquisitions by bank holding companies, interstate branching by banks, and interstate merging by banks. The Dodd-Frank Act removed previous state law restrictions on de novo interstate branching in states such as South Carolina and Georgia. This change effectively permits out of state banks to open de novo branches in states where the laws of such state would permit a bank chartered by that state to open a de novo branch.

Anti-Tying Restrictions. Under amendments to the Bank Holding Company Act and Federal Reserve regulations, a bank is prohibited from engaging in certain tying or reciprocity arrangements with its customers. In general, a bank may not extend credit, lease, sell property, or furnish any services or fix or vary the consideration for these on the condition that (i) the customer obtain or provide some additional credit, property, or services from or to the bank, the bank holding company or subsidiaries thereof or (ii) the customer may not obtain some other credit, property, or services from a competitor, except to the extent reasonable conditions are imposed to assure the soundness of the credit extended. Certain arrangements are permissible: a bank may offer combined-balance products and may otherwise offer more favorable terms if a customer obtains two or more traditional bank products; and certain foreign transactions are exempt from the general rule. A bank holding company or any bank affiliate also is subject to anti-tying requirements in connection with electronic benefit transfer services.

Community Reinvestment Act. The Bank is subject to certain requirements and reporting obligations under the CRA, which requires federal banking regulators to evaluate the record of each financial institution in meeting the credit needs of its local community, including low- and moderate- income neighborhoods. The CRA further requires these criteria to be considered in evaluating mergers, acquisitions and applications to open a branch or facility. Failure to adequately meet these criteria could result in the imposition of additional requirements and limitations on the Bank. Additionally, financial institutions must publicly disclose the terms of various CRA-related agreements. In its most recent CRA examination, the Bank received a “satisfactory” rating.

In December 2019, the FDIC and the Office of the Comptroller of the Currency (“OCC”) issued a notice of proposed rulemaking intended to (i) clarify which activities qualify for CRA credit; (ii) update where activities count for CRA credit; (iii) create a more transparent and objective method for measuring CRA performance; and (iv) provide for more transparent, consistent, and timely CRA-related data collection, recordkeeping, and reporting. However, the Federal Reserve has not joined the proposed rulemaking. In May 2020, the OCC issued its final CRA rule, which was later rescinded in December 2021. On the same day that the OCC announced its plans to rescind the CRA final rule, the OCC, FDIC, and Federal Reserve announced that they are working together to “strengthen and modernize the rules implementing the CRA.” On May 5, 2022, the OCC, FDIC, and Federal Reserve released a notice of proposed rulemaking regarding the CRA and invited public comment on the proposed rules. The comment period closed on August 5, 2022. The proposed rules, among other things, seek to (i) expand access to credit, investment, and basic banking services in low- and moderate-income communities, (ii) adapt to changes in the banking industry, including internet and mobile banking, (iii) provide greater clarity, consistency, and transparency, (iv) tailor CRA evaluations and data collection to bank size and type, and (v) maintain a unified approach among the bank regulatory agencies. The effects on the Company and the Bank of any potential change to the CRA rules will depend on the final form of any federal rulemaking and cannot be predicted at this time. Management will continue to evaluate any changes to the CRA’s regulations and their impact to the Company and the Bank.

Fair Lending Requirements. We are subject to certain fair lending requirements and reporting obligations involving lending operations. A number of laws and regulations provide these fair lending requirements and reporting obligations, including, at the federal level, the Equal Credit Opportunity Act (“ECOA”), as amended by the Dodd-Frank Act, and Regulation B, as well as the Fair Housing Act (“FHA”) and regulations implementing FHA found at 24 C.F.R. Part 100. ECOA and Regulation B prohibit discrimination in any aspect of a credit transaction based on a number of prohibited factors, including race or color, religion, national origin, sex, marital status, age, the applicant’s receipt of income derived from public assistance programs, and the applicant’s exercise, in good faith, of any right under the Consumer Credit Protection Act. ECOA and Regulation B include lending acts and practices that are specifically prohibited, permitted, or required, and these laws and regulations proscribe data collection requirements, legal action statute of limitations, and disclosure of the consumer’s ability to receive a copy of any appraisal(s) and valuation(s) prepared in connection with certain loans secured by dwellings. FHA prohibits discrimination in all aspects of residential real-estate related transactions based on prohibited factors, including race or color, national origin, religion, sex, familial status, and handicap.

In addition to prohibiting discrimination in credit transactions on the basis of prohibited factors, these laws and regulations can cause a lender to be liable for policies that result in a disparate treatment of or have a disparate impact on a protected class of persons. If a pattern or practice of lending discrimination is alleged by a regulator, then the matter may be referred by the agency to the DOJ for investigation. In December 2012, the DOJ and CFPB entered into a Memorandum of Understanding under which the agencies have agreed to share information, coordinate investigations, and have generally committed to strengthen their coordination efforts.

In addition to substantive penalties and corrective measures that may be required for a violation of certain fair lending laws, the federal banking agencies may take compliance with fair lending requirements into account when regulating and supervising other activities of the bank, including in acting on expansionary proposals.

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Financial Subsidiaries. Under the Gramm-Leach-Bliley Act, otherwise referred to as the GLBA, subject to certain conditions imposed by their respective banking regulators, national and state-chartered banks are permitted to form “financial subsidiaries” that may conduct financial or incidental activities, thereby permitting bank subsidiaries to engage in certain activities that previously were impermissible. The GLBA imposes several safeguards and restrictions on financial subsidiaries, including that the parent bank’s equity investment in the financial subsidiary be deducted from the bank’s assets and tangible equity for purposes of calculating the bank’s capital adequacy. In addition, the GLBA imposes new restrictions on transactions between a bank and its financial subsidiaries similar to restrictions applicable to transactions between banks and non-bank affiliates.

Consumer Protection Regulations. Activities of the Bank are subject to a variety of statutes and regulations—both at the federal and state levels—designed to protect consumers. This includes Title X of the Dodd-Frank Act, which prohibits engaging in any unfair, deceptive, or abusive acts or practices (“UDAAP”). UDAAP claims involve detecting and assessing risks to consumers and to markets for consumer financial products and services. Interest and other charges collected or contracted for by the Bank are subject to state usury laws and federal laws concerning interest rates. The Bank’s loan operations are also subject to federal laws applicable to credit transactions, such as:

| · | the Dodd-Frank Act that created the Consumer Financial Protection Bureau (“CFPB”), an independent regulatory authority housed within the Federal Reserve, which has broad rule-making authority over a wide range of consumer laws that apply to insured depository institutions;

| · | the Truth-In-Lending Act (“TILA”) and Regulation Z, governing disclosures of credit terms to consumer borrowers and including substantial requirements for mortgage lending and servicing, as mandated by the Dodd-Frank Act;

| · | the Home Mortgage Disclosure Act (“HMDA”) and Regulation C, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves, and requiring collection and disclosure of data about applicant and borrower characteristics to assist in identifying possible discriminatory lending patterns and enforcing antidiscrimination statutes;

| · | the Equal Credit Opportunity Act (“ECOA”) and Regulation B, prohibiting discrimination on the basis of race, color, religion, or other prohibited factors in any aspect of a credit transaction;

| · | the Fair Credit Reporting Act, as amended by the Fair and Accurate Credit Transactions Act, and Regulation V, governing the use of consumer reports, provision of information to credit reporting agencies, certain identity theft protections, and certain credit and other disclosures, and requiring Bank to have in place an “identity theft red flags” program to detect, prevent and mitigate identity theft.

| · | the Fair Debt Collection Practices Act and Regulation F, governing the manner in which consumer debts may be collected by collection agencies and intending to eliminate abusive, deceptive, and unfair debt collection practices;

| · | the Real Estate Settlement Procedures Act (“RESPA”) and Regulation X, which governs various aspects of residential mortgage loans, including the settlement and servicing process, dictates certain disclosures to be provided to consumers, and imposes other requirements related to compensation of service providers, insurance escrow accounts, and loss mitigation procedures;

| · | The Secure and Fair Enforcement for Mortgage Licensing Act (“SAFE Act”) which mandates a nationwide licensing and registration system for residential mortgage loan originators. The SAFE Act also prohibits individuals from engaging in the business of a residential mortgage loan originator without first obtaining and maintaining annually registration as either a federal or state licensed mortgage loan originator;

| · | The Homeowners Protection Act (“HPA”), or the PMI Cancellation Act, provides requirements relating to private mortgage insurance (PMI) on residential mortgages, including the cancelation and termination of PMI, disclosure and notification requirements, and the requirement to return unearned premiums;

| · | The Fair Housing Act (“FHA”) prohibits discrimination in all aspects of residential real-estate related transactions based on race or color, national origin, religion, sex, and other prohibited factors;

| · | The Servicemembers Civil Relief Act (“SCRA”) and Military Lending Act (“MLA”), providing certain protections for servicemembers, members of the military, and their respective spouses, dependents and others;

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| · | Section 106(c)(5) of the Housing and Urban Development Act requires making home ownership available to eligible homeowners; and

| · | the rules and regulations of the various federal agencies charged with the responsibility of implementing such federal laws.

The deposit operations of the Bank also are subject to laws, such as the following federal laws:

| · | the FDIA, which, among other things, imposes a minimum amount of deposit insurance available per account to $250,000 and imposes other limits on deposit-taking;

| · | the Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records;

| · | the Electronic Funds Transfer Act and Regulation E, which governs the rights, liabilities, and responsibilities of consumers and financial institutions using electronic fund transfer services, and which generally mandates disclosure requirements, establishes limitations on liability applicable to consumers for unauthorized electronic fund transfers, dictates certain error resolution processes, and applies other requirements relating to automatic deposits to and withdrawals from deposit accounts;

| · | the Check Clearing for the 21st Century Act (also known as “Check 21”), which gives “substitute checks,” such as digital check images and copies made from that image, the same legal standing as the original paper check;

| · | The Expedited Funds Availability Act (“EFA Act”) and Regulation CC, setting forth requirements to make funds deposited into transaction accounts available according to specified time schedules, disclose funds availability policies to customers, and relating to the collection and return of checks and electronic checks, including the rules regarding the creation or receipt of substitute checks; and

| · | the Truth in Savings Act (“TISA”) and Regulation DD, which requires depository institutions to provide disclosures so that consumers can make meaningful comparisons about depository institutions and accounts.

The CFPB has broad authority to regulate the offering and provision of consumer financial products and services. The CFPB has the authority to supervise and examine depository institutions with more than $10 billion in assets for compliance with federal consumer laws. The authority to supervise and examine depository institutions with $10 billion or less in assets, such as the Bank, for compliance with federal consumer laws remains largely with those institutions’ primary regulators. However, the CFPB may participate in examinations of these smaller institutions on a “sampling basis” and may refer potential enforcement actions against such institutions to their primary regulators. As such, the CFPB may participate in examinations of the Bank. In addition, states are permitted to adopt consumer protection laws and regulations that are stricter than the regulations promulgated by the CFPB.

The CFPB has issued a number of significant rules that impact nearly every aspect of the lifecycle of consumer financial products and services, including rules regarding residential mortgage loans. These rules implement Dodd-Frank Act amendments to ECOA, TILA and RESPA. Among other things, the rules adopted by the CFPB require banks to: (i) develop and implement procedures to ensure compliance with a “reasonable ability-to-repay” test; (ii) implement new or revised disclosures, policies and procedures for originating and servicing mortgages, including, but not limited to, pre-loan counseling, early intervention with delinquent borrowers and specific loss mitigation procedures for loans secured by a borrower’s principal residence, and mortgage origination disclosures, which integrate existing requirements under TILA and RESPA; (iii) comply with additional restrictions on mortgage loan originator hiring and compensation; and (iv) comply with new disclosure requirements and standards for appraisals and certain financial products. In March 2022, the CFPB announced changes to its supervisory operations to scrutinize discriminatory conduct under the CFPB’s UDAAP powers to examine financial institution’s decision-making in advertising, pricing, and other areas to ensure that companies are testing for and eliminating illegal discrimination. In this supervisory notice, the CFPB expanded its UDAAP powers to create essentially a fair-lending style discrimination test outside of ECOA that applies to non-lending products. In October 2022, the CFPB issued Bulletin 2022-06 explaining that blanket policies of charging returned deposit item fees to consumers or all returned transactions irrespective of the circumstances or patterns of behavior on the account are likely unfair under the Consumer Financial Protection Act of 2010. The CFPB has also issued an advisory opinion prohibiting the collection of pay-to-pay fees (such as convenience fees), which are prohibited under the Fair Debt Collection Practices Act .

Bank regulators take into account compliance with consumer protection laws when considering approval of a proposed expansionary proposals.

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Enforcement Powers. The Bank and its “institution-affiliated parties,” including its management, employee’s agent’s independent contractors and consultants, such as attorneys and accountants, and others who participate in the conduct of the financial institution’s affairs, are subject to potential civil and criminal penalties for violations of law, regulations or written orders of a government agency. These practices can include the failure of an institution to timely file required reports or the filing of false or misleading information or the submission of inaccurate reports. Civil penalties may be as high as $1,000,000 a day for such violations. Criminal penalties for some financial institution crimes have been increased to twenty years. In addition, regulators are provided with greater flexibility to commence enforcement actions against institutions and institution-affiliated parties. Possible enforcement actions include the termination of deposit insurance. Furthermore, banking agencies’ powers to issue cease-and-desist orders have been expanded. Such orders may, among other things, require affirmative action to correct any harm resulting from a violation or practice, including restitution, reimbursement, indemnifications or guarantees against loss. A financial institution may also be ordered to restrict its growth, dispose of certain assets, rescind agreements or contracts, or take other actions as determined by the ordering agency to be appropriate.

Anti-Money Laundering; the USA Patriot Act; the Office of Foreign Asset Control. Financial institutions must maintain anti-money laundering programs that include established internal policies, procedures, and controls; a designated compliance officer; an ongoing employee training program; and testing of the program by an independent audit function. The program must comply with the anti-money laundering provisions of the Bank Secrecy Act (“BSA”). The Company and the Bank are also prohibited from entering into specified financial transactions and account relationships and must meet enhanced standards for due diligence and “knowing your customer” in their dealings with foreign financial institutions, foreign customers, and other high risk customers. Financial institutions must take reasonable steps to conduct enhanced scrutiny of account relationships to guard against money laundering and to report any suspicious transactions, and certain laws provide law enforcement authorities with increased access to financial information maintained by banks. Financial institutions must comply with requirements regarding risk-based procedures for conducing ongoing customer due diligence, which requires the institutions to take appropriate steps to understand the nature and purpose of customer relationships and identify and verify the identity of the beneficial owners of legal entity customers.

Anti-money laundering obligations have been substantially strengthened as a result of the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act (which we refer to as the “USA PATRIOT Act”). Bank regulators routinely examine institutions for compliance with these obligations and are required to consider compliance in connection with the regulatory review of applications. The regulatory authorities have been active in imposing cease and desist orders and money penalty sanctions against institutions that have not complied with these requirements.

The USA PATRIOT Act amended the Bank Secrecy Act and provides, in part, for the facilitation of information sharing among governmental entities and financial institutions for the purpose of combating terrorism and money laundering by enhancing anti-money laundering and financial transparency laws, as well as enhanced information collection tools and enforcement mechanics for the U.S. government, including: (i) requiring standards for verifying customer identification at account opening; (ii) rules to promote cooperation among financial institutions, regulators, and law enforcement entities in identifying parties that may be involved in terrorism or money laundering; (iii) reports by nonfinancial trades and businesses filed with the U.S. Treasury Department’s Financial Crimes Enforcement Network for transactions exceeding $10,000; (iv) filing suspicious activities reports if a bank believes a customer may be violating U.S. laws and regulations; and (v) requires enhanced due diligence requirements for financial institutions that administer, maintain, or manage private bank accounts or correspondent accounts for non-U.S. persons. Bank regulators routinely examine institutions for compliance with these obligations and are required to consider compliance in connection with the regulatory review of applications.

Under the USA PATRIOT Act, the regulators can provide lists of the names of persons suspected of involvement in terrorist activities. The Bank can be requested, to search its records for any relationships or transactions with persons on those lists. If the Bank finds any relationships or transactions, it must file a suspicious activity report and contact the applicable governmental authorities.

On January 1, 2021, Congress overrode former President Trump’s veto and thereby enacted the National Defense Authorization Act for Fiscal Year 2021 (“NDAA”). The NDAA provides for one of the most significant overhauls of the BSA and related anti-money laundering laws since the USA Patriot Act. Notably, changes include:

| · | expansion of coordination and information sharing efforts among the agencies tasked with administering anti-money laundering and countering the financing of terrorism requirements, including the Financial Crimes Enforcement Network (“FinCEN”), the primary federal banking regulators, federal law enforcement agencies, national security agencies, the intelligence community, and financial institutions;

| · | providing additional penalties with respect to violations of BSA and enhancing the powers of FinCEN;

| · | significant updates to the beneficial ownership collection rules and the creation of a registry of beneficial ownership which will track the beneficial owners of reporting companies which may be shared with law enforcement and financial institutions conducting due diligence under certain circumstances;

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| · | improvements to existing information sharing provisions that permit financial institutions to share information relating to suspicious activity reports with foreign branches, subsidiaries, and affiliates (except those located in China, Russia, or certain other jurisdictions) for the purpose of combating illicit finance risks; and

| · | enhanced whistleblower protection provisions, allowing whistleblower(s) who provide original information which leads to successful enforcement of anti-money laundering laws in certain judicial or administrative actions resulting in certain monetary sanctions to receive up to 30 percent of the amount that is collected in monetary sanctions as well as increased protections.

The Office of Foreign Assets Control (“OFAC”), which is a division of the U.S. Department of the Treasury (the “Treasury”), is responsible for helping to ensure that United States entities do not engage in transactions with “enemies” of the United States, as defined by various Executive Orders and Acts of Congress. OFAC publishes lists of names of persons and organizations with which the Bank is prohibited from engaging in business. If the Bank finds a name on any transaction, account or wire transfer that is on an OFAC list, it must freeze such account, file a suspicious activity report and notify the FBI. The Bank has appointed an OFAC compliance officer to oversee the inspection of its accounts and the filing of any notifications. The Bank actively checks high-risk OFAC areas such as new accounts, wire transfers and customer files. The Bank performs these checks utilizing software, which is updated each time a modification is made to the lists provided by OFAC and other agencies of Specially Designated Nationals and Blocked Persons.

Following Russia’s invasion of Ukraine, OFAC took several sanctions related actions related to the Russian financial services sector pursuant to Executive Order 14024 beginning in February 2022 including: (i) a determination by the Secretary of the Treasury with respect to the financial services sector of the Russian Federation that authorizes sanctions against persons determined to operate or to have operated in that sector; (ii) correspondent or payable-through account and payment processing prohibitions on certain Russian financial institutions; (iii) the blocking of certain Russian financial institutions; (iv) expanding sovereign debt prohibitions to apply to new issuances in the secondary market; (v) prohibitions related to new debt and equity for certain Russian entities; and (vi) a prohibition on transactions involving certain Russian government entities, including the Central Bank of the Russian Federation. In March 2022, FinCEN issued an alert advising increased vigilance for potential Russian Sanctions Evasion Attempts. The Financial Action Task Force (“FATF”) continues to revise the list of high-risk jurisdictions. In October 2022, FATF removed Nicaragua and Pakistan from its lists of Jurisdictions under Increased Monitoring and added the Democratic Republic of the Congo, Mozambique, and Tanzania. The FATF also added Burma to the list of High-Risk Jurisdictions Subject to a Call for Action.

Privacy and Data Security. There are a number of state and federal laws and regulations that govern financial privacy and cybersecurity. At the federal level, this includes the privacy protection provisions of the Gramm-Leach-Bliley Act (“GLBA”) and related regulations, including Regulation P, which govern the treatment of nonpublic personal information. Under these privacy protection provisions, we are limited in our ability to disclose non-public information about consumers to nonaffiliated third parties. These limitations require disclosure of privacy policies and notices to consumers and, in some circumstances, allow consumers to prevent disclosure of certain personal information to a nonaffiliated third party.

Consumers must be notified in the event of a data breach under applicable state laws. Multiple states and Congress are considering laws or regulations which could create new individual privacy rights and impose increased obligations on companies handling personal data. For example, on November 18, 2021, the federal financial regulatory agencies published a final rule that will impose upon banking organizations and their service providers new notification requirements for significant cybersecurity incidents. Specifically, the final rule requires banking organizations to notify their primary federal regulator as soon as possible and no later than 36 hours after the discovery of a “computer-security incident” that rises to the level of a “notification incident” within the meaning attributed to those terms by the final rule. Banks’ service providers are required under the final rule to notify any affected bank to or on behalf of which the service provider provides services “as soon as possible” after determining that it has experienced an incident that materially disrupts or degrades, or is reasonably likely to materially disrupt or degrade, covered services provided to such bank for as much as four hours. The final rule took effect on April 1, 2022 and banks and their service providers must have complied with the requirements of the rule by May 1, 2022. Effective December 9, 2022, the FTC’s amendments to GLBA’s Safeguards Rule went into effect requiring financial institutions to: (i) appoint a qualified individual to oversee and implement their information security programs; (ii) implement additional criteria for information security risk assessments; (iii) implement safeguards identified by assessments, including access controls, data inventory, data disposal, change management, and monitoring, among other things; (iv) implement information system monitoring in the form of either “continuous monitoring” or “periodic penetration testing;” (v) implement additional controls including training for security personnel, periodic assessment of service providers, written incident response plans, and periodic reports from the qualified individual to the board of directors.

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Effect of Governmental Monetary Policies. Our earnings are affected by domestic economic conditions and the monetary and fiscal policies of the United States government and its agencies. The Federal Reserve’s monetary policies have had, and are likely to continue to have, an important impact on the operating results of commercial banks through its power to implement national monetary policy in order, among other things, to curb inflation or combat a recession. The monetary policies of the Federal Reserve have major effects upon the levels of bank loans, investments and deposits through its open market operations in United States government securities and through its regulation of the discount rate on borrowings of member banks and the reserve requirements against member bank deposits. It is not possible to predict the nature or impact of future changes in monetary and fiscal policies. On March 3, 2020, the FMOC decreased the federal funds target rate by 50 basis points to a target range of 1.00% to 1.25%; and on March 15, 2020, the FMOC decreased the federal funds target rate by 100 basis points to the target range of 0.00% to 0.25%. However, during 2022, market interest rates have increased significantly due to an increase in inflation. The Federal Open Market Committee (FOMC) made the following increases to the target range of federal funds during the twelve months of 2022:

| - | 0.25% on March 16, 2022;
| - | 0.50% on May 4, 2022;
| - | 0.75% on June 15, 2022;
| - | 0.75% on July 27, 2022;
| - | 0.75% on September 21, 2022;
| - | 0.75% on November 2, 2022; and
| - | 0.50% on December 14, 2022

The target range of federal funds was 4.25% - 4.50% at December 31, 2022 compared to 0.00% - 0.25% at both December 31, 2021 and December 31, 2020. Changes in market interest rates can have a significant impact on the level of income and expense recorded on a large portion of our interest-earning assets and interest-bearing liabilities, and on the market value of all interest-earning assets, other than those possessing a short term to maturity. Furthermore, changes in market interest rates can have a significant impact on the level of mortgage originations and related mortgage non-interest income.

Insurance of Accounts and Regulation by the FDIC. The Bank’s deposits are insured up to applicable limits by the Deposit Insurance Fund of the FDIC. As insurer, the FDIC imposes deposit insurance premiums and is authorized to conduct examinations of and to require reporting by FDIC insured institutions. It also may prohibit any FDIC insured institution from engaging in any activity the FDIC determines by regulation or order to pose a serious risk to the insurance fund. The FDIC also has the authority to initiate enforcement actions against savings institutions, after giving the bank’s regulatory authority an opportunity to take such action, and may terminate the deposit insurance if it determines that the institution has engaged in unsafe or unsound practices or is in an unsafe or unsound condition.

As an FDIC-insured bank, the Bank must pay deposit insurance assessments to the FDIC based on its average total assets minus its average tangible equity. The Bank’s assessment rates are currently based on its risk classification (i.e., the level of risk it poses to the FDIC’s deposit insurance fund). Institutions classified as higher risk pay assessments at higher rates than institutions that pose a lower risk.

In addition to the ordinary assessments described above, the FDIC has the ability to impose special assessments in certain instances. For example, the Dodd-Frank Act increased the minimum target Deposit Insurance Fund ratio from 1.15% of estimated insured deposits to 1.35% of estimated insured deposits. On September 30, 2018, the deposit insurance fund reached 1.36%, exceeding the statutorily required minimum reserve ratio of 1.35%. On reaching the minimum reserve ratio of 1.35%, FDIC regulations provided for two changes to deposit insurance assessments: (i) surcharges on insured depository institutions with total consolidated assets of $10 billion or more (large institutions) ceased; and (ii) small banks received assessment credits for the portion of their assessments that contributed to the growth in the reserve ratio from between 1.15% and 1.35%, to be applied when the reserve ratio is at or above 1.38%. All remaining small bank credits were refunded on the September 30, 2020 assessment invoice effectively ending the application of small bank credits. Assessment rates are expected to decrease if the reserve ratio increases such that it exceeds 2%.

The FDIC may terminate the deposit insurance of any insured depository institution, including the Bank, if it determines after a hearing that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. It also may suspend deposit insurance temporarily during the hearing process for the permanent termination of insurance, if the institution has no tangible capital. If insurance of accounts is terminated, the accounts at the institution at the time of the termination, less subsequent withdrawals, shall continue to be insured for a period of six months to two years, as determined by the FDIC. Management is not aware of any practice, condition or violation that might lead to termination of the Bank’s deposit insurance.

Incentive Compensation. In addition to the potential restrictions on discretionary bonus compensation under the Basel III rules, the federal bank regulatory agencies have issued guidance on incentive compensation policies (the “Incentive Compensation Guidance”) intended to ensure that the incentive compensation policies of financial institutions do not undermine the safety and soundness of such institutions by encouraging excessive risk-taking. The Incentive Compensation Guidance, which covers all employees that have the ability to materially affect the risk profile of an institution, either individually or as part of a group, is based upon the key principles that a financial institution’s incentive compensation arrangements should comply with the following principles: (i) provide employees incentives that appropriately balance risk and reward; (ii) be compatible with effective controls and risk-management; and (iii) be supported by strong corporate governance, including active and effective oversight by the organization’s board of directors.

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The scope and content of federal bank regulatory agencies’ policies on executive compensation are continuing to develop and are likely to continue evolving in the near future. In 2016, federal agencies proposed regulations which could significantly change the regulation of incentive compensation programs at financial institutions. The proposal would create four tiers of institutions based on asset size. Institutions in the top two tiers would be subject to rules much more detailed and proscriptive than are currently in effect. If interpreted aggressively by the regulators, the proposed rules could be used to prevent, as a practical matter, larger institutions from engaging in certain lines of business where substantial commission and bonus pool arrangements are the norm. In the 2016 proposal, the top two tiers included institutions with more than $50 billion of assets, which would not currently apply to us. We cannot predict what final rules may be adopted, nor how they may be implemented and, therefore, it cannot be determined at this time whether compliance with such policies will adversely affect our ability to hire, retain and motivate our key employees..

In addition, the Tax Cuts and Jobs Act (the “Tax Act”), which was signed into law in December 2017, contains certain provisions affecting performance-based compensation. Specifically, the pre-existing exception to the $1.0 million deduction limitation applicable to performance-based compensation was repealed. The deduction limitation is now applied to all compensation exceeding $1.0 million, for our covered employees, regardless of how it is classified, which could have an adverse effect on our income tax expense and net income.

Corporate Governance. The Dodd-Frank Act addressed many investor protection, corporate governance and executive compensation matters that affect most U.S. publicly traded companies. The Dodd-Frank Act (i) grants stockholders of U.S. publicly traded companies an advisory vote on executive compensation and so-called “golden parachute” payments, (ii) enhances independence requirements for compensation committee members, (iii) requires the SEC to adopt rules directing national securities exchanges to establish listing standards requiring all listed companies to adopt incentive-based compensation clawback policies for executive officers, and (iv) provides the SEC with authority to adopt proxy access rules that would allow stockholders of publicly traded companies to nominate candidates for election as a director and have those nominees included in a company’s proxy materials. The SEC has completed the bulk (although not all) of the rulemaking necessary to implement these provisions. However, on October 14, 2021, the SEC signaled a renewed interest in this rulemaking initiative by re-opening the comment period on a proposed rule issued originally in 2015 regarding clawbacks of incentive-based executive compensation. On October 26, 2022, the SEC adopted final rules implementing the incentive-based compensation recovery (clawback) provisions of the Dodd-Frank Act. The final rules direct the stock exchanges to establish listing standards requiring listed companies to develop and implement a policy providing for the recovery of erroneously awarded incentive-based compensation received by current or former executive officers and to satisfy related disclosure obligations. We are currently awaiting the final rules from The Nasdaq Stock Market, which are not expected to take effect until mid-2023 at the earliest.

Concentrations in Commercial Real Estate. Concentration risk exists when FDIC-insured institutions deploy too many assets to any one industry or segment. A concentration in commercial real estate is one example of regulatory concern. The interagency Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices guidance (“CRE Guidance”) provides supervisory criteria, including the following numerical indicators, to assist bank examiners in identifying banks with potentially significant commercial real estate loan concentrations that may warrant greater supervisory scrutiny: (i) total non-owner-occupied commercial real estate loans, including loans secured by apartment buildings, investor commercial real estate, and construction and land loans, exceeding 300% or more of an institution’s total risk-based capital and the outstanding balance of the commercial real estate loan portfolio has increased by 50% or more in the preceding three years or (ii) construction and land development loans exceeding 100% of total risk-based capital. The CRE Guidance does not limit banks’ levels of commercial real estate lending activities, but rather guides institutions in developing risk management practices and levels of capital that are commensurate with the level and nature of their commercial real estate concentrations. On December 18, 2015, the federal banking agencies issued a statement to reinforce prudent risk-management practices related to commercial real estate lending, having observed substantial growth in many commercial real estate asset and lending markets, increased competitive pressures, rising commercial real estate concentrations in banks, and an easing of commercial real estate underwriting standards. The federal bank agencies reminded FDIC-insured institutions to maintain underwriting discipline and exercise prudent risk-management practices to identify, measure, monitor and manage the risks arising from commercial real estate lending. In addition, FDIC-insured institutions must maintain capital commensurate with the level and nature of their commercial real estate concentration risk. Based on the Bank’s loan portfolio as of December 31, 2022, its non-owner occupied commercial loans and its construction and land development loans were approximately 272% and 56% of total risk-based capital, respectively. Management will continue to monitor the level of the concentration in commercial real estate loans within the bank’s loan portfolio.

Proposed Legislation and Regulatory Action. From time to time, various legislative and regulatory initiatives are introduced in Congress and state legislatures, as well as by regulatory agencies. Such initiatives may include proposals to expand or contract the powers of bank holding companies and depository institutions or proposals to substantially change the financial institution regulatory system. Such legislation could change banking statutes and our operating environment in substantial and unpredictable ways. If enacted, such legislation could increase or decrease the cost of doing business, limit or expand permissible activities or affect the competitive balance among banks, savings associations, credit unions, and other financial institutions. We cannot predict whether any such legislation will be enacted, and, if enacted, the effect that it, or any implementing regulations, would have on our financial condition or results of operations. A change in statutes, regulations or regulatory policies applicable to the Company or the Bank could have a material effect on our business.

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Item 1A. Risk Factors.

There are risks, many beyond our control, which could cause our results to differ significantly from management’s expectations. Some of these risk factors are described below. Any factor described in this Annual Report on Form 10-K could, by itself or together with one or more other factors, adversely affect our business, results of operations and/or financial condition. Additional risks and uncertainties not currently known to us or that we currently consider to not be material also may materially and adversely affect us. In assessing these risks, you should also refer to other information disclosed in our SEC filings, including the financial statements and notes thereto. The risks discussed below also include forward-looking statements, and actual results may differ substantially from those discussed or implied in these forward-looking statements.

Economic and Geographic-Related Risks

Our business may be adversely affected by economic conditions generally.

Our financial performance generally, and in particular the ability of borrowers to pay interest on and repay principal of outstanding loans and the value of collateral securing those loans, as well as demand for loans and other products and services we offer and whose success we rely on to drive our growth, is highly dependent upon the business environment in the primary markets where we operate and in the U.S. as a whole. Unlike larger banks that are more geographically diversified, we are a regional bank that provides banking and financial services to customers primarily in South Carolina and Georgia. The economic conditions in these local markets may be different from, and in some instances worse than, the economic conditions in the U.S. as a whole.

Some elements of the business environment that affect our financial performance include short-term and long-term interest rates, the prevailing yield curve, inflation and price levels, monetary and trade policy, unemployment and the strength of the domestic economy and the local economy in the markets in which we operate. Unfavorable market conditions can result in a deterioration in the credit quality of our borrowers and the demand for our products and services, an increase in the number of loan delinquencies, defaults and charge-offs, foreclosures, additional provisions for loan losses, adverse asset values of the collateral securing our loans and an overall material adverse effect on the quality of our loan portfolio. The majority of our loan portfolio is secured by real estate. A decline in real estate values can negatively impact our ability to recover our investment should the borrower become delinquent. Loans secured by stock or other collateral may be adversely impacted by a downturn in the economy and other factors that could reduce the recoverability of our investment. Unsecured loans are dependent on the solvency of the borrower, which can deteriorate, leaving us with a risk of loss. Unfavorable or uncertain economic and market conditions can be caused by declines in economic growth, business activity or investor or business confidence; limitations on the availability or increases in the cost of credit and capital; increases in inflation or interest rates; high unemployment; natural disasters; epidemics and pandemics (such as COVID-19); or a combination of these or other factors.

As economic conditions relating to the COVID-19 pandemic have improved, the Federal Reserve has shifted its focus to limiting inflationary and other potentially adverse effects of the extensive pandemic-related government stimulus, which signals the potential for a continued period of economic uncertainty even though the pandemic has subsided. In addition, there are continuing concerns related to, among other things, the level of U.S. government debt and fiscal actions that may be taken to address that debt, a potential resurgence of economic and political tensions with China and the Russian invasion of Ukraine, all of which may have a destabilizing effect on financial markets and economic activity. Economic pressure on consumers and overall economic uncertainty may result in changes in consumer and business spending, borrowing and saving habits. These economic conditions and/or other negative developments in the domestic or international credit markets or economies may significantly affect the markets in which we do business, the value of our loans and investments, and our ongoing operations, costs and profitability. Declines in real estate values and sales volumes and high unemployment or underemployment may also result in higher than expected loan delinquencies, increases in our levels of nonperforming and classified assets and a decline in demand for our products and services. These negative events may cause us to incur losses and may adversely affect our capital, liquidity and financial condition.

In addition, recently, concerns have arisen with respect to the financial condition of a number of banking organizations in the United States, in particular those with exposure to certain types of depositors and large portfolios of investment securities. On March 10, 2023, Silicon Valley Bank was closed by the California Department of Financial Protection and Innovation and the Federal Deposit Insurance Corporation was appointed receiver of Silicon Valley Bank. On March 11, 2023, Signature Bank was similarly closed and placed into receivership and concurrently the Federal Reserve Board announced it will make available additional funding to eligible depository institutions to assist eligible banking organizations with potential liquidity needs. While the Company’s business, balance sheet and depositor profile differs substantially from banking institutions that are the focus of the greatest scrutiny, the operating environment and public trading prices of financial services sector securities can be highly correlated, in particular in times of stress, which may adversely affect the trading price of the Company’s common stock and potentially its results of operations.

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Credit and Interest Rate Risk

Our decisions regarding credit risk and reserves for loan losses may materially and adversely affect our business.

Making loans and other extensions of credit is an essential element of our business. Although we seek to mitigate risks inherent in lending by adhering to specific underwriting practices, our loans and other extensions of credit may not be repaid. The risk of nonpayment is affected by a number of factors, including:

| · | the duration of the credit;
| · | credit risks of a particular customer;
| · | changes in economic and industry conditions; and
| · | in the case of a collateralized loan, risks resulting from uncertainties about the future value of the collateral.

We attempt to maintain an appropriate allowance for loan losses to provide for potential losses in our loan portfolio. We periodically determine the amount of the allowance based on consideration of several factors, including:

| · | an ongoing review of the quality, mix, and size of our overall loan portfolio;
| · | our historical loan loss experience;
| · | evaluation of economic conditions;
| · | regular reviews of loan delinquencies and loan portfolio quality; and
| · | the amount and quality of collateral, including guarantees, securing the loans.

There is no precise method of predicting credit losses; therefore, we face the risk that charge-offs in future periods will exceed our allowance for loan losses and that additional increases in the allowance for loan losses will be required. Additions to the allowance for loan losses would result in a decrease of our net income, and possibly our capital.

Federal and state regulators periodically review our allowance for loan losses and may require us to increase our provision for loan losses or recognize further loan charge-offs, based on judgments different than those of our management. Any increase in the amount of our provision or loans charged-off as required by these regulatory agencies could have a negative effect on our operating results.

We may have higher loan losses than we have allowed for in our allowance for loan losses.

Our actual loan losses could exceed our allowance for loan losses. Our average loan size continues to increase and reliance on our historic allowance for loan losses may not be adequate. As of December 31, 2022, approximately 89.0% of our loan portfolio (excluding loans held for sale) is composed of construction (9.3%), commercial mortgage (71.8%) and commercial (7.9%) loans. Repayment of such loans is generally considered more subject to market risk than residential mortgage loans. Industry experience shows that a portion of loans will become delinquent and a portion of loans will require partial or entire charge-off. Regardless of the underwriting criteria utilized, losses may be experienced as a result of various factors beyond our control, including among other things, changes in market conditions affecting the value of loan collateral and problems affecting the credit of our borrowers. If we suffer loan losses that exceed our allowance for loans losses, our financial condition, liquidity or results of operations could be materially and adversely affected.

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We have a concentration of credit exposure in commercial real estate and challenges faced by the commercial real estate market could adversely affect our business, financial condition, and results of operations.

As of December 31, 2022, we had approximately $788.9 million in loans outstanding to borrowers whereby the collateral securing the loan was commercial real estate, representing approximately 80.4% of our total loans outstanding as of that date. Approximately $267.2 million or 27.2% of our total loans and 33.9% of our commercial real estate loans are secured by owner-occupied properties. Commercial real estate loans are generally viewed as having more risk of default than residential real estate loans. They are also typically larger than residential real estate loans and consumer loans and depend on cash flows from the owner’s business or the property to service the debt. Cash flows may be affected significantly by general economic conditions, and a downturn in the local economy or in occupancy rates in the local economy where the property is located could increase the likelihood of default. Because our loan portfolio contains a number of commercial real estate loans with relatively large balances, the deterioration of one or a few of these loans could cause a significant increase in our level of non-performing loans. An increase in non-performing loans could result in a loss of earnings from these loans, an increase in the related provision for loan losses and an increase in charge-offs, all of which could have a material adverse effect on our financial condition and results of operations.

Our commercial real estate loans have grown 12.2%, or $85.6 million, since December 31, 2021. The banking regulators give commercial real estate lending greater scrutiny, and may require banks with higher levels of commercial real estate loans to implement more stringent underwriting, internal controls, risk management policies and portfolio stress testing, as well as possibly higher levels of allowances for losses and capital levels as a result of commercial real estate lending growth and exposures.

Imposition of limits by the bank regulators on commercial and multi-family real estate lending activities could curtail our growth and adversely affect our earnings.

In 2006, the FDIC, the Federal Reserve and the Office of the Comptroller of the Currency issued joint guidance entitled “Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices” (the “CRE Guidance”). Although the CRE Guidance did not establish specific lending limits, it provides that a bank’s commercial real estate lending exposure could receive increased supervisory scrutiny where (i) total non-owner-occupied commercial real estate loans, including loans secured by apartment buildings, investor commercial real estate, and construction and land loans, represent 300% or more of an institution’s total risk-based capital, and the outstanding balance of the commercial real estate loan portfolio has increased by 50% or more during the preceding 36 months, or (ii) construction and land development loans exceed 100% of total risk-based capital. Our total non-owner-occupied commercial real estate loans represented 272% of the Bank’s total risk-based capital at December 31, 2022, and our construction and land development loans represented 56% of the Bank’s total risk-based capital at December 31, 2022.

In December 2015, the regulatory agencies released a new statement on prudent risk management for commercial real estate lending (the “2015 Statement”). In the 2015 Statement, the regulatory agencies, among other things, indicated their intent to continue “to pay special attention” to commercial real estate lending activities and concentrations going forward. If the FDIC, our primary federal regulator, were to impose restrictions on the amount of commercial real estate loans we can hold in our portfolio, for reasons noted above or otherwise, our earnings would be adversely affected.

Repayment of our commercial business loans is often dependent on the cash flows of the borrower, which may be unpredictable, and the collateral securing these loans may fluctuate in value.

At December 31, 2022, commercial business loans comprised 7.9% of our total loan portfolio. Our commercial business loans are originated primarily based on the identified cash flow and general liquidity of the borrower and secondarily on the underlying collateral provided by the borrower and/or repayment capacity of any guarantor. The borrower’s cash flow may be unpredictable, and collateral securing these loans may fluctuate in value. Although commercial business loans are often collateralized by equipment, inventory, accounts receivable, or other business assets, the liquidation of collateral in the event of default is often an insufficient source of repayment because accounts receivable may be uncollectible and inventories may be obsolete or of limited use. In addition, business assets may depreciate over time, may be difficult to appraise, and may fluctuate in value based on the success of the business. Accordingly, the repayment of commercial business loans depends primarily on the cash flow and credit worthiness of the borrower and secondarily on the underlying collateral value provided by the borrower and liquidity of the guarantor. If these borrowers do not have sufficient cash flows or resources to pay these loans as they come due or the value of the underlying collateral is insufficient to fully secure these loans, we may suffer losses on these loans that exceed our allowance for loan losses.

Our focus on lending to small to mid-sized community-based businesses may increase our credit risk.

Most of our commercial business and commercial real estate loans are made to small business or middle market customers. These businesses generally have fewer financial resources in terms of capital or borrowing capacity than larger entities and have a heightened vulnerability to economic conditions. If general economic conditions in the markets in which we operate negatively impact this important customer sector, our results of operations and financial condition and the value of our common stock may be adversely affected. Moreover, a portion of these loans have been made by us in recent years and the borrowers may not have experienced a complete business or economic cycle. Furthermore, the deterioration of our borrowers’ businesses may hinder their ability to repay their loans with us, which could have a material adverse effect on our financial condition and results of operations.

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Our underwriting decisions may materially and adversely affect our business.

While we generally underwrite the loans in our portfolio in accordance with our own internal underwriting guidelines and regulatory supervisory guidelines, in certain circumstances we have made loans which exceed either our internal underwriting guidelines, supervisory guidelines, or both. As of December 31, 2022, approximately $21.9 million of our loans, or 13.9% of the Bank’s regulatory capital (Tier 1 Capital plus allowance for loan and lease losses), had loan-to-value ratios that exceeded regulatory supervisory guidelines, of which two loans totaling approximately $481 thousand had loan-to-value ratios of 100% or more. In addition, supervisory limits on commercial loan-to-value exceptions are set at 30% of the Bank’s tier 1 capital plus allowance for loan and lease losses. At December 31, 2022, $16.6 million of our commercial loans, or 10.6% of the Bank’s regulatory capital, exceeded the supervisory loan-to-value ratio. The number of loans in our portfolio with loan-to-value ratios in excess of supervisory guidelines, our internal guidelines, or both could increase the risk of delinquencies and defaults in our portfolio, which could have a material adverse effect on our financial condition and results of operations.

We depend on the accuracy and completeness of information about clients and counterparties and our financial condition could be adversely affected if we rely on misleading information.

In deciding whether to extend credit or to enter into other transactions with clients and counterparties, we may rely on information furnished to us by or on behalf of clients and counterparties, including financial statements and other financial information, which we do not independently verify. We also may rely on representations of clients and counterparties as to the accuracy and completeness of that information and, with respect to financial statements, on reports of independent auditors. For example, in deciding whether to extend credit to clients, we may assume that a customer’s audited financial statements conform with GAAP and present fairly, in all material respects, the financial condition, results of operations and cash flows of the customer. Our financial condition and results of operations could be negatively impacted to the extent we rely on financial statements that do not comply with GAAP or are materially misleading.

If we fail to effectively manage credit risk and interest rate risk, our business and financial condition will suffer.

We must effectively manage credit risk. There are risks inherent in making any loan, including risks with respect to the period of time over which the loan may be repaid, risks relating to proper loan underwriting and guidelines, risks resulting from changes in economic and industry conditions, risks inherent in dealing with individual borrowers and risks resulting from uncertainties as to the future value of collateral. There is no assurance that our credit risk monitoring and loan approval procedures are or will be adequate or will reduce the inherent risks associated with lending. Our credit administration personnel, policies and procedures may not adequately adapt to changes in economic or any other conditions affecting customers and the quality of our loan portfolio. Any failure to manage such credit risks may materially adversely affect our business and our consolidated results of operations and financial condition.

Changes in prevailing interest rates may reduce our profitability.

Our results of operations depend in large part upon the level of our net interest income, which is the difference between interest income from interest-earning assets, such as loans and investment securities, which include mortgage-backed securities (“MBSs”), and interest expense on interest-bearing liabilities, such as deposits and other borrowings. Depending on the terms and maturities of our assets and liabilities, we believe a significant change in interest rates could potentially have a material adverse effect on our profitability. Many factors cause changes in interest rates, including governmental monetary policies and domestic and international economic and political conditions. While we intend to manage the effects of changes in interest rates by adjusting the terms, maturities, and pricing of our assets and liabilities, our efforts may not be effective and our financial condition and results of operations could suffer.

Capital and Liquidity Risks

Changes in the financial markets could impair the value of our investment portfolio.

Our investment securities portfolio is a significant component of our total earning assets. Total investment securities averaged $570.6 million in 2022, as compared to $456.8 million in 2021. This represents 37.0% and 32.2% of the average earning assets for the years ended December 31, 2022 and 2021, respectively. At December 31, 2021, the portfolio was 36.2% of earning assets compared to 38.2% of earning assets at December 31, 2021. Turmoil in the financial markets could impair the market value of our investment portfolio, which could adversely affect our net income and possibly our capital.

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On June 1, 2022, we reclassified $224.5 million in investments to held-to-maturity (HTM) from available-for-sale (AFS). These securities were transferred at fair value at the time of the transfer, which became the new cost basis for the securities held to maturity. The pretax unrealized net holding loss on the available for sale securities on the date of transfer totaled approximately $16.7 million, and continued to be reported as a component of accumulated other comprehensive loss. This net unrealized loss is being amortized to interest income over the remaining life of the securities as a yield adjustment. There were no gains or losses recognized as a result of this transfer. The remaining pretax unrealized net holding loss on these investments was $15.7 million ($12.4 million net of tax) at December 31, 2022. Our HTM investments totaled $228.7 million and represented approximately 40.5% of our total investments at December 31, 2022. Our AFS investments totaled $331.9 million or approximately 58.8% of our total investments with an modified duration of 3.15 at December 31, 2022. Investments at cost totaled $4.2 million or approximately 0.7% of our total investments at December 31, 2022.

As of December 31, 2022 and 2021, securities which have unrealized losses were not considered to be “other than temporarily impaired,” and we believe it is more likely than not we will be able to hold these until they mature or recover our current book value. We currently maintain substantial liquidity which supports our ability to hold these investments until they mature, or until there is a market price recovery. However, if we were to cease to have the ability and intent to hold these investments until maturity or the market prices do not recover, and we were to sell these securities at a loss, it could adversely affect our net income and possibly our capital.

The Bank is subject to strict capital requirements, which could be amended to be more stringent, in the future.

The Bank is subject to regulatory requirements specifying minimum amounts and types of capital that we must maintain and an additional capital conservation buffer. From time to time, the regulators change these regulatory capital adequacy guidelines. If we fail to meet these capital guidelines and other regulatory requirements, we or our subsidiaries may be restricted in the types of activities we may conduct and we may be prohibited from taking certain capital actions, such as paying dividends, repurchasing or redeeming capital securities, and paying certain bonuses.

In particular, the capital requirements applicable under the Basel III require the Bank to satisfy additional, more stringent, capital adequacy standards than it had in the past. Failure to meet minimum capital requirements could result in certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have an adverse material effect on our financial condition and results of operations. In addition, these requirements could have a negative impact on our ability to lend, grow deposit balances, make acquisitions, make capital distributions in the form of dividends or share repurchases, or pay certain bonuses needed to attract and retain key personnel. Higher capital levels could also lower our return on equity.

Risks Related to Our Industry

Inflationary pressures and rising prices may affect our results of operations and financial condition.

Inflation has continued rising in 2022 at levels not seen for over 40 years. Inflationary pressures are currently expected to remain elevated throughout 2023. Inflation could lead to increased costs to our customers, making it more difficult for them to repay their loans or other obligations increasing our credit risk. Sustained higher interest rates by the Federal Reserve may be needed to tame persistent inflationary price pressures, which could push down asset prices and weaken economic activity. A deterioration in economic conditions in the United States and our markets could result in an increase in loan delinquencies and non-performing assets, decreases in loan collateral values and a decrease in demand for our products and services, all of which, in turn, would adversely affect our business, financial condition and results of operations.

The phase-out of LIBOR could negatively impact our net interest income and require significant operational work.

The United Kingdom’s Financial Conduct Authority (“FCA”) regulates the London Interbank Offered Rate (“LIBOR”), the reference rate previously used for many of our transactions, including our lending and borrowing and our purchase and sale of securities, as well as the derivatives that we use to manage risk related to such transactions. The FCA announced in July 2017 that the sustainability of LIBOR could not be guaranteed. Accordingly, although the FCA confirmed the extension of overnight and 1-, 3-, 6-, and 12-month LIBOR through June 30, 2023 in order to accord financial institutions greater time with which to manage the transition from LIBOR, the FCA is no longer persuading, or compelling, banks to submit to LIBOR. The federal banking agencies, including the OCC, previously determined that banks should have ceased entering into any new contract that uses LIBOR as a reference rate by December 31, 2021. In addition, banks have been encouraged to identify contracts that extend beyond June 30, 2023 and implement plans to identify and address insufficient contingency provisions in those contracts. The discontinuance of LIBOR has resulted in significant uncertainty regarding the transition to suitable alternative reference rates and could adversely impact our business, operations, and financial results.

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The discontinuation of LIBOR, changes in LIBOR, or changes in market perceptions of the acceptability of LIBOR as a benchmark could result in changes to our risk exposures (for example, if the anticipated discontinuation of LIBOR adversely affects the availability or cost of floating-rate funding and, therefore, our exposure to fluctuations in interest rates) or otherwise result in losses on a product or having to pay more or receive less on securities that we own or have issued. In addition, such uncertainty could result in pricing volatility and increased capital requirements, loss of market share in certain products, adverse tax or accounting impacts, and compliance, legal and operational costs and risks associated with client disclosures, discretionary actions taken or negotiation of fallback provisions, systems disruption, business continuity, and model disruption. The implementation of LIBOR reform proposals may result in increased compliance costs and operational costs, including costs related to continued participation in LIBOR and the transition to a replacement reference rate or rates. We cannot reasonably estimate the expected cost.

As of December 31, 2022, we had $15.5 million in LIBOR-based loans, $48.1 million in securities, and $15.0 million in junior subordinated debt indexed to LIBOR. Uncertainty as to the nature of alternative reference rates and as to potential changes or other reforms to LIBOR may adversely affect LIBOR rates and the value of LIBOR-based loans, if such loans do not mature or pre-pay before the transition. For new loan originations and renewals, we have ceased relying on LIBOR and have moved to alternative indices.

Higher FDIC deposit insurance premiums and assessments could adversely affect our financial condition.

Our deposits are insured up to applicable limits by the Deposit Insurance Fund of the FDIC and are subject to deposit insurance assessments to maintain deposit insurance. As an FDIC-insured institution, we are required to pay quarterly deposit insurance premium assessments to the FDIC. Although we cannot predict what the insurance assessment rates will be in the future, either deterioration in our risk-based capital ratios or adjustments to the base assessment rates could have a material adverse impact on our business, financial condition, results of operations, and cash flows.

We could experience a loss due to competition with other financial institutions or nonbank companies.

We face substantial competition in all areas of our operations from a variety of different competitors, both within and beyond our principal markets, many of which are larger and may have more financial resources. Such competitors primarily include national, regional, community and internet banks within the various markets in which we operate. We also face competition from many other types of financial institutions, including, without limitation, savings and loans, credit unions, finance companies, brokerage firms, insurance companies, and other financial intermediaries. The financial services industry could become even more competitive as a result of legislative and regulatory changes and continued consolidation. In addition, as customer preferences and expectations continue to evolve, technology has lowered barriers to entry and made it possible for banks to offer products and services in more areas in which they do not have a physical location and for nonbanks, such as FinTech companies, to offer products and services traditionally provided by banks, such as automatic transfer and automatic payment systems. Banks, securities firms, and insurance companies can merge under the umbrella of a financial holding company, which can offer virtually any type of financial service, including banking, securities underwriting, insurance (both agency and underwriting), and merchant banking. Many of our competitors have fewer regulatory constraints and may have lower cost structures. Additionally, due to their size, many competitors may be able to achieve economies of scale and, as a result, may offer a broader range of products and services as well as better pricing for those products and services than we can.

Our ability to compete successfully depends on a number of factors, including, among other things:

| · | our ability to develop, maintain, and build upon long-term customer relationships based on top quality service, high ethical standards, and safe, sound assets;
| · | our ability to expand our market position;
| · | the scope, relevance, and pricing of the products and services we offer to meet our customers’ needs and demands;
| · | the rate at which we introduce new products and services relative to our competitors;
| · | customer satisfaction with our level of service; and
| · | industry and general economic trends.

Failure to perform in any of these areas could significantly weaken our competitive position, which could adversely affect our growth and profitability, which, in turn, could have a material adverse effect on our business, financial condition and results of operations.

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We may be adversely affected by the soundness of other financial institutions.

Financial services institutions are interrelated as a result of trading, clearing, counterparty, or other relationships. We have exposure to many different industries and counterparties, and routinely execute transactions with counterparties in the financial services industry, including commercial banks, brokers and dealers, investment banks, and other institutional clients. Many of these transactions expose us to credit risk in the event of a default by a counterparty or client. In addition, our credit risk may be exacerbated when the collateral held by the bank cannot be realized upon or is liquidated at prices not sufficient to recover the full amount of the credit or derivative exposure due to the bank. Any such losses could have a material adverse effect on our financial condition and results of operations.

Failure to keep pace with technological change could adversely affect our business.

The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology-driven products and services. The effective use of technology increases efficiency and enables financial institutions to better serve customers and to reduce costs. Our future success depends, in part, upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in our operations. Many of our competitors have substantially greater resources to invest in technological improvements. We may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to our customers. In addition, we depend on internal and outsourced technology to support all aspects of our business operations. Failure to successfully keep pace with technological changes could have a material adverse impact on our business, financial condition and results of operations.

New lines of business or new products and services may subject us to additional risk.

From time to time, we may implement new lines of business or offer new products and services within existing lines of business. There are substantial risks and uncertainties associated with these efforts, particularly in instances where the markets are not fully developed. In developing and marketing new lines of business and/or new products and services, we may invest significant time and resources. Initial timetables for the introduction and development of new lines of business and/or new products or services may not be achieved and price and profitability targets may not prove feasible. External factors, such as compliance with regulations, competitive alternatives, and shifting market preferences, may also impact the successful implementation of a new line of business and/or a new product or service. Furthermore, any new line of business and/or new product or service could have a significant impact on the effectiveness of our system of internal controls. Failure to successfully manage these risks in the development and implementation of new lines of business and/or new products or services could have a material adverse effect on our business, financial condition and results of operations.

Consumers may decide not to use banks to complete their financial transactions.

Technology and other changes are allowing parties to complete financial transactions through alternative methods that historically have involved banks. For example, consumers can now maintain funds that would have historically been held as bank deposits in brokerage accounts, mutual funds or general-purpose reloadable prepaid cards. Consumers can also complete transactions such as paying bills and/or transferring funds directly without the assistance of banks. The process of eliminating banks as intermediaries, known as “disintermediation,” could result in the loss of fee income, as well as the loss of customer deposits and the related income generated from those deposits. The loss of these revenue streams and the lower cost of deposits as a source of funds could have a material adverse effect on our financial condition and results of operations.

Risks Related to Our Strategy

We may be adversely affected by risks associated with future mergers and acquisitions, including execution risk, which could disrupt our business and dilute shareholder value.

From time to time, we may seek to acquire other financial institutions or parts of those institutions. We may also expand into new markets, like we did in York County, South Carolina in 2022, or lines of business or offer new products or services. These activities would involve a number of risks, including:

| · | the potential inaccuracy of the estimates and judgments used to evaluate credit, operations, management, and market risks with respect to a target institution;
| · | regulatory approvals could be delayed, impeded, restrictively conditioned or denied due to existing or new regulatory issues we have, or may have, with regulatory agencies, including, without limitation, issues related to anti-money laundering/Bank Secrecy Act compliance, fair lending laws, fair housing laws, consumer protection laws, unfair, deceptive, or abusive acts or practices regulations, CRA issues, and other similar laws and regulations;
| · | the time and costs of evaluating new markets, hiring or retaining experienced local management, including those from competitors,, and opening new offices and the time lags between these activities and the generation of sufficient assets and deposits to support the costs of the expansion;
| · | difficulty or unanticipated expense associated with converting the operating systems of the acquired or merged company into ours;

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| · | the incurrence and possible impairment of goodwill and other intangible assets associated with an acquisition or merger and possible adverse effects on our results of operations; and
| · | the risk of loss of key employees and customers of the Company or the acquired or merged company.

If we do not successfully manage these risks, our merger and acquisition activities could have a material adverse effect on our business, financial condition, and results of operations, including short-term and long-term liquidity, and our ability to successfully implement our strategic plan.

We may be exposed to difficulties in combining the operations of acquired businesses into our own operations, which may prevent us from achieving the expected benefits from our acquisition activities.

We may not be able to fully achieve the strategic objectives and operating efficiencies that we anticipate in our acquisition activities. Inherent uncertainties exist in integrating the operations of an acquired business. In addition, the markets and industries in which we and our potential acquisition targets operate are highly competitive. We may lose customers or the customers of acquired entities as a result of an acquisition. We also may lose key personnel from the acquired entity as a result of an acquisition. We may not discover all known and unknown factors when examining a company for acquisition during the due diligence period. These factors could produce unintended and unexpected consequences for us. Undiscovered factors as a result of acquisitions, pursued by non-related third party entities, could bring civil, criminal, and financial liabilities against us, our management, and the management of those entities acquired. These factors could contribute to us not achieving the expected benefits from acquisitions within desired time frames.

New or acquired banking office facilities and other facilities may not be profitable.

We may not be able to identify profitable locations for new banking offices. The costs to start up new banking offices or to acquire existing branches, and the additional costs to operate these facilities, may increase our non-interest expense and decrease our earnings in the short term. If branches of other banks become available for sale, we may acquire those offices. It may be difficult to adequately and profitably manage our growth through the establishment or purchase of additional banking offices and we can provide no assurance that any such banking offices will successfully attract enough deposits to offset the expenses of their operation. In addition, any new or acquired banking offices will be subject to regulatory approval, and there can be no assurance that we will succeed in securing such approval.

Risks Related to Our Human Capital

We are dependent on key individuals, and the loss of one or more of these key individuals could curtail our growth and adversely affect our prospects.

Michael C. Crapps, our president and chief executive officer, has extensive and long-standing ties within our primary market area and substantial experience with our operations, and he has contributed significantly to our business. If we lose the services of Mr. Crapps, he would be difficult to replace and our business and development could be materially and adversely affected. Our success also depends, in part, on our continued ability to attract and retain experienced loan originators, as well as other management personnel. Competition for personnel is intense, and we may not be successful in attracting or retaining qualified personnel. Our failure to compete for these personnel, or the loss of the services of several of such key personnel, could adversely affect our business strategy and materially and adversely affect our business, results of operations, and financial condition.

Operational Risks

A failure in or breach of our operational or security systems or infrastructure, or those of our third party vendors and other service providers or other third parties, including as a result of cyber attacks, could disrupt our businesses, result in the disclosure or misuse of confidential or proprietary information, damage our reputation, increase our costs, and cause losses.

We rely heavily on communications and information systems to conduct our business. Information security risks for financial institutions such as ours have generally increased in recent years in part because of the proliferation of new technologies, the use of the internet and telecommunications technologies to conduct financial transactions, and the increased sophistication and activities of organized crime, hackers, and terrorists, activists, and other external parties. As customer, public, and regulatory expectations regarding operational and information security have increased, our operating systems and infrastructure must continue to be safeguarded and monitored for potential failures, disruptions, and breakdowns. Our business, financial, accounting, and data processing systems, or other operating systems and facilities may stop operating properly or become disabled or damaged as a result of a number of factors, including events that are wholly or partially beyond our control. For example, there could be electrical or telecommunication outages; natural disasters such as earthquakes, tornadoes, and hurricanes; disease pandemics; events arising from local or larger scale political or social matters, including terrorist acts; and as described below, cyber attacks.

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As noted above, our business relies on our digital technologies, computer and email systems, software and networks to conduct its operations. Although we have information security procedures and controls in place, our technologies, systems, networks, and our customers’ devices may become the target of cyber attacks or information security breaches that could result in the unauthorized release, gathering, monitoring, misuse, loss, or destruction of our or our customers’ or other third parties’ confidential information. Third parties with whom we do business or that facilitate our business activities, including financial intermediaries, or vendors that provide service or security solutions for our operations, and other unaffiliated third parties, including the South Carolina Department of Revenue, which had customer records exposed in a 2012 cyber attack, could also be sources of operational and information security risk to us, including from breakdowns or failures of their own systems or capacity constraints.

While we have disaster recovery and other policies, plans and procedures designed to prevent or limit the effect of the failure, interruption or security breach of our information systems, there can be no assurance that any such failures, interruptions or security breaches will not occur or, if they do occur, that they will be adequately addressed. Our risk and exposure to these matters remains heightened because of the evolving nature of these threats. As a result, cyber security and the continued development and enhancement of our controls, processes, and practices designed to protect our systems, computers, software, data, and networks from attack, damage or unauthorized access remain a focus for us. As threats continue to evolve, we may be required to expend additional resources to continue to modify or enhance our protective measures or to investigate and remediate information security vulnerabilities. Disruptions or failures in the physical infrastructure or operating systems that support our businesses and clients, or cyber attacks or security breaches of the networks, systems or devices that our clients use to access our products and services could result in client attrition, regulatory fines, penalties or intervention, reputation damage, reimbursement or other compensation costs, and/or additional compliance costs, any of which could have a material effect on our results of operations or financial condition.

We are at risk of increased losses from fraud.

Criminals committing fraud increasingly are using more sophisticated techniques and in some cases are part of larger criminal rings, which allow them to be more effective. The fraudulent activity has taken many forms, ranging from check fraud, mechanical devices attached to ATM machines, social engineering and phishing attacks to obtain personal information or impersonation of our clients through the use of falsified or stolen credentials. Additionally, an individual or business entity may properly identify themselves, particularly when banking online, yet seek to establish a business relationship for the purpose of perpetrating fraud. Further, in addition to fraud committed against us, we may suffer losses as a result of fraudulent activity committed against third parties. Increased deployment of technologies, such as chip card technology, defray and reduce aspects of fraud; however, criminals are turning to other sources to steal personally identifiable information, such as unaffiliated healthcare providers and government entities, in order to impersonate the consumer to commit fraud. Many of these data compromises are widely reported in the media. As a result of the increased sophistication of fraud activity, we have increased our spending on systems and controls to detect and prevent fraud. This will result in continued ongoing investments in the future.

Nevertheless, these investments may prove insufficient and fraudulent activity could result in losses to us or our customers; loss of business and/or customers; damage to our reputation; the incurrence of additional expenses (including the cost of notification to consumers, credit monitoring and forensics, and fees and fines imposed by the card networks); disruption to our business; our inability to grow our online services or other businesses; additional regulatory scrutiny or penalties; or our exposure to civil litigation and possible financial liability any of which could have a material adverse effect on our business, financial condition and results of operations.

Our use of third party vendors and our other ongoing third party business relationships are subject to increasing regulatory requirements and attention.

We regularly use third party vendors as part of our business. We also have substantial ongoing business relationships with other third parties. These types of third party relationships are subject to increasingly demanding regulatory requirements and attention by our federal bank regulators. Recent regulation requires us to enhance our due diligence, ongoing monitoring and control over our third party vendors and other ongoing third party business relationships. We expect that our regulators will hold us responsible for deficiencies in our oversight and control of our third party relationships and in the performance of the parties with which we have these relationships. As a result, if our regulators conclude that we have not exercised adequate oversight and control over our third party vendors or other ongoing third party business relationships or that such third parties have not performed appropriately, we could be subject to enforcement actions, including civil money penalties or other administrative or judicial penalties or fines as well as requirements for customer remediation, any of which could have a material adverse effect on our business, financial condition or results of operations.

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Negative public opinion surrounding the Bank and the financial institutions industry generally could damage our reputation and adversely impact our earnings.

Reputation risk, or the risk to our business, earnings and capital from negative public opinion surrounding the Bank and the financial institutions industry generally, is inherent in our business. Negative public opinion can result from our actual or alleged conduct in any number of activities, including lending practices, corporate governance, mergers and acquisitions, and from actions taken by government regulators and community organizations in response to those activities. Negative public opinion can adversely affect our ability to keep and attract clients and employees, could impair the confidence of our investors, counterparties and business partners and can affect our ability to effect transactions and can expose us to litigation and regulatory action. Although we take steps to minimize reputation risk in dealing with our clients and communities, this risk will always be present given the nature of our business.

Legal, Accounting, Regulatory and Compliance Risks

We are subject to extensive regulation that could restrict our activities, have an adverse impact on our operations, and impose financial requirements or limitations on the conduct of our business.

We operate in a highly regulated industry and are subject to examination, supervision, and comprehensive regulation by various regulatory agencies. We are subject to Federal Reserve regulation. The Bank is subject to extensive regulation, supervision, and examination by our primary federal regulator, the FDIC, the regulating authority that insures customer deposits; and by our state regulator, the S.C. Board. Also, as a member of the Federal Home Loan Bank (the “FHLB”), the Bank must comply with applicable regulations of the Federal Housing Finance Board and the FHLB. Regulation by these agencies is intended primarily for the protection of our depositors and the deposit insurance fund and not for the benefit of our shareholders. The Bank’s activities are also regulated under consumer protection laws applicable to our lending, deposit, and other activities. A sufficient claim against us under these laws could have a material adverse effect on our results of operations.

Failure to comply with laws, regulations or policies could also result in heightened regulatory scrutiny and in sanctions by regulatory agencies (such as a memorandum of understanding, a written supervisory agreement or a cease and desist order), civil money penalties and/or reputation damage. Any of these consequences could restrict our ability to expand our business or could require us to raise additional capital or sell assets on terms that are not advantageous to us or our shareholders and could have a material adverse effect on our business, financial condition and results of operations. While we have policies and procedures designed to prevent any such violations, such violations may occur despite our best efforts.

Federal, state and local consumer lending laws may restrict our ability to originate certain mortgage loans or increase our risk of liability with respect to such loans and could increase our cost of doing business.

Federal, state and local laws have been adopted that are intended to eliminate certain lending practices considered “predatory.” These laws prohibit practices such as steering borrowers away from more affordable products, selling unnecessary insurance to borrowers, repeatedly refinancing loans and making loans without a reasonable expectation that the borrowers will be able to repay the loans irrespective of the value of the underlying property. Loans with certain terms and conditions and that otherwise meet the definition of a “qualified mortgage” may be protected from liability to a borrower for failing to make the necessary determinations. In either case, we may find it necessary to tighten our mortgage loan underwriting standards in response to the CFPB rules, which may constrain our ability to make loans consistent with our business strategies. It is our policy not to make predatory loans and to determine borrowers’ ability to repay, but the law and related rules create the potential for increased liability with respect to our lending and loan investment activities. They increase our cost of doing business and, ultimately, may prevent us from making certain loans and cause us to reduce the average percentage rate or the points and fees on loans that we do make.

We are subject to federal and state fair lending laws, and failure to comply with these laws could lead to material penalties.

Federal and state fair lending laws and regulations, such as the Equal Credit Opportunity Act and the Fair Housing Act, impose nondiscriminatory lending requirements on financial institutions. The DOJ, CFPB and other federal and state agencies are responsible for enforcing these laws and regulations. Private parties may also have the ability to challenge an institution’s performance under fair lending laws in private class action litigation. A successful challenge to our performance under the fair lending laws and regulations could adversely impact our rating under the CRA and result in a wide variety of sanctions, including the required payment of damages and civil money penalties, injunctive relief, imposition of restrictions on merger and acquisition activity and restrictions on expansion activity, which could negatively impact our reputation, business, financial condition and results of operations.

Changes in accounting standards could materially affect our financial statements.

Our accounting policies and methods are fundamental to how we record and report our financial condition and results of operations. From time to time, FASB, the SEC and our bank regulators change the financial accounting and reporting standards, or the interpretation thereof, and guidance that govern the preparation and disclosure of external financial statements. Such changes are beyond our control, can be hard to predict and could materially impact how we report and disclose our financial condition and results of operations. In some cases, we could be required to apply a new or revised standard retrospectively, or apply an existing standard differently, also retrospectively, which under some circumstances could potentially result in a need to revise or restate prior period financial statements.

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New accounting standards will likely require us to increase our allowance for loan losses and may have a material adverse effect on our financial condition and results of operations.

The measure of our allowance for loan losses is dependent on the adoption and interpretation of accounting standards. The Financial Accounting Standards Board (the “FASB”) has issued a new credit impairment model, the Current Expected Credit Loss, or CECL model, which became applicable to us on January 1, 2023 and for interim periods within that year. Under the CECL model, we are required to present certain financial assets carried at amortized cost, such as loans held for investment and held-to-maturity debt securities, at the net amount expected to be collected. The measurement of expected credit losses is to be based on information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. This measurement will take place at the time the financial asset is first added to the balance sheet and periodically thereafter. This differs significantly from the “incurred loss” model currently required under GAAP, which delays recognition until it is probable a loss has been incurred. Accordingly, the adoption of the CECL model will materially affect how we determine our allowance for loan losses and could require us to significantly increase our allowance. Moreover, the CECL model may create more volatility in the level of our allowance for loan losses. If we are required to materially increase our level of allowance for loan losses for any reason, such increase could adversely affect our business, financial condition and results of operations.

We adopted CECL on January 1, 2023, and currently estimate the allowance for credit losses will increase by approximately zero to $50 thousand upon adoption. In addition, we expect to recognize a liability for the unfunded commitments of approximately $350 thousand to $450 thousand upon adoption. The impact to retained earnings is expected to be a reduction of approximately $275 thousand to $395 thousand, net of tax. The adoption of CECL will not have a significant impact to our regulatory capital. We will finalize the adoption during the first quarter of 2023.

The Federal Reserve may require us to commit capital resources to support the Bank.

The Federal Reserve requires a bank holding company to act as a source of financial and managerial strength to a subsidiary bank and to commit resources to support such subsidiary bank. Under the “source of strength” doctrine, the Federal Reserve may require a bank holding company to make capital injections into a troubled subsidiary bank and may charge the bank holding company with engaging in unsafe and unsound practices for failure to commit resources to such a subsidiary bank. In addition, the Dodd-Frank Act directs the federal bank regulators to require that all companies that directly or indirectly control an insured depository institution serve as a source of strength for the institution. Under these requirements, in the future, we could be required to provide financial assistance to our Bank if the Bank experiences financial distress.

A capital injection may be required at times when we do not have the resources to provide it, and therefore we may be required to borrow the funds. In the event of a bank holding company’s bankruptcy, the bankruptcy trustee will assume any commitment by the holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank. Moreover, bankruptcy law provides that claims based on any such commitment will be entitled to a priority of payment over the claims of the holding company’s general unsecured creditors, including the holders of its note obligations. Thus, any borrowing that must be done by the holding company in order to make the required capital injection becomes more difficult and expensive and will adversely impact the holding company’s cash flows, financial condition, results of operations and prospects.

We face risks related to the adoption of future legislation and potential changes in federal regulatory agency leadership, policies, and priorities.

With the new Congress taking office in 2023, Republicans gained control of the U.S. House of Representatives, while Democrats retained control of the U.S. Senate. However slim the majorities, though, the net result was a split Congress, which in the past leads to less sweeping policy changes. Congressional committees with jurisdiction over the banking sector have pursued oversight and legislative initiatives in a variety of areas, including addressing climate-related risks, promoting diversity and equality within the banking industry and addressing other Environmental, Social, and Governance matters, improving competition in the banking sector and enhancing oversight of bank mergers and acquisitions, establishing a regulatory framework for digital assets and markets, and oversight of the COVID-19 pandemic response and economic recovery. The prospects for the enactment of major banking reform legislation remains unclear at this time.

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Moreover, the turnover of the presidential administration resulted in certain changes in the leadership and senior staffs of the federal banking agencies, the CFPB, CFTC, SEC, and the Treasury Department, with certain significant leadership positions yet to be filled, including the Comptroller of the Currency. These changes have impacted the rulemaking, supervision, examination and enforcement priorities and policies of the agencies and likely will continue to do so over the next several years. The potential impact of any changes in agency personnel, policies and priorities on the financial services sector, including the Company and the Bank, cannot be predicted at this time. Regulations and laws may be modified at any time, and new legislation may be enacted that will affect us. Any future changes in federal and state laws and regulations, as well as the interpretation and implementation of such laws and regulations, could affect us in substantial and unpredictable ways, including those listed above or other ways that could have a material adverse effect on our business, financial condition or results of operations.

We are party to various claims and lawsuits incidental to our business. Litigation is subject to many uncertainties such that the expenses and ultimate exposure with respect to many of these matters cannot be ascertained.

From time to time, we, our directors and our management are or may be the subject of various claims and legal actions by customers, employees, shareholders and others. Whether such claims and legal actions are legitimate or unfounded, if such claims and legal actions are not resolved in our favor, they may result in significant financial liability and/or adversely affect the market perception of us and our products and services as well as impact customer demand for those products and services. In light of the potential cost, reputational damage and uncertainty involved in litigation, we have in the past and may in the future settle matters even when we believe we have a meritorious defense. Certain claims may seek injunctive relief, which could disrupt the ordinary conduct of our business and operations or increase our cost of doing business. Our insurance or indemnities may not cover all claims that may be asserted against us. Any judgments or settlements in any pending litigation or future claims, litigation or investigation could have a material adverse effect on our business, reputation, financial condition and results of operations.

From time to time we are, or may become, involved in suits, legal proceedings, information-gatherings, investigations and proceedings by governmental and self-regulatory agencies that may lead to adverse consequences.

Many aspects of the banking business involve a substantial risk of legal liability. From time to time, we are, or may become, the subject of information-gathering requests, reviews, investigations and proceedings, and other forms of regulatory inquiry, including by bank regulatory agencies, self-regulatory agencies, the SEC and law enforcement authorities. The results of such proceedings could lead to significant civil or criminal penalties, including monetary penalties, damages, adverse judgements, settlements, fines, injunctions, restrictions on the way we conduct our business or reputational harm.

We could be adversely affected by changes in tax laws and regulations or the interpretations of such laws and regulations.

We are subject to the income tax laws of the U.S., and its states and municipalities in which we do business. These tax laws are complex and may be subject to different interpretations. We must make judgments and interpretations about the application of these inherently complex tax laws when determining our provision for income taxes, our deferred tax assets and liabilities, and our valuation allowance. Changes to the tax laws, administrative rulings or court decisions could increase our provision for income taxes and reduce our net income.

In addition, our ability to continue to record our deferred tax assets is dependent on our ability to realize their value through future projected earnings. Future changes in tax laws or regulations could adversely affect our ability to record our deferred tax assets. Loss of part or all of our deferred tax assets would have a material adverse effect on our financial condition and results of operations.

Our ability to realize deferred tax assets may be reduced, which may adversely impact our results of operations.

Deferred tax assets are reported as assets on our balance sheet and represent the decrease in taxes expected to be paid in the future because of net operating losses (“NOLs”) and tax credit carryforwards and because of future reversals of temporary differences in the bases of assets and liabilities as measured by enacted tax laws and their bases as reported in the financial statements. As of December 31, 2022, we had net deferred tax assets of $11.7 million. Realization of deferred tax assets is dependent upon the generation of sufficient future taxable income during the periods in which existing deferred tax assets are expected to become deductible for federal income tax purposes. Based on projections of future taxable income in periods in which deferred tax assets are expected to become deductible, management determined that the realization of our net deferred tax asset was more likely than not. As a result, we did not recognize a valuation allowance on our net deferred tax asset as of December 31, 2022. If it becomes more likely than not that some portion or the entire deferred tax asset will not be realized, a valuation allowance must be recognized. Our deferred tax asset may be further reduced in the future if estimates of future income or our tax planning strategies do not support the amount of the deferred tax assets. Charges to establish a valuation allowance with respect to our deferred tax asset could have a material adverse effect on our financial condition and results of operations.

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Risks Related to an Investment in Our Common Stock

Our ability to pay cash dividends is limited, and we may be unable to pay future dividends even if we desire to do so.

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 banks by standing ready to use available resources to provide adequate capital funds to those banks during periods of financial stress or adversity and by maintaining the financial flexibility and capital-raising capacity to obtain additional resources for assisting its subsidiary banks where necessary. In addition, under the prompt corrective action regulations, the ability of a bank holding company to pay dividends may be restricted if a subsidiary bank becomes undercapitalized. These regulatory policies could affect our ability to pay dividends or otherwise engage in capital distributions.

Our ability to pay cash dividends may be limited by regulatory restrictions, by our Bank’s ability to pay cash dividends to the Company and by our need to maintain sufficient capital to support our operations. As a South Carolina-chartered bank, the Bank is subject to limitations on the amount of dividends that it is permitted to pay. Unless otherwise instructed by the S.C. Board, the Bank is generally permitted under South Carolina state banking regulations to pay cash dividends of up to 100% of net income in any calendar year without obtaining the prior approval of the S.C. Board. If our Bank is not permitted to pay cash dividends to us, it is unlikely that we would be able to pay cash dividends on our common stock. Moreover, holders of our common stock are entitled to receive dividends only when, and if declared by our board of directors. Although we have historically paid cash dividends on our common stock, we are not required to do so and our board of directors could reduce or eliminate our common stock dividend in the future.

Our stock price may be volatile, which could result in losses to our investors and litigation against us.

Our stock price has been volatile in the past and several factors could cause the price to fluctuate substantially in the future. These factors include but are not limited to: actual or anticipated variations in earnings, changes in analysts’ recommendations or projections, our announcement of developments related to our businesses, operations and stock performance of other companies deemed to be peers, new technology used or services offered by traditional and non-traditional competitors, news reports of trends, irrational exuberance on the part of investors, new federal banking regulations, and other issues related to the financial services industry. Our stock price may fluctuate significantly in the future, and these fluctuations may be unrelated to our performance. General market declines or market volatility in the future, especially in the financial institutions sector, could adversely affect the price of our common stock, and the current market price may not be indicative of future market prices. Stock price volatility may make it more difficult for you to resell your common stock when you want and at prices you find attractive. Moreover, in the past, securities class action lawsuits have been instituted against some companies following periods of volatility in the market price of its securities. We could in the future be the target of similar litigation. Securities litigation could result in substantial costs and divert management’s attention and resources from our normal business.

Future sales of our stock by our shareholders or the perception that those sales could occur may cause our stock price to decline.

Although our common stock is listed for trading on The NASDAQ Capital Market, the trading volume in our common stock is lower than that of other larger financial services companies. A public trading market having the desired characteristics of depth, liquidity and orderliness depends on the presence in the marketplace of willing buyers and sellers of our common stock at any given time. This presence depends on the individual decisions of investors and general economic and market conditions over which we have no control. Given the relatively low trading volume of our common stock, significant sales of our common stock in the public market, or the perception that those sales may occur, could cause the trading price of our common stock to decline or to be lower than it otherwise might be in the absence of those sales or perceptions.

Economic and other circumstances may require us to raise capital at times or in amounts that are unfavorable to us. If we have to issue shares of common stock, they will dilute the percentage ownership interest of existing shareholders and may dilute the book value per share of our common stock and adversely affect the terms on which we may obtain additional capital.

We may need to incur additional debt or equity financing in the future to make strategic acquisitions or investments or to strengthen our capital position. Our ability to raise additional capital, if needed, will depend on, among other things, conditions in the capital markets at that time, which are outside of our control and our financial performance. We cannot provide assurance that such financing will be available to us on acceptable terms or at all, or if we do raise additional capital that it will not be dilutive to existing shareholders.

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If we determine, for any reason, that we need to raise capital, subject to applicable NASDAQ rules, our board generally has the authority, without action by or vote of the shareholders, to issue all or part of any authorized but unissued shares of stock for any corporate purpose, including issuance of equity-based incentives under or outside of our equity compensation plans. Additionally, we are not restricted from issuing additional common stock or preferred stock, including any securities that are convertible into or exchangeable for, or that represent the right to receive, common stock or preferred stock or any substantially similar securities. The market price of our common stock could decline as a result of sales by us of a large number of shares of common stock or preferred stock or similar securities in the market or from the perception that such sales could occur. If we issue preferred stock that has a preference over the common stock with respect to the payment of dividends or upon liquidation, dissolution or winding-up, or if we issue preferred stock with voting rights that dilute the voting power of the common stock, the rights of holders of the common stock or the market price of our common stock could be adversely affected. Any issuance of additional shares of stock will dilute the percentage ownership interest of our shareholders and may dilute the book value per share of our common stock. Shares we issue in connection with any such offering will increase the total number of shares and may dilute the economic and voting ownership interest of our existing shareholders.

Provisions of our articles of incorporation and bylaws, South Carolina law, and state and federal banking regulations, could delay or prevent a takeover by a third party.

Our articles of incorporation and bylaws could delay, defer, or prevent a third party takeover, despite possible benefit to the shareholders, or otherwise adversely affect the price of our common stock. Our governing documents:

| · | authorize a class of preferred stock that may be issued in series with terms, including voting rights, established by the board of directors without shareholder approval;
| · | authorize 20,000,000 shares of common stock and 10,000,000 shares of preferred stock that may be issued by the board of directors without shareholder approval;
| · | classify our board with staggered three-year terms, preventing a change in a majority of the board at any annual meeting;
| · | require advance notice of proposed nominations for election to the board of directors and business to be conducted at a shareholder meeting;
| · | grant the board of directors the discretion, when considering whether a proposed merger or similar transaction is in the best interests of the Company and our shareholders, to take into account the effect of the transaction on our employees, clients and suppliers and upon the communities in which we are located, to the extent permitted by South Carolina law;
| · | provide that the number of directors shall be fixed from time to time by resolution adopted by a majority of the directors then in office, but may not consist of fewer than nine nor more than 25 members; and
| · | provide that no individual who is or becomes a “business competitor” or who is or becomes affiliated with, employed by, or a representative of any individual, corporation, or other entity which the board of directors, after having such matter formally brought to its attention, determines to be in competition with us or any of our subsidiaries (any such individual, corporation, or other entity being a “business competitor”) shall be eligible to serve as a director if the board of directors determines that it would not be in our best interests for such individual to serve as a director (any financial institution having branches or affiliates within the counties in which we operate is presumed to be a business competitor unless the board of directors determines otherwise).

In addition, the South Carolina business combinations statute provides that a 10% or greater shareholder of a resident domestic corporation cannot engage in a “business combination” (as defined in the statute) with such corporation for a period of two years following the date on which the 10% shareholder became such, unless the business combination or the acquisition of shares is approved by a majority of the disinterested members of such corporation’s board of directors before the 10% shareholder’s share acquisition date. This statute further provides that at no time (even after the two-year period subsequent to such share acquisition date) may the 10% shareholder engage in a business combination with the relevant corporation unless certain approvals of the board of directors or disinterested shareholders are obtained or unless the consideration given in the combination meets certain minimum standards set forth in the statute. The law is very broad in its scope and is designed to inhibit unfriendly acquisitions but it does not apply to corporations whose articles of incorporation contain a provision electing not to be covered by the law. Our articles of incorporation do not contain such a provision. An amendment of our articles of incorporation to that effect would, however, permit a business combination with an interested shareholder even though such status was obtained prior to the amendment.

Finally, the Change in Bank Control Act and the Bank Holding Company Act generally require filings and approvals prior to certain transactions that would result in a party acquiring control of the Company or the Bank.

An investment in our common stock is not an insured deposit.

Our common stock is not a bank deposit and, therefore, is not insured against loss by the FDIC, any other deposit insurance fund or by any other public or private entity. An investment in our common stock is inherently risky for the reasons described in this “Risk Factors” section and elsewhere in this report and is subject to the same market forces that affect the price of common stock in any company. As a result, if you acquire our common stock, you may lose some or all of your investment.

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General Risk Factors

Increasing scrutiny and evolving expectations from customers, regulators, investors, and other stakeholders with respect to our environmental, social and governance practices may impose additional costs on us or expose us to new or additional risks.

Companies are facing increasing scrutiny from customers, regulators, investors, and other stakeholders related to their environmental, social and governance (“ESG”) practices and disclosure. Investor advocacy groups, investment funds and influential investors are also increasingly focused on these practices, especially as they relate to the environment, health and safety, diversity, labor conditions and human rights. Increased ESG related compliance costs could result in increases to our overall operational costs. Failure to adapt to or comply with regulatory requirements or investor or stakeholder expectations and standards could negatively impact our reputation, ability to do business with certain partners, and our stock price. New government regulations could also result in new or more stringent forms of ESG oversight and expanding mandatory and voluntary reporting, diligence, and disclosure. Additionally, concerns over the long-term impacts of climate change have led and will continue to lead to governmental efforts around the world to mitigate those impacts. Consumers and businesses also may change their behavior on their own as a result of these concerns. We and our customers will need to respond to new laws and regulations as well as consumer and business preferences resulting from climate change concerns. We and our customers may face cost increases, asset value reductions, operating process changes, among other impacts. The impact on our customers will likely vary depending on their specific attributes, including reliance on or role in carbon intensive activities. In addition, we could face reductions in creditworthiness on the part of some customers or in the value of assets securing loans. Our efforts to take these risks into account in making lending and other decisions may not be effective in protecting us from the negative impact of new laws and regulations or changes in consumer or business behavior.

Climate change could have a material adverse impact on us and our customers.

We are exposed to risks of physical impacts of climate change and risks arising from the process of transitioning to a less carbon-dependent economy. Climate change-related physical risks include increased severity and frequency of adverse weather events, such as extreme storms and flooding, and longer-term shifts in climate patterns, such as rising temperatures and sea levels and changes in precipitation amount and distribution. Such physical risks may have adverse impacts on us, both directly on our business operations and as a result of impacts on our borrowers and counterparties, such as declines in the value of loans, investments, real estate and other assets, disruptions in business operations and economic activity, including supply chains, and market volatility.

Transition risks include changes in regulations, market preferences and technologies toward a less carbon-dependent economy. The possible adverse impacts of transition risks include asset devaluations, increased operational and compliance costs, and an inability to meet regulatory or market expectations. For example, we may become subject to new or heightened regulatory requirements and stakeholder expectations regarding climate change, including those relating operational resiliency, disclosure and financial reporting.

The risks associated with climate change are rapidly changing and evolving, making them difficult to assess due to limited data and other uncertainties. We could experience increased expenses resulting from strategic planning, litigation, and technology and market changes, and reputational harm as a result of negative public sentiment, regulatory scrutiny, and reduced investor and stakeholder confidence due to our response to climate change and our climate change strategy, which, in turn, could have a material negative impact on our business, results of operations, and financial condition.

Our historical operating results may not be indicative of our future operating results.

We may not be able to sustain our historical rate of growth, and, consequently, our historical results of operations will not necessarily be indicative of our future operations. Various factors, such as economic conditions, regulatory and legislative considerations, and competition, may also impede our ability to expand our market presence. If we experience a significant decrease in our historical rate of growth, our results of operations and financial condition may be adversely affected because a high percentage of our operating costs are fixed expenses.

A downgrade of the U.S. credit rating could negatively impact our business, results of operations and financial condition.

In August 2011, Standard & Poor’s Ratings Services lowered its long-term sovereign credit rating on the U.S. from “AAA” to “AA+”. If U.S. debt ceiling, budget deficit or debt concerns, domestic or international economic or political concerns, or other factors were to result in further downgrades to the U.S. government’s sovereign credit rating or its perceived creditworthiness, it could adversely affect the U.S. and global financial markets and economic conditions. A downgrade of the U.S. government’s credit rating or any failure by the U.S. government to satisfy its debt obligations could create financial turmoil and uncertainty, which could weigh heavily on the global banking system. It is possible that any such impact could have a material adverse effect on our business, results of operations and financial condition.

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Item 1B. Unresolved Staff Comments.

Not applicable.

Item 2. Properties.

Our principal place of business as well as the Bank’s is located at 5455 Sunset Boulevard, Lexington, South Carolina 29072. In addition, we currently operate 22 full-service offices located in the South Carolina counties of Lexington County (6 offices), Richland County (4 offices), Newberry County (2 offices), Kershaw County (1 office), Aiken County (1 office), Greenville County (2 offices), Anderson County (1 office), Pickens County (1 office), York County (1 office), and in the Georgia counties of Richmond County (2 offices) and Columbia County (1 office). All of these properties are owned by the Bank except for the Downtown Augusta, Georgia (Richmond County), Greenville, South Carolina, and York County, South Carolina full-service branch offices, which are leased by the Bank. Although the properties owned are generally considered adequate, we have a continuing program of modernization, expansion and, when necessary, occasional replacement of facilities.

Item 3. Legal Proceedings.

In the ordinary course of operations, we may be a party to various legal proceedings from time to time. We do not believe that there is any pending or threatened proceeding against us, which, if determined adversely, would have a material effect on our business, results of operations, or financial condition.

Item 4. Mine Safety Disclosures.

Not applicable.

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PART II

Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters, and Issuer Purchases of Equity Securities.

As of February 28, 2023, there were approximately 1,838 shareholders of record of our common stock. Our common stock trades on The NASDAQ Capital Market under the trading symbol of “FCCO.”

Quarterly Common Stock Price Ranges and Dividends

The following table sets forth the high and low sales price information as reported by NASDAQ for the periods indicated, and the dividends per share declared on our common stock in each such quarter. All information has been adjusted for any stock splits and stock dividends effected during the periods presented.

|  |  | High |  |  | Low |  |  | Dividends |
2022 |  |  |  |  |  |  |  |  |  |  |  |  |
Quarter ended March 31, 2022 |  |  | $ | 22.00 |  |  | $ | 20.00 |  |  | $ | 0.13 |
Quarter ended June 30, 2022 |  |  | $ | 21.36 |  |  | $ | 17.55 |  |  | $ | 0.13 |
Quarter ended September 30, 2022 |  |  | $ | 19.70 |  |  | $ | 17.25 |  |  | $ | 0.13 |
Quarter ended December 31, 2022 |  |  | $ | 22.00 |  |  | $ | 16.97 |  |  | $ | 0.13 |
2021 |  |  |  |  |  |  |  |  |  |  |  |  |
Quarter ended March 31, 2021 |  |  | $ | 22.00 |  |  | $ | 16.18 |  |  | $ | 0.12 |
Quarter ended June 30, 2021 |  |  | $ | 20.85 |  |  | $ | 18.00 |  |  | $ | 0.12 |
Quarter ended September 30, 2021 |  |  | $ | 21.49 |  |  | $ | 18.57 |  |  | $ | 0.12 |
Quarter ended December 31, 2021 |  |  | $ | 23.42 |  |  | $ | 19.21 |  |  | $ | 0.12 |

Dividend Policy

We currently intend to continue to pay quarterly cash dividends on our common stock, subject to approval by our board of directors, although we may elect not to pay dividends or to change the amount of such dividends. The payment of dividends is a decision of our board of directors based upon then-existing circumstances, including our rate of growth, profitability, financial condition, existing and anticipated capital requirements, the amount of funds legally available for the payment of cash dividends, regulatory constraints and such other factors as the board determines relevant. The Company is a legal entity separate and distinct from the Bank. The Federal Reserve has issued a policy statement on the payment of cash dividends by bank holding companies, which expresses the Federal Reserve’s view that a bank holding company generally should pay cash dividends only to the extent that the holding company’s net income for the past year is sufficient to cover both the cash dividends and a rate of earnings retention that is consistent with the holding company’s capital needs, asset quality, and overall financial condition. The Federal Reserve has also indicated that a bank holding company should not maintain a level of cash dividends that places undue pressure on the capital of its bank subsidiaries, or that can be funded only through additional borrowings or other arrangements that undermine the bank holding company’s ability to act as a source of strength.

The Company’s ability to pay dividends is generally limited by the ability of the Bank to pay dividends to the Company. As a South Carolina-chartered bank, the Bank is subject to limitations on the amount of dividends that it is permitted to pay. Unless otherwise instructed by the S.C. Board, the Bank is generally permitted under South Carolina state banking regulations to pay cash dividends of up to 100% of net income in any calendar year without obtaining the prior approval of the S.C. Board. In addition, the Bank must maintain a capital conservation buffer, above its regulatory minimum capital requirements, consisting entirely of Common Equity Tier 1 capital, in order to avoid restrictions with respect to its payment of dividends to the Company.

Unregistered Sales of Equity Securities

Pursuant to our Amended and Restated Non-Employee Director Deferred Compensation Plan, non-employee directors may elect to defer all or any part of annual retainer fees payable in respect of the following calendar year to the director for his or her service on the board of directors or any committee of the board of directors. During the year, a number of deferred stock units are credited quarterly to the director’s account equal to (i) the otherwise payable amount divided by (ii) the fair market value of a share of our common stock on the last trading day of such calendar quarter. In general, a director’s vested account balance will be distributed in a lump sum of our common stock on the 30th day following the participants separation from service. During the year ended December 31, 2022, we credited an aggregate of 7,723 deferred stock units to accounts for directors who elected to defer monthly fees or annual retainer fees for 2022. These deferred stock units include dividend equivalents in the form of additional stock units. The deferred stock units were issued pursuant to an exemption from registration under the Securities Act of 1933 in reliance upon Section 4(a)(2) of the Securities Act of 1933.

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Repurchases of Equity Securities

On April 12, 2021, we announced that our Board of Directors approved the repurchase of up to 375,000 shares of our common stock (the “2021 Repurchase Plan”). No repurchases were made under the 2021 Repurchase Plan prior to its expiration at the market close on March 31, 2022. On April 20, 2022, we announced that our Board of Directors approved the repurchase of up to 375,000 shares of our common stock (the “2022 Repurchase Plan”), which represented approximately 5% of our 7,577,912 shares outstanding as of December 31, 2022. No repurchases have been made under the 2022 Repurchase Plan. The 2022 Repurchase Plan expires at the market close on December 31, 2023.

Item 6. [Reserved].

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis identifies significant factors that have affected our financial position and operating results during the periods included in the accompanying financial statements. We encourage you to read this discussion and analysis in conjunction with the financial statements and the related notes and the other statistical information also included in this Annual Report on Form 10-K.

Overview

We are headquartered in Lexington, South Carolina and serve as the bank holding company for the Bank. We engage in a general commercial and retail banking business characterized by personalized service and local decision making, emphasizing the banking needs of small to medium-sized businesses, professionals and individuals. We operate from our main office in Lexington, South Carolina, and our 22 full-service offices located in the South Carolina counties of Lexington County (6 offices), Richland County (4 offices), Newberry County (2 offices), Kershaw County (1 office), Aiken County (1 office), Greenville County (2 offices), Anderson County (1 office), Pickens County (1 office), and York County (1 office); and in the Georgia counties of Richmond County (2 offices) and Columbia County (1 office). On March 14, 2022, we opened a loan production office in Rock Hill, South Carolina, which is located in York County. We converted this loan production office into a full-service banking office on October 20, 2022. We refer to York County, South Carlina and the surrounding area as the Piedmont Region.

The following discussion describes our results of operations for 2022, as compared to 2021 and 2020, and also analyzes our financial condition as of December 31, 2022, as compared to December 31, 2021. Like most community banks, we derive most of our income from interest we receive on our loans and investments. A primary source of funds for making these loans and investments is our deposits, on which we pay interest. Consequently, one of the key measures of our success is our amount of net interest income, or the difference between the income on our interest-earning assets, such as loans and investments, and the expense on our interest-bearing liabilities, such as deposits and borrowings.

We have included a number of tables to assist in our description of these measures. For example, the “Average Balances” table shows the average balance during 2022, 2021 and 2020 of each category of our assets and liabilities, as well as the yield we earned or the rate we paid with respect to each category. A review of this table shows that our loans typically provide higher interest yields than do other types of interest earning assets, which is why we intend to channel a substantial percentage of our earning assets into our loan portfolio. Similarly, the “Rate/Volume Analysis” table helps demonstrate the impact of changing interest rates and changing volume of assets and liabilities during the years shown. We also track the sensitivity of our various categories of assets and liabilities to changes in interest rates, and we have included a “Sensitivity Analysis Table” to help explain this. Finally, we have included a number of tables that provide detail about our investment securities, our loans, our deposits and our borrowings.

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

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Critical Accounting Estimates

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 notes to our consolidated financial statements in this report.

Certain accounting policies inherently involve a greater reliance on the use of estimates, assumptions and judgments and, as such, have a greater possibility of producing results that could be materially different than originally reported, which could have a material impact on the carrying values of our assets and liabilities and our results of operations. We consider these accounting policies and estimates to be critical accounting policies. We have identified the determination of the allowance for loan losses and income taxes and deferred tax assets, to be the accounting areas that require the most subjective or complex judgments and, as such, could be most subject to revision as new or additional information becomes available or circumstances change, including overall changes in the economic climate and/or market interest rates. Therefore, management has reviewed and approved these critical accounting policies and estimates and has discussed these policies with our Audit and Compliance Committee.

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

For the financial information included in this Annual Report of Form 10-K, we account for our allowance for loan losses under the incurred loss model. We perform an analysis quarterly to assess the risk within the loan portfolio. The portfolio is segregated into similar risk components for which historical loss ratios are calculated and adjusted for identified changes in current portfolio characteristics. Historical loss ratios are calculated by product type and by regulatory credit risk classification (See Note 4 to the Consolidated Financial Statements). The annualized weighted average loss ratios over the last 36 months for loans classified as substandard, special mention and pass have been approximately 0.00%, 0.07% and 0.00%, respectively. The allowance consists of an allocated and unallocated allowance. The allocated portion is determined by types and ratings of loans within the portfolio. The unallocated portion of the allowance is established for losses that exist in the remainder of the portfolio and compensates for uncertainty in estimating the loan losses. The allocated portion of the allowance is based on historical loss experience as well as certain qualitative factors as explained above. The qualitative factors have been established based on certain assumptions made as a result of the current economic conditions and are adjusted as conditions change to be directionally consistent with these changes. The unallocated portion of the allowance is composed of factors based on management’s evaluation of various conditions that are not directly measured in the estimation of probable losses through the experience formula or specific allowances.

The allowance represents management’s best estimate, [and we believe our estimate has been reasonably accurate in determining allowance for loan loss adequacy], but significant downturns in circumstances relating to loan quality and economic conditions could result in a requirement for additional allowance. Likewise, an upturn in loan quality and improved economic conditions may allow a reduction in the required allowance. In either instance, unanticipated changes could have a significant impact on results of operations. In addition, regulatory agencies, as an integral part of their examination process, periodically review our allowance for loan losses. Such agencies may require us to recognize additions to the allowances based on their judgments about information available to them at the time of their examination.

In June 2016, the FASB issued ASU 2016-13, as amended, to replace the incurred loss model with an expected loss model, which is referred to as the current expected credit loss (CECL) model. The CECL model is applicable to the measurement of credit losses on financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities. It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and similar instruments) and net investments in leases recognized by a lessor. For debt securities with other-than-temporary impairment (OTTI), the guidance will be applied prospectively. Existing purchased credit impaired (PCI) assets will be grandfathered and classified as purchased credit deteriorated (PCD) assets at the date of adoption. The assets will be grossed up for the allowance of expected credit losses for all PCD assets at the date of adoption and will continue to recognize the noncredit discount in interest income based on the yield of such assets as of the adoption date. Subsequent changes in expected credit losses will be recorded through the allowance. Adoption is effective for interim and annual reporting periods beginning after December 15, 2022. Early adoption was permitted. The Company adopted CECL on January 1, 2023, and currently estimates the allowance for credit losses will increase by approximately zero to $50 thousand. In addition, the Company expects to recognize a liability for the unfunded commitments of approximately $350 thousand to $450 thousand upon adoption. The impact to retained earnings is expected to be a reduction of approximately $275 thousand to $395 thousand, net of tax. The adoption of CECL will not have a significant impact to the Bank’s regulatory capital. The Company will finalize the adoption during the first quarter of 2023.

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Income Taxes, Deferred Tax Assets, and Deferred Tax Liabilities

We are subject to the income tax laws of the U.S., its states, and the municipalities in which we operate. These tax laws are complex and subject to different interpretations by the taxpayer and the relevant government taxing authorities.

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

In establishing our provision for income taxes, our deferred tax assets and liabilities, and our valuation allowance, we must make judgments and interpretations about the application of these inherently complex tax laws. We must also make estimates about when in the future certain items will affect taxable income in the various tax jurisdictions. Disputes over interpretations of the tax laws may be subject to review/adjudication by the court systems of the various tax jurisdictions or may be settled with the taxing authority upon examination or audit. Although we believe that the judgments and estimates used are reasonable, and we believe our estimates have been reasonably accurate, actual results could differ, and we may be exposed to losses or gains that could be material. To the extent we prevail in matters for which reserves have been established, or are required to pay amounts in excess of our reserves, our effective income tax rate in a given financial statement period could be materially affected. An unfavorable tax settlement would result in an increase in our effective income tax rate in the period of resolution. A favorable tax settlement would result in a reduction in our effective income tax rate in the period of resolution.

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Financial Highlights

|  | As of or For the Years Ended December 31, |
(Dollars in thousands except per share amounts) |  | 2022 |  |  | 2021 |  |  | 2020 |
Balance Sheet Data: |  |  |  |  |  |  |  |  |  |  |  |
Total assets |  | $ | 1,672,946 |  |  | $ | 1,584,508 |  |  | $ | 1,395,382 |
Loans held for sale |  |  | 1,779 |  |  |  | 7,120 |  |  |  | 45,020 |
Loans |  |  | 980,857 |  |  |  | 863,702 |  |  |  | 844,157 |
Deposits |  |  | 1,385,382 |  |  |  | 1,361,291 |  |  |  | 1,189,413 |
Total common shareholders’ equity |  |  | 118,361 |  |  |  | 140,998 |  |  |  | 136,337 |
Total shareholders’ equity |  |  | 118,361 |  |  |  | 140,998 |  |  |  | 136,337 |
Average shares outstanding, basic |  |  | 7,528 |  |  |  | 7,491 |  |  |  | 7,446 |
Average shares outstanding, diluted |  |  | 7,608 |  |  |  | 7,549 |  |  |  | 7,482 |
Results of Operations: |  |  |  |  |  |  |  |  |  |  |  |
Interest income |  | $ | 51,117 |  |  | $ | 47,520 |  |  | $ | 43,778 |
Interest expense |  |  | 3,174 |  |  |  | 2,241 |  |  |  | 3,755 |
Net interest income |  |  | 47,943 |  |  |  | 45,279 |  |  |  | 40,023 |
Provision for (release of) loan losses |  |  | (152 | ) |  |  | 335 |  |  |  | 3,663 |
Net interest income after provision for (release of) loan losses |  |  | 48,095 |  |  |  | 44,944 |  |  |  | 36,360 |
Non-interest income |  |  | 11,569 |  |  |  | 13,904 |  |  |  | 13,769 |
Non-interest expenses |  |  | 41,253 |  |  |  | 39,201 |  |  |  | 37,534 |
Income before taxes |  |  | 18,411 |  |  |  | 19,647 |  |  |  | 12,595 |
Income tax expense |  |  | 3,798 |  |  |  | 4,182 |  |  |  | 2,496 |
Net income |  |  | 14,613 |  |  |  | 15,465 |  |  |  | 10,099 |
Net income available to common shareholders |  |  | 14,613 |  |  |  | 15,465 |  |  |  | 10,099 |
Per Share Data: |  |  |  |  |  |  |  |  |  |  |  |
Basic earnings per common share |  | $ | 1.94 |  |  | $ | 2.06 |  |  | $ | 1.36 |
Diluted earnings per common share |  |  | 1.92 |  |  |  | 2.05 |  |  |  | 1.35 |
Book value at period end |  |  | 15.62 |  |  |  | 18.68 |  |  |  | 18.18 |
Tangible book value at period end (non-GAAP) |  |  | 13.59 |  |  |  | 16.62 |  |  |  | 16.08 |
Dividends per common share |  |  | 0.52 |  |  |  | 0.48 |  |  |  | 0.48 |
Asset Quality Ratios: |  |  |  |  |  |  |  |  |  |  |  |
Non-performing assets to total assets(3) |  |  | 0.35 | % |  |  | 0.09 | % |  |  | 0.50 | %
Non-performing loans to period end loans |  |  | 0.50 | % |  |  | 0.03 | % |  |  | 0.69 | %
Net charge-offs (recoveries) to average loans |  |  | (0.03 | )% |  |  | (0.05 | )% |  |  | (0.01 | )%
Allowance for loan losses to period-end total loans |  |  | 1.16 | % |  |  | 1.29 | % |  |  | 1.23 | %
Allowance for loan losses to non-performing assets |  |  | 194.41 | % |  |  | 789.98 | % |  |  | 148.10 | %
Selected Ratios: |  |  |  |  |  |  |  |  |  |  |  |
Return on average assets |  |  | 0.88 | % |  |  | 1.02 | % |  |  | 0.78 | %
Return on average common equity: |  |  | 11.99 | % |  |  | 11.22 | % |  |  | 7.84 | %
Return on average tangible common equity (non-GAAP): |  |  | 13.73 | % |  |  | 12.65 | % |  |  | 8.94 | %
Efficiency Ratio (non-GAAP)(1) |  |  | 68.60 | % |  |  | 66.09 | % |  |  | 69.99 | %
Noninterest income to operating revenue(2) |  |  | 19.44 | % |  |  | 23.49 | % |  |  | 25.60 | %
Net interest margin (tax equivalent) |  |  | 3.14 | % |  |  | 3.23 | % |  |  | 3.37 | %
Equity to assets |  |  | 7.08 | % |  |  | 8.90 | % |  |  | 9.77 | %
Tangible common shareholders’ equity to tangible assets (non-GAAP) |  |  | 6.21 | % |  |  | 8.00 | % |  |  | 8.74 | %
Tier 1 risk-based capital (Bank)(4) |  |  | 13.49 | % |  |  | 14.00 | % |  |  | 12.83 | %
Total risk-based capital (Bank)(4) |  |  | 14.54 | % |  |  | 15.80 | % |  |  | 13.94 | %
Leverage (Bank)(4) |  |  | 8.63 | % |  |  | 8.45 | % |  |  | 8.84 | %
Average loans to average deposits(5) |  |  | 64.92 | % |  |  | 68.77 | % |  |  | 76.79 | %

(1) | The efficiency ratio is a key performance indicator in our industry. The ratio is calculated by dividing non-interest expense by net interest income on a tax equivalent basis and non-interest income, excluding gains (losses) on sales of securities and other assets, write-downs on premises held-for-sale, non-recurring bank owned life insurance (BOLI) income, gains on insurance proceeds, and collection of summary judgments on loans charged-off at a bank we acquired. The efficiency ratio is a measure of the relationship between operating expenses and net revenue.
(2) | Operating revenue is defined as net interest income plus noninterest income.
(3) | Includes non-accrual loans, loans > 90 days delinquent and still accruing interest and other real estate owned (“OREO”).
(4) | As a small bank holding company, we are generally not subject to the capital requirements at the holding company level unless otherwise advised by the Federal Reserve; however, our Bank remains subject to capital requirements.
(5) | Includes loans held for sale.

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Certain financial information presented above is determined by methods other than in accordance with GAAP. These non-GAAP financial measures include “efficiency ratio,” “tangible book value at period end,” “return on average tangible common equity” and “tangible common shareholders’ equity to tangible assets.” The “efficiency ratio” is defined as non-interest expense divided by the sum of net interest income on a tax equivalent basis and non-interest income, excluding gains (losses) on sales of securities and other assets, write-downs on premises held-for-sale, non-recurring bank owned life insurance (BOLI) income, gains on insurance proceeds, and collection of summary judgments on loans charged off at a bank we acquired. The efficiency ratio is a measure of the relationship between operating expenses and net revenue. “Tangible book value at period end” is defined as total equity reduced by recorded intangible assets divided by total common shares outstanding. “Tangible common shareholders’ equity to tangible assets” is defined as total common equity reduced by recorded intangible assets divided by total assets reduced by recorded intangible assets. Our management believes that these non-GAAP measures are useful because they enhance the ability of investors and management to evaluate and compare our operating results from period-to-period in a meaningful manner. Non-GAAP measures have limitations as analytical tools, and investors should not consider them in isolation or as a substitute for analysis of our results as reported under GAAP.

The table below provides a reconciliation of non-GAAP measures to GAAP for the three years ended December 31:

|  | 2022 |  |  | 2021 |  |  | 2020 |
Tangible book value per common share |  |  |  |  |  |  |  |  |
Tangible common equity per common share (non-GAAP) |  | $ | 13.59 |  |  | $ | 16.62 |  |  | $ | 16.08 |
Effect to adjust for intangible assets |  |  | 2.03 |  |  |  | 2.06 |  |  |  | 2.10 |
Book value per common share (GAAP) |  | $ | 15.62 |  |  | $ | 18.68 |  |  | $ | 18.18 |
Return on average tangible common equity |  |  |  |  |  |  |  |  |  |  |  |
Return on average tangible common equity (non-GAAP) |  |  | 13.73 | % |  |  | 12.65 | % |  |  | 8.94 | %
Effect to adjust for intangible assets |  |  | (1.74 | )% |  |  | (1.43 | )% |  |  | (1.10 | )%
Return on average common equity (GAAP) |  |  | 11.99 | % |  |  | 11.22 | % |  |  | 7.84 | %
Tangible common shareholders’ equity to tangible assets |  |  |  |  |  |  |  |  |  |  |  |
Tangible common equity to tangible assets (non-GAAP) |  |  | 6.21 | % |  |  | 8.00 | % |  |  | 8.74 | %
Effect to adjust for intangible assets |  |  | 0.87 | % |  |  | 0.90 | % |  |  | 1.03 | %
Common equity to assets (GAAP) |  |  | 7.08 | % |  |  | 8.90 | % |  |  | 9.77 | %

Results of Operations

Year Ended December 31, 2022 and 2021

Our net income for the twelve months ended December 31, 2022 was $14.6 million, or $1.92 diluted earnings per common share, as compared to $15.5 million, or $2.05 diluted earnings per common share, for the twelve months ended December 31, 2021. The $852 thousand decline in net income between the two periods is primarily due to a $2.3 million decline in non-interest income and a $2.1 million increase in non-interest expense partially offset by a $2.7 million increase in net interest income, a $487 thousand reduction in provision for loan losses, and a $384 thousand reduction in income tax expense.

| · | The increase in net interest income results from an increase of $122.2 million in average earning assets partially offset by an eight basis points decline in the net interest margin between the two periods.
| · | The decline in non-interest income is primarily related to declines in mortgage banking income of $2.4 million, lower gains on sale of other real estate of $122 thousand, lower gains on sale of other assets of $190 thousand, and lower other non-recurring income of $164 thousand partially offset by an increase in investment advisory fees and non-deposit commissions of $484 thousand.

| o | The reduction in other non-recurring income was related to the collection of $147 thousand in summary judgments related to two loans charged off at a bank, which we subsequently acquired and $24 thousand in gains on insurance proceeds during the twelve months ended December 31, 2021. We recorded $7 thousand in other non-recurring income related to gains on insurance proceeds during the twelve months ended December 31, 2022.

47

| · | The reduction in provision for loan losses is primarily related to the following: a decrease in our COVID-19 qualitative factor in our allowance for loan losses methodology and net recoveries during the twelve months ended December 31, 2022 partially offset by increases in our economic conditions qualitative factor due to inflation, supply chain bottlenecks, labor shortages in certain industries, and the war in Ukraine; an increase in our changes in staff qualitative factor due to the addition of a new team and new market in York County, South Carolina in March 2022; an increase in our change in total of past due, rated, and non-accrual loans qualitative factor due to a $4.1 million loan being moved to non-accrual status in June 2022; and loan growth.
| · | The increase in non-interest expense is primarily related to increased salaries and employee benefits expense of $863 thousand, increased occupancy expense of $55 thousand, increased equipment expense of $47 thousand, increased marketing and public relations expense of $86 thousand, increased legal and professional fees of $299 thousand, increased ATM/debit card and data processing expense of $428 thousand, increased other real estate expense including other real estate write-downs of $203 thousand, increased fraud expense of $106 thousand, increased travel, meals, and entertainment expense of $103 thousand, and increased postage / courier expense of $118 thousand partially offset by lower FDIC assessments of $150 thousand, lower amortization of intangibles of $43 thousand, and lower loan processing costs of $63 thousand.
| · | Our effective tax rate was 20.6% during the twelve months ended December 31, 2022 compared to 21.3% during the twelve months ended December 31, 2021.

| o | The reduction in the effective tax rate was due to lower net income before tax and a $153 thousand non-recurring reduction to income tax expense during the twelve months ended December 31, 2022.

Year Ended December 31, 2021 and 2020

Our net income for the twelve months ended December 31, 2021 was $15.5 million, or $2.05 diluted earnings per common share, as compared to $10.1 million, or $1.35 diluted earnings per common share, for the twelve months ended December 31, 2020. The $5.4 million increase in net income between the two periods is primarily due to a $5.3 million increase in net interest income, a $135 thousand increase in non-interest income, and a $3.3 million reduction in provision for loan losses partially offset by a $1.7 million increase in non-interest expense and $1.7 million increase in income tax expense.

| · | The increase in net interest income results from an increase of $220.3 million in average earning assets partially offset by a 15-basis point decline in the net interest margin between the two periods. The increase in non-interest income is primarily related to increases in investment advisory fees and non-deposit commissions of $1.3 million, ATM/debit card income of $412 thousand, rental income of $40 thousand, gain on bank premises held-for-sale of $104 thousand, gain on sale of bank owned land of $13 thousand, gain on insurance proceeds of $24 thousand, and the collection of summary judgments of $147 thousand related to two loans charged off at a bank we acquired, partially offset by lower mortgage loan fees of $1.2 million, lower deposit service charges of $144 thousand, lower loan late charges of $33 thousand, lower gain on sale of securities of $99 thousand, lower gain on sale of other real estate owned of $70 thousand, lower non-recurring bank owned life insurance (BOLI) income of $311 thousand, and lower recurring BOLI income of $31 thousand.
| · | The reduction in provision for loan losses is primarily related to net recoveries of $455 thousand during the twelve months ended December 31, 2021 compared to net recoveries of $99 thousand during the same period in 2020; and a reduction in the qualitative factors in our allowance for loan losses methodology during 2021 related to the economic uncertainties caused by the COVID-19 pandemic and the change in total past due, rated, and non-accrual loans; partially offset by increases in the qualitative factors for the change in economic conditions and the change in legal or regulatory requirements; and loan growth of $19.5 million including PPP Loans and $60.3 million excluding PPP Loans. We reduced the loss emergence period assumption on our COVID-19 qualitative factor, which was added to our allowance for loan losses methodology during 2020, to 18 months at June 30, 2021 from 24 months at December 31, 2020 due to reductions in the number of COVID-19 cases, hospitalizations, and deaths in our markets. However, we increased the loss emergence period to 21 months at December 31, 2021 due to the prevalence of the highly transmittable COVID-19 Omicron variant. We partially offset these reductions by increasing our economic conditions qualitative factor by four basis points during 2021 (two basis points at June 30, 2021 and two basis points at September 30, 2021) due to higher inflation, supply chain bottlenecks, and labor shortages in certain industries; and we increased our change in legal or regulatory requirements qualitative factor by one basis point at December 31, 2021 due to the resignation of the Chair of the FDIC on December 31, 2021, which may lead to regulatory changes that negatively affect banks.
| · | The increase in non-interest expense is primarily related to increased salaries and employee benefits expense of $468 thousand, increased occupancy expense of $238 thousand, increased marketing and public relations expense of $130 thousand, increased FDIC assessment of $214 thousand, increased director fees and benefits of $165 thousand, increased third party broker dealer expenses of $90 thousand related to our higher investment advisory fees and non-deposit commissions, and increased ATM/debit card and computer processing expense of $700 thousand partially offset by lower legal and professional fees of $180 thousand and lower amortization of intangibles of $162 thousand.
| · | Our effective tax rate was 21.3% during the twelve months of 2021 compared to 19.8% during the same period in 2020.

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Net Interest Income

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

Year Ended December 31, 2022 and 2021

Net interest income increased $2.7 million, or 5.9%, to $47.9 million for the twelve months ended December 31, 2022 from $45.3 million for the twelve months ended December 31, 2021. Our net interest margin declined by eight basis points to 3.11% during the twelve months ended December 31, 2022 from 3.19% during the twelve months ended December 31, 2021. Our net interest margin, on a taxable equivalent basis, was 3.14% for the twelve months ended December 31, 2022 compared to 3.23% for the twelve months ended December 31, 2021. Average earning assets increased $122.2 million, or 8.6%, to $1.5 billion for the twelve months ended December 31, 2022 compared to $1.4 billion in the same period of 2021.

| · | The increase in net interest income was primarily due to a higher level of average earning assets partially offset by lower net interest margin.
| · | The increase in average earning assets was due to increases in non-PPP loans and securities partially offset by declines in PPP loans and other short-term investments.
| · | Although market interest rates increased in 2022, the decline in net interest margin was due to excess liquidity generated from PPP loan proceeds, other stimulus funds related to the COVID-19 pandemic, and organic deposit growth being deployed in lower yielding securities; and due to a reduction in PPP loans, which resulted in a change in the mix of our earning assets.

| o | Investment securities represented 37.0% of average total earning assets for the twelve month ended December 31, 2022 compared to 32.2% during the same period in 2021.
| o | Interest income on PPP loans declined to $49 thousand during the twelve months ended December 31, 2022 from $3.3 million during the twelve months ended December 31, 2021 due to a reduction in PPP loans. Average PPP loans declined to $336 thousand for the twelve months ended December 31, 2022 compared to $36.8 million during the same period in 2021.

| · | In June 2022, a $4.1 million loan was moved to non-accrual status, which resulted in a $51 thousand reversal to interest income in June 2022.

Average loans increased $31.4 million, or 3.5%, to $920.4 million for the twelve months ended December 31, 2022 from $889.0 million for the same period in 2021. Average PPP loans declined $36.5 million and average Non-PPP loans increased $67.9 million to $336 thousand and $920.0 million, respectively, for the twelve months ended December 31, 2022. Average loans represented 59.7% of average earning assets during the twelve months ended December 31, 2022 compared to 62.6% of average earning assets during the same period in 2021. Our loan (including loans held-for-sale) to deposit ratio on average during 2022 was 64.9%, as compared to 68.8% during 2021. These declines were due to our growth in deposits of $124.9 million exceeding our loan (including loans held-for-sale) growth of $31.4 million, net of a $36.5 million decline in PPP loans. However, the loan to deposit ratio (including loans held-for-sale) increased to 70.9% at December 31, 2022 as compared to 64.0% at December 31, 2021. Our growth in loans of $111.8 million from December 31, 2021 to December 31, 2022 exceeded our growth in deposits of $24.1 million during the same period.

The growth in our average deposits and securities sold under agreements to repurchase compared to the growth in our average loans, net of the $36.5 million decline in PPP loans resulted in the excess funds being deployed in our securities portfolio. The yield on loans declined 20 basis points to 4.26% during the twelve months ended December 31, 2022 from 4.46% during the same period in 2021 due to reduction in higher yielding PPP loans. The yield on Non-PPP loans was 4.26% during both the twelve months ended December 31, 2022 and December 31, 2021. Average securities for the twelve months ended December 31, 2022 increased $113.7 million, or 24.9%, to $570.6 million from $456.8 million during the same period in 2021. Other short-term investments declined $22.9 million to $50.5 million during the twelve months ended December 31, 2022 from $73.4 million during the same period in 2021 due to the deployment of lower yielding other short-term investments into higher yielding securities and loans. The yield on our securities portfolio increased to 1.97% for the twelve months ended December 31, 2022 from 1.69% for the same period in 2021. The yield on our other short-term investments increased to 1.25% for the twelve months ended December 31, 2022 from 0.18% for the same period in 2021 due to the Federal Open Market Committee (FOMC) increasing the target range of federal funds during the twelve months of 2022 a total of 425 basis points. The target range of federal funds was 4.25% - 4.50% at December 31, 2022 compared to compared to 0.00% - 0.25% at December 31, 2021.

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The yield on earning assets for the twelve months ended December 31, 2022 and 2021 were 3.32% and 3.35%, respectively.

The cost of interest-bearing liabilities was 30 basis points during the twelve months ended December 31, 2022 compared to 24 basis points during the same period in 2021. The cost of deposits, including demand deposits, was 13 basis points during the twelve months ended December 31, 2022 compared to 13 basis points during the same period in 2021. The cost of funds, including demand deposits, was 21 basis points during the twelve months ended December 31, 2022 compared to 16 basis points during the same period in 2021. We continue to focus on growing our pure deposits (demand deposits, interest-bearing transaction accounts, savings deposits, money market accounts, IRAs, and customer cash management repurchase agreements) as these accounts tend to be low-cost deposits and assist us in controlling our overall cost of funds. During the twelve months ended December 31, 2022, these pure deposits averaged 92.2% of total deposits as compared to 90.6% during the same period of 2021.

Year Ended December 31, 2021 and 2020

Net interest income increased $5.3 million, or 13.1%, to $45.3 million for the twelve months ended December 31, 2021 from $40.0 million for the twelve months ended December 31, 2020. The yield on earning assets was 3.35%, and 3.65% in 2021 and 2020, respectively. The rate paid on interest-bearing liabilities was 0.24%, and 0.46% in 2021 and 2020, respectively. The fully taxable equivalent net interest margin was 3.23% in 2021 and 3.37% in 2020.

Loans typically provide a higher yield than other types of earning assets and, thus, one of our goals continues to be growing the loan portfolio as a percentage of earning assets in order to improve the overall yield on earning assets and the net interest margin. Our average loan portfolio (including loans held-for-sale) as a percentage of average earning assets was 62.6% in 2021 and 69.7% in 2020. Loans held-for-investment as a percentage of earning assets declined to 58.2% at December 31, 2021 from 65.1% at December 31, 2020. Our loan (including loans held-for-sale) to deposit ratio on average during 2021 was 68.8%, as compared to 76.8% during 2020. The loan to deposit ratio declined to 64.0% at December 31, 2021 as compared to 74.8% at December 31, 2020. This decline was due to our deposit growth of $171.9 million exceeding our loan (including loans held-for-sale) decline of $18.4 million and loan (excluding loans held-for-sale) growth of $19.5 million from December 31, 2020 to December 31, 2021.

Our net interest margin declined by 15 basis points to 3.19% during the twelve months ended December 31, 2021 from 3.34% during the twelve months ended December 31, 2020. Our net interest margin, on a taxable equivalent basis, was 3.23% for the twelve months ended December 31, 2021 compared to 3.37% for the twelve months ended December 31, 2020. Average earning assets increased $220.3 million, or 18.4%, to $1.4 billion for the twelve months ended December 31, 2021 compared to $1.2 billion in the same period of 2020. The increase in net interest income was due to a higher level of average earning assets partially offset by lower net interest margin. The increase in average earning assets was due to increases in loans, securities, and other short-term investments primarily due to Non-PPP loan growth, PPP loans, organic deposit growth, and excess liquidity from PPP loan proceeds and other stimulus funds related to the COVID-19 pandemic. The decline in net interest margin was primarily due to the Federal Reserve reducing the target range of the federal funds rate twice totaling 150 basis points during the first quarter of 2020 and the excess liquidity generated from PPP loan proceeds and other stimulus funds related to the COVID-19 pandemic being deployed in lower yielding securities and other short-term investments. Lower market rates, the competitive loan pricing environment, and the COVID-19 pandemic put downward pressure on our net interest margin during 2020 and 2021.

The net interest margin was positively affected by PPP loans and a $140 thousand interest recovery on a non-accrual loan that was successfully resolved during the twelve months ended December 31, 2021. We earned $3.3 million in PPP loan interest income, which includes $3.0 million in accretion of PPP deferred fees net of deferred costs, on an average balance of $36.8 million during the twelve months ended December 31, 2021 compared to $1.1 million in PPP loan interest income, which includes $738 thousand in accretion of PPP deferred loan fees net of deferred costs, on an average balance of $32.3 million during the twelve months ended December 31, 2020. Excluding PPP loans, our net margin declined by 31 basis points to 3.03% during the twelve months ended December 31, 2021 from 3.34% during the twelve months ended December 31, 2020. Excluding PPP loans, our net interest margin, on a taxable equivalent basis, was 3.07% for the twelve months ended December 31, 2021 compared to 3.37% for the twelve months ended December 31, 2020.

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Average loans increased $53.9 million, or 6.5%, to $889.0 million for the twelve months ended December 31, 2021 from $835.1 million for the same period in 2020. Average PPP loans increased $4.5 million to $36.8 million and average Non-PPP loans increased $49.4 million to $852.1 million for the twelve months ended December 31, 2021. Average loans represented 62.6% of average earning assets during the twelve months ended December 31, 2021 compared to 69.7% of average earning assets during the same period in 2020. The decline in average loans as a percentage of average earning assets was primarily due to increases in deposits of $205.3 million and securities sold under agreements to repurchase of $12.7 million. The growth in our deposits and securities sold under agreements to repurchase was higher than the growth in our loans, which resulted in the excess funds being deployed in our securities portfolio and other short-term investments and to reduce the amount of our FHLB advances. The yield on loans increased two basis points to 4.46% during the twelve months ended December 31, 2021 from 4.44% during the same period in 2020. Excluding PPP loans, the yield on Non-PPP loans declined 22 basis points to 4.26% during the twelve months ended December 31, 2021 from 4.48% during the same period in 2020. The yield on loans during the twelve months ended December 31, 2021 also included $140 thousand in interest recoveries on a non-accrual relationship that was successfully resolved during the third quarter of 2021. The yield on PPP loans was 9.07% during the twelve months ended December 31, 2021 compared to 3.32% during the same period in 2020. PPP loans declined to $1.5 million at December 31, 2021 from $42.2 million at December 31, 2020 due to PPP loans forgiven through the SBA PPP forgiveness process. When PPP loans are forgiven any remaining deferred fees net of deferred costs are recognized in interest income through accelerated accretion of the deferred fees net of deferred costs. Interest income on PPP loans increased $2.3 million to $3.3 million during the twelve months of 2021 from $1.1 million during the same period in 2020. The $3.3 million in interest income on PPP loans during the twelve months ended December 31, 2021 includes $3.0 million in accretion of deferred fees net of deferred costs.

Average securities and average other short-term investments for the twelve months ended December 31, 2021 increased $155.9 million and $10.5 million, respectively, from the prior year period. The yield on our securities portfolio declined to 1.69% for the twelve months ended December 31, 2021 from 2.15% for the same period in 2020; and the yield on our other short-term investments declined to 0.18% for the twelve months ended December 31, 2021 from 0.44% for the same period in 2020. These declines were primarily related to the Federal Reserve reducing the target range of the federal funds rate as described above. The yield on earning assets for the twelve months ended December 31, 2021 and 2020 was 3.35% and 3.65%, respectively. The cost of interest-bearing liabilities was at 24 basis points during the twelve months ended December 31, 2021 compared to 46 basis points during the same period in 2020.

The cost of deposits, including demand deposits, was 13 basis points during the twelve months ended December 31, 2021 compared to 28 basis points during the same period in 2020. The cost of funds, including demand deposits, was 16 basis points during the twelve months ended December 31, 2021 compared to 33 basis points during the same period in 2020. We continue to focus on growing our pure deposits (demand deposits, interest-bearing transaction accounts, savings deposits, money market accounts, and IRAs) as these accounts tend to be low-cost deposits and assist us in controlling our overall cost of funds. During the twelve months ended December 31, 2021, these deposits averaged 90.1% of total deposits as compared to 87.4% during the same period of 2020. This increase was due to PPP loan proceeds, other stimulus funds related to the COVID-19 pandemic, and organic deposit growth.

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

|  | Year ended December 31, |
|  | 2022 |  |  | 2021 |  |  | 2020 |
(Dollars in thousands) |  | Average Balance |  |  | Income/ Expense |  |  | Yield/ Rate |  |  | Average Balance |  |  | Income/ Expense |  |  | Yield/ Rate |  |  | Average Balance |  |  | Income/ Expense |  |  | Yield/ Rate |
Assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Earning assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
PPP loans |  | $ | 336 |  |  | $ | 49 |  |  |  | 14.58 | % |  | $ | 36,837 |  |  | $ | 3,340 |  |  |  | 9.07 | % |  | $ | 32,312 |  |  | $ | 1,073 |  |  |  | 3.32 | %
Non-PPP loans |  |  | 920,043 |  |  |  | 39,185 |  |  |  | 4.26 | % |  |  | 852,136 |  |  |  | 36,331 |  |  |  | 4.26 | % |  |  | 802,779 |  |  |  | 35,964 |  |  |  | 4.48 | %
Total loans(1) |  | $ | 920,379 |  |  | $ | 39,234 |  |  |  | 4.26 | % |  | $ | 888,973 |  |  | $ | 39,671 |  |  |  | 4.46 | % |  | $ | 835,091 |  |  | $ | 37,037 |  |  |  | 4.44 | %
Non-Taxable Securities |  |  | 52,501 |  |  |  | 1,525 |  |  |  | 2.90 | % |  |  | 54,771 |  |  |  | 1,564 |  |  |  | 2.86 | % |  |  | 48,957 |  |  |  | 1,454 |  |  |  | 2.97 | %
Taxable Securities |  |  | 518,051 |  |  |  | 9,725 |  |  |  | 1.88 | % |  |  | 402,034 |  |  |  | 6,155 |  |  |  | 1.53 | % |  |  | 251,937 |  |  |  | 5,011 |  |  |  | 1.99 | %
Int Bearing Deposits in Other Banks |  |  | 50,435 |  |  |  | 633 |  |  |  | 1.26 | % |  |  | 72,823 |  |  |  | 130 |  |  |  | 0.18 | % |  |  | 62,313 |  |  |  | 275 |  |  |  | 0.44 | %
Fed Funds Sold |  |  | 15 |  |  |  | — |  |  |  | 0.00 | % |  |  | 564 |  |  |  | — |  |  |  | 0.00 | % |  |  | 590 |  |  |  | 1 |  |  |  | 0.14 | %
Total earning assets |  | $ | 1,541,381 |  |  | $ | 51,117 |  |  |  | 3.32 | % |  | $ | 1,419,165 |  |  | $ | 47,520 |  |  |  | 3.35 | % |  | $ | 1,198,888 |  |  | $ | 43,778 |  |  |  | 3.65 | %
Cash and due from banks |  |  | 27,034 |  |  |  |  |  |  |  |  |  |  |  | 23,668 |  |  |  |  |  |  |  |  |  |  |  | 15,552 |  |  |  |  |  |  |  |  |
Premises and equipment |  |  | 32,274 |  |  |  |  |  |  |  |  |  |  |  | 33,780 |  |  |  |  |  |  |  |  |  |  |  | 34,769 |  |  |  |  |  |  |  |  |
Goodwill and other intangible assets |  |  | 15,476 |  |  |  |  |  |  |  |  |  |  |  | 15,649 |  |  |  |  |  |  |  |  |  |  |  | 15,922 |  |  |  |  |  |  |  |  |
Other assets |  |  | 48,031 |  |  |  |  |  |  |  |  |  |  |  | 38,846 |  |  |  |  |  |  |  |  |  |  |  | 39,540 |  |  |  |  |  |  |  |  |
Allowance for loan losses |  |  | (11,250 | ) |  |  |  |  |  |  |  |  |  |  | (10,750 | ) |  |  |  |  |  |  |  |  |  |  | (8,590 | ) |  |  |  |  |  |  |  |
Total assets |  | $ | 1,652,946 |  |  |  |  |  |  |  |  |  |  | $ | 1,520,358 |  |  |  |  |  |  |  |  |  |  | $ | 1,296,081 |  |  |  |  |  |  |  |  |
Liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest-bearing liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest-bearing transaction accounts |  | $ | 336,115 |  |  | $ | 273 |  |  |  | 0.08 | % |  | $ | 303,633 |  |  | $ | 196 |  |  |  | 0.06 | % |  | $ | 246,385 |  |  | $ | 284 |  |  |  | 0.12 | %
Money market accounts |  |  | 308,473 |  |  |  | 943 |  |  |  | 0.31 | % |  |  | 273,005 |  |  |  | 471 |  |  |  | 0.17 | % |  |  | 217,018 |  |  |  | 820 |  |  |  | 0.38 | %
Savings deposits |  |  | 157,626 |  |  |  | 102 |  |  |  | 0.06 | % |  |  | 134,980 |  |  |  | 78 |  |  |  | 0.06 | % |  |  | 113,255 |  |  |  | 84 |  |  |  | 0.07 | %
Time deposits |  |  | 146,112 |  |  |  | 531 |  |  |  | 0.36 | % |  |  | 158,053 |  |  |  | 995 |  |  |  | 0.63 | % |  |  | 166,791 |  |  |  | 1,833 |  |  |  | 1.10 | %
Fed Funds Purchased |  |  | 1,496 |  |  |  | 53 |  |  |  | 3.54 | % |  |  | — |  |  |  | — |  |  |  | 0.00 | % |  |  | 7 |  |  |  | — |  |  |  | 0.00 | %
Securities Sold Under Agreements to Repurchase |  |  | 74,805 |  |  |  | 227 |  |  |  | 0.30 | % |  |  | 62,194 |  |  |  | 85 |  |  |  | 0.14 | % |  |  | 49,537 |  |  |  | 190 |  |  |  | 0.38 | %
Other Short-Term Debt |  |  | 9,457 |  |  |  | 370 |  |  |  | 3.91 | % |  |  | — |  |  |  | — |  |  |  | 0.00 | % |  |  | 2,020 |  |  |  | 8 |  |  |  | 0.40 | %
Other Long-Term Debt |  |  | 14,964 |  |  |  | 675 |  |  |  | 4.51 | % |  |  | 14,964 |  |  |  | 416 |  |  |  | 2.78 | % |  |  | 14,964 |  |  |  | 536 |  |  |  | 3.58 | %
Total interest-bearing liabilities |  | $ | 1,049,048 |  |  | $ | 3,174 |  |  |  | 0.30 | % |  | $ | 946,829 |  |  | $ | 2,241 |  |  |  | 0.24 | % |  | $ | 809,977 |  |  | $ | 3,755 |  |  |  | 0.46 | %
Demand deposits |  |  | 469,292 |  |  |  |  |  |  |  |  |  |  |  | 423,056 |  |  |  |  |  |  |  |  |  |  |  | 343,999 |  |  |  |  |  |  |  |  |
Other liabilities |  |  | 12,725 |  |  |  |  |  |  |  |  |  |  |  | 12,607 |  |  |  |  |  |  |  |  |  |  |  | 13,242 |  |  |  |  |  |  |  |  |
Shareholders’ equity |  | $ | 121,881 |  |  |  |  |  |  |  |  |  |  | $ | 137,866 |  |  |  |  |  |  |  |  |  |  | $ | 128,863 |  |  |  |  |  |  |  |  |
Total liabilities and shareholders’ equity |  | $ | 1,652,946 |  |  |  |  |  |  |  |  |  |  | $ | 1,520,358 |  |  |  |  |  |  |  |  |  |  | $ | 1,296,081 |  |  |  |  |  |  |  |  |
Cost of deposits, including demand deposits |  |  |  |  |  |  |  |  |  |  | 0.13 | % |  |  |  |  |  |  |  |  |  |  | 0.13 | % |  |  |  |  |  |  |  |  |  |  | 0.28 | %
Cost of funds, including demand deposits |  |  |  |  |  |  |  |  |  |  | 0.21 | % |  |  |  |  |  |  |  |  |  |  | 0.16 | % |  |  |  |  |  |  |  |  |  |  | 0.33 | %
Net interest spread |  |  |  |  |  |  |  |  |  |  | 3.01 | % |  |  |  |  |  |  |  |  |  |  | 3.11 | % |  |  |  |  |  |  |  |  |  |  | 3.19 | %
Net interest income/margin |  |  |  |  |  | $ | 47,943 |  |  |  | 3.11 | % |  |  |  |  |  | $ | 45,279 |  |  |  | 3.19 | % |  |  |  |  |  | $ | 40,023 |  |  |  | 3.34 | %
Net interest margin (tax equivalent)(2) |  |  |  |  |  | $ | 48,455 |  |  |  | 3.14 | % |  |  |  |  |  | $ | 45,776 |  |  |  | 3.23 | % |  |  |  |  |  | $ | 40,413 |  |  |  | 3.37 | %

(1) | All loans and deposits are domestic. Average loan balances include non-accrual loans and loans held for sale.
(2) | Based on a 21.0% marginal tax rate.

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The following table presents the dollar amount of changes in interest income and interest expense attributable to changes in volume and the amount attributable to changes in rate. The combined effect related to volume and rate which cannot be separately identified, has been allocated proportionately, to the change due to volume and the change due to rate.

|  | 2022 versus 2021 Increase (decrease) due to |  |  | 2021 versus 2020 Increase (decrease) due to |
(In thousands) |  | Volume |  |  | Rate |  |  | Net |  |  | Volume |  |  | Rate |  |  | Net |
Assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Earning assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Loans |  | $ | 1,636 |  |  | $ | (2,073 | ) |  | $ | (437 | ) |  | $ | 2,403 |  |  | $ | 231 |  |  | $ | 2,634 |
Investment securities-taxable |  |  | (67 | ) |  |  | 28 |  |  |  | (39 | ) |  |  | 163 |  |  |  | (53 | ) |  |  | 110 |
Investment securities- nontaxable |  |  | 2,001 |  |  |  | 1,569 |  |  |  | 3,570 |  |  |  | 1,865 |  |  |  | (721 | ) |  |  | 1,144 |
Interest bearing deposits in other banks |  |  | (27 | ) |  |  | 530 |  |  |  | 503 |  |  |  | 57 |  |  |  | (202 | ) |  |  | (145 | )
Fed Funds sold |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (1 | ) |  |  | (1 | )
Total earning assets |  |  | 4,048 |  |  |  | (451 | ) |  |  | 3,597 |  |  |  | 6,826 |  |  |  | (3,084 | ) |  |  | 3,742 |
Interest-bearing liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest-bearing transaction accounts |  |  | 23 |  |  |  | 54 |  |  |  | 77 |  |  |  | 98 |  |  |  | (186 | ) |  |  | (88 | )
Money market accounts |  |  | 68 |  |  |  | 404 |  |  |  | 472 |  |  |  | 315 |  |  |  | (664 | ) |  |  | (349 | )
Savings deposits |  |  | 14 |  |  |  | 10 |  |  |  | 24 |  |  |  | 40 |  |  |  | (46 | ) |  |  | (6 | )
Time deposits |  |  | (70 | ) |  |  | (394 | ) |  |  | (464 | ) |  |  | (92 | ) |  |  | (746 | ) |  |  | (838 | )
Fed funds purchased |  |  | 53 |  |  |  | — |  |  |  | 53 |  |  |  | — |  |  |  | — |  |  |  | — |
Securities sold under agreements to repurchase |  |  | 20 |  |  |  | 122 |  |  |  | 142 |  |  |  | 69 |  |  |  | (174 | ) |  |  | (105 | )
Other short-term debt |  |  | 370 |  |  |  | — |  |  |  | 370 |  |  |  | (4 | ) |  |  | (4 | ) |  |  | (8 | )
Other long-term debt |  |  | — |  |  |  | 259 |  |  |  | 259 |  |  |  | — |  |  |  | (120 | ) |  |  | (120 | )
Total interest-bearing liabilities |  |  | 261 |  |  |  | 672 |  |  |  | 933 |  |  |  | 798 |  |  |  | (2,312 | ) |  |  | (1,514 | )
Net interest income |  |  |  |  |  |  |  |  |  | $ | 2,664 |  |  |  |  |  |  |  |  |  |  | $ | 5,256 |

Market Risk and Interest Rate Sensitivity

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

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

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The following table illustrates our interest rate sensitivity at December 31, 2022.

Interest Sensitivity Analysis

(Dollars in thousands) |  | Within One Year |  |  | One to Three Years |  |  | Three to Five Years |  |  | Over Five Years |  |  | Total |
Assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Earning assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Loans(1) |  | $ | 304,496 |  |  | $ | 290,834 |  |  | $ | 208,714 |  |  | $ | 176,813 |  |  | $ | 980,857 |
Loans Held for Sale |  |  | 1,779 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 1,779 |
Total Securities(2) |  |  | 186,564 |  |  |  | 87,755 |  |  |  | 40,770 |  |  |  | 275,238 |  |  |  | 590,327 |
Federal funds sold, securities purchased under agreements to resell and other earning assets |  |  | 12,687 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 12,687 |
Total earning assets |  |  | 505,526 |  |  |  | 378,589 |  |  |  | 249,484 |  |  |  | 452,051 |  |  |  | 1,585,650 |
Liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest bearing liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest bearing deposits |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest checking accounts |  |  | 96,863 |  |  |  | — |  |  |  | — |  |  |  | 236,035 |  |  |  | 332,898 |
Money market accounts |  |  | 140,429 |  |  |  | — |  |  |  | — |  |  |  | 154,794 |  |  |  | 295,223 |
Savings deposits |  |  | 35,756 |  |  |  | — |  |  |  | — |  |  |  | 127,656 |  |  |  | 163,412 |
Time deposits |  |  | 104,563 |  |  |  | 24,634 |  |  |  | 3,641 |  |  |  | 1 |  |  |  | 132,839 |
Total interest-bearing deposits |  |  | 377,611 |  |  |  | 24,634 |  |  |  | 3,641 |  |  |  | 518,486 |  |  |  | 924,372 |
Borrowings |  |  | 155,707 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 155,707 |
Total interest-bearing liabilities |  |  | 533,318 |  |  |  | 24,634 |  |  |  | 3,641 |  |  |  | 518,486 |  |  |  | 1,080,079 |
Period gap |  | $ | (27,792 | ) |  | $ | 353,955 |  |  | $ | 245,843 |  |  | $ | (66,435 | ) |  | $ | 505,571 |
Cumulative gap |  | $ | (27,792 | ) |  | $ | 326,163 |  |  | $ | 572,006 |  |  | $ | 505,571 |  |  | $ | 505,571 |
Ratio of cumulative gap to total earning assets |  |  | (5.50 | )% |  |  | 36.89 | % |  |  | 50.46 | % |  |  | 31.88 | % |  |  | 31.88 | %

(1) | Loans classified as non-accrual as of December 31, 2022 are not included in the balances.
(2) | Securities based on amortized cost.

Based on the many factors and assumptions used in simulating the effect of changes in interest rates, the following table estimates the hypothetical percentage change in net interest income at December 31, 2022 and 2021 over the subsequent 12 months. At December 31, 2022, we are liability sensitive and at December 31, 2021, we are asset sensitive. The primary driver for the change is decreased interest bearing cash balances coupled with growth in the loan portfolio and short-term borrowings. As a result, our modeling at December 31, 2022, reflects a decrease in net interest income in a rising interest rate environment during the first twelve months subsequent to interest rate changes. The negative impact of rising rates reverses and net interest income is favorably impacted over a 24-month period. In a declining interest rate environment, the model reflects increases in net interest income in the down 100 basis point and down 200 basis point scenarios. At December 31, 2021, we are asset sensitive. As a result, our modeling reflects an increase in net interest income in a rising interest rate environment and a reduction in net interest income in a declining interest rate environment. In a declining rate environment, the decline in net interest income is primarily due to the level of interest rates being paid on our interest bearing transaction accounts as well as money market accounts. The interest rates on these accounts are at a level where they cannot be repriced in proportion to the change in interest rates. The increase and decrease of 100 and 200 basis points, respectively, reflected in the table below assume a simultaneous and parallel change in interest rates along the entire yield curve.

Net Interest Income Sensitivity

Change in short-term interest rates |  | Hypothetical percentage change in net interest income December 31, |
|  | 2022 |  |  | 2021 |
+200bp |  |  | -3.74 | % |  |  | 3.04 | %
+100bp |  |  | -1.82 | % |  |  | 2.12 | %
Flat |  |  | — |  |  |  | — |
-100bp |  |  | 3.13 | % |  |  | -5.12 | %
-200bp |  |  | 1.12 | % |  |  | -9.81 | %

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During the second 12-month period after 100 basis point and 200 basis point simultaneous and parallel increases in interest rates along the entire yield curve, our net interest income is projected to increase 3.44% and 6.13%, respectively, at December 31, 2022, and 7.82% and 15.00%, respectively, at December 31, 2021. During the second 12-month period after 100 basis point and 200 basis point simultaneous and parallel reduction in interest rates along the entire yield curve, our net interest income is projected to decline 4.92% and 12.86%, respectively, at December 31, 2022, and to decline 10.17% and 15.60%, respectively, at December 31, 2021.

We perform a valuation analysis projecting future cash flows from assets and liabilities to determine the Present Value of Equity (“PVE”) over a range of changes in market interest rates. The sensitivity of PVE to changes in interest rates is a measure of the sensitivity of earnings over a longer time horizon. At December 31, 2022 and 2021, the PVE exposure in a plus 200 basis point increase in market interest rates was estimated to increase 3.13% and 9.73%, respectively. The PVE exposure in a down 100 basis point decrease was estimated to decline 3.83% at December 31, 2022 compared to 9.86% at December 31, 2021. The PVE exposure in a down 200 basis point decrease was estimated to decline 10.00% at December 31, 2022 compared to 21.79% at December 31, 2021.

Provision and Allowance for Loan Losses

Year Ended December 31, 2022 and 2021

We account for our allowance for loan losses under the incurred loss model. At December 31, 2022, the allowance for loan losses was $11.3 million, or 1.16% of total loans (excluding loans held-for-sale), compared to $11.2 million, or 1.29% of total loans (excluding loans held-for-sale) at December 31, 2021. Excluding PPP loans and loans held-for-sale, the allowance for loan losses was 1.16% of total loans at December 31, 2022 compared to 1.30% of total loans at December 31, 2021. The decline in the allowance for loan losses as a percentage of total loans compared to December 31, 2021 is primarily related to a reduction in the loss emergence period assumption in our COVID-19 qualitative factor, which was added to our allowance for loan losses methodology during 2020 and is discussed below. The loss emergence assumption on our COVID-19 qualitative factor was reduced to zero months at December 31, 2022 from 21 months at December 31, 2021. This reduction was partially offset by loan growth of $117.2 million; $309 thousand in net recoveries; an increase in our economic conditions qualitative factor by six basis points due to higher inflation, supply chain bottlenecks, labor shortages in certain industries, and the war in Ukraine; an increase in our change in staff qualitative factor by one basis point due to the addition of a new team and new market in York County, South Carolina in March 2022; and an increase in our change in total of past due, rated, and non-accrual loans qualitative factor by two basis points due to a $4.1 million loan being moved to non-accrual status in June 2022. This loan has a loan-to-value of 76.3% based on an appraisal received in May 2022.

During 2020, we added a qualitative factor for the COVID-19 pandemic to our allowance for loan losses methodology. This qualitative factor was based on the dollar amount of our deferrals and a one-year loss emergence period based on the highest period of annual historical loss rate since the Bank’s inception. As the pandemic worsened, we added our exposure to certain industry segments most impacted by the COVID-19 pandemic (hotels, restaurants, assisted living, and retail) to the COVID-19 qualitative factor and we extended the loss emergence period to two years based on the highest two periods of annual historical loss rates since the Bank’s inception. The loss emergence period assumption in the COVID-19 qualitative factor was reduced to zero months at December 31, 2022 from 21 months at December 31, 2021. At December 31, 2022 and December 31, 2021, the COVID-19 qualitative factor represented zero dollars and $1.9 million, respectively, of our allowance for loan losses.

Loans that we acquired in our acquisition of Cornerstone Bancorp, otherwise referred to herein as Cornerstone, in 2017 as well as in our acquisition of Savannah River Financial Corp., otherwise referred to herein as Savannah River, in 2014 are accounted for under FASB ASC 310-30. These acquired loans were initially measured at fair value, which includes estimated future credit losses expected to be incurred over the life of the loans. The credit component on loans related to cash flows not expected to be collected is not subsequently accreted (non-accretable difference) into interest income. Any remaining portion representing the excess of a loan’s or pool’s cash flows expected to be collected over the fair value is accreted (accretable difference) into interest income. At December 31, 2022 and December 31, 2021, the remaining credit component on loans attributable to acquired loans in the Cornerstone and Savannah River transactions was $81 thousand and $130 thousand, respectively.

Our provision for loan losses was a credit of $152 thousand for the twelve months ended December 31, 2022 compared to an expense of $335 thousand during the same period in 2021. The reduction in provision for loan losses is primarily related to a decrease in our COVID-19 qualitative factor in our allowance for loan losses methodology and net recoveries during the twelve months of 2022, partially offset by increases in our economic conditions, change in staff, and changes in past due, rated, and non-accrual loan qualitative factors and loan growth as discussed above.

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The allowance for loan losses represents an amount that we believe will be adequate to absorb probable losses on existing loans that may become uncollectible. Our judgment as to the adequacy of the allowance for loan losses is based on assumptions about future events, which we believe to be reasonable, but which may or may not prove to be accurate. Our determination of the allowance for loan losses is based on evaluations of the collectability of loans, including consideration of factors such as the balance of impaired loans, the quality, mix, and size of our overall loan portfolio, the knowledge and depth of lending personnel, economic conditions (local and national) that may affect the borrower’s ability to repay, the amount and quality of collateral securing the loans, our historical loan loss experience, and a review of specific problem loans. We also consider qualitative factors such as changes in the lending policies and procedures, changes in the local or national economies, 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. We charge recognized losses to the allowance and add subsequent recoveries back to the allowance for loan losses. There can be no assurance that charge-offs of loans in future periods will not exceed the allowance for loan losses as estimated at any point in time or that provisions for loan losses will not be significant to a particular accounting period.

We perform an analysis quarterly to assess the risk within the loan portfolio. The portfolio is segregated into similar risk components for which historical loss ratios are calculated and adjusted for identified changes in current portfolio characteristics. Historical loss ratios are calculated by product type and by regulatory credit risk classification (See Note 4 to the Consolidated Financial Statements). The annualized weighted average loss ratios over the last 36 months for loans classified as substandard, special mention and pass have been approximately 0.00%, 0.07% and 0.00%, respectively. The allowance consists of an allocated and unallocated allowance. The allocated portion is determined by types and ratings of loans within the portfolio. The unallocated portion of the allowance is established for losses that exist in the remainder of the portfolio and compensates for uncertainty in estimating the loan losses. The allocated portion of the allowance is based on historical loss experience as well as certain qualitative factors as explained above. The qualitative factors have been established based on certain assumptions made as a result of the current economic conditions and are adjusted as conditions change to be directionally consistent with these changes. The unallocated portion of the allowance is composed of factors based on management’s evaluation of various conditions that are not directly measured in the estimation of probable losses through the experience formula or specific allowances. The overall risk as measured in our three-year lookback, both quantitatively and qualitatively, does not encompass a full economic cycle. Net charge-offs in the 2009 to 2011 period averaged 63 basis points annualized in our loan portfolio. Over the most recent three-year period, our net charge-offs have experienced a modest net recovery. We currently believe the unallocated portion of our allowance represents potential risk associated throughout a full economic cycle.

We have a significant portion of our loan portfolio with real estate as the underlying collateral. At December 31, 2022 and December 31, 2021, approximately 90.8% and 90.9%, 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.

The non-performing asset ratio was 0.35% of total assets with the nominal level of $5.8 million in non-performing assets at December 31, 2022 compared to 0.09% and $1.4 million at December 31, 2021. Non-accrual loans increased to $4.9 million at December 31, 2022 from $250 thousand at December 31, 2021. The increases in both non-performing assets and non-accrual loans from December 31, 2021 to December 31, 2022 were due to one $4.1 million loan that was moved to non-accrual status in June 2022. This loan had a loan-to-value of 76.3% at the time it was moved to non-accrual based on an appraisal received in May 2022. The balance of this loan is $4.0 million at December 31, 2022. Furthermore, we had one customer relationship with two loans totaling $508 thousand, which was placed on non-accrual during September 2022. This relationship had a loan-to-value of 42.5% at the time it was moved to non-accrual. The balance of this relationship increased to $550 thousand at December 31, 2022 due to a loan advance to pay real estate taxes. We had $2 thousand in accruing loans past due 90 days or more at December 31, 2022 compared to zero at December 31, 2021. Loans past due 30 days or more represented 0.06% of the loan portfolio at December 31, 2022 compared to 0.03% at December 31, 2021. The ratio of classified loans plus OREO and repossessed assets declined to 4.47% of total bank regulatory risk-based capital at December 31, 2022 from 6.27% at December 31, 2021. During the twelve months ended December 31, 2022, we experienced net loan recoveries of $361 thousand and net overdraft charge-offs of $52 thousand.

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There were 12 loans totaling $4.9 million (0.50% of total loans) included on non-performing status (non-accrual loans and loans past due 90 days and still accruing) at December 31, 2022. Ten of these loans totaling $4.9 million were on non-accrual status. The largest loan included on non-accrual status is in the amount of $4.0 million and is secured by a first mortgage lien and had a loan-to-value of 76.3% at the time it was moved to non-accrual based on an appraisal received in May 2022. The average balance of the remaining nine loans on non-accrual status is approximately $104 thousand with a range between $1 and $406 thousand. Five of these loans are secured by first mortgage liens, three loans are secured by second mortgage liens, and one is secured by equipment. Furthermore, we had $88 thousand in accruing trouble debt restructurings, or TDRs, at December 31, 2022 compared to $1.4 million at December 31, 2021. This reduction was due to the payoff of one loan. We had two loans totaling $2 thousand that were accruing loans past due 90 days or more at December 31, 2022. We consider a loan impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due, including both principal and interest, according to the contractual terms of the loan agreement. Nonaccrual loans and accruing TDRs are considered impaired. At December 31, 2022, we had 11 impaired loans totaling $5.0 million compared to ten impaired loans totaling $1.7 million at December 31, 2021. These loans were measured for impairment under the fair value of collateral method or present value of expected cash flows method. For collateral dependent loans, the fair value of collateral method is used and the fair value is determined by an independent appraisal less estimated selling costs. There was no specific allowance for loan and lease losses on our impaired loans at December 31, 2022 and December 31, 2021. At December 31, 2022, we had ten loans totaling $565 thousand that were delinquent 30 days to 89 days representing 0.06% of total loans compared to $235 thousand or 0.03% of total loans at December 31, 2021.

Year Ended December 31, 2021 and 2020

At December 31, 2021, the allowance for loan losses was $11.2 million, or 1.29% of total loans (excluding loans held-for-sale), compared to $10.4 million, or 1.23% of total loans (excluding loans held-for-sale) at December 31, 2020. Excluding PPP loans and loans held-for-sale, the allowance for loan losses was 1.30% of total loans at December 31, 2021 compared to 1.30% of total loans at December 31, 2020. The increase in the allowance for loan losses compared to December 31, 2020 is primarily related to loan growth of $19.5 million; $455 thousand in net recoveries; an increase in our economic conditions qualitative factor by four basis points during 2021 due to higher inflation, supply chain bottlenecks, and labor shortages in certain industries; and a one basis point increase in our change in legal or regulatory requirements qualitative factor. These increases were partially offset by a reduction in the loss emergence period assumption on our COVID-19 qualitative factor, which was added to our allowance for loan losses methodology during 2020, to 21 months at December 31, 2021 from 24 months at December 31, 2020. At June 30, 2021, we reduced the loss emergence period in the COVID-19 qualitative factor to 18 months from 24 months due to a reduction in the number of COVID-19 related cases, hospitalizations, and deaths within our markets. However, we increased the loss emergence period to 21 months at December 31, 2021 due to the prevalence of the highly transmittable COVID-19 Omicron variant.

Loans that we acquired in our acquisition of Cornerstone Bancorp, otherwise referred to herein as Cornerstone, in 2017 as well as in our acquisition of Savannah River Financial Corp., otherwise referred to herein as Savannah River, in 2014 are accounted for under FASB ASC 310-30. These acquired loans were initially measured at fair value, which includes estimated future credit losses expected to be incurred over the life of the loans. The credit component on loans related to cash flows not expected to be collected is not subsequently accreted (non-accretable difference) into interest income. Any remaining portion representing the excess of a loan’s or pool’s cash flows expected to be collected over the fair value is accreted (accretable difference) into interest income. At December 31, 2021 and December 31, 2020, the remaining credit component on loans attributable to acquired loans in the Cornerstone and Savannah River transactions was $130 thousand and $264 thousand, respectively.

Our provision for loan losses was $335 thousand for the twelve months ended December 31, 2021 compared to $3.7 million during the same period in 2020. The decline in the provision for loan losses is primarily related to an increase during the twelve months of 2020 in the qualitative factors in our allowance for loan losses methodology related to the deteriorating economic conditions and economic uncertainties caused by the COVID-19 pandemic. As discussed above, during the twelve months of 2020, we added a qualitative factor for the COVID-19 pandemic to our allowance for loan losses methodology. This new qualitative factor was based on the dollar amount of our deferrals and a one-year loss emergence period based on the highest period of annual historical loss rate since the Bank’s inception. As the pandemic worsened, we added our exposure to certain industry segments most impacted by the COVID-19 pandemic (hotels, restaurants, assisted living, and retail) to the COVID-19 qualitative factor and we extended the loss emergence period to two years based on the highest two periods of annual historical loss rates since the Bank’s inception. At December 31, 2021, the COVID-19 qualitative factor represented $1.9 million of our allowance for loan losses.

We also recognized $455 thousand in net recoveries during the twelve months ended December 31, 2021. These items were partially offset by $19.5 million in loan growth; a four basis points increase (two basis points at June 30, 2021 and two basis points at September 30, 2021) in our qualitative factor related to economic conditions due to an increase in inflation, supply chain bottlenecks, and labor shortages in our markets; and a one basis point increase in our change in legal or regulatory requirements qualitative factor at December 31, 2021 due to the resignation of the Chair of the FDIC on December 31, 2021, which may lead to regulatory changes that negatively affect banks.

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The allowance for loan losses represents an amount which we believe will be adequate to absorb probable losses on existing loans that may become uncollectible. Our judgment as to the adequacy of the allowance for loan losses is based on assumptions about future events, which we believe to be reasonable, but which may or may not prove to be accurate. Our determination of the allowance for loan losses is based on evaluations of the collectability of loans, including consideration of factors such as the balance of impaired loans, the quality, mix, and size of our overall loan portfolio, the knowledge and depth of lending personnel, economic conditions (local and national) that may affect the borrower’s ability to repay, the amount and quality of collateral securing the loans, our historical loan loss experience, and a review of specific problem loans. We also consider qualitative factors such as changes in the lending policies and procedures, changes in the local or national economies, 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. We charge recognized losses to the allowance and add subsequent recoveries back to the allowance for loan losses. There can be no assurance that charge-offs of loans in future periods will not exceed the allowance for loan losses as estimated at any point in time or that provisions for loan losses will not be significant to a particular accounting period.

We perform an analysis quarterly to assess the risk within the loan portfolio. The portfolio is segregated into similar risk components for which historical loss ratios are calculated and adjusted for identified changes in current portfolio characteristics. Historical loss ratios are calculated by product type and by regulatory credit risk classification (See Note 4 to the Consolidated Financial Statements). The annualized weighted average loss ratios over the last 36 months for loans classified as substandard, special mention and pass have been approximately 0.18%, 0.03% and 0.00%, respectively. The allowance consists of an allocated and unallocated allowance. The allocated portion is determined by types and ratings of loans within the portfolio. The unallocated portion of the allowance is established for losses that exist in the remainder of the portfolio and compensates for uncertainty in estimating the loan losses. The allocated portion of the allowance is based on historical loss experience as well as certain qualitative factors as explained above. The qualitative factors have been established based on certain assumptions made as a result of the current economic conditions and are adjusted as conditions change to be directionally consistent with these changes. The unallocated portion of the allowance is composed of factors based on management’s evaluation of various conditions that are not directly measured in the estimation of probable losses through the experience formula or specific allowances. The overall risk as measured in our three-year lookback, both quantitatively and qualitatively, does not encompass a full economic cycle. Net charge-offs in the 2009 to 2011 period averaged 63 basis points annualized in our loan portfolio. Over the most recent three-year period, our net charge-offs have experienced a modest net recovery. We currently believe the unallocated portion of our allowance represents potential risk associated throughout a full economic cycle.

We have a significant portion of our loan portfolio with real estate as the underlying collateral. At December 31, 2021 and December 31, 2020, approximately 90.9% and 87.5%, respectively, of the loan portfolio had real estate collateral. The increase in the percent of our loan portfolio with real estate as the underlying collateral is due to a $46.1 million increase in loans with real estate as the underlying collateral and a $40.8 million decline in PPP loans, which declined to $1.5 million at December 31, 2021 from $42.2 at December 31, 2020. When loans, whether commercial or personal, are granted, they are based on the borrower’s ability to generate repayment cash flows from income sources sufficient to service the debt. Real estate is generally taken to reinforce the likelihood of the ultimate repayment and as a secondary source of repayment. We work closely with all our borrowers that experience cash flow or other economic problems, and we believe that we have the appropriate processes in place to monitor and identify problem credits. There can be no assurance that charge-offs of loans in future periods will not exceed the allowance for loan losses as estimated at any point in time or that provisions for loan losses will not be significant to a particular accounting period. The allowance is also subject to examination and testing for adequacy by regulatory agencies, which may consider such factors as the methodology used to determine adequacy and the size of the allowance relative to that of peer institutions. Such regulatory agencies could require us to adjust our allowance based on information available to them at the time of their examination.

The non-performing asset ratio was 0.09% of total assets with the nominal level of $1.4 million in non-performing assets at December 31, 2021 compared to 0.50% and $7.0 million at December 31, 2020. The decline in the non-performing asset ratio was related to the successful resolution of several non-accrual and accruing loans past due of 90 days or more. Non-accrual loans declined $4.3 million to $250 thousand at December 31, 2021 from $4.6 million at December 31, 2020. Accruing loans past due 90 days or more declined to none at December 31, 2021 from $1.3 million at December 31, 2020. Loans past due 30 days or more represented 0.03% of the loan portfolio at December 31, 2021 compared to 0.23% at December 31, 2020. The ratio of classified loans plus OREO and repossessed assets declined to 6.27% of total bank regulatory risk-based capital at December 31, 2021 from 6.89% at December 31, 2020.

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There were seven loans totaling $250 thousand (0.03% of total loans) included on non-performing status (non-accrual loans and loans past due 90 days and still accruing) at December 31, 2021. All seven of these loans were on non-accrual status. The largest loan included on non-accrual status is in the amount of $103 thousand. The average balance of the remaining six loans on non-accrual status is approximately $25 thousand with a range between $3 and $87 thousand, and the majority of these loans are secured by first mortgage liens. Furthermore, we had $1.4 million in accruing trouble debt restructurings, or TDRs, at December 31, 2021 compared to $1.6 million at December 31, 2020. We consider a loan impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due, including both principal and interest, according to the contractual terms of the loan agreement. Nonaccrual loans and accruing TDRs are considered impaired. At December 31, 2021, we had 10 impaired loans totaling $1.7 million compared to 23 impaired loans totaling $6.1 million at December 31, 2020. These loans were measured for impairment under the fair value of collateral method or present value of expected cash flows method. For collateral dependent loans, the fair value of collateral method is used and the fair value is determined by an independent appraisal less estimated selling costs. At December 31, 2021, we had loans totaling $235 thousand that were delinquent 30 days to 89 days representing 0.03% of total loans compared to $665 thousand or 0.08% of total loans at December 31, 2020.

Beginning in March 2020, we proactively offered payment deferrals for up to 90 days to our loan customers regardless of the impact of the pandemic on their business or personal finances. As a result of payments being resumed at the conclusion of their payment deferral period, loans in which payments were being deferred decreased from the peak of $206.9 million to $175.0 million at June 30, 2020, to $27.3 million at September 30, 2020, to $16.1 million at December 31, 2020, to $8.7 million at March 31, 2021, to $4.5 million at June 30, 2021, to $4.1 million at September 30, 2021, and to zero at December 31, 2021. We had no loans on which payments have been deferred at December 31, 2021 compared to $16.1 million at December 31, 2020. The $16.1 million in deferrals at December 31, 2020 consisted of seven loans on which only principal was being deferred. Our management continuously monitors non-performing, classified and past due loans to identify deterioration regarding the condition of these loans and we will continue to monitor our loan portfolio for potential risks.

The following table summarizes the activity related to our allowance for loan losses.

Allowance for Loan Losses

(Dollars in thousands) |  | 2022 |  |  | 2021 |  |  | 2020 |
Average loans outstanding (excluding loans held-for-sale) |  | $ | 914,569 |  |  | $ | 871,551 |  |  | $ | 806,583 |
Loans outstanding at period end (excluding loans held-for-sale) |  | $ | 980,857 |  |  | $ | 863,702 |  |  | $ | 844,157 |
Total nonaccrual loans |  | $ | 4,895 |  |  | $ | 250 |  |  | $ | 4,562 |
Loans past due 90 days and still accruing |  | $ | 2 |  |  | $ | — |  |  | $ | 1,260 |
Beginning balance of allowance |  | $ | 11,179 |  |  | $ | 10,389 |  |  | $ | 6,627 |
Loans charged-off: |  |  |  |  |  |  |  |  |  |  |  |
1-4 family residential mortgage |  |  | — |  |  |  | — |  |  |  | — |
Real Estate - Construction |  |  | — |  |  |  | — |  |  |  | 2 |
Real Estate Mortgage - Residential |  |  | — |  |  |  | — |  |  |  | — |
Real Estate Mortgage - Commercial |  |  | — |  |  |  | 110 |  |  |  | 1 |
Consumer - Home equity |  |  | 1 |  |  |  | — |  |  |  | — |
Commercial |  |  | — |  |  |  | — |  |  |  | — |
Consumer - Other |  |  | 67 |  |  |  | 72 |  |  |  | 107 |
Overdrafts |  |  | — |  |  |  | — |  |  |  | — |
Total loans charged-off |  |  | 68 |  |  |  | 182 |  |  |  | 110 |
Recoveries: |  |  |  |  |  |  |  |  |  |  |  |
1-4 family residential mortgage |  |  | — |  |  |  | — |  |  |  | — |
Real Estate - Construction |  |  | 5 |  |  |  | — |  |  |  | 2 |
Real Estate Mortgage - Residential |  |  | — |  |  |  | 10 |  |  |  | — |
Real Estate Mortgage - Commercial |  |  | 326 |  |  |  | 473 |  |  |  | 23 |
Consumer - Home equity |  |  | 13 |  |  |  | 69 |  |  |  | 2 |
Commercial |  |  | 17 |  |  |  | 39 |  |  |  | 130 |
Consumer - Other |  |  | 16 |  |  |  | 46 |  |  |  | 52 |
Total recoveries |  |  | 377 |  |  |  | 637 |  |  |  | 209 |
Net loans recovered (charged off) |  |  | 309 |  |  |  | 455 |  |  |  | 99 |
Provision for (release of) loan losses |  |  | (152 | ) |  |  | 335 |  |  |  | 3,663 |
Balance at period end |  | $ | 11,336 |  |  | $ | 11,179 |  |  | $ | 10,389 |
Net charge -offs (recoveries) to average loans and loans held for sale |  |  | (0.03 | )% |  |  | (0.05 | )% |  |  | (0.01 | )%
Allowance as percent of total loans |  |  | 1.16 | % |  |  | 1.29 | % |  |  | 1.23 | %
Non-performing loans as% of total loans |  |  | 0.59 | % |  |  | 0.09 | % |  |  | 0.50 | %
Allowance as% of non-performing loans |  |  | 194.41 | % |  |  | 4,471.60 | % |  |  | 178.23 | %
Nonaccrual loans as% of total loans |  |  | 0.50 | % |  |  | 0.03 | % |  |  | 0.54 | %
Allowance as % of nonaccrual loans |  |  | 231.58 | % |  |  | 4,473.93 | % |  |  | 227.79 | %

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The following table details net charge-offs to average loans outstanding by loan category for the years ended December 31:

(Dollars in thousands) |  | 2022 |  |  | 2021 |  |  | 2020 |
Commercial, financial & agricultural |  |  |  |  |  |  |  |  |  |  |  |
Net charge-offs (recoveries) |  | $ | (17 | ) |  | $ | (39 | ) |  | $ | (130 | )
Average loans for the year |  | $ | 71,999 |  |  | $ | 98,301 |  |  | $ | 82,191 |
Net charge-offs (recoveries)/average loans |  |  | (0.02 | )% |  |  | (0.04 | )% |  |  | (0.16 | )%
Real estate: |  |  |  |  |  |  |  |  |  |  |  |
Construction |  |  |  |  |  |  |  |  |  |  |  |
Net charge-offs (recoveries) |  | $ | (5 | ) |  | $ | — |  |  | $ | — |
Average loans for the year |  | $ | 91,258 |  |  | $ | 98,196 |  |  | $ | 86,089 |
Net charge-offs (recoveries)/average loans |  |  | (0.01 | )% |  |  | 0.00 | % |  |  | 0.00 | %
Mortgage-residential |  |  |  |  |  |  |  |  |  |  |  |
Net charge-offs (recoveries) |  | $ | — |  |  | $ | (10 | ) |  | $ | — |
Average loans for the year(1) |  | $ | 49,278 |  |  | $ | 42,880 |  |  | $ | 46,024 |
Net charge-offs (recoveries)/average loans(1) |  |  | 0.00 | % |  |  | (0.02 | )% |  |  | 0.00 | %
Mortgage-commercial |  |  |  |  |  |  |  |  |  |  |  |
Net charge-offs (recoveries) |  | $ | (326 | ) |  | $ | (363 | ) |  | $ | (22 | )
Average loans for the year |  | $ | 662,044 |  |  | $ | 597,721 |  |  | $ | 555,090 |
Net charge-offs (recoveries)/average loans |  |  | (0.05 | )% |  |  | (0.06 | )% |  |  | 0.00 | %
Consumer: |  |  |  |  |  |  |  |  |  |  |  |
Home Equity |  |  |  |  |  |  |  |  |  |  |  |
Net charge-offs (recoveries) |  | $ | (12 | ) |  | $ | (69 | ) |  | $ | (2 | )
Average loans for the year |  | $ | 27,479 |  |  | $ | 26,399 |  |  | $ | 27,904 |
Net charge-offs (recoveries)/average loans |  |  | (0.04 | )% |  |  | (0.26 | )% |  |  | (0.01 | )%
Other |  |  |  |  |  |  |  |  |  |  |  |
Net charge-offs (recoveries) |  | $ | 51 |  |  | $ | 26 |  |  | $ | 55 |
Average loans for the year |  | $ | 12,511 |  |  | $ | 8,054 |  |  | $ | 9,286 |
Net charge-offs (recoveries)/average loans |  |  | 0.41 | % |  |  | 0.32 | % |  |  | 0.59 | %
Total: |  |  |  |  |  |  |  |  |  |  |  |
Net charge-offs (recoveries) |  | $ | (309 | ) |  | $ | (455 | ) |  | $ | (99 | )
Average loans for the year(1) |  | $ | 914,569 |  |  | $ | 871,551 |  |  | $ | 806,583 |
Net charge-offs (recoveries)/average loans(1) |  |  | (0.03 | )% |  |  | (0.05 | )% |  |  | (0.01 | )%

(1) | Average loans exclude loans held for sale

The following table presents an allocation of the allowance for loan losses at the end of each of the past three years. The allocation is calculated on an approximate basis and is not necessarily indicative of future losses or allocations. The entire amount is available to absorb losses occurring in any category of loans.

Allocation of the Allowance for Loan Losses

|  | 2022 |  |  | 2021 |  |  | 2020 |
(Dollars in thousands) |  | Amount |  |  | % of loans in category |  |  | Amount |  |  | % of loans in category |  |  | Amount |  |  | % of loans in category |
Commercial, Financial and Agricultural |  | $ | 849 |  |  |  | 7.9 | % |  | $ | 853 |  |  |  | 8.1 | % |  | $ | 778 |  |  |  | 8.0 | %
Real Estate Construction |  |  | 75 |  |  |  | 0.7 | % |  |  | 113 |  |  |  | 1.1 | % |  |  | 145 |  |  |  | 1.5 | %
Real Estate Mortgage: |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Commercial |  |  | 8,569 |  |  |  | 80.1 | % |  |  | 8,570 |  |  |  | 81.2 | % |  |  | 7,855 |  |  |  | 80.4 | %
Residential |  |  | 1,037 |  |  |  | 9.7 | % |  |  | 893 |  |  |  | 8.4 | % |  |  | 865 |  |  |  | 8.8 | %
Consumer |  |  | 170 |  |  |  | 1.6 | % |  |  | 126 |  |  |  | 1.2 | % |  |  | 125 |  |  |  | 1.3 | %
Unallocated |  |  | 636 |  |  |  | N/A |  |  |  | 624 |  |  |  | N/A |  |  |  | 621 |  |  |  | N/A |
Total |  | $ | 11,336 |  |  |  | 100.0 | % |  | $ | 11,179 |  |  |  | 100.0 | % |  | $ | 10,389 |  |  |  | 100.0 | %

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Loans acquired in the Cornerstone transaction are excluded from our evaluation of the adequacy of the allowance as they were measured at fair value at acquisition. The assumptions used in this evaluation included a credit component and an interest rate component. These loans amounted to approximately $5.5 million and $9.5 million at December 31, 2022 and 2021, respectively.

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

Non-interest Income and Expense

Non-interest Income. A significant source of noninterest income is service charges on deposit accounts. We also originate and sell residential loans on a servicing released basis in the secondary market. These loans are originated in our name. The loans have locked in price commitments to be purchased by investors at the time of closing. Therefore, these loans present very little market risk for us. We typically deliver to, and receive funding from, the investor within 30 days. Other sources of noninterest income are derived from investment advisory fees and commissions on non-deposit investment products, ATM/debit card fees, commissions on check sales, safe deposit box rent, wire transfer and official check fees.

Non-interest income during the twelve months ended December 31, 2022 was $11.6 million compared to $13.9 million during the same period in 2021. Deposit service charges declined $17 thousand to $960 thousand during the twelve months ended December 31, 2022 from $977 thousand during the same period in 2021 primarily due to customer refunds related to the completion of a project to discontinue multiple presentments on consumer returns and refund customers in a determined “lookback period” of two years. A total of $39 thousand was refunded to 477 accounts ($24 thousand was refunded to 313 active accounts and $15 thousand was refunded to 164 closed accounts). Furthermore, effective July 1, 2022, we increased the NSF de minimis amount to $50 from $5 and reduced our maximum fee per day to $140 from $210, each of which will impact our future aggregate deposit service charges. Mortgage banking income declined by $2.4 million to $1.9 million during the twelve months ended December 31, 2022 from $4.3 million during the same period in 2021. Mortgage production during the twelve months ended December 31, 2022 was $88.6 million, $65.8 million of the production was originated to be sold in the secondary market and $22.8 million of the production was originated as adjustable rate mortgage (ARM) loans for our loans held-for-investment portfolio, compared to $142.1 million, which was all produced to be sold in the secondary market during the same period in 2021. The gain on sale margin decreased to 2.85% during the twelve months ended December 31, 2022 from 3.04% during the same period in 2021. The reduction in mortgage production was primarily due to a higher interest rate environment and low housing inventory. With the headwinds of rising interest rates, we began to market an ARM product during the second quarter of 2022 to provide borrowers with an alternative to fixed-rate mortgages and to help offset anticipated mortgage production challenges. Currently, we are offering 5/1, 7/1, and 10/1 ARM loans that are originated for our loans held-for-investment portfolio. As these ARM loans are being held on our balance sheet as loans held-for-investment, the result is additive to loan growth and interest income but results in less gain on sale fee income, which is reported in noninterest income as mortgage banking income.

Investment advisory fees increased $484 thousand to $4.5 million during the twelve months ended December 31, 2022 from $4.0 million during the same period in 2021. Total assets under management declined to $558.8 million at December 31, 2022 compared to $650.9 million at December 31, 2021. While revenue in our financial planning and investment management line of business increased during the twelve months of 2022 compared to the same period in 2021, assets under management (AUM) declined due to the stock market performance in the twelve months of 2022. Our investment advisory fees trail changes in AUM. Management continues to focus on both the mortgage banking income as well as the investment advisory fees and commissions. Gain (loss) on sale of other real estate owned was a loss of $45 thousand during the twelve months ended December 31, 2022 compared to a gain of $77 thousand during the same period in 2021. The $45 thousand loss was related to the sale of one other real estate owned property during the twelve months ended December 31, 2022. Gain (loss) on sale of other assets was a loss of $73 thousand during the twelve months ended December 31, 2022 compared to a gain of $117 thousand during the same period in 2021. The $73 thousand loss in 2022 was related to the sale of one bank owned premise during the twelve months ended December 31, 2022. The $117 thousand gain in 2021 was related to a $104 thousand gain on sale of bank premise held-for-sale and a $13 thousand gain on the sale of bank owned land during the twelve months ended December 31, 2021. Other non-recurring income declined $164 thousand to $7 thousand during the twelve months ended December 31, 2022 from $171 thousand during the same period in 2021. The reduction in other non-recurring income was related to the collection of $147 thousand in summary judgments related to two loans charged off at a bank, which we subsequently acquired and $24 thousand in gains on insurance proceeds during the twelve months ended December 31, 2021. We recorded $7 thousand in other non-recurring income related to gains on insurance proceeds during the twelve months ended December 31, 2022.

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Non-interest income, other increased $93 thousand during the twelve months ended December 31, 2022 compared to the same period in 2021 primarily due to increases in ATM/debit card income of $37 thousand, recurring income on bank owned life insurance of $28 thousand, rental income of $11 thousand, wire transfer fees of $14 thousand, and bankcard fees of $14 thousand partially offset by lower customer check sales of $19 thousand.

Non-interest income during the twelve months ended December 31, 2021 was $13.9 million compared to $13.8 million during the same period in 2020. Deposit service charges declined $144 thousand during the twelve months ended December 31, 2021 compared to the same period in 2020 primarily due to lower overdraft fees. Mortgage banking income declined by $1.2 million to $4.3 million during the twelve months ended December 31, 2021 from $5.6 million during the same period in 2020 due to a reduction in mortgage production partially offset by an increase in the gain-on-sale margin. Mortgage production during the twelve months ended December 31, 2021 was $142.1 million compared to $199.3 million during the same period in 2020. The gain on sale margin was 3.04% in the twelve months ended December 31, 2021 compared to 2.79% during the same period in 2020. The gain on sale margin was limited during 2020 and the first quarter of 2021 as we worked on certain loans not yet sold, in an effort to resolve processing and delivery issues.

Investment advisory fees increased $1.3 million to $4.0 million during the twelve months ended December 31, 2021 from $2.7 million during the same period in 2020. Total assets under management increased to $650.9 million at December 31, 2021 compared to $501.6 million at December 31, 2020 due to both organic growth and higher equity markets. Management continues to focus on increasing both the mortgage banking income as well as the investment advisory fees and commissions.

We had no gain on sale of securities during the twelve months ended December 31, 2021 compared to $99 thousand during the same period in 2020. We had a (i) $13 thousand gain on the sale of bank owned land during the twelve months ended December 31, 2021 compared to zero during the prior year period; (ii) $104 thousand gain on the sale of bank premises held-for-sale during the twelve months ended December 31, 2021 compared to zero during the prior year period; and (iii) $77 thousand gain on sale of other real estate owned during the twelve months ended December 31, 2021 compared to $147 thousand during the prior year period. Other non-recurring income includes a $24 thousand gain on insurance proceeds during the twelve months ended December 31, 2021 compared to zero during the prior year period; $147 thousand received from the collection of summary judgments during the twelve months ended December 31, 2021 related to two loans charged off at a bank we acquired; $311 thousand in non-recurring bank owned life insurance (BOLI) income during the twelve months ended December 31, 2020. The $311 thousand in non-recurring BOLI income was due to insurance benefits on two former members of the boards of directors of acquired banks who passed away during the third quarter of 2020.

Non-interest income, other increased $434 thousand during the twelve months ended December 31, 2021 compared to the same period in 2020 primarily due increases in ATM debit card income of $412 thousand and rental income of $40 thousand partially offset by lower recurring BOLI income of $31 thousand and lower loan late charges of $33 thousand.

The following table sets forth for the periods indicated the primary components of noninterest income:

|  | Year ended December 31, |
(In thousands) |  | 2022 |  |  | 2021 |  |  | 2020 |
Deposit service charges |  |  | 960 |  |  |  | 977 |  |  |  | 1,121 |
Mortgage banking income |  |  | 1,900 |  |  |  | 4,319 |  |  |  | 5,557 |
Investment advisory fees and non-deposit commissions |  |  | 4,479 |  |  |  | 3,995 |  |  |  | 2,720 |
Gain on sale of securities |  |  | — |  |  |  | — |  |  |  | 99 |
Gain (loss) on sale of other real estate owned |  |  | (45 | ) |  |  | 77 |  |  |  | 147 |
Gain on sale of other assets |  |  | (73 | ) |  |  | 117 |  |  |  | — |
Other non-recurring income |  |  | 7 |  |  |  | 171 |  |  |  | 311 |
ATM debit card income |  |  | 2,706 |  |  |  | 2,669 |  |  |  | 2,257 |
Recurring income on bank owned life insurance |  |  | 721 |  |  |  | 693 |  |  |  | 724 |
Rental income |  |  | 322 |  |  |  | 311 |  |  |  | 271 |
Loan late charges |  |  | 68 |  |  |  | 68 |  |  |  | 101 |
Safe deposit fees |  |  | 56 |  |  |  | 59 |  |  |  | 55 |
Wire transfer fees |  |  | 132 |  |  |  | 118 |  |  |  | 93 |
Other |  |  | 336 |  |  |  | 330 |  |  |  | 313 |
Total |  | $ | 11,569 |  |  | $ | 13,904 |  |  | $ | 13,769 |

Non-interest Expense. In the very competitive financial services industry, we recognize the need to place a great deal of emphasis on expense management and continually evaluate and monitor growth in discretionary expense categories in order to control future increases.

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Non-interest expense increased $2.1 million during the twelve months ended December 31, 2022 to $41.3 million compared to $39.2 million during the same period in 2021. The $2.1 million increase in non-interest expense is primarily related to increased salaries and employee benefits expense of $863 thousand, increased occupancy expense of $55 thousand, increased equipment expense of $47 thousand, increased marketing and public relations expense of $86 thousand, increased legal and professional fees of $299 thousand, increased ATM/debit card and data processing expense of $428 thousand, increased other real estate expense including other real estate write-downs of $203 thousand, increased fraud expense of $106 thousand, increased travel, meals, and entertainment expense of $103 thousand, and increased postage / courier expense of $118 thousand partially offset by lower FDIC assessments of $150 thousand, lower amortization of intangibles of $43 thousand, and lower loan processing costs of $63 thousand.

| · | Salary and benefit expense increased $863 thousand to $25.4 million during the twelve months ended December 31, 2022 from $24.5 million during the same period in 2021. This increase is primarily a result of normal salary adjustments, financial planning and investment advisory commissions, the addition of six employees in our York County, South Carolina office, which opened as a loan production office on March 14, 2022 and converted to a full service branch on October 20, 2022, the addition of new mortgage lenders in the third quarter of 2022, and increased compensation levels for banking officer employees implemented at the beginning of the third quarter of 2022 partially offset by lower mortgage commissions and open positions. We had 254 full-time employees at December 31, 2022 compared to 250 at December 31, 2021.
| · | Occupancy expense increased $55 thousand to $3.0 million during the twelve months ended December 31, 2022 compared to $2.9 million during the same period in 2021 primarily related to major maintenance projects and our loan production office in York County, South Carolina (which converted to a full service branch on October 20, 2022) partially offset by lower janitorial services expense and lower bank premises taxes due to the sale of one bank owned property in 2022 and two bank owned properties in 2021.
| · | Equipment expense increased $47 thousand to $1.3 million during the twelve months ended December 31, 2022 compared to $1.3 million during the same period in 2021 primarily due to increases in auto expense and ATM and security monitoring service agreements.
| · | Marketing and public relations expense increased $86 thousand to $1.3 million during the twelve months ended December 31, 2022 compared to $1.2 million during the same period in 2021 due to larger media schedules including activity in our new York County, South Carolina market.
| · | FDIC assessments declined $150 thousand to $468 thousand during the twelve months ended December 31, 2022 compared to $618 thousand during the same period in 2021 due to a reduction in our FDIC assessment rate.
| · | Other real estate expenses increased $203 thousand to $308 thousand during the twelve months ended December 31, 2022 compared to $105 thousand during the same period in 2021 due to the accrual of $210 thousand in 2022 real estate taxes on one non-accrual loan and $69 thousand in write-downs on two other real estate owned properties during the twelve months ended December 31, 2022 compared to $50 thousand in write-downs during the same period in 2021.
| · | Amortization of intangibles declined $43 thousand to $158 thousand during the twelve months ended December 31, 2022 compared to $201 thousand during the same period in 2021.
| · | Other expense increased $991 thousand to $9.4 million during the twelve months ended December 31, 2022 compared to $8.4 million during the same period in 2021.

| o | ATM/debit card and data processing expense increased $428 thousand primarily due to higher ATM debit card customer activity, core processing system expenses, and enhanced technology solutions.
| o | Fraud expense increased $106 thousand primarily related to an isolated fraud incident.
| o | Travel, meals, and entertainment increased $103 thousand due to more in-person meetings from eased COVID-19 restrictions.
| o | Postage and courier expense increased $118 thousand partially due to higher fuel costs.
| o | Legal and professional fees increased $299 thousand primarily due to higher legal, professional, recruiting, and consulting fees.
| o | Loan processing and closing costs/fees declined $63 thousand primarily due to lower mortgage loan processing costs.

Non-interest expense increased $1.7 million during the twelve months ended December 31, 2021 to $39.2 million compared to $37.5 million during the same period in 2020. Salary and benefit expense increased $468 thousand to $24.5 million during the twelve months ended December 31, 2021 from $24.0 million during the same period in 2020. This increase is primarily a result of the normal salary adjustments and increased financial planning and investment advisory commissions. We had 250 employees at December 31, 2021 compared to 244 at December 31, 2020. Occupancy expense increased $238 thousand to $2.9 million during the twelve months ended December 31, 2021 compared to $2.7 million during the same period in 2020. Marketing and public relations expense increased $130 thousand to $1.2 million during the twelve months ended December 31, 2021 from $1.0 million during the same period in 2020 due to the production of new ad campaigns and related creative materials. FDIC assessments increased $214 thousand due to a higher assessment rate in 2021 related to a decrease in our leverage ratio and an increase in our assessment base due to higher average assets as well as $39 thousand of small bank assessment credits utilized in the twelve months ended December 31, 2020. The reduction in our leverage ratio and the increase in our assessment base were partially related to PPP loans and the excess liquidity generated from PPP loan proceeds and other stimulus funds related to the COVID-19 pandemic. Furthermore, we received FDIC small bank assessment credits during the twelve months ended December 31, 2020 compared to none during the same period in 2021. The FDIC small bank assessment credits were fully utilized during the first quarter of 2020. Other real estate expense declined $96 thousand to $105 thousand during the twelve months ended December 31, 2021 compared to $201 thousand during the same period in 2020. Amortization of intangibles declined $162 thousand to $201 thousand during the twelve months ended December 31, 2021 compared to $363 thousand during the same period in 2020.

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Non-interest expense, other increased $816 thousand during the 12 months ended December 31, 2021 as compared to the same period in 2020 primarily due to increased director fees and benefits of $165 thousand, increased third party broker dealer expenses of $90 thousand related to our higher investment advisory fees and non-deposit commissions, and increased ATM/debit card and computer processing expense of $700 thousand due to higher ATM/debit card transactions, which resulted in higher income and expense, partially offset by lower legal and professional fees of $180 thousand.

The following table sets forth for the periods indicated the primary components of noninterest expense:

|  | Year ended December 31, |
(In thousands) |  | 2022 |  |  | 2021 |  |  | 2020 |
Salary and employee benefits |  | $ | 25,357 |  |  | $ | 24,494 |  |  | $ | 24,026 |
Occupancy |  |  | 3,002 |  |  |  | 2,947 |  |  |  | 2,709 |
Furniture and Equipment |  |  | 1,343 |  |  |  | 1,296 |  |  |  | 1,237 |
Marketing and public relations |  |  | 1,259 |  |  |  | 1,173 |  |  |  | 1,043 |
FDIC/FICO premium |  |  | 468 |  |  |  | 618 |  |  |  | 404 |
Other real estate expenses including OREO write downs |  |  | 308 |  |  |  | 105 |  |  |  | 201 |
Amortization of intangibles |  |  | 158 |  |  |  | 201 |  |  |  | 363 |
ATM/debit card and data processing* |  |  | 4,251 |  |  |  | 3,823 |  |  |  | 3,123 |
Investment advisory and non-deposit expense |  |  | 409 |  |  |  | 420 |  |  |  | 330 |
Supplies |  |  | 134 |  |  |  | 116 |  |  |  | 138 |
Telephone |  |  | 354 |  |  |  | 365 |  |  |  | 350 |
Courier |  |  | 279 |  |  |  | 181 |  |  |  | 176 |
Correspondent services |  |  | 303 |  |  |  | 280 |  |  |  | 272 |
Insurance |  |  | 358 |  |  |  | 325 |  |  |  | 316 |
Legal and Professional fees |  |  | 1,177 |  |  |  | 878 |  |  |  | 1,058 |
Director fees |  |  | 488 |  |  |  | 500 |  |  |  | 336 |
Shareholder expense |  |  | 221 |  |  |  | 212 |  |  |  | 192 |
Other |  |  | 1,384 |  |  |  | 1,267 |  |  |  | 1,260 |
|  | $ | 41,253 |  |  | $ | 39,201 |  |  | $ | 37,534 |

| * | Data processing includes core processing, bill payment, online banking, remote deposit capture, and postage costs for mailing customer notices and statements.

Income Tax Expense

Our income tax expense for 2022 was $3.8 million as compared to income tax expense for the year ended December 31, 2021 of $4.2 million and $2.5 million for the year ended December 31, 2020 (see Note 14 “Income Taxes” to the Consolidated Financial Statements for additional information). We recognize deferred tax assets for future deductible amounts resulting from differences in the financial statement and tax bases of assets and liabilities and operating loss carry forwards. The deferred tax assets are established based on the amounts expected to be paid/recovered at existing tax rates. A valuation allowance is established to reduce the deferred tax asset to the level that it is more likely than not that the tax benefit will be realized. Our effective tax rate was 20.6% during the twelve months ended December 31, 2022 compared to 21.3% during the twelve months ended December 31, 2021 and compared to 19.8% during the twelve months ended December 31, 2020. The reduction in our effective tax rate in 2022 compared to 2021 was due to lower net income before tax and a $153 thousand non-recurring reduction to income tax expense during the twelve months ended December 31, 2022. As a result of our current level of tax-exempt securities in our investment portfolio and our BOLI holdings, assuming the current corporate rate remains unchanged, our effective tax rate is expected to be approximately 21.25% to 21.75%.

Financial Position

Assets totaled $1.7 billion at December 31, 2022 and $1.6 billion at December 31, 2021. Loans (excluding loans held-for-sale) increased $117.2 million or 13.6% to $980.9 million at December 31, 2022 from $863.7 million at December 31, 2021. Non-PPP loans increased $118.4 million to $980.6 million at December 31, 2022 from $862.2 million at December 31, 2021. PPP loans declined $1.2 million to $219 thousand at December 31, 2022 from $1.5 million at December 31, 2021.

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Total loan production excluding PPP loans was $257.9 million during the twelve months ended December 31, 2022 compared to $217.1 million during the same period in 2021. In addition, we originated zero and $37.1 million in PPP loans during the twelve months ended December 31, 2022 and December 31, 2021, respectively. Loans held-for-sale declined to $1.8 million at December 31, 2022 from $7.1 million at December 31, 2021. Mortgage production during the twelve months ended December 31, 2022 was $88.6 million, $65.8 million of the production was originated to be sold in the secondary market and $22.8 million of the loan production was originated as adjustable rate mortgage (ARM) loans for our loans held-for-investment portfolio and are included total loan production numbers referenced above compared to $142.1 million, which was all produced to be sold in the secondary market during the same period in 2021. The reduction in mortgage production was primarily due to a higher interest rate environment and low housing inventory. With the headwinds of rising interest rates, we began to market an ARM product during the second quarter of 2022 to provide borrowers with an alternative to fixed-rate mortgages and to help offset anticipated mortgage production challenges. Currently, we are offering 5/1, 7/1, and 10/1 ARM loans that are originated for our loans held-for-investment portfolio. As these ARM loans are being held on our balance sheet as loans held-for-investment, the result is additive to loan growth and interest income but results in less gain on sale fee income, which is reported in noninterest income as mortgage banking income. The loan-to-deposit ratio (including loans held-for-sale) at December 31, 2022 and December 31, 2021 was 70.9% and 64.0%, respectively. The loan-to-deposit ratio (excluding loans held-for-sale) at December 31, 2022 and December 31, 2021 was 70.8% and 63.4%, respectively. 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.

Investment securities declined $1.9 million to $564.8 million at December 31, 2022 from $566.6 million at December 31, 2021. On June 1, 2022, we reclassified $224.5 million in investments to held-to-maturity (HTM) from available-for-sale (AFS). These securities were transferred at fair value at the time of the transfer, which became the new cost basis for the securities held to maturity. The pretax unrealized net holding loss on the available for sale securities on the date of transfer totaled approximately $16.7 million, and continued to be reported as a component of accumulated other comprehensive loss. This net unrealized loss is being amortized to interest income over the remaining life of the securities as a yield adjustment. There were no gains or losses recognized as a result of this transfer. The remaining pretax unrealized net holding loss on these investments was $15.7 million ($12.4 million net of tax) at December 31, 2022. Our HTM investments totaled $228.7 million and represented approximately 40% of our total investments at December 31, 2022. Our AFS investments totaled $331.9 million or approximately 59% of our total investments at December 31, 2022. Our investments at cost totaled $4.2 million or approximately 1% of our total investments at December 31, 2022. Other short-term investments declined $34.1 million to $12.9 million at December 31, 2022 from $47.0 million at December 31, 2021 due to loan growth exceeding deposit growth. Other assets increased $11.6 million to $19.2 million at December 31, 2022 from $7.6 million at December 31 2021 primarily due to higher deferred tax assets related to unrealized losses on our investment securities. The unrealized losses on our investment securities are related in an increase in market interest rates, which has a temporary negative impact on the fair value of our investment securities portfolio and on accumulated other comprehensive income (loss), which is included in shareholders’ equity.

Deposits increased $24.1 million to $1.4 billion at December 31, 2022 compared to $1.4 billion at December 31, 2021. Our pure deposits, which are defined as total deposits less certificates of deposits, increased $43.7 million to $1.3 billion at December 31, 2022 from $1.2 billion at December 31, 2021. We continue to focus on growing our pure deposits as a percentage of total deposits in order to better manage our overall cost of funds. We had no brokered deposits and no listing services deposits at December 31, 2022 and December 31, 2021. Our securities sold under agreements to repurchase, which are related to our customer cash management accounts, increased $14.5 million to $68.7 million at December 31, 2022 from $54.2 million at December 31, 2021.

Other borrowings increased $72.0 million to $87.0 million at December 31, 2022 from $15.0 million at December 31, 2021. Other borrowings include $22.0 million in federal funds purchased, $50.0 million in FHLB Advances, and $15.0 million in junior subordinated debt at December 31, 2022 compared to zero in federal funds purchased, zero in FHLB Advances, and $15.0 million in junior subordinated debt at December 31, 2021. The $72.0 million increase in other borrowings was primarily due to loan growth exceeding deposit growth.

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Shareholders’ equity declined to 7.1% of total assets at December 31, 2022 from 8.9% at December 31, 2021 due to total asset growth of $88.4 million compared to total shareholders’ equity decline of $22.6 million. The growth in total assets was primarily due to growth of $117.2 million in loans held-for-investment and $11.6 million in other assets partially offset by declines of $31.6 million in cash and interest bearing bank balances, $5.3 million in loans held-for-sale, and $1.9 million in investment securities. The $22.6 million decline in shareholders’ equity was due to a $35.7 million reduction in accumulated other comprehensive income (loss) partially offset by a $10.7 million increase in retention of earnings less dividends paid, the transfer of $1.2 million in deferred board compensation stock units from other liabilities to shareholders’ equity, the transfer of $0.2 million in restricted stock units from other liabilities to shareholder’s equity, a $0.5 million increase due to employee and director stock awards, and a $0.4 million increase due to dividend reinvestment plan (DRIP) purchases. The decline in accumulated other comprehensive income was due to an increase in market interest rates, which has a temporary negative impact on the fair value of our investment securities portfolio and on accumulated other comprehensive income (loss), which is included in shareholders’ equity. On June 1, 2022, we reclassified $224.5 million in investments to held-to-maturity (HTM) from available-for-sale (AFS). These securities were transferred at fair value at the time of the transfer, which became the new cost basis for the securities held to maturity. The pretax unrealized net holding loss on the available for sale securities on the date of transfer totaled approximately $16.7 million, and continued to be reported as a component of accumulated other comprehensive loss. This net unrealized loss is being amortized to interest income over the remaining life of the securities as a yield adjustment. There were no gains or losses recognized as a result of this transfer. The remaining pretax unrealized net holding loss on these investments was $15.7 million ($12.4 million net of tax) at December 31, 2022. Our HTM investments totaled $228.7 million and represented approximately 40% of our total investments at December 31, 2022. Our AFS investments totaled $331.9 million or approximately 59% of our total investments with a modified duration of 3.15 at December 31, 2022. Our investments at cost totaled $4.2 million or approximately 1% of our total investments at December 31, 2022.

On April 12, 2021, we announced that our Board of Directors approved the repurchase of up to 375,000 shares of our common stock (the “2021 Repurchase Plan”), which represents approximately 5% of our 7,548,638 shares outstanding as of December 31, 2021. No share repurchases were made under the 2021 Repurchase Plan prior to its expiration at the market close on March 31, 2022. On April 20, 2022, we announced that our Board of Directors approved the repurchase of up to 375,000 shares of our common stock (the “2022 Repurchase Plan”), which represented approximately 5% of our 7,577,912 shares outstanding as of December 31, 2022. No repurchases have been made under the 2022 Repurchase Plan. The 2022 Repurchase Plan expires at the market close on December 31, 2023.

Earning Assets

Loans and loans held for sale

Loans typically provide higher yields than the other types of earning assets. During 2022 and 2021, loans accounted for 59.7% and 62.6% of average earning assets, respectively. The loan portfolio (including held-for-sale) averaged $920.4 million in 2022 as compared to $889.0 million in 2021. Quality loan portfolio growth continued to be a strategic focus of ours in 2022. However, with the higher loan yields, there are inherent credit and liquidity risks, which we attempt to control and counterbalance. One of our goals as a community bank continues to be to grow our assets through quality loan growth by providing credit to small and mid-size businesses, as well as individuals within the markets we serve. In 2022, we funded new loans (excluding loans originated for sale) of approximately $257.9 million, as compared to $217.1 million in 2021. In addition, we originated $37.1 million in PPP loans in 2021. PPP loans net of deferred fees and costs were $219 thousand at December 31, 2022 compared to $1.5 million at December 31, 2021.. We remain committed to meeting the credit needs of our local markets, but adverse national and local economic conditions, as well as deterioration of our asset quality, could significantly impact our ability to grow our loan portfolio. Significant increases in regulatory capital expectations beyond the traditional “well capitalized” ratios and significantly increased regulatory burdens could impede our ability to leverage our balance sheet and expand the loan portfolio.

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

(In thousands) |  | 2022 |  |  | 2021 |  |  | 2020 |
Commercial, financial & agricultural |  | $ | 72,409 |  |  | $ | 69,952 |  |  | $ | 96,688 |
Real estate: |  |  |  |  |  |  |  |  |  |  |  |
Construction |  |  | 91,223 |  |  |  | 94,969 |  |  |  | 95,282 |
Mortgage—residential |  |  | 65,759 |  |  |  | 45,498 |  |  |  | 43,928 |
Mortgage—commercial |  |  | 709,218 |  |  |  | 617,464 |  |  |  | 573,258 |
Consumer: |  |  |  |  |  |  |  |  |  |  |  |
Home equity |  |  | 28,723 |  |  |  | 27,116 |  |  |  | 26,442 |
Other |  |  | 13,525 |  |  |  | 8,703 |  |  |  | 8,559 |
Total gross loans |  | $ | 980,857 |  |  | $ | 863,702 |  |  | $ | 844,157 |
Allowance for loan losses |  |  | (11,336 | ) |  |  | (11,179 | ) |  |  | (10,389 | )
Total net loans |  | $ | 969,521 |  |  | $ | 852,523 |  |  | $ | 833,768 |

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In the context of this discussion, a real estate mortgage loan is defined as any loan, other than loans for construction purposes, secured by real estate, regardless of the purpose of the loan. We follow the common practice of financial institutions in our market area 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. Generally, we limit the loan-to-value ratio to 80%. The principal components of our loan portfolio at year-end 2022 and 2021 were commercial mortgage loans in the amount of $704.5 million and $617.5 million, respectively, representing 71.8% and 71.5% of the portfolio, respectively, excluding loans held for sale. Significant portions of these commercial mortgage loans are made to finance owner-occupied real estate. We continue to maintain a conservative philosophy regarding our underwriting guidelines, and believe it will reduce the risk elements of the loan portfolio through strategies that diversify the lending mix.

The previously referenced PPP loans and PPP related credit facility are included in “Commercial, financial & agricultural” loans above.

The repayment of loans in the loan portfolio as they mature is a source of liquidity. The following table sets forth the loans maturing within specified intervals at December 31, 2022.

Loan Maturity Schedule and Sensitivity to Changes in Interest Rates

|  | December 31, 2022 |
(In thousands) |  | One Year or Less |  |  | Over One Year Through Five Years |  |  | Over Five Years Through Fifteen years |  |  | Over Fifteen Years |  |  | Total |
Commercial, financial and agricultural |  | $ | 7,790 |  |  | $ | 36,114 |  |  | $ | 28,505 |  |  | $ | — |  |  | $ | 72,409 |
Real estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Construction(1) |  |  | 21,519 |  |  |  | 21,476 |  |  |  | 48,228 |  |  |  | — |  |  |  | 91,223 |
Mortgage-residential |  |  | 1,494 |  |  |  | 15,658 |  |  |  | 3,458 |  |  |  | 45,149 |  |  |  | 65,759 |
Mortgage-commercial |  |  | 39,059 |  |  |  | 342,536 |  |  |  | 322,802 |  |  |  | 4,821 |  |  |  | 709,218 |
Consumer: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Home equity |  |  | 1,304 |  |  |  | 5,185 |  |  |  | 22,234 |  |  |  | — |  |  |  | 28,723 |
Other |  |  | 2,254 |  |  |  | 8,865 |  |  |  | 2,009 |  |  |  | 397 |  |  |  | 13,55 |
Total |  | $ | 73,420 |  |  | $ | 429,834 |  |  | $ | 427,236 |  |  | $ | 50,367 |  |  | $ | 980,587 |

(1) | Included in construction loans over 5 years through 15 years are a total of $48.2 million in construction-to-permanent loans that will move to their permanent loan category upon completion of the construction phase.

Loans maturing after one year with:

Variable Rate |  | $ | 103,854 |
Fixed Rate |  |  | 803,583 |
|  | $ | 907,437 |

The information presented in the above table is based on the contractual maturities of the individual loans, including loans which may be subject to renewal at their contractual maturity. Renewal of such loans is subject to review and credit approval, as well as modification of terms upon their maturity.

Investment Securities

Our investment securities portfolio is a significant component of our total earning assets. Total investment securities averaged $570.6 million in 2022, as compared to $456.8 million in 2021, which represents 37.0% and 32.2% of the average earning assets for the years ended December 31, 2022 and 2021, respectively. At December 31, 2022 and 2021, our investment securities portfolio amounted to $564.8 million and $566.6 million, respectively.

On June 1, 2022, we reclassified $224.5 million in investments to held-to-maturity (HTM) from available-for-sale (AFS). These securities were transferred at fair value at the time of the transfer, which became the new cost basis for the securities held to maturity. The pretax unrealized net holding loss on the available for sale securities on the date of transfer totaled approximately $16.7 million, and continued to be reported as a component of accumulated other comprehensive loss. This net unrealized loss is being amortized to interest income over the remaining life of the securities as a yield adjustment. There were no gains or losses recognized as a result of this transfer. The remaining pretax unrealized net holding loss on these investments was $15.7 million ($12.4 million net of tax) at December 31, 2022. Our HTM investments totaled $228.7 million and represented approximately 40% of our total investments at December 31, 2022. Our AFS investments totaled $331.9 million or approximately 59% of our total investments at December 31, 2022. Our investments at cost totaled $4.2 million or approximately 1% of our total investments at December 31, 2022.

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At December 31, 2022, the estimated weighted average life of our total investment portfolio was 6.41 years, the modified duration was 4.32, and the weighted average tax equivalent book yield was 3.33%. At December 31, 2022, the estimated weighted average life of our investments held-to-maturity was 7.12 years, the modified duration was 6.15, and the weighted average tax equivalent book yield was 3.41%. At December 31, 2022, the estimated weighted average life of our investments available-for-sale was 5.95 years, the modified duration was 3.15, and the weighted average tax equivalent book yield was 3.28%. At December 31, 2021, the estimated weighted average life of our investment portfolio was 6.82 years, the effective duration was 3.58, and the weighted average tax equivalent book yield was 1.73%.

We held no debt securities rated below investment grade at December 31, 2022 and December 31, 2021.

The following table shows the Available-for Sale investment portfolio composition.

|  | December 31, |
(Dollars in thousands) |  | 2022 |  |  | 2021 |  |  | 2020 |
Securities available-for-sale at fair value: |  |  |  |  |  |  |  |  |  |  |  |
US Treasury Securities |  | $ | 55,982 |  |  | $ | 15,436 |  |  | $ | 1,502 |
Government sponsored enterprises |  |  | 2,074 |  |  |  | 2,501 |  |  |  | 1,006 |
Small Business Administration pools |  |  | 21,088 |  |  |  | 31,273 |  |  |  | 35,498 |
Mortgage-backed securities |  |  | 244,599 |  |  |  | 397,729 |  |  |  | 229,929 |
State and local government |  |  | — |  |  |  | 109,848 |  |  |  | 88,603 |
Corporate and Other Securities |  |  | 8,118 |  |  |  | 8,052 |  |  |  | 3,328 |
Total |  | $ | 331,861 |  |  | $ | 564,839 |  |  | $ | 359,866 |

The following table shows the Held-to-Maturity investment portfolio composition.

|  | December 31, |
(Dollars in thousands) |  | 2022 |  |  | 2021 |  |  | 2020 |
Securities held-to-maturity at fair value: |  |  |  |  |  |  |  |  |  |  |  |
US Treasury Securities |  | $ | — |  |  | $ | — |  |  | $ | — |
Government sponsored enterprises |  |  | — |  |  |  | — |  |  |  | — |
Small Business Administration pools |  |  | — |  |  |  | — |  |  |  | — |
Mortgage-backed securities |  |  | 113,116 |  |  |  | — |  |  |  | — |
State and local government |  |  | 100,497 |  |  |  | — |  |  |  | — |
Corporate and Other Securities |  |  | — |  |  |  | — |  |  |  | — |
Total |  | $ | 213,613 |  |  | $ | — |  |  | $ | — |

We hold other investments carried at cost totaling $4.2 million and $1.8 million at December 31, 2022 and 2021, respectively. Other investments, at cost, include Federal Home Loan Bank (“FHLB”) stock in the amount of $2.9 million, corporate stock in the amount of $1.0 million, and a venture capital fund in the amount of $274.1 thousand at December 31, 2022. The Company held FHLB stock in the amount of $698.4 thousand, corporate stock in the amount of $1.0 million, and a venture capital fund in the amount of $86.7 thousand at December 31, 2021. These are equity securities without readily determinable fair values. Investment in the FHLB of Atlanta is a condition of borrowing from the FHLB Atlanta. FHLB stock is carried at cost, and periodically evaluated for impairment based on an assessment of the ultimate recovery of par value. Both cash and stock dividends are reported as interest income. Dividends received on other investments, at cost are reported as interest income.

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Investment Securities Maturity Distribution and Yields

The following table shows, at amortized cost, the expected maturities and weighted average yield, which is calculated using amortized cost as the weight and tax-equivalent book yield, of securities held at December 31, 2022:

(In thousands) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  | After One But |  |  | After Five But |  |  |  |  |  |  |
|  | Within One Year |  |  | Within Five Years |  |  | Within Ten Years |  |  | After Ten Years |
Available-for-sale: |  | Amount |  |  | Yield |  |  | Amount |  |  | Yield |  |  | Amount |  |  | Yield |  |  | Amount |  |  | Yield |
US Treasury Securities |  | $ | — |  |  |  | — |  |  | $ | 45,781 |  |  |  | 0.67 | % |  | $ | 14,770 |  |  |  | 0.08 | % |  | $ | — |  |  |  | — |
Government sponsored enterprises |  |  | — |  |  |  | — |  |  | $ | 2,500 |  |  |  | 0.04 | % |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Small Business Administration pools |  | $ | 335 |  |  |  | 0.17 | % |  |  | 19,085 |  |  |  | 0.76 | % |  |  | 2,237 |  |  |  | 0.04 | % |  |  | — |  |  |  | — |
Mortgage-backed securities |  |  | 870 |  |  |  | 0.50 | % |  |  | 40,461 |  |  |  | 0.77 | % |  |  | 202,863 |  |  |  | 2.65 | % |  |  | 19,517 |  |  |  | 2.91 | %
State and local government |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Corporate and other securities |  |  | 10 |  |  |  | 0.03 | % |  |  | 5,764 |  |  |  | 0.20 | % |  |  | 2,986 |  |  |  | 0.06 | % |  |  | 9 |  |  |  | — |
Total investment securities available-for-sale |  | $ | 1,215 |  |  |  | 0.70 | % |  | $ | 113,591 |  |  |  | 2.44 | % |  | $ | 222,856 |  |  |  | 2.83 | % |  | $ | 19,526 |  |  |  | 2.91 | %
(In thousands) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  | After One But |  |  | After Five But |  |  |  |  |  |  |
|  | Within One Year |  |  | Within Five Years |  |  | Within Ten Years |  |  | After Ten Years |
Held-to-Maturity: |  | Amount |  |  | Yield |  |  | Amount |  |  | Yield |  |  | Amount |  |  | Yield |  |  | Amount |  |  | Yield |
US Treasury Securities |  | $ | — |  |  |  | — |  |  | $ | — |  |  |  | — |  |  | $ | — |  |  |  | — |  |  | $ | — |  |  |  | — |
Government sponsored enterprises |  |  | — |  |  |  | — |  |  | $ | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Small Business Administration pools |  | $ | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Mortgage-backed securities |  |  | 3,228 |  |  |  | 0.85 | % |  |  | 24,520 |  |  |  | 2.16 | % |  |  | 81,646 |  |  |  | 1.86 | % |  |  | 12,381 |  |  |  | 0.97 | %
State and local government |  |  | 3,236 |  |  |  | 0.47 | % |  |  | 14,664 |  |  |  | 0.96 | % |  |  | 61,567 |  |  |  | 1.42 | % |  |  | 27,462 |  |  |  | 2.63 | %
Corporate and other securities |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Total investment securities held-to-maturity |  | $ | 6,464 |  |  |  | 1.33 | % |  | $ | 39,184 |  |  |  | 3.12 | % |  | $ | 143,213 |  |  |  | 3.29 | % |  | $ | 39,843 |  |  |  | 3.59 | %

Short-Term Investments

Short-term investments, which consist of federal funds sold, securities purchased under agreements to resell and interest bearing deposits, averaged $50.5 million in 2022, as compared to $73.4 million in 2021. The decline in short-term investments in 2022 is primarily due to loan growth exceeding deposit growth, which resulted in short-term investments used to fund loan growth. We maintain the majority of our short-term overnight investments in our account at the Federal Reserve rather than in federal funds at various correspondent banks due to the lower regulatory capital risk weighting. At December 31, 2022, short-term investments including funds on deposit at the Federal Reserve totaled $12.9 million. These funds are an immediate source of liquidity and are generally invested in an earning capacity on an overnight basis.

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Deposits and Other Interest-Bearing Liabilities

Deposits. Average deposits were $1.4 billion during 2022, compared to $1.3 billion during 2021, and $1.1 billion during 2020. Total deposits were $1.4 billion at December 31, 2022 compared to $1.4 billion at December 31, 2021, and $1.2 billion at December 31, 2020. Average interest-bearing deposits were $948.3 million during 2022, as compared to $869.7 million during 2021, and $743.4 million during 2020. Total interest-bearing deposits were $924.4 million at December 31, 2022 compared to $916.6 million at December 31, 2021, and $803.9 million at December 31, 2020. These increases are primarily due to organic deposit growth and PPP loan proceeds and other stimulus funds related to the COVID-19 pandemic being held in customers deposit accounts. Total uninsured deposits were $407.0 million and $392.2 million at December 31, 2022 and December 31, 2021, respectively. Included in uninsured deposits at December 31, 2022 and December 31, 2021 were $59.5 million and $55.2 million of collateralized public funds, respectively. We had no brokered deposits and no listing services deposits at December 31, 2022, December 31, 2021, and December 31, 2020.

The following table sets forth the deposits by category:

|  | December 31, |
|  | 2022 |  |  | 2021 |  |  | 2020 |
(In thousands) |  | Amount |  |  | % of Deposits |  |  | Amount |  |  | % of Deposits |  |  | Amount |  |  | % of Deposits |
Demand deposit accounts |  | $ | 461,010 |  |  |  | 33.3 | % |  | $ | 444,688 |  |  |  | 32.7 | % |  | $ | 385,511 |  |  |  | 32.4 | %
Interest bearing checking accounts |  |  | 334,540 |  |  |  | 24.1 | % |  |  | 331,638 |  |  |  | 24.4 | % |  |  | 278,077 |  |  |  | 23.4 | %
Money market accounts |  |  | 295,223 |  |  |  | 21.3 | % |  |  | 287,419 |  |  |  | 21.1 | % |  |  | 242,128 |  |  |  | 20.4 | %
Savings accounts |  |  | 161,770 |  |  |  | 11.7 | % |  |  | 143,765 |  |  |  | 10.5 | % |  |  | 123,032 |  |  |  | 10.3 | %
Time deposits less than $100,000 |  |  | 66,410 |  |  |  | 4.8 | % |  |  | 74,489 |  |  |  | 5.5 | % |  |  | 78,794 |  |  |  | 6.6 | %
Time deposits more than $100,000 |  |  | 66,429 |  |  |  | 4.8 | % |  |  | 79,292 |  |  |  | 5.8 | % |  |  | 81,871 |  |  |  | 6.9 | %
Total deposits |  | $ | 1,385,382 |  |  |  | 100.0 | % |  | $ | 1,361,291 |  |  |  | 100.0 | % |  | $ | 1,189,413 |  |  |  | 100.0 | %

Large certificate of deposit customers, whom we identify as those of $100 thousand or more, tend to be extremely sensitive to interest rate levels, making these deposits less reliable sources of funding for liquidity planning purposes than core deposits. Core deposits, which exclude time deposits of $100 thousand or more, provide a relatively stable funding source for the loan portfolio and other earning assets. Core deposits were $1.3 billion and $1.3 billion at December 31, 2022 and 2021, respectively. Time deposits greater than $250 thousand, the FDIC deposit insurance coverage limit, amounted to $25.0 million and $27.9 million at December 31, 2022 and December 31, 2021, respectively.

A stable base of deposits is expected to continue to be the primary source of funding to meet both our short-term and long-term liquidity needs in the future. The maturity distribution of time deposits is shown in the following table.

Maturities of Certificates of Deposit and Other Time Deposit of $250,000 or More

At December 31, 2022, time deposits in excess of the FDIC insurance limit were as follows:

|  | December 31, 2022 |
(In thousands) |  | Within Three Months |  |  | After Three Through Six Months |  |  | After Six Through Twelve Months |  |  | After Twelve Months |  |  | Total |
Time deposits of $250,000 or more |  | $ | 2,586 |  |  | $ | 619 |  |  | $ | 5,315 |  |  | $ | 976 |  |  | $ | 9,496 |

Borrowed funds. Borrowed funds consist of fed funds purchased, securities sold under agreements to repurchase, FHLB advances and long-term debt, which is a result of issuing $15.0 million in trust preferred securities. Short-term borrowings in the form of securities sold under agreements to repurchase averaged $74.8 million, $62.2 million and $49.5 million during 2022, 2021 and 2020, respectively. The maximum month-end balances during 2022, 2021 and 2020 were $93.4 million, $72.4 million and $73.0 million, respectively. The average rates paid during these periods were 0.30%, 0.14% and 0.38%, respectively. The balances of securities sold under agreements to repurchase were $68.7 million and $54.2 million at December 31, 2022 and 2021, respectively. The repurchase agreements all mature within one to four days and are generally originated with customers that have other relationships with us and tend to provide a stable and predictable source of funding. Federal funds purchased averaged $1.5 million, zero and seven thousand dollars during 2022, 2021 and 2020, respectively. The average rates paid during these periods were 3.54%, 0.00% and 0.00%, respectively. The balances of federal funds purchased were $22.0 million and zero at December 31, 2022 and 2021, respectively. As a member of the FHLB, the Bank has access to advances from the FHLB for various terms and amounts. FHLB advances averaged $9.5 million, zero and $2.0 million during 2022, 2021 and 2020, respectively. The average rates paid during these periods were 3.91%, 0.00% and 0.40%, respectively. The balances of FHLB advances were $50.0 million and zero at December 31, 2022 and 2021, respectively.

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At December 31, 2022, FHLB advance maturities were as follows:

|  | December 31, 2022 |
(In thousands) |  | Within Three Months |  |  | After Three Through Six Months |  |  | After Six Through Twelve Months |  |  | After Twelve Months |  |  | Total |
FHLB Advances |  | $ | 50,000 |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 50,000 |

The $50 million in FHLB advances at December 31, 2022 had maturity dates between January 17, 2023 and March 7, 2023 with interest rates between 4.15% and 4.63%. There were no FHLB Advances as of December 31, 2021.

In addition to the above borrowings, we issued $15.5 million in trust preferred securities on September 16, 2004. During the fourth quarter of 2015, we redeemed $500 thousand of these securities. The securities accrue and pay distributions quarterly at a rate of three month LIBOR plus 257 basis points. The remaining debt may be redeemed in full anytime with notice and matures on September 16, 2034. Trust preferred securities averaged $15.0 million during 2022, 2021 and 2020. The average rates paid during these periods were 4.51%, 2.78% and 3.58%, respectively. The balances of trust preferred securities were $15.0 million at December 31, 2022 and 2021.

Capital Adequacy and Dividend Policy

Capital Adequacy

Shareholders’ equity declined to 7.1% of total assets at December 31, 2022 from 8.9% at December 31, 2021 due to total asset growth of $88.4 million compared to total shareholders’ equity decline of $22.6 million. The growth in total assets was primarily due to growth of $117.2 million in loans held-for-investment and $11.6 million in other assets partially offset by declines of $31.6 million in cash and interest bearing bank balances, $5.3 million in loans held-for-sale, and $1.9 million in investment securities. The $22.6 million decline in shareholders’ equity was due to a $35.7 million reduction in accumulated other comprehensive income (loss) partially offset by a $10.7 million increase in retention of earnings less dividends paid, the transfer of $1.2 million in deferred board compensation stock units from other liabilities to shareholders’ equity, the transfer of $0.2 million in restricted stock units from other liabilities to shareholder’s equity, a $0.5 million increase due to employee and director stock awards, and a $0.4 million increase due to dividend reinvestment plan (DRIP) purchases. The decline in accumulated other comprehensive income was due to an increase in market interest rates, which has a temporary negative impact on the fair value of our investment securities portfolio and on accumulated other comprehensive income (loss), which is included in shareholders’ equity. On June 1, 2022, we reclassified $224.5 million in investments to held-to-maturity (HTM) from available-for-sale (AFS). These securities were transferred at fair value at the time of the transfer, which became the new cost basis for the securities held to maturity. The pretax unrealized net holding loss on the available for sale securities on the date of transfer totaled approximately $16.7 million, and continued to be reported as a component of accumulated other comprehensive loss. This net unrealized loss is being amortized to interest income over the remaining life of the securities as a yield adjustment. There were no gains or losses recognized as a result of this transfer. The remaining pretax unrealized net holding loss on these investments was $15.7 million ($12.4 million net of tax) at December 31, 2022. Our HTM investments totaled $228.7 million and represented approximately 40% of our total investments at December 31, 2022. Our AFS investments totaled $331.9 million or approximately 59% of our total investments with a modified duration of 3.15 at December 31, 2022. Our investments at cost totaled $4.2 million or approximately 1% of our total investments at December 31, 2022.

On April 12, 2021, we announced that our Board of Directors approved the repurchase of up to 375,000 shares of our common stock (the “2021 Repurchase Plan”), which represents approximately 5% of our 7,548,638 shares outstanding as of December 31, 2021. No share repurchases were made under the 2021 Repurchase Plan prior to its expiration at the market close on March 31, 2022. On April 20, 2022, we announced that our Board of Directors approved the repurchase of up to 375,000 shares of our common stock (the “2022 Repurchase Plan”), which represented approximately 5% of our 7,577,912 shares outstanding as of December 31, 2022. No repurchases have been made under the 2022 Repurchase Plan. The 2022 Repurchase Plan expires at the market close on December 31, 2023.

During each quarter in 2020 and 2021, we paid a $0.12 per share dividend on our common stock. During each quarter in 2022, we paid an $0.13 per share dividend on our common stock. On January 18, 2023, we announced a $0.14 per share dividend payable on February 14, 2023 to shareholders of record of our common stock on January 31, 2023.

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In addition, we have a dividend reinvestment plan that allows existing shareholders the option of reinvesting cash dividends as well as making optional purchases of up to $5,000 in the purchase of common stock per quarter.

The following table shows the return on average assets (net income divided by average total assets), return on average equity (net income divided by average equity), and equity to assets ratio for the three years ended December 31, 2022.

|  | 2022 |  |  | 2021 |  |  | 2020 |
Return on average assets |  |  | 0.88 | % |  |  | 1.02 | % |  |  | 0.78 | %
Return on average common equity |  |  | 11.99 | % |  |  | 11.22 | % |  |  | 7.84 | %
Equity to assets ratio |  |  | 7.08 | % |  |  | 8.90 | % |  |  | 9.77 | %
Dividend Payout Ratio |  |  | 26.78 | % |  |  | 23.24 | % |  |  | 35.38 | %

While the Company is currently a small bank holding company and so generally is not subject to Basel III capital requirements, our Bank remains subject to such capital requirements. See “Supervision and Regulation—Basel Capital Standards” for additional information on Basel III and the Dodd-Frank Act.

The Bank exceeded the regulatory capital ratios at December 31, 2022 and 2021, as set forth in the following table:

(In thousands) |  | Required Amount |  |  | % |  |  | Actual Amount |  |  | % |  |  | Excess Amount |  |  | % |
The Bank(1)(2): |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
December 31, 2022 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Risk Based Capital |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Tier 1 |  | $ | 64,741 |  |  |  | 6.0 | % |  | $ | 145,578 |  |  |  | 13.5 | % |  | $ | 80,837 |  |  |  | 7.5 | %
Total Capital |  |  | 86,321 |  |  |  | 8.0 | % |  |  | 156,914 |  |  |  | 14.5 | % |  |  | 70,593 |  |  |  | 6.5 | %
CET1 |  |  | 48,555 |  |  |  | 4.5 | % |  |  | 145,578 |  |  |  | 13.5 | % |  |  | 97,023 |  |  |  | 9.0 | %
Tier 1 Leverage |  |  | 67,509 |  |  |  | 4.0 | % |  |  | 145,578 |  |  |  | 8.6 | % |  |  | 78,069 |  |  |  | 4.6 | %
December 31, 2021 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Risk Based Capital |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Tier 1 |  | $ | 57,075 |  |  |  | 6.0 | % |  | $ | 132,918 |  |  |  | 14.0 | % |  | $ | 75,843 |  |  |  | 8.0 | %
Total Capital |  |  | 76,101 |  |  |  | 8.0 | % |  |  | 144,097 |  |  |  | 15.1 | % |  |  | 67,996 |  |  |  | 7.1 | %
CET1 |  |  | 42,807 |  |  |  | 4.5 | % |  |  | 132,918 |  |  |  | 14.0 | % |  |  | 90,111 |  |  |  | 9.5 | %
Tier 1 Leverage |  |  | 62,897 |  |  |  | 4.0 | % |  |  | 132,918 |  |  |  | 8.5 | % |  |  | 70,021 |  |  |  | 4.5 | %

(1) | As a small bank holding company, the Company is generally not subject to the Basel III capital requirements unless otherwise advised by the Federal Reserve.
(2) | Required Amounts and Required Ratios do not include the capital conservation buffer of 2.5%.

Dividend Policy

Since we are a bank holding company, our ability to declare and pay dividends is dependent on certain federal and state regulatory considerations, including the guidelines of the Federal Reserve. The Federal Reserve has issued a policy statement regarding the payment of dividends by bank holding companies. In general, the Federal Reserve’s policies provide that dividends should be paid only out of current earnings and only if the prospective rate of earnings retention by the bank holding company appears consistent with the organization’s capital needs, asset quality and overall financial condition. The Federal Reserve’s policies also require that a bank holding company serve as a source of financial strength to its subsidiary banks 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.

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Because the Company is a legal entity separate and distinct from the Bank and does not conduct stand-alone operations, the Company’s ability to pay dividends depends on the ability of the Bank to pay dividends to the Company, which is also subject to regulatory restrictions. As a South Carolina-chartered bank, the Bank is subject to limitations on the amount of dividends that it is permitted to pay. Unless otherwise instructed by the S.C. Board, the Bank is generally permitted under South Carolina state banking regulations to pay cash dividends of up to 100% of net income in any calendar year without obtaining the prior approval of the S.C. Board. In addition, the Bank must maintain a capital conservation buffer, above its regulatory minimum capital requirements, consisting entirely of Common Equity Tier 1 capital, in order to avoid restrictions with respect to its payment of dividends to First Community Corporation. 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.

Liquidity Management

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

We had no brokered deposits and no listing services deposits at December 31, 2022 and December 31, 2021. We believe that we have ample liquidity to meet the needs of our customers 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 FHLB.

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. Furthermore, we believe that we will have access to adequate liquidity and capital to support the long-term operations of the Bank. Shareholders’ equity declined to 7.1% of total assets at December 31, 2022 from 8.9% at December 31, 2021 due to total asset growth of $88.4 million compared to total shareholders’ equity decline of $22.6 million. The growth in total assets was primarily due to growth of $117.2 million in loans held-for-investment and $11.6 million in other assets partially offset by declines of $31.6 million in cash and interest bearing bank balances, $5.3 million in loans held-for-sale, and $1.9 million in investment securities. The $22.6 million decline in shareholders’ equity was due to a $35.7 million reduction in accumulated other comprehensive income (loss) partially offset by a $10.7 million increase in retention of earnings less dividends paid, the transfer of $1.2 million in deferred board compensation stock units from other liabilities to shareholders’ equity, the transfer of $0.2 million in restricted stock units from other liabilities to shareholder’s equity, a $0.5 million increase due to employee and director stock awards, and a $0.4 million increase due to dividend reinvestment plan (DRIP) purchases. The decline in accumulated other comprehensive income was due to an increase in market interest rates, which has a temporary negative impact on the fair value of our investment securities portfolio and on accumulated other comprehensive income (loss), which is included in shareholders’ equity. On June 1, 2022, we reclassified $224.5 million in investments to held-to-maturity (HTM) from available-for-sale (AFS). These securities were transferred at fair value at the time of the transfer, which became the new cost basis for the securities held to maturity. The pretax unrealized net holding loss on the available for sale securities on the date of transfer totaled approximately $16.7 million, and continued to be reported as a component of accumulated other comprehensive loss. This net unrealized loss is being amortized to interest income over the remaining life of the securities as a yield adjustment. There were no gains or losses recognized as a result of this transfer. The remaining pretax unrealized net holding loss on these investments was $15.7 million ($12.4 million net of tax) at December 31, 2022. Our HTM investments totaled $228.7 million and represented approximately 40% of our total investments at December 31, 2022. Our AFS investments totaled $331.9 million or approximately 59% of our total investments with a modified duration of 3.15 at December 31, 2022. Our investments at cost totaled $4.2 million or approximately 1% of our total investments at December 31, 2022.

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The Bank maintains federal funds purchased lines in the total amount of $65.0 million with three financial institutions and $10 million through the Federal Reserve Discount Window. We utilized $22 million of our federal funds purchased lines at December 31, 2022 compared to zero at December 31, 2021. The FHLB of Atlanta has approved a line of credit of up to 25% of the Bank’s assets, which, when utilized, is collateralized by a pledge against specific investment securities and/or eligible loans. We had $50 million in FHLB advances at December 31, 2022 compared to zero at December 31, 2021. The $50 million in FHLB advances at December 31, 2022 had maturity dates between January 17, 2023 and March 7, 2023 with interest rates between 4.15% and 4.63%.

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 December 31, 2022, we had issued commitments to extend unused credit of $156.9 million, including $47.3 million in unused home equity lines of credit, through various types of lending arrangements. At December 31, 2021, we had issued commitments to extend unused credit of $137.4 million, including $42.9 million in unused home equity lines of credit, through various types of lending arrangements. We evaluate each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by us upon extension of credit, is based on our credit evaluation of the borrower. Collateral varies but may include accounts receivable, inventory, property, plant and equipment, commercial and residential real estate. We manage the credit risk on these commitments by subjecting them to normal underwriting and risk management processes.

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

Off-Balance Sheet Arrangements

In the normal course of operations, we engage in a variety of financial transactions that, in accordance with GAAP, are not recorded in the financial statements, or are recorded in amounts that differ from the notional amounts. These transactions involve, to varying degrees, elements of credit, interest rate, and liquidity risk. Such transactions are used by the company for general corporate purposes or for customer needs. Corporate purpose transactions are used to help manage credit, interest rate, and liquidity risk or to optimize capital. Customer transactions are used to manage customers’ requests for funding. Please refer to Note 15 of our financial statements for a discussion of our off-balance sheet arrangements.

Impact of Inflation

Unlike most industrial companies, the assets and liabilities of financial institutions such as the Company and the Bank are primarily monetary in nature. Therefore, interest rates have a more significant effect on our performance than do the effects of changes in the general rate of inflation and change in prices. In addition, interest rates do not necessarily move in the same direction or in the same magnitude as the prices of goods and services. However, we are not immune from changes occurring in inflation, which risks include a decrease in demand for new mortgage loan and commercial real estate loan originations and refinancings, an increase in competition for deposits, and an increase in non-interest expenses, which may have an adverse impact on our financial performance. As discussed previously, we continually seek to manage the relationships between interest sensitive assets and liabilities in order to protect against wide interest rate fluctuations, including those resulting from inflation.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Not Applicable

Item 8. Financial Statements and Supplementary Data.

Additional information required under this Item 8 may be found under the accompanying Financial Statements and Notes to Financial Statements under Note 23.

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MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) promulgated under the Securities Exchange Act of 1934 as a process designed by, or under the supervision of, our principal executive and principal financial officers and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles and includes those policies and procedures that:

| · | Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;
| · | Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
| · | Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Our management assessed the effectiveness of our internal controls over financial reporting as of December 31, 2022. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control—Integrated Framework issued in 2013.

Based on that assessment, we believe that, as of December 31, 2022, our internal control over financial reporting is effective based on those criteria.

/s/ Michael C. Crapps |  | /s/ D. Shawn Jordan
Chief Executive Officer and President |  | Executive Vice President and Chief Financial Officer

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Report of Independent Registered Public Accounting Firm

To the Shareholders and the Board of Directors of First Community Corporation:

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of First Community Corporation and its subsidiary (the Company) as of December 31, 2022 and 2021, the related consolidated statements of income, comprehensive income (loss), changes in shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2022, and the related notes to the consolidated financial statements (collectively, the consolidated financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Allowance for Loan Losses

As described in Note 4 to the Company’s financial statements, the Company has a loan portfolio, net of deferred fees of approximately $980.9 million and related allowance for loan losses of approximately $11.3 million as of December 31, 2022. As described by the Company in Note 2, the evaluation of the allowance for loan losses is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. The allowance for loan losses is evaluated on a regular basis. Management’s determination of the adequacy of the allowance is based on an evaluation of the portfolio, past loss experience, economic conditions and volume, growth and composition of the portfolio.

We identified the Company’s estimate of the allowance for loan losses as a critical audit matter. The principal considerations for our determination of the allowance for loan losses as a critical audit matter related to the high degree of subjectivity in the Company’s judgments in determining the qualitative factors. Auditing these complex judgments and assumptions by the Company involves especially challenging auditor judgment due to the nature and extent of audit evidence and effort required to address these matters, including the extent of specialized skill or knowledge needed.

76

The primary procedures we performed to address this critical audit matter included the following:

| · | We evaluated the relevance and the reasonableness of assumptions related to evaluation of the loan portfolio, current economic conditions, and other risk factors used in development of the qualitative factors for collectively evaluated loans.
| · | We validated the completeness and accuracy of the underlying data used to develop the factors.
| · | We validated the mathematical accuracy of the calculation.
| · | We evaluated the reasonableness of assumptions and data used by the Company in developing the qualitative factors by comparing these data points to internally developed and third-party sources, as well as other audit evidence gathered.
| · | Analytical procedures were performed to evaluate the directional consistency of changes that occurred in the allowance for loan losses for loans collectively evaluated for impairment.

/s/ Elliott Davis, LLC

Firm ID: 149

We have served as the Company’s auditor since 2006.

Columbia, South Carolina

March 22, 2023

77

FIRST COMMUNITY CORPORATION

Consolidated Balance Sheets

|  | December 31, |
(Dollars in thousands, except par values) |  | 2022 |  |  | 2021 |
ASSETS |  |  |  |  |  |  |  |
Cash and due from banks |  | $ | 24,464 |  |  | $ | 21,973 |
Interest-bearing bank balances |  |  | 12,937 |  |  |  | 47,049 |
Investment securities available-for-sale |  |  | 331,862 |  |  |  | 564,839 |
Investment securities held-to-maturity, fair value of $213,613 and $0 at December 31, 2022 and December 31, 2021, respectively |  |  | 228,701 |  |  |  | — |
Other investments, at cost |  |  | 4,191 |  |  |  | 1,785 |
Loans held-for-sale |  |  | 1,779 |  |  |  | 7,120 |
Loans held-for-investment |  |  | 980,857 |  |  |  | 863,702 |
Less, allowance for loan losses |  |  | 11,336 |  |  |  | 11,179 |
Net loans held-for-investment |  |  | 969,521 |  |  |  | 852,523 |
Property and equipment - net |  |  | 31,277 |  |  |  | 32,831 |
Lease right-of-use asset |  |  | 2,702 |  |  |  | 2,842 |
Bank owned life insurance |  |  | 29,952 |  |  |  | 29,231 |
Other real estate owned |  |  | 934 |  |  |  | 1,165 |
Intangible assets |  |  | 761 |  |  |  | 919 |
Goodwill |  |  | 14,637 |  |  |  | 14,637 |
Other assets |  |  | 19,228 |  |  |  | 7,594 |
Total assets |  | $ | 1,672,946 |  |  | $ | 1,584,508 |
LIABILITIES |  |  |  |  |  |  |  |
Deposits: |  |  |  |  |  |  |  |
Non-interest bearing |  | $ | 461,010 |  |  | $ | 444,688 |
Interest bearing |  |  | 924,372 |  |  |  | 916,603 |
Total deposits |  |  | 1,385,382 |  |  |  | 1,361,291 |
Securities sold under agreements to repurchase |  |  | 68,743 |  |  |  | 54,216 |
Federal funds purchased |  |  | 22,000 |  |  |  | — |
Federal Home Loan Bank advances |  |  | 50,000 |  |  |  | — |
Junior subordinated debt |  |  | 14,964 |  |  |  | 14,964 |
Lease liability |  |  | 2,832 |  |  |  | 2,950 |
Other liabilities |  |  | 10,664 |  |  |  | 10,089 |
Total liabilities |  |  | 1,554,585 |  |  |  | 1,443,510 |
Commitments and Contingencies (Note 15) |  |  |  |  |  |  |  |
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 7,577,912 at December 31, 2022 and 7,548,638 at December 31, 2021 |  |  | 7,578 |  |  |  | 7,549 |
Nonvested restricted stock and stock units |  |  | 1,461 |  |  |  | (294 | )
Additional paid in capital |  |  | 92,683 |  |  |  | 92,139 |
Retained earnings |  |  | 49,025 |  |  |  | 38,325 |
Accumulated other comprehensive (loss) income |  |  | (32,386 | ) |  |  | 3,279 |
Total shareholders’ equity |  |  | 118,361 |  |  |  | 140,998 |
Total liabilities and shareholders’ equity |  | $ | 1,672,946 |  |  | $ | 1,584,508 |

See Notes to Consolidated Financial Statements

78

FIRST COMMUNITY CORPORATION

Consolidated Statements of Income

|  | Year Ended December 31, |
(Dollars in thousands except per share amounts) |  | 2022 |  |  | 2021 |  |  | 2020 |
Interest income: |  |  |  |  |  |  |  |  |  |  |  |
Loans, including fees |  | $ | 39,234 |  |  | $ | 39,671 |  |  | $ | 37,037 |
Investment securities - taxable |  |  | 9,725 |  |  |  | 6,155 |  |  |  | 5,011 |
Investment securities - non taxable |  |  | 1,525 |  |  |  | 1,564 |  |  |  | 1,454 |
Other short term investments and CDs |  |  | 633 |  |  |  | 130 |  |  |  | 276 |
Total interest income |  |  | 51,117 |  |  |  | 47,520 |  |  |  | 43,778 |
Interest expense: |  |  |  |  |  |  |  |  |  |  |  |
Deposits |  |  | 1,849 |  |  |  | 1,740 |  |  |  | 3,021 |
Securities sold under agreement to repurchase |  |  | 227 |  |  |  | 85 |  |  |  | 190 |
Other borrowed money |  |  | 1,098 |  |  |  | 416 |  |  |  | 544 |
Total interest expense |  |  | 3,174 |  |  |  | 2,241 |  |  |  | 3,755 |
Net interest income |  |  | 47,943 |  |  |  | 45,279 |  |  |  | 40,023 |
Provision for (release of) loan losses |  |  | (152 | ) |  |  | 335 |  |  |  | 3,663 |
Net interest income after provision for (release of) loan losses |  |  | 48,095 |  |  |  | 44,944 |  |  |  | 36,360 |
Non-interest income: |  |  |  |  |  |  |  |  |  |  |  |
Deposit service charges |  |  | 960 |  |  |  | 977 |  |  |  | 1,121 |
Mortgage banking income |  |  | 1,900 |  |  |  | 4,319 |  |  |  | 5,557 |
Investment advisory fees and non-deposit commissions |  |  | 4,479 |  |  |  | 3,995 |  |  |  | 2,720 |
Gain on sale of securities |  |  | — |  |  |  | — |  |  |  | 99 |
Gain (loss) on sale of other real estate owned |  |  | (45 | ) |  |  | 77 |  |  |  | 147 |
Gain (loss) on sale of other assets |  |  | (73 | ) |  |  | 117 |  |  |  | — |
Other non-recurring income |  |  | 7 |  |  |  | 171 |  |  |  | 311 |
Other |  |  | 4,341 |  |  |  | 4,248 |  |  |  | 3,814 |
Total non-interest income |  |  | 11,569 |  |  |  | 13,904 |  |  |  | 13,769 |
Non-interest expense: |  |  |  |  |  |  |  |  |  |  |  |
Salaries and employee benefits |  |  | 25,357 |  |  |  | 24,494 |  |  |  | 24,026 |
Occupancy |  |  | 3,002 |  |  |  | 2,947 |  |  |  | 2,709 |
Equipment |  |  | 1,343 |  |  |  | 1,296 |  |  |  | 1,237 |
Marketing and public relations |  |  | 1,259 |  |  |  | 1,173 |  |  |  | 1,043 |
FDIC Insurance assessments |  |  | 468 |  |  |  | 618 |  |  |  | 404 |
Other real estate expense |  |  | 308 |  |  |  | 105 |  |  |  | 201 |
Amortization of intangibles |  |  | 158 |  |  |  | 201 |  |  |  | 363 |
Other |  |  | 9,358 |  |  |  | 8,367 |  |  |  | 7,551 |
Total non-interest expense |  |  | 41,253 |  |  |  | 39,201 |  |  |  | 37,534 |
Net income before tax |  |  | 18,411 |  |  |  | 19,647 |  |  |  | 12,595 |
Income tax expense |  |  | 3,798 |  |  |  | 4,182 |  |  |  | 2,496 |
Net income |  | $ | 14,613 |  |  | $ | 15,465 |  |  | $ | 10,099 |
Basic earnings per common share |  | $ | 1.94 |  |  | $ | 2.06 |  |  | $ | 1.36 |
Diluted earnings per common share |  | $ | 1.92 |  |  | $ | 2.05 |  |  | $ | 1.35 |

See Notes to Consolidated Financial Statements

79

FIRST COMMUNITY CORPORATION

Consolidated Statements of Comprehensive Income (Loss)

|  | Year ended December 31, |
(Dollars in thousands) |  | 2022 |  |  | 2021 |  |  | 2020 |
Net income |  | $ | 14,613 |  |  | $ | 15,465 |  |  | $ | 10,099 |
Other comprehensive income (loss): |  |  |  |  |  |  |  |  |  |  |  |
Unrealized gain (loss) during the period on available for sale securities, net of tax benefit (expense) of $6,190, $2,128 and ($2,360), respectively |  |  | (23,285 | ) |  |  | (8,008 | ) |  |  | 8,875 |
Less: Reclassification adjustment for gain included in net income, net of tax benefit of $0, $0, and $21, respectively |  |  | — |  |  |  | — |  |  |  | (78 | )
Unrealized loss during the period on available-for-sale securities transferred to held-to-maturity, net of tax benefit of $3,509, $0, and $0, respectively. |  |  | (13,198 | ) |  |  | — |  |  |  | — |
Reclassification adjustment for amortization of unrealized losses on securities transferred from available-for-sale to held-to-maturity, net of tax expense of $218, $0, and $0 respectively. |  |  | 818 |  |  |  | — |  |  |  | — |
Other comprehensive income (loss) |  |  | (35,665 | ) |  |  | (8,008 | ) |  |  | 8,797 |
Comprehensive income (loss) |  | $ | (21,052 | ) |  | $ | 7,457 |  |  | $ | 18,896 |

See Notes to Consolidated Financial Statements

80

FIRST COMMUNITY CORPORATION

Consolidated Statements of Changes in Shareholders’ Equity

|  | Common Stock |  |  |  |  |  | Nonvested |  |  |  |  |  | Accumulated |  |  |  |
(Dollars and shares in thousands) |  | Number Shares Issued |  |  | Common Stock |  |  | Additional Paid-in Capital |  |  | Restricted Stock and Stock Units |  |  | Retained Earnings |  |  | Other Comprehensive Income (loss) |  |  | Total |
Balance, December 31, 2019 |  |  | 7,440 |  |  | $ | 7,440 |  |  | $ | 90,488 |  |  | $ | (151 | ) |  | $ | 19,927 |  |  | $ | 2,490 |  |  | $ | 120,194 |
Net income |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 10,099 |  |  |  | — |  |  |  | 10,099 |
Other comprehensive income net of tax expense of $2,339 |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 8,797 |  |  |  | 8,797 |
Issuance of restricted stock |  |  | 20 |  |  |  | 20 |  |  |  | 371 |  |  |  | (391 | ) |  |  | — |  |  |  | — |  |  |  | — |
Issuance of common stock |  |  | — |  |  |  | — |  |  |  | 4 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 4 |
Issuance of common stock-deferred compensation |  |  | 18 |  |  |  | 18 |  |  |  | 182 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 200 |
Amortization of compensation on restricted stock |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 259 |  |  |  | — |  |  |  | — |  |  |  | 259 |
Shares forfeited |  |  | (1 | ) |  |  | (1 | ) |  |  | (14 | ) |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (15 | )
Dividends: Common ($0.44 per share) |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (3,573 | ) |  |  | — |  |  |  | (3,573 | )
Dividend reinvestment plan |  |  | 23 |  |  |  | 23 |  |  |  | 349 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 372 |
Balance, December 31, 2020 |  |  | 7,500 |  |  | $ | 7,500 |  |  | $ | 91,380 |  |  | $ | (283 | ) |  | $ | 26,453 |  |  | $ | 11,287 |  |  | $ | 136,337 |
Net income |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 15,465 |  |  |  | — |  |  |  | 15,465 |
Other comprehensive loss net of tax benefit of $2,128 |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (8,008 | ) |  |  | (8,008 | )
Issuance of restricted stock |  |  | 21 |  |  |  | 21 |  |  |  | 353 |  |  |  | (374 | ) |  |  | — |  |  |  | — |  |  |  | — |
Issuance of common stock |  |  | 2 |  |  |  | 2 |  |  |  | 44 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 46 |
Issuance of common stock-deferred compensation |  |  | 10 |  |  |  | 10 |  |  |  | 80 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 90 |
Amortization of compensation on restricted stock |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 363 |  |  |  | — |  |  |  | — |  |  |  | 363 |
Shares forfeited |  |  | (4 | ) |  |  | (4 | ) |  |  | (66 | ) |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (70 | )
Dividends: Common ($0.48 per share) |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (3,593 | ) |  |  | — |  |  |  | (3,593 | )
Dividend reinvestment plan |  |  | 20 |  |  |  | 20 |  |  |  | 348 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 368 |
Balance, December 31, 2021 |  |  | 7,549 |  |  | $ | 7,549 |  |  | $ | 92,139 |  |  | $ | (294 | ) |  | $ | 38,325 |  |  | $ | 3,279 |  |  | $ | 140,998 |
Net income |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 14,613 |  |  |  | — |  |  |  | 14,613 |
Other comprehensive loss net of tax benefit of $9,481 |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (35,665 | ) |  |  | (35,665 | )
Issuance of restricted stock |  |  | 9 |  |  |  | 9 |  |  |  | 190 |  |  |  | (199 | ) |  |  | — |  |  |  | — |  |  |  | — |
Issuance of common stock |  |  | 1 |  |  |  | 1 |  |  |  | 27 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 28 |
Grant of restricted stock units |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 1,447 |  |  |  | — |  |  |  | — |  |  |  | 1,447 |
Amortization of compensation on restricted stock |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 507 |  |  |  | — |  |  |  | — |  |  |  | 507 |
Shares forfeited |  |  | (2 | ) |  |  | (2 | ) |  |  | (40 | ) |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (42 | )
Dividends: Common ($0.52 per share) |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (3,913 | ) |  |  | — |  |  |  | (3,913 | )
Dividend reinvestment plan |  |  | 21 |  |  |  | 21 |  |  |  | 367 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 388 |
Balance, December 31, 2022 |  |  | 7,578 |  |  | $ | 7,578 |  |  | $ | 92,683 |  |  | $ | 1,461 |  |  | $ | 49,025 |  |  | $ | (32,386 | ) |  | $ | 118,361 |

See Notes to Consolidated Financial Statements

81

FIRST COMMUNITY CORPORATION

Consolidated Statements of Cash Flows

|  | Year Ended December 31, |
(Amounts in thousands) |  | 2022 |  |  | 2021 |  |  | 2020 |
Cash flows from operating activities: |  |  |  |  |  |  |  |  |  |  |  |
Net income |  | $ | 14,613 |  |  | $ | 15,465 |  |  | $ | 10,099 |
Adjustments to reconcile net income to net cash (used) provided in operating activities |  |  |  |  |  |  |  |  |  |  |  |
Depreciation |  |  | 1,663 |  |  |  | 1,714 |  |  |  | 1,637 |
Net premium amortization AFS |  |  | 1,869 |  |  |  | 2,317 |  |  |  | 2,016 |
Net premium amortization HTM |  |  | (264 | ) |  |  | — |  |  |  | — |
Provision for loan losses |  |  | (152 | ) |  |  | 335 |  |  |  | 3,663 |
Write-downs of other real estate owned |  |  | 69 |  |  |  | 50 |  |  |  | 128 |
Loss (gain) loss on sale of other real estate owned |  |  | 45 |  |  |  | (77 | ) |  |  | (147 | )
Originations of HFS loans |  |  | (64,495 | ) |  |  | (139,773 | ) |  |  | (197,608 | )
Sales of HFS loans |  |  | 69,836 |  |  |  | 177,673 |  |  |  | 163,743 |
Amortization of intangibles |  |  | 158 |  |  |  | 201 |  |  |  | 363 |
Gain on sale of securities |  |  | — |  |  |  | — |  |  |  | (99 | )
Loss on fair value of equity investments |  |  | (2 | ) |  |  | (4 | ) |  |  | — |
Accretion on acquired loans |  |  | (49 | ) |  |  | (135 | ) |  |  | (271 | )
Write-down of premises held for sale |  |  | — |  |  |  | — |  |  |  | — |
Gain on sale of other assets |  |  | 73 |  |  |  | (117 | ) |  |  | — |
(Increase) decrease in other assets |  |  | (1,696 | ) |  |  | 994 |  |  |  | (911 | )
Increase (decrease) in other liabilities |  |  | 457 |  |  |  | (715 | ) |  |  | 341 |
Net cash (used) provided in operating activities |  |  | 22,125 |  |  |  | 57,928 |  |  |  | (17,046 | )
Cash flows from investing activities: |  |  |  |  |  |  |  |  |  |  |  |
Proceeds from sale of securities available-for-sale |  |  | — |  |  |  | — |  |  |  | 1,200 |
Proceeds from sale of securities held-to-maturity |  |  | — |  |  |  | — |  |  |  | — |
Purchase of investment securities available-for-sale |  |  | (105,943 | ) |  |  | (271,293 | ) |  |  | (111,972 | )
Purchase of investment securities held-to-maturity |  |  | (11,270 | ) |  |  | — |  |  |  | — |
Purchase of other investment securities |  |  | (2,406 | ) |  |  | (87 | ) |  |  | (70 | )
Maturity/call of investment securities available-for-sale |  |  | 61,958 |  |  |  | 53,872 |  |  |  | 46,933 |
Maturity/call of investment securities held-to-maturity |  |  | 11,745 |  |  |  | — |  |  |  | — |
Proceeds from sale of other investments |  |  | — |  |  |  | 355 |  |  |  | — |
Increase in loans |  |  | (116,797 | ) |  |  | (19,100 | ) |  |  | (106,874 | )
Proceeds from sale of other real estate owned |  |  | 117 |  |  |  | 201 |  |  |  | 349 |
Proceeds from sale of fixed assets |  |  | 925 |  |  |  | 1,414 |  |  |  | — |
Purchase of property and equipment |  |  | (1,223 | ) |  |  | (813 | ) |  |  | (1,087 | )
Net disposal of property and equipment |  |  | 115 |  |  |  | 19 |  |  |  | — |
Purchase of BOLI |  |  | — |  |  |  | (850 | ) |  |  | — |
Net cash used in investing activities |  |  | (162,779 | ) |  |  | (236,282 | ) |  |  | (171,521 | )
Cash flows from financing activities: |  |  |  |  |  |  |  |  |  |  |  |
Increase in deposit accounts |  |  | 24,091 |  |  |  | 171,878 |  |  |  | 201,213 |
Increase in Fed Funds Borrowed |  |  | 22,000 |  |  |  | — |  |  |  | — |
Advances from the Federal Home Loan Bank |  |  | 118,000 |  |  |  | — |  |  |  | 34,001 |
Repayment of advances from the Federal Home Loan Bank |  |  | (68,000 | ) |  |  | — |  |  |  | (34,212 | )
Increase in securities sold under agreements to repurchase |  |  | 14,527 |  |  |  | 13,302 |  |  |  | 7,618 |
Deferred compensation shares |  |  | — |  |  |  | 90 |  |  |  | 200 |
Shares Retired |  |  | (42 | ) |  |  | (70 | ) |  |  | (15 | )
Restricted Stock Units Granted |  |  | 1,447 |  |  |  | — |  |  |  | — |
Change in non-vested restricted stock |  |  | 507 |  |  |  | 363 |  |  |  | 259 |
Dividend reinvestment plan |  |  | 388 |  |  |  | 368 |  |  |  | 372 |
Repurchase of common stock |  |  | — |  |  |  | — |  |  |  | — |
Proceeds from issuance of common stock |  |  | 28 |  |  |  | 46 |  |  |  | 4 |
Dividends paid on Common Stock |  |  | (3,913 | ) |  |  | (3,593 | ) |  |  | (3,573 | )
Net cash provided in financing activities |  |  | 109,033 |  |  |  | 182,384 |  |  |  | 205,867 |
Net increase in cash and cash equivalents |  |  | (31,621 | ) |  |  | 4,030 |  |  |  | 17,300 |
Cash and cash equivalents at beginning of year |  |  | 69,022 |  |  |  | 64,992 |  |  |  | 47,692 |
Cash and cash equivalents at end of year |  | $ | 37,401 |  |  | $ | 69,022 |  |  | $ | 64,992 |
Supplemental disclosure: |  |  |  |  |  |  |  |  |  |  |  |
Cash paid during the period for: interest |  | $ | 3,058 |  |  | $ | 3,312 |  |  | $ | 4,258 |
Income Taxes |  | $ | 3,893 |  |  | $ | 5,097 |  |  | $ | 3,043 |
Non-cash investing and financing activities: |  |  |  |  |  |  |  |  |  |  |  |
Unrealized gain (loss) on securities available-for-sale, net of tax |  | $ | (23,285 | ) |  | $ | (8,008 | ) |  | $ | 8,797 |
Unrealized loss on securities held-to-maturity, net of tax |  |  | (12,380 | ) |  |  | — |  |  |  | — |
Transfer of investment securities available-for-sale to held-to-maturity |  |  | 245,619 |  |  |  | — |  |  |  | — |
Transfer of loans to other real estate owned |  | $ | — |  |  | $ | 145 |  |  | $ | 114 |
Recognition of operating lease right of use asset |  | $ | — |  |  | $ | — |  |  | $ | — |
Recognition of operating lease liability |  | $ | — |  |  | $ | — |  |  | $ | — |
Transfer of investment securities held-to-maturity to available-for-sale |  | $ | — |  |  | $ | — |  |  | $ | — |

See Notes to Consolidated Financial Statements

82

FIRST COMMUNITY CORPORATION

Notes to Consolidated Financial Statements

Note 1—ORGANIZATION AND BASIS OF PRESENTATION

The consolidated financial statements include the accounts of First Community Corporation (the “Company”) and its wholly owned subsidiary, First Community Bank (the “Bank”). The Company owns all of the common stock of FCC Capital Trust I. All material intercompany transactions are eliminated in consolidation. The Company was organized on November 2, 1994, as a South Carolina corporation, and was formed to become a bank holding company. The Bank opened for business on August 17, 1995. FCC Capital Trust I is an unconsolidated special purpose subsidiary organized for the sole purpose of issuing trust preferred securities.

Note 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates

The financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. These principles require management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses. The estimation process includes management’s judgment as to future losses on existing loans based on an internal review of the loan portfolio, including an analysis of the borrower’s current financial position, the consideration of current and anticipated economic conditions and the effect on specific borrowers. In determining the collectability of loans management also considers the fair value of underlying collateral. Various regulatory agencies, as an integral part of their examination process, review the Company’s allowance for loan losses. Such agencies may require the Company to recognize additions to the allowance based on their judgments about information available to them at the time of their examination. Because of these factors it is possible that the allowance for loan losses could change materially.

Cash and Cash Equivalents

Cash and cash equivalents consist of cash on hand, due from banks, interest-bearing bank balances, federal funds sold and securities purchased under agreements to resell. Generally federal funds are sold for a one-day period and securities purchased under agreements to resell mature in less than 90 days.

Investment Securities

Investment securities are classified as either held-to-maturity, available-for-sale or trading securities. In determining such classification, securities that the Company has the positive intent and ability to hold to maturity are classified as held-to maturity and are carried at amortized cost. Securities classified as available-for-sale are carried at estimated fair values with unrealized gains and losses included in shareholders’ equity on an after-tax basis. Trading securities are carried at estimated fair value with unrealized gains and losses included in non-interest income (See Note 3).

Gains and losses on the sale of available-for-sale securities and trading securities are determined using the specific identification method. Declines in the fair value of individual held-to-maturity and available-for-sale securities below their cost that are judged to be other than temporary are written down to fair value and charged to income in the Consolidated Statement of Income.

Premiums are recognized in interest income using the interest method over the period to the earliest call date. Discounts are recognized in interest income using the interest method to maturity.

Other Investments, At Cost

Equity Securities without readily determinable fair values include Federal Home Loan Bank (“FHLB”) of Atlanta capital stock and various other non-marketable equity investments. Investment in the FHLB of Atlanta is a condition of borrowing from the FHLB Atlanta. FHLB stock is carried at cost, and periodically evaluated for impairment based on an assessment of the ultimate recovery of par value. Both cash and stock dividends are reported as interest income. At December 31, 2022 and 2021, the Company’s investment in FHLB stock was $2.9 million and $698.4 thousand, respectively. Dividends received on other investments, at cost are reported as interest income.

83

Note 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Mortgage 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 primarily fixed rate residential loans that have been originated in the Company’s name and have closed. Virtually all 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.

The Company usually delivers to, and receives funding from, the investor within 30 days. Commitments to sell these loans to the investor are considered derivative contracts and are sold to investors on a “best efforts” basis. The Company is not obligated to deliver a loan or pay a penalty if a loan is not delivered to the investor. As a result of the short-term nature of these derivative contracts, the fair value of the mortgage loans held for sale in most cases is the same as the value of the loan amount at its origination. These loans are classified as Level 2.

Loans and Allowance for Loan Losses

Loan receivables that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are reported at their outstanding principal balance adjusted for any charge-offs, the allowance for loan losses, and any deferred fees or costs on originated loans. Interest is recognized over the term of the loan based on the loan balance outstanding. Fees charged for originating loans, if any, are deferred and offset by the deferral of certain direct expenses associated with loans originated. The net deferred fees are recognized as yield adjustments by applying the interest method.

The allowance for loan losses is maintained at a level believed to be adequate by management to absorb potential losses in the loan portfolio. Management’s determination of the adequacy of the allowance is based on an evaluation of the portfolio, past loss experience, economic conditions and volume, growth and composition of the portfolio.

The Company considers a loan to be impaired when, based upon current information and events, it is believed that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Loans that are considered impaired are accounted for at the lower of carrying value or fair value. The accrual of interest on impaired loans is discontinued when, in management’s opinion, the borrower may be unable to meet payments as they become due, generally when a loan becomes 90 days past due. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received first to principal and then to interest income.

Property and Equipment

Property and equipment are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the asset’s estimated useful life. Estimated lives range up to 39 years for buildings and up to 10 years for furniture, fixtures and equipment.

Goodwill and Other Intangible Assets

Goodwill represents the cost in excess of fair value of net assets acquired (including identifiable intangibles) in purchase transactions. Other intangible assets represent premiums paid for acquisitions of core deposits (core deposit intangibles). Core deposit intangibles are being amortized on a straight-line basis over seven years. Goodwill and identifiable intangible assets are reviewed for impairment annually or whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. 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. During the year ended December 31, 2022 and 2021, qualitative factors indicated it was more likely than not that the carrying value of goodwill was less than fair value, thus there were no indicators of impairment and no quantitative testing was performed.

Other Real Estate Owned

Other real estate owned includes real estate acquired through foreclosure. Other real estate owned is carried at the lower of cost (principal balance at date of foreclosure) or fair value minus estimated cost to sell. Any write-downs at the date of foreclosure are charged to the allowance for loan losses. Expenses to maintain such assets, subsequent changes in the valuation allowance, and gains or losses on disposal are included in other expenses.

84

Note 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Comprehensive Income (loss)

The Company reports comprehensive income (loss) in accordance with Accounting Standards Codification (“ASC”) 220, “Comprehensive Income.” ASC 220 requires that all items that are required to be reported under accounting standards as comprehensive income (loss) be reported in a financial statement that is displayed with the same prominence as other financial statements. The disclosures requirements have been included in the Company’s consolidated statements of comprehensive income.

Mortgage Origination Fees

Mortgage origination fees relate to activities comprised of accepting residential mortgage applications, qualifying borrowers to standards established by investors and selling the mortgage loans to the investors under pre-existing commitments. The related fees received by the Company for these services are recognized at the time the loan is closed.

Advertising Expense

Marketing and public relations costs are generally expensed as incurred. External costs incurred in producing media advertising are expensed the first time the advertising takes place. External costs relating to direct mailing costs are expensed in the period in which the direct mailings are sent. Marketing and public relations expense totaled $1.3 million, $1.2 million and $1.0 million for the years ended December 31, 2022, 2021, and 2020, respectively.

Income Taxes

A deferred income tax liability or asset is recognized for the estimated future effects attributable to differences in the tax bases of assets or liabilities and their reported amounts in the financial statements as well as operating loss and tax credit carry forwards. The deferred tax asset or liability is measured using the enacted tax rate expected to apply to taxable income in the period in which the deferred tax asset or liability is expected to be realized.

In 2006, the FASB issued guidance related to Accounting for Uncertainty in Income Taxes. This guidance clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB ASC Topic 740-10, “Income Taxes.” It also prescribes a recognition threshold and measurement of a tax position taken or expected to be taken in an enterprise’s tax return.

Stock Based Compensation Cost

The Company accounts for stock-based compensation under the fair value provisions of the accounting literature. Compensation expense is recognized in salaries and employee benefits.

The fair value of each grant is estimated on the date of grant using the Black-Sholes option pricing model. No options were granted in 2022, 2021 or 2020.

Earnings Per Common Share

Basic earnings per common share (“EPS”) excludes dilution and is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted EPS is computed by dividing net income available to common shareholders by the weighted average number of shares of common stock and common stock equivalents. Common stock equivalents consist of restricted stock and restricted stock units and are computed using the treasury stock method.

Business Combinations and Method of Accounting for Loans Acquired

The Company accounts for its 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. Loans acquired are recorded at fair value in accordance with the fair value methodology prescribed in FASB ASC Topic 820, “Fair Value Measurements and Disclosures.”

85

Note 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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,” formerly American Institute of Certified Public Accountants (“AICPA”) Statement of Position (“SOP”) 03-3, “Accounting for Certain Loans or Debt Securities Acquired in a Transfer,” 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 since origination and for which it is probable that all contractually required payments will not be collected are considered to be credit impaired. Evidence of credit quality deterioration as of purchase dates may include information such as past-due and nonaccrual status, borrower credit scores and recent loan to value percentages. The Company considers expected prepayments and estimates the amount and timing of expected principal, interest and other cash flows for each loan or pool of loans meeting the criteria above, and determines the excess of the loan’s scheduled contractual principal and contractual interest payments over all cash flows expected to be collected at acquisition as an amount that should not be accreted (non-accretable difference). The remaining amount, representing the excess of the loan’s or pool’s cash flows expected to be collected over the fair value for the loan or pool of loans, is accreted into interest income over the remaining life of the loan or pool (accretable difference). Subsequent to the acquisition date, increases in cash flows expected to be received in excess of the Company’s initial estimates are reclassified from non-accretable difference to accretable difference and are accreted into interest income on a level-yield basis over the remaining life of the loan. Decreases in cash flows expected to be collected are recognized as impairment through the provision for loan losses.

Segment Information

ASC Topic 280-10, “Segment Reporting,” requires selected segment information of operating segments based on a management approach. The Company’s four reportable segments represent the distinct product lines the Company offers and are viewed separately for strategic planning by management (see Note 25, Reportable Segments, for further information).

Recently Issued Accounting Standards

In June 2016, the FASB issued ASU 2016-13, as amended, to replace the incurred loss model with an expected loss model, which is referred to as the current expected credit loss (CECL) model. The CECL model is applicable to the measurement of credit losses on financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities. It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and similar instruments) and net investments in leases recognized by a lessor. For debt securities with other-than-temporary impairment (OTTI), the guidance will be applied prospectively. Existing purchased credit impaired (PCI) assets will be grandfathered and classified as purchased credit deteriorated (PCD) assets at the date of adoption. The assets will be grossed up for the allowance of expected credit losses for all PCD assets at the date of adoption and will continue to recognize the noncredit discount in interest income based on the yield of such assets as of the adoption date. Subsequent changes in expected credit losses will be recorded through the allowance. Adoption is effective for interim and annual reporting periods beginning after December 15, 2022. Early adoption was permitted. The Company adopted CECL on January 1, 2023, and currently estimates the allowance for credit losses will increase by approximately zero to $50 thousand. In addition, the Company expects to recognize a liability for the unfunded commitments of approximately $350 thousand to $450 thousand upon adoption. The impact to retained earnings is expected to be a reduction of approximately $275 thousand to $395 thousand, net of tax. The adoption of CECL will not have a significant impact to the Bank’s regulatory capital. The Company will finalize the adoption during the first quarter of 2023.

In March 2020, the FASB issued guidance to provide temporary optional guidance to ease the potential burden in accounting for reference rate reform. The guidance provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. The ASU is intended to help stakeholders during the global market-wide reference rate transition period. The amendments are effective through December 31, 2022. The Company does not expect these amendments to have a material effect on its financial statements. In December 2022, the FASB issued amendments to extend the period of time preparers can use the reference rate reform relief guidance under Accounting Standards Codification (ASC) Topic 848 from December 31, 2022, to December 31, 2024, to address the fact that all London Interbank Offered Rate (LIBOR) tenors were not discontinued as of December 31, 2021, and some tenors will be published until June 2023. The amendments are effective immediately for all entities and applied prospectively. The Company does not expect these amendments to have a material effect on its financial statements.

86

Note 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

In March 2022, the FASB issued amendments which are intended to improve the decision usefulness of information provided to investors about certain loan refinancings, restructurings, and write-offs. The amendments are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company does not expect these amendments to have a material effect on its 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.

General Risk and Uncertainties

In the normal course of business, the Company encounters two significant types of risks: economic and regulatory. There are three main components of economic risk: interest rate risk, credit risk and market risk. The Company is subject to interest rate risk to the degree that its interest-bearing liabilities mature or reprice at different speeds, or on a different basis, than its interest-earning assets. Credit risk is the risk of default on the Company’s loan and investment portfolios that results from borrowers’ or issuer’s inability or unwillingness to make contractually required payments. Market risk reflects changes in the value of collateral underlying loans and investments and the valuation of real estate held by the Company.

The Company is subject to regulations of various governmental agencies (regulatory risk). These regulations can and do change significantly from period to period. The Company also undergoes periodic examinations by the regulatory agencies, which may subject it to further changes with respect to asset valuations, amounts of required loan loss allowances and operating restrictions from regulators’ judgments based on information available to them at the time of their examination.

Reclassifications

Certain captions and amounts in the 2020 and 2021 consolidated financial statements were reclassified to conform to the 2022 presentation.

Note 3—INVESTMENT SECURITIES

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

AVAILABLE-FOR-SALE:

(Dollars in thousands) |  | Amortized Cost |  |  | Gross Unrealized Gains |  |  | Gross Unrealized Losses |  |  | Fair Value |
December 31, 2022 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
US Treasury securities |  | $ | 60,552 |  |  | $ | — |  |  | $ | (4,569 | ) |  | $ | 55,983 |
Government Sponsored Enterprises |  |  | 2,500 |  |  |  | — |  |  |  | (426 | ) |  |  | 2,074 |
Mortgage-backed securities |  |  | 263,704 |  |  |  | 10 |  |  |  | (19,114 | ) |  |  | 244,600 |
Small Business Administration pools |  |  | 21,657 |  |  |  | 60 |  |  |  | (630 | ) |  |  | 21,087 |
State and local government |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Corporate and other securities |  |  | 8,772 |  |  |  | 12 |  |  |  | (666 | ) |  |  | 8,118 |
Total |  | $ | 357,185 |  |  | $ | 82 |  |  | $ | (25,405 | ) |  | $ | 331,862 |
(Dollars in thousands) |  | Amortized Cost |  |  | Gross Unrealized Gains |  |  | Gross Unrealized Losses |  |  | Fair Value |
December 31, 2021 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
US Treasury securities |  | $ | 15,736 |  |  | $ | — |  |  | $ | 300 |  |  | $ | 15,436 |
Government Sponsored Enterprises |  |  | 2,499 |  |  |  | 2 |  |  |  | — |  |  |  | 2,501 |
Mortgage-backed securities |  |  | 398,125 |  |  |  | 3,596 |  |  |  | 3,992 |  |  |  | 397,729 |
Small Business Administration pools |  |  | 30,835 |  |  |  | 505 |  |  |  | 67 |  |  |  | 31,273 |
State and local government |  |  | 105,469 |  |  |  | 4,918 |  |  |  | 539 |  |  |  | 109,848 |
Corporate and other securities |  |  | 8,024 |  |  |  | 157 |  |  |  | 129 |  |  |  | 8,052 |
Total |  | $ | 560,688 |  |  | $ | 9,178 |  |  | $ | 5,027 |  |  | $ | 564,839 |

87

Note 3—INVESTMENT SECURITIES (Continued)

HELD-TO-MATURITY:

(Dollars in thousands) |  | Amortized Cost |  |  | Gross Unrealized Gains |  |  | Gross Unrealized Losses |  |  | Fair Value |
December 31, 2022 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
US Treasury securities |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |
Government Sponsored Enterprises |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Mortgage-backed securities |  |  | 121,772 |  |  |  | — |  |  |  | (8,656 | ) |  |  | 113,116 |
Small Business Administration pools |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
State and local government |  |  | 106,929 |  |  |  | — |  |  |  | (6,432 | ) |  |  | 100,497 |
Corporate and other securities |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Total |  | $ | 228,701 |  |  | $ | — |  |  | $ | (15,088 | ) |  | $ | 213,613 |

There were no investment securities listed as held-to-maturity as of December 31, 2021.

On June 1, 2022, we reclassified $224.5 million in investments to held-to-maturity (HTM) from available-for-sale (AFS). These securities were transferred at fair value at the time of the transfer, which became the new cost basis for the securities held to maturity. The pretax unrealized net holding loss on the available for sale securities on the date of transfer totaled approximately $16.7 million, and continued to be reported as a component of accumulated other comprehensive loss. This net unrealized loss is being amortized to interest income over the remaining life of the securities as a yield adjustment. There were no gains or losses recognized as a result of this transfer. The remaining pretax unrealized net holding loss on these investments was $15.7 million ($12.4 million net of tax) at December 31, 2022.

During the years ended December 31, 2022 and December 31, 2021, the Company did not receive any proceeds from the sale of investment securities available-for-sale. For the years ended December 31, 2022 and December 31, 2021, there were no gross realized gains or losses from the sale of investment securities available-for-sale. The tax (benefit) provision applicable to the net realized gain (loss) was approximately $0, $0, and $21 thousand for 2022, 2021 and 2020, respectively.

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 December 31, 2022 and December 31, 2021.

Schedule of gross unrealized losses and fair values, aggregated by investment category and length of time that individual securities have been in a continuous loss position.

(Dollars in thousands) |  | Less than 12 months |  |  | 12 months or more |  |  | Total |
December 31, 2022 |  | Fair |  |  | Unrealized |  |  | Fair |  |  | Unrealized |  |  | Fair |  |  | Unrealized |
Available-for-sale securities: |  | Value |  |  | Loss |  |  | Value |  |  | Loss |  |  | Value |  |  | Loss |
US Treasury Securities |  | $ | 28,827 |  |  | $ | 1,032 |  |  | $ | 27,156 |  |  | $ | 3,537 |  |  | $ | 55,983 |  |  | $ | 4,569 |
Government Sponsored Enterprise |  |  | — |  |  |  | — |  |  |  | 2,074 |  |  |  | 426 |  |  |  | 2,074 |  |  |  | 426 |
Mortgage-backed securities |  |  | 81,961 |  |  |  | 4,435 |  |  |  | 159,227 |  |  |  | 14,679 |  |  |  | 241,188 |  |  |  | 19,114 |
Small Business Administration pools |  |  | 16,066 |  |  |  | 453 |  |  |  | 2,592 |  |  |  | 177 |  |  |  | 18,658 |  |  |  | 630 |
State and local government |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Corporate and other securities |  |  | 2,128 |  |  |  | 146 |  |  |  | 3,230 |  |  |  | 520 |  |  |  | 5,358 |  |  |  | 666 |
Total |  | $ | 128,982 |  |  | $ | 6,067 |  |  | $ | 194,279 |  |  | $ | 19,338 |  |  | $ | 323,261 |  |  | $ | 25,405 |

88

Note 3—INVESTMENT SECURITIES (Continued)

(Dollars in thousands) |  | Less than 12 months |  |  | 12 months or more |  |  | Total |
December 31, 2021 |  | Fair |  |  | Unrealized |  |  | Fair |  |  | Unrealized |  |  | Fair |  |  | Unrealized |
Available-for-sale securities: |  | Value |  |  | Loss |  |  | Value |  |  | Loss |  |  | Value |  |  | Loss |
US Treasury Securities |  | $ | 14,479 |  |  | $ | 264 |  |  | $ | 958 |  |  | $ | 36 |  |  | $ | 15,437 |  |  | $ | 300 |
Mortgage-backed securities |  |  | 200,238 |  |  |  | 3,156 |  |  |  | 48,570 |  |  |  | 836 |  |  |  | 248,808 |  |  |  | 3,992 |
Small Business Administration pools |  |  | 7,232 |  |  |  | 67 |  |  |  | — |  |  |  | — |  |  |  | 7,232 |  |  |  | 67 |
State and local government |  |  | 21,261 |  |  |  | 539 |  |  |  | — |  |  |  | — |  |  |  | 21,261 |  |  |  | 539 |
Corporate and other securities |  |  | 3,621 |  |  |  | 129 |  |  |  | — |  |  |  | — |  |  |  | 3,621 |  |  |  | 129 |
Total |  | $ | 246,831 |  |  | $ | 4,155 |  |  | $ | 49,528 |  |  | $ | 872 |  |  | $ | 296,359 |  |  | $ | 5,027 |

Schedule of gross unrealized losses and fair values, aggregated by investment category and length of time that individual held-to-maturity have been in a continuous loss position.

(Dollars in thousands) |  | Less than 12 months |  |  | 12 months or more |  |  | Total |
December 31, 2022 |  | Fair |  |  | Unrealized |  |  | Fair |  |  | Unrealized |  |  | Fair |  |  | Unrealized |
Held-to-maturity securities: |  | Value |  |  | Loss |  |  | Value |  |  | Loss |  |  | Value |  |  | Loss |
US Treasury Securities |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |
Government Sponsored Enterprise |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Mortgage-backed securities |  |  | 98,971 |  |  |  | 7,249 |  |  |  | 14,145 |  |  |  | 1,407 |  |  |  | 113,116 |  |  |  | 8,656 |
Small Business Administration pools |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
State and local government |  |  | 92,140 |  |  |  | 5,518 |  |  |  | 8,357 |  |  |  | 914 |  |  |  | 100,497 |  |  |  | 6,432 |
Corporate and other securities |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Total |  | $ | 191,111 |  |  | $ | 12,767 |  |  | $ | 22,502 |  |  | $ | 2,321 |  |  | $ | 213,613 |  |  | $ | 15,088 |

The amortized cost and fair value of investment securities at December 31, 2022, by expected maturity, follow. Expected maturities differ from contractual maturities because borrowers may have the right to call or prepay the obligations with or without prepayment penalties. Mortgage-backed securities are included in the year corresponding with the remaining expected life.

Schedule of Amortized Cost and Fair Value of Investment Securities

AVAILABLE-FOR-SALE:

(Dollars in thousands) |  | Available-for-sale |
|  | Amortized Cost |  |  | Fair Value |
Due in one year or less |  | $ | 1,215 |  |  | $ | 1,214 |
Due after one year through five years |  |  | 111,088 |  |  |  | 106,385 |
Due after five years through ten years |  |  | 221,565 |  |  |  | 203,959 |
Due after ten years |  |  | 23,317 |  |  |  | 20,304 |
|  | $ | 357,185 |  |  | $ | 331,862 |

89

Note 3—INVESTMENT SECURITIES (Continued)

HELD-TO-MATURITY:

(Dollars in thousands) |  | Held-to-maturity |
|  | Amortized Cost |  |  | Fair Value |
Due in one year or less |  | $ | 6,464 |  |  | $ | 6,440 |
Due after one year through five years |  |  | 39,184 |  |  |  | 37,568 |
Due after five years through ten years |  |  | 143,211 |  |  |  | 133,554 |
Due after ten years |  |  | 39,842 |  |  |  | 36,051 |
|  | $ | 228,701 |  |  | $ | 213,613 |

Securities with an amortized cost of $290.1 million and fair value of $270.4 million at December 31, 2022 were pledged to secure FHLB advances, public deposits, and securities sold under agreements to repurchase. Securities with an amortized cost of $128.5 million and fair value of $130.4 million at December 31, 2021 were pledged to secure FHLB advances, public deposits, and securities sold under agreements to repurchase.

Other-Than-Temporary-Impairment: Of the securities in an unrealized loss position at December 31, 2022, 90 securities were in a continuous loss position for twelve months or more. The Company believes, based on industry analyst reports, credit ratings and/or government guarantees, that the deterioration in value is attributable to changes in market interest rates and is not in the credit quality of the issuer and therefore, these losses are not considered other-than-temporary.

The Company evaluates securities available-for-sale for other-than-temporary impairment on a quarterly basis. As a result of this evaluation, at December 31, 2022, the Company has determined that the declines summarized in the tables above are not deemed to be other-than-temporary.

Note 4—LOANS

The following table summarizes the composition of our loan portfolio. Total loans are recorded net of deferred loan fees and costs, which totaled $1.9 million and $1.4 million as of December 31, 2022 and December 31, 2021, respectively.

Schedule of Loan Portfolio

|  | December 31, |
(Dollars in thousands) |  | 2022 |  |  | 2021 |
Commercial, financial and agricultural |  | $ | 72,409 |  |  | $ | 69,952 |
Real estate: |  |  |  |  |  |  |  |
Construction |  |  | 91,223 |  |  |  | 94,969 |
Mortgage-residential |  |  | 65,759 |  |  |  | 45,498 |
Mortgage-commercial |  |  | 709,218 |  |  |  | 617,464 |
Consumer: |  |  |  |  |  |  |  |
Home equity |  |  | 28,723 |  |  |  | 27,116 |
Other |  |  | 13,525 |  |  |  | 8,703 |
Total |  | $ | 980,857 |  |  | $ | 863,702 |

Commercial, financial, and agricultural category includes $219.0 thousand and $1.5 million in PPP loans, net of deferred fees and costs, as of December 31, 2022 and December 31, 2021, respectively.

90

Note 4—LOANS (Continued)

Activity in the allowance for loan losses was as follows:

Schedule of Activity in the allowance for loan losses

|  | Years ended December 31, |
(Dollars in thousands) |  | 2022 |  |  | 2021 |  |  | 2020 |
Balance at the beginning of year |  | $ | 11,179 |  |  | $ | 10,389 |  |  | $ | 6,627 |
Provision for (release of) loan losses |  |  | (152 | ) |  |  | 335 |  |  |  | 3,663 |
Charged off loans |  |  | (68 | ) |  |  | (182 | ) |  |  | (110 | )
Recoveries |  |  | 377 |  |  |  | 637 |  |  |  | 209 |
Balance at end of year |  | $ | 11,336 |  |  | $ | 11,179 |  |  | $ | 10,389 |

The detailed activity in the allowance for loan losses and the recorded investment in loans receivable as of and for the years ended December 31, 2022, December 31, 2021 and December 31, 2020 follows:

Schedule of activity in the allowance for loan losses and the recorded investment in loans receivable

(Dollars in thousands) |  | Commercial |  |  | Real estate Construction |  |  | Real estate Mortgage Residential |  |  | Real estate Mortgage Commercial |  |  | Consumer Home equity |  |  | Consumer Other |  |  | Unallocated |  |  | Total |
2022 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Allowance for loan losses: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Beginning balance |  | $ | 853 |  |  | $ | 113 |  |  | $ | 560 |  |  | $ | 8,570 |  |  | $ | 333 |  |  | $ | 126 |  |  | $ | 624 |  |  | $ | 11,179 |
Charge-offs |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (1 | ) |  |  | (67 | ) |  |  | — |  |  |  | (68 | )
Recoveries |  |  | 17 |  |  |  | — |  |  |  | 6 |  |  |  | 325 |  |  |  | 13 |  |  |  | 16 |  |  |  | — |  |  |  | 377 |
Provisions |  |  | (21 | ) |  |  | (38 | ) |  |  | 157 |  |  |  | (326 | ) |  |  | (31 | ) |  |  | 95 |  |  |  | 12 |  |  |  | (152 | )
Ending balance |  | $ | 849 |  |  | $ | 75 |  |  | $ | 723 |  |  | $ | 8,569 |  |  | $ | 314 |  |  | $ | 170 |  |  | $ | 636 |  |  | $ | 11,336 |
Ending balances: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Individually evaluated for impairment |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |
Collectively evaluated for impairment |  |  | (849 | ) |  |  | 75 |  |  |  | 723 |  |  |  | 8,569 |  |  |  | 314 |  |  |  | 170 |  |  |  | 636 |  |  |  | 11,336 |
Loans receivable: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Ending balance-total |  | $ | 72,409 |  |  | $ | 91,223 |  |  | $ | 65,759 |  |  | $ | 709,218 |  |  | $ | 28,723 |  |  | $ | 13,525 |  |  | $ | — |  |  | $ | 980,857 |
Ending balances: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Individually evaluated for impairment |  |  | 29 |  |  |  | — |  |  |  | 34 |  |  |  | 4,752 |  |  |  | 168 |  |  |  | — |  |  |  | — |  |  |  | 4,983 |
Collectively evaluated for impairment |  |  | 72,380 |  |  |  | 91,223 |  |  |  | 65,725 |  |  |  | 704,466 |  |  |  | 28,555 |  |  |  | 13,525 |  |  |  | — |  |  |  | 975,874 |

91

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 |
2021 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Allowance for loan losses: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Beginning balance |  | $ | 778 |  |  | $ | 145 |  |  | $ | 541 |  |  | $ | 7,855 |  |  | $ | 324 |  |  | $ | 125 |  |  | $ | 621 |  |  | $ | 10,389 |
Charge-offs |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (110 | ) |  |  | — |  |  |  | (72 | ) |  |  | — |  |  |  | (182 | )
Recoveries |  |  | 39 |  |  |  | — |  |  |  | 10 |  |  |  | 473 |  |  |  | 69 |  |  |  | 46 |  |  |  | — |  |  |  | 637 |
Provisions |  |  | 36 |  |  |  | (32 | ) |  |  | 9 |  |  |  | 352 |  |  |  | (60 | ) |  |  | 27 |  |  |  | 3 |  |  |  | 335 |
Ending balance |  | $ | 853 |  |  | $ | 113 |  |  | $ | 560 |  |  | $ | 8,570 |  |  | $ | 333 |  |  | $ | 126 |  |  | $ | 624 |  |  | $ | 11,179 |
Ending balances: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Individually evaluated for impairment |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 1 |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 1 |
Collectively evaluated for impairment |  |  | 853 |  |  |  | 113 |  |  |  | 560 |  |  |  | 8,569 |  |  |  | 333 |  |  |  | 126 |  |  |  | 624 |  |  |  | 11,178 |
Loans receivable: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Ending balance-total |  | $ | 69,952 |  |  | $ | 94,969 |  |  | $ | 45,498 |  |  | $ | 617,464 |  |  | $ | 27,116 |  |  | $ | 8,703 |  |  | $ | — |  |  | $ | 863,702 |
Ending balances: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Individually evaluated for impairment |  |  | — |  |  |  | — |  |  |  | 133 |  |  |  | 1,561 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 1,694 |
Collectively evaluated for impairment |  |  | 69,952 |  |  |  | 94,969 |  |  |  | 45,365 |  |  |  | 615,903 |  |  |  | 27,116 |  |  |  | 8,703 |  |  |  | — |  |  |  | 862,008 |

92

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 |
2020 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Allowance for loan losses: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Beginning balance |  | $ | 427 |  |  | $ | 111 |  |  | $ | 367 |  |  | $ | 4,602 |  |  | $ | 240 |  |  | $ | 97 |  |  | $ | 783 |  |  | $ | 6,627 |
Charge-offs |  |  | — |  |  |  | (2 | ) |  |  | — |  |  |  | (1 | ) |  |  | — |  |  |  | (107 | ) |  |  | — |  |  |  | (110 | )
Recoveries |  |  | 130 |  |  |  | 2 |  |  |  | — |  |  |  | 23 |  |  |  | 2 |  |  |  | 52 |  |  |  | — |  |  |  | 209 |
Provisions |  |  | 221 |  |  |  | 34 |  |  |  | 174 |  |  |  | 3,231 |  |  |  | 82 |  |  |  | 83 |  |  |  | (162 | ) |  |  | 3,663 |
Ending balance |  | $ | 778 |  |  | $ | 145 |  |  | $ | 541 |  |  | $ | 7,855 |  |  | $ | 324 |  |  | $ | 125 |  |  | $ | 621 |  |  | $ | 10,389 |
Ending balances: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Individually evaluated for impairment |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 2 |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 2 |
Collectively evaluated for impairment |  |  | 778 |  |  |  | 145 |  |  |  | 541 |  |  |  | 7,853 |  |  |  | 324 |  |  |  | 125 |  |  |  | 621 |  |  |  | 10,387 |
Loans receivable: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Ending balance-total |  | $ | 96,688 |  |  | $ | 95,282 |  |  | $ | 43,928 |  |  | $ | 573,258 |  |  | $ | 26,442 |  |  | $ | 8,559 |  |  | $ | — |  |  | $ | 844,157 |
Ending balances: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Individually evaluated for impairment |  |  | — |  |  |  | — |  |  |  | 440 |  |  |  | 5,631 |  |  |  | 42 |  |  |  | — |  |  |  | — |  |  |  | 6,113 |
Collectively evaluated for impairment |  |  | 96,688 |  |  |  | 95,282 |  |  |  | 43,488 |  |  |  | 567,627 |  |  |  | 26,400 |  |  |  | 8,559 |  |  |  | — |  |  |  | 838,044 |

At December 31, 2022 and December 31, 2021, there were $5.5 million of loans and $9.5 million acquired in the Cornerstone acquisition were excluded in the evaluation of the adequacy of the allowance for loan losses. These loans were recorded at fair value at acquisition which included a credit component of approximately $78.1 thousand and $125.6 thousand at December 31, 2022 and December 31, 2021 respectively. Loans acquired prior to 2017 have been included in the evaluation of the allowance for loan losses.

93

Note 4—LOANS (Continued)

The following tables are by loan category and present at December 31, 2022, December 31, 2021 and December 31, 2020 loans individually evaluated and considered impaired under FASB ASC 310, “Accounting by Creditors for Impairment of a Loan.” Impairment includes performing troubled debt restructurings.

Schedule of loan category and loans individually evaluated and considered impaired

(Dollars in thousands) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
December 31, 2022 |  | Recorded Investment |  |  | Unpaid Principal Balance |  |  | Related Allowance |  |  | Average Recorded Investment |  |  | Interest Income Recognized |
With no allowance recorded: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial |  | $ | 29 |  |  | $ | 29 |  |  | $ | — |  |  | $ | 27 |  |  | $ | 2 |
Real estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Construction |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Mortgage-residential |  |  | 34 |  |  |  | 51 |  |  |  | — |  |  |  | 34 |  |  |  | 3 |
Mortgage-commercial |  |  | 4,752 |  |  |  | 5,260 |  |  |  | — |  |  |  | 4,747 |  |  |  | 464 |
Consumer: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Home Equity |  |  | 168 |  |  |  | 168 |  |  |  | — |  |  |  | 167 |  |  |  | 9 |
Other |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
With an allowance recorded: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Real estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Construction |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Mortgage-residential |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Mortgage-commercial |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Consumer: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Home Equity |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Other |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Total: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial |  |  | 29 |  |  |  | 29 |  |  |  | — |  |  |  | 27 |  |  |  | 2 |
Real estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Construction |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Mortgage-residential |  |  | 34 |  |  |  | 51 |  |  |  | — |  |  |  | 34 |  |  |  | 3 |
Mortgage-commercial |  |  | 4,752 |  |  |  | 5,260 |  |  |  | — |  |  |  | 4,747 |  |  |  | 464 |
Consumer: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Home Equity |  |  | 168 |  |  |  | 168 |  |  |  | — |  |  |  | 167 |  |  |  | 9 |
Other |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
|  | $ | 4,983 |  |  | $ | 5,508 |  |  | $ | — |  |  | $ | 4,975 |  |  | $ | 478 |

94

Note 4—LOANS (Continued)

(Dollars in thousands) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
December 31, 2021 |  | Recorded Investment |  |  | Unpaid Principal Balance |  |  | Related Allowance |  |  | Average Recorded Investment |  |  | Interest Income Recognized |
With no allowance recorded: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |
Real estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Construction |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Mortgage-residential |  |  | 133 |  |  |  | 151 |  |  |  | — |  |  |  | 131 |  |  |  | 6 |
Mortgage-commercial |  |  | 1,521 |  |  |  | 3,514 |  |  |  | — |  |  |  | 1,748 |  |  |  | 223 |
Consumer: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Home Equity |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Other |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
With an allowance recorded: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Real estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Construction |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Mortgage-residential |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Mortgage-commercial |  |  | 40 |  |  |  | 40 |  |  |  | 1 |  |  |  | 39 |  |  |  | 5 |
Consumer: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Home Equity |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Other |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Total: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Real estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Construction |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Mortgage-residential |  |  | 133 |  |  |  | 151 |  |  |  | — |  |  |  | 131 |  |  |  | 6 |
Mortgage-commercial |  |  | 1,561 |  |  |  | 3,554 |  |  |  | 1 |  |  |  | 1,787 |  |  |  | 228 |
Consumer: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Home Equity |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Other |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
|  | $ | 1,694 |  |  | $ | 3,705 |  |  | $ | 1 |  |  | $ | 1,918 |  |  | $ | 234 |

95

Note 4—LOANS (Continued)

(Dollars in thousands) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
December 31, 2020 |  | Recorded Investment |  |  | Unpaid Principal Balance |  |  | Related Allowance |  |  | Average Recorded Investment |  |  | Interest Income Recognized |
With no allowance recorded: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |
Real estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Construction |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Mortgage-residential |  |  | 440 |  |  |  | 499 |  |  |  | — |  |  |  | 440 |  |  |  | 1 |
Mortgage-commercial |  |  | 5,508 |  |  |  | 7,980 |  |  |  | — |  |  |  | 5,770 |  |  |  | 388 |
Consumer: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Home Equity |  |  | 42 |  |  |  | 47 |  |  |  | — |  |  |  | 42 |  |  |  | 3 |
Other |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
With an allowance recorded: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Real estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Construction |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Mortgage-residential |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Mortgage-commercial |  |  | 123 |  |  |  | 123 |  |  |  | 2 |  |  |  | 123 |  |  |  | 11 |
Consumer: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Home Equity |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Other |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Total: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Real estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Construction |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Mortgage-residential |  |  | 440 |  |  |  | 499 |  |  |  | — |  |  |  | 440 |  |  |  | 1 |
Mortgage-commercial |  |  | 5,631 |  |  |  | 8,103 |  |  |  | 2 |  |  |  | 5,893 |  |  |  | 399 |
Consumer: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Home Equity |  |  | 42 |  |  |  | 47 |  |  |  | — |  |  |  | 42 |  |  |  | 3 |
Other |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
|  | $ | 6,113 |  |  | $ | 8,649 |  |  | $ | 2 |  |  | $ | 6,375 |  |  | $ | 403 |

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: 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.

96

Note 4—LOANS (Continued)

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be “Pass” rated loans. As of December 31, 2022 and December 31, 2021, 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 December 31, 2022 and December 31, 2021, no loans were classified as doubtful.

Schedule of loan category and loan by risk categories

(Dollars in thousands) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
December 31, 2022 |  | Pass |  |  | Special Mention |  |  | Substandard |  |  | Doubtful |  |  | Total |
Commercial, financial & agricultural |  | $ | 72,333 |  |  | $ | 47 |  |  | $ | 29 |  |  | $ | — |  |  | $ | 72,409 |
Real estate: |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Construction |  |  | 91,223 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 91,223 |
Mortgage – residential |  |  | 65,505 |  |  |  | 220 |  |  |  | 34 |  |  |  | — |  |  |  | 65,759 |
Mortgage – commercial |  |  | 704,357 |  |  |  | 80 |  |  |  | 4,781 |  |  |  | — |  |  |  | 709,218 |
Consumer: |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Home Equity |  |  | 27,531 |  |  |  | 117 |  |  |  | 1,075 |  |  |  | — |  |  |  | 28,723 |
Other |  |  | 13,269 |  |  |  | 93 |  |  |  | 163 |  |  |  | — |  |  |  | 13,525 |
Total |  | $ | 974,218 |  |  | $ | 557 |  |  | $ | 6,082 |  |  | $ | — |  |  | $ | 980,857 |
(Dollars in thousands) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  |  |  |  | Special |  |  |  |  |  |  |  |  |  |
December 31, 2021 |  | Pass |  |  | Mention |  |  | Substandard |  |  | Doubtful |  |  | Total |
Commercial, financial & agricultural |  | $ | 69,833 |  |  | $ | 119 |  |  | $ | — |  |  | $ | — |  |  | $ | 69,952 |
Real estate: |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Construction |  |  | 94,966 |  |  |  | — |  |  |  | 3 |  |  |  | — |  |  |  | 94,969 |
Mortgage – residential |  |  | 45,049 |  |  |  | 305 |  |  |  | 144 |  |  |  | — |  |  |  | 45,498 |
Mortgage – commercial |  |  | 610,001 |  |  |  | 1,009 |  |  |  | 6,454 |  |  |  | — |  |  |  | 617,464 |
Consumer: |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Home Equity |  |  | 25,751 |  |  |  | 171 |  |  |  | 1,194 |  |  |  | — |  |  |  | 27,116 |
Other |  |  | 8,604 |  |  |  | 22 |  |  |  | 77 |  |  |  | — |  |  |  | 8,703 |
Total |  | $ | 854,204 |  |  | $ | 1,626 |  |  | $ | 7,872 |  |  | $ | — |  |  | $ | 863,702 |

97

Note 4—LOANS (Continued)

The following tables are by loan category and present loans past due and on non-accrual status as of December 31, 2022 and December 31, 2021:

(Dollars in thousands) December 31, 2022 |  | 30-59 Days Past Due |  |  | 60-89 Days Past Due |  |  | Greater than 90 Days and Accruing |  |  | Nonaccrual |  |  | Total Past Due |  |  | Current |  |  | Total Loans |
Commercial |  | $ | 87 |  |  | $ | — |  |  | $ | — |  |  | $ | 29 |  |  | $ | 116 |  |  | $ | 72,293 |  |  | $ | 72,409 |
Real estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Construction |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 91,223 |  |  |  | 91,223 |
Mortgage-residential |  |  | 327 |  |  |  | — |  |  |  | — |  |  |  | 34 |  |  |  | 361 |  |  |  | 65,398 |  |  |  | 65,759 |
Mortgage-commercial |  |  | 46 |  |  |  | 8 |  |  |  | — |  |  |  | 4,664 |  |  |  | 4,718 |  |  |  | 704,500 |  |  |  | 709,218 |
Consumer: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Home equity |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 168 |  |  |  | 168 |  |  |  | 28,555 |  |  |  | 28,723 |
Other |  |  | 96 |  |  |  | — |  |  |  | 2 |  |  |  | — |  |  |  | 98 |  |  |  | 13,427 |  |  |  | 13,525 |
Total |  | $ | 556 |  |  | $ | 8 |  |  | $ | 2 |  |  | $ | 4,895 |  |  | $ | 5,461 |  |  | $ | 975,396 |  |  | $ | 980,857 |
(Dollars in thousands) December 31, 2021 |  | 30-59 Days Past Due |  |  | 60-89 Days Past Due |  |  | Greater than 90 Days and Accruing |  |  | Nonaccrual |  |  | Total Past Due |  |  | Current |  |  | Total Loans |
Commercial |  | $ | 125 |  |  | $ | 35 |  |  | $ | — |  |  | $ | 118 |  |  | $ | 278 |  |  | $ | 69,674 |  |  | $ | 69,952 |
Real estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Construction |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 94,969 |  |  |  | 94,969 |
Mortgage-residential |  |  | 8 |  |  |  | 4 |  |  |  | — |  |  |  | 132 |  |  |  | 144 |  |  |  | 45,354 |  |  |  | 45,498 |
Mortgage-commercial |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 617,464 |  |  |  | 617,464 |
Consumer: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Home equity |  |  | — |  |  |  | 62 |  |  |  | — |  |  |  | — |  |  |  | 62 |  |  |  | 27,054 |  |  |  | 27,116 |
Other |  |  | — |  |  |  | 1 |  |  |  | — |  |  |  | — |  |  |  | 1 |  |  |  | 8,702 |  |  |  | 8,703 |
Total |  | $ | 133 |  |  | $ | 102 |  |  | $ | — |  |  | $ | 250 |  |  | $ | 485 |  |  | $ | 863,217 |  |  | $ | 863,702 |

Troubled Debt Restructurings. 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 twelve month period ended December 31, 2022 and December 31, 2021. Additionally, 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 90 days past due. TDRs that are still accruing and included in impaired loans at December 31, 2022 and at December 31, 2021 amounted to $88.2 thousand and $1.4 million, respectively

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 its corresponding collateral value. All TDR accruing loans where the loan balance exceeds the present value of cash flow 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 Bank will be unable to collect all amounts due including both principal and interest according to the contractual terms of the loan agreement.

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.

98

Note 4—LOANS (Continued)

A summary of changes in the accretable yield for PCI loans for the years ended December 31, 2022, 2021, and 2020 follows:

Schedule for changes in the accretable yield for PCI loans

(Dollars in thousands) |  | Year Ended December 31, 2022 |  |  | Year Ended December 31, 2021 |  |  | Year Ended December 31, 2020 |
Accretable yield, beginning of period |  | $ | 64 |  |  | $ | 93 |  |  | $ | 123 |
Additions |  |  | — |  |  |  | — |  |  |  | — |
Accretion |  |  | (28 | ) |  |  | (29 | ) |  |  | (30 | )
Reclassification of non-accretable difference due to improvement in expected cash flows |  |  | — |  |  |  | — |  |  |  | — |
Other changes, net |  |  | — |  |  |  | — |  |  |  | — |
Accretable yield, end of period |  | $ | 36 |  |  | $ | 64 |  |  | $ | 93 |

At December 31, 2022 and December 31, 2021, the recorded investment in purchased impaired loans was $91 thousand and $109 thousand, respectively. The unpaid principal balance was $117 thousand and $152 thousand at December 31, 2022 and December 31, 2021, respectively. At December 31, 2022 and December 31, 2021, these loans were all secured by commercial real estate.

Related party loans 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 years ended December 31, 2022 and December 31, 2021.

Schedule of Related Party Loans

|  | For the years ended December 31, |
(Dollars in thousands) |  | 2022 |  |  | 2021 |
Balance, beginning of year |  | $ | 2,809 |  |  | $ | 3,297 |
New Loans |  |  | 3 |  |  |  | 4 |
Less loan repayments |  |  | 623 |  |  |  | 492 |
Balance, end of year |  | $ | 2,189 |  |  | $ | 2,809 |

Note 5—FAIR VALUE MEASUREMENT

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.

99

Note 5—FAIR VALUE MEASUREMENT (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 mortgage-backed securities issued both by government sponsored enterprises and private label mortgage-backed securities. Generally, these fair values are priced from established pricing models. Level 3 securities include corporate debt obligations and asset–backed securities that are less liquid or for which there is an inactive market.

Other investments, at cost—The carrying value of other investments, such as FHLB stock, approximates fair value based on redemption provisions.

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

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 values of junior subordinated debentures are 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.

100

Note 5—FAIR VALUE MEASUREMENT (Continued)

The carrying amount and estimated fair value by classification Level of the Company’s financial instruments as of December 31, 2022 and December 31, 2021 are as follows:

Fair Value, by Balance Sheet Grouping

|  | December 31, 2022 |
|  | Carrying |  |  | Fair Value |
(Dollars in thousands) |  | Amount |  |  | Total |  |  | Level 1 |  |  | Level 2 |  |  | Level 3 |
Financial Assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cash and short term investments |  | $ | 37,401 |  |  | $ | 37,401 |  |  | $ | 37,401 |  |  | $ | — |  |  | $ | — |
Available-for-sale securities |  |  | 331,862 |  |  |  | 331,862 |  |  |  | — |  |  |  | 331,862 |  |  |  | — |
Held-to-maturity securities |  |  | 228,701 |  |  |  | 213,613 |  |  |  | — |  |  |  | 213,613 |  |  |  | — |
Other investments, at cost |  |  | 4,191 |  |  |  | 4,191 |  |  |  | — |  |  |  | — |  |  |  | 4,191 |
Loans held for sale |  |  | 1,779 |  |  |  | 1,779 |  |  |  | — |  |  |  | 1,779 |  |  |  | — |
Net loans receivable |  |  | 969,521 |  |  |  | 943,498 |  |  |  | — |  |  |  | — |  |  |  | 943,498 |
Accrued interest |  |  | 5,217 |  |  |  | 5,217 |  |  |  | 5,217 |  |  |  | — |  |  |  | — |
Financial liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Non-interest bearing demand |  | $ | 461,010 |  |  | $ | 461,010 |  |  | $ | — |  |  | $ | 461,010 |  |  | $ | — |
Interest bearing demand deposits and money market accounts |  |  | 629,763 |  |  |  | 629,763 |  |  |  | — |  |  |  | 629,763 |  |  |  | — |
Savings |  |  | 161,770 |  |  |  | 161,770 |  |  |  | — |  |  |  | 161,770 |  |  |  | — |
Time deposits |  |  | 132,839 |  |  |  | 132,825 |  |  |  | — |  |  |  | 132,825 |  |  |  | — |
Total deposits |  |  | 1,385,382 |  |  |  | 1,385,368 |  |  |  | — |  |  |  | 1,385,368 |  |  |  | — |
Federal Home Loan Bank Advances |  |  | 50,000 |  |  |  | 50,000 |  |  |  | — |  |  |  | 50,000 |  |  |  | — |
Short term borrowings |  |  | 90,743 |  |  |  | 90,743 |  |  |  | — |  |  |  | 90,743 |  |  |  | — |
Junior subordinated debentures |  |  | 14,964 |  |  |  | 13,402 |  |  |  | — |  |  |  | 13,402 |  |  |  | — |
Accrued interest payable |  |  | 520 |  |  |  | 520 |  |  |  | 520 |  |  |  | — |  |  |  | — |

|  | December 31, 2021 |
|  | Carrying |  |  | Fair Value |
(Dollars in thousands) |  | Amount |  |  | Total |  |  | Level 1 |  |  | Level 2 |  |  | Level 3 |
Financial Assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cash and short term investments |  | $ | 69,022 |  |  | $ | 69,022 |  |  | $ | 69,022 |  |  | $ | — |  |  | $ | — |
Available-for-sale securities |  |  | 564,839 |  |  |  | 564,839 |  |  |  | 39,829 |  |  |  | 525,010 |  |  |  | — |
Other investments, at cost |  |  | 1,785 |  |  |  | 1,785 |  |  |  | — |  |  |  | — |  |  |  | 1,785 |
Loans held for sale |  |  | 7,120 |  |  |  | 7,120 |  |  |  | — |  |  |  | 7,120 |  |  |  | — |
Net loans receivable |  |  | 852,523 |  |  |  | 851,822 |  |  |  | — |  |  |  | — |  |  |  | 851,822 |
Accrued interest |  |  | 3,927 |  |  |  | 3,927 |  |  |  | 3,927 |  |  |  | — |  |  |  | — |
Financial liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Non-interest bearing demand |  | $ | 444,688 |  |  | $ | 444,688 |  |  | $ | — |  |  | $ | 444,688 |  |  | $ | — |
Interest bearing demand deposits and money market accounts |  |  | 619,057 |  |  |  | 619,057 |  |  |  | — |  |  |  | 619,057 |  |  |  | — |
Savings |  |  | 143,765 |  |  |  | 143,765 |  |  |  | — |  |  |  | 143,765 |  |  |  | — |
Time deposits |  |  | 153,781 |  |  |  | 154,030 |  |  |  | — |  |  |  | 154,030 |  |  |  | — |
Total deposits |  |  | 1,361,291 |  |  |  | 1,361,540 |  |  |  | — |  |  |  | 1,361,540 |  |  |  | — |
Short term borrowings |  |  | 54,216 |  |  |  | 54,216 |  |  |  | — |  |  |  | 54,216 |  |  |  | — |
Junior subordinated debentures |  |  | 14,964 |  |  |  | 15,015 |  |  |  | — |  |  |  | 15,015 |  |  |  | — |
Accrued interest payable |  |  | 404 |  |  |  | 404 |  |  |  | 404 |  |  |  | — |  |  |  | — |

101

Note 5—FAIR VALUE MEASUREMENT (Continued)

The following table summarizes quantitative disclosures about the fair value for each category of assets carried at fair value as of December 31, 2022 and December 31, 2021 that are measured on a recurring basis. There were no liabilities carried at fair value as of December 31, 2022 or December 31, 2021 that are measured on a recurring basis.

Fair Value, Assets Measured on Recurring Basis

AVAILABLE-FOR-SALE:

(Dollars in thousands)

Description |  | December 31, 2022 |  |  | (Level 1) |  |  | (Level 2) |  |  | (Level 3) |
Available- for-sale securities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
US Treasury Securities |  | $ | 55,983 |  |  | $ | — |  |  | $ | 55,983 |  |  | $ | — |
Government Sponsored Enterprises |  |  | 2,074 |  |  |  | — |  |  |  | 2,074 |  |  |  | — |
Mortgage-backed securities |  |  | 244,600 |  |  |  | — |  |  |  | 244,600 |  |  |  | — |
Small Business Administration pools |  |  | 21,087 |  |  |  | — |  |  |  | 21,087 |  |  |  | — |
State and local government |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Corporate and other securities |  |  | 8,118 |  |  |  | — |  |  |  | 8,118 |  |  |  | — |
Total Available-for-sale securities |  |  | 331,862 |  |  |  | — |  |  |  | 331,862 |  |  |  | — |
Loans held for sale |  |  | 1,779 |  |  |  | — |  |  |  | 1,779 |  |  |  | — |
Total |  | $ | 333,641 |  |  | $ | — |  |  | $ | 333,641 |  |  | $ | — |

(Dollars in thousands)

Description |  | December 31, 2021 |  |  | (Level 1) |  |  | (Level 2) |  |  | (Level 3) |
Available-for-sale securities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
US treasury securities |  | $ | 15,436 |  |  | $ | — |  |  | $ | 15,436 |  |  | $ | — |
Government sponsored enterprises |  |  | 2,501 |  |  |  | — |  |  |  | 2,501 |  |  |  | — |
Mortgage-backed securities |  |  | 397,729 |  |  |  | 25,934 |  |  |  | 371,796 |  |  |  | — |
Small Business Administration securities |  |  | 31,273 |  |  |  | — |  |  |  | 31,273 |  |  |  | — |
State and local government |  |  | 109,848 |  |  |  | 12,896 |  |  |  | 96,952 |  |  |  | — |
Corporate and other securities |  |  | 8,052 |  |  |  | 1,000 |  |  |  | 7,052 |  |  |  | — |
Total Available-for-sale securities |  |  | 564,839 |  |  |  | 39,830 |  |  |  | 525,010 |  |  |  | — |
Loans held-for-sale |  |  | 7,120 |  |  |  | — |  |  |  | 7,120 |  |  |  | — |
Total |  | $ | 571,959 |  |  | $ | 39,830 |  |  | $ | 532,130 |  |  | $ | — |

The following tables summarize quantitative disclosures about the fair value for each category of assets carried at fair value as of December 31, 2022 and December 31, 2021 that are measured on a non-recurring basis. There were no liabilities carried at fair value and measured on a non-recurring basis at December 31, 2022 and 2021.

Fair Value, Assets Measured on Non-Recurring Basis

(Dollars in thousands) |  |  |  |  |  |  |  |  |  |  |  |
Description |  | December 31, 2022 |  |  | (Level 1) |  |  | (Level 2) |  |  | (Level 3) |
Impaired loans: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial & Industrial |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |
Real estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Mortgage-residential |  |  | 34 |  |  |  | — |  |  |  | — |  |  |  | 34 |
Mortgage-commercial |  |  | 4,752 |  |  |  | — |  |  |  | — |  |  |  | 4,752 |
Consumer: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Home equity |  |  | 168 |  |  |  | — |  |  |  | — |  |  |  | 168 |
Other |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Total impaired |  |  | 4,954 |  |  |  | — |  |  |  | — |  |  |  | 4,954 |
Other real estate owned: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Construction |  |  | 412 |  |  |  | — |  |  |  | — |  |  |  | 412 |
Mortgage-commercial |  |  | 522 |  |  |  | — |  |  |  | — |  |  |  | 522 |
Total other real estate owned |  |  | 934 |  |  |  | — |  |  |  | — |  |  |  | 934 |
Total |  | $ | 5,888 |  |  | $ | — |  |  | $ | — |  |  | $ | 5,888 |

102

Note 5—FAIR VALUE MEASUREMENT (Continued)

(Dollars in thousands) |  |  |  |  |  |  |  |  |  |  |  |
Description |  | December 31, 2021 |  |  | (Level 1) |  |  | (Level 2) |  |  | (Level 3) |
Impaired loans: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial & Industrial |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |
Real estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Mortgage-residential |  |  | 133 |  |  |  | — |  |  |  | — |  |  |  | 133 |
Mortgage-commercial |  |  | 1,561 |  |  |  | — |  |  |  | — |  |  |  | 1,561 |
Consumer: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Home equity |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Other |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Total impaired |  |  | 1,694 |  |  |  | — |  |  |  | — |  |  |  | 1,694 |
Other real estate owned: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Construction |  |  | 624 |  |  |  | — |  |  |  | — |  |  |  | 624 |
Mortgage-commercial |  |  | 541 |  |  |  | — |  |  |  | — |  |  |  | 541 |
Total other real estate owned |  |  | 1,165 |  |  |  | — |  |  |  | — |  |  |  | 1,165 |
Total |  | $ | 2,859 |  |  | $ | — |  |  | $ | — |  |  | $ | 2,859 |

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 would consist 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 geographic sales trends, the value of comparable surrounding properties as well as the condition of the property.

For Level 3 assets and liabilities measured at fair value on a non-recurring basis as of December 31, 2022 and December 31, 2021, the significant unobservable inputs used in the fair value measurements were as follows:

Fair Value Measurement Inputs and Valuation Techniques

(Dollars in thousands) |  | Fair Value as of December 31, 2022 |  |  | Valuation Technique |  |  | Significant Observable Inputs |  |  | Significant Unobservable Inputs |
OREO |  | $ | 934 |  |  |  | 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 |  | $ | 4,954 |  |  |  | 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, 2021 |  |  | Valuation Technique |  |  | Significant Observable Inputs |  |  | Significant Unobservable Inputs |
OREO |  | $ | 1,165 |  |  |  | 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 |  | $ | 1,694 |  |  |  | Appraisal Value |  |  |  | Appraisals and or sales of comparable properties |  |  |  | Appraisals discounted 6% to 16% for sales commissions and other holding cost |

103

Note 6—PROPERTY AND EQUIPMENT

Property and equipment consisted of the following:

Schedule of Property and Equipment

|  | December 31, |
(Dollars in thousands) |  | 2022 |  |  | 2021 |
Land |  | $ | 9,804 |  |  | $ | 10,454 |
Premises |  |  | 28,684 |  |  |  | 29,415 |
Equipment |  |  | 7,900 |  |  |  | 6,855 |
Fixed assets in progress |  |  | 90 |  |  |  | (4 | )
Property and equipment, gross |  |  | 46,478 |  |  |  | 46,720 |
Accumulated depreciation |  |  | 15,201 |  |  |  | 13,889 |
Property and Equipment Net |  | $ | 31,277 |  |  | $ | 32,831 |

Provision for depreciation included in operating expenses for the years ended December 31, 2022, 2021 and 2020 amounted to $1.6 million, $1.7 million, and $1.6 million, respectively.

As of December 31, 2022 and December 31, 2021 there were no premises held-for-sale. During the year ended December 31, 2022, the Company sold a warehouse that had previously been used for storage. Loss on premises held-for-sale was $73 thousand for the year ended December 31, 2022 and gain on premises held-for-sale was $103 thousand for the year ended December 31, 2021. Loss on sale of fixed assets was $45 thousand for the year ended December 31, 2022 and gain on sale of fixed assets was $14 thousand for the year ended December 31, 2021.

Note 7—GOODWILL, CORE DEPOSIT INTANGIBLE

Intangible assets (excluding goodwill) consisted of the following:

Schedule of Intangible Assets excluding Goodwill

|  | December 31, |
(Dollars in thousands) |  | 2022 |  |  | 2021 |  |  | 2020 |
Core deposit premiums, gross carrying amount |  | $ | 3,358 |  |  | $ | 3,358 |  |  | $ | 3,358 |
Other intangibles |  |  | 538 |  |  |  | 538 |  |  |  | 538 |
Gross carrying amount |  |  | 3,896 |  |  |  | 3,896 |  |  |  | 3,896 |
Accumulated amortization |  |  | (3,135 | ) |  |  | (2,977 | ) |  |  | (2,776 | )
Net |  | $ | 761 |  |  | $ | 919 |  |  | $ | 1,120 |

Based on the core deposit and other intangibles as of December 31, 2022, the following table presents the aggregate amortization expense for each of the succeeding years ending December 31:

Schedule of Aggregate Amortization Expenses

(Dollars in thousands) |  | Amount |
2023 |  | $ | 157 |
2024 |  |  | 158 |
2025 |  |  | 157 |
2026 |  |  | 158 |
2027 and thereafter |  |  | 131 |
Total |  | $ | 761 |

Amortization of the intangibles amounted to $158 thousand, $201 thousand and $363 thousand for the years ended December 31, 2022, 2021 and 2020, respectively. 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. During the year ended December 31, 2022, qualitative factors indicated it was more likely than not that the carrying value of goodwill was less than fair value, thus

104

Note 7—GOODWILL, CORE DEPOSIT INTANGIBLE (Continued)

there were no indicators of impairment and no quantitative testing was performed. The Company’s carrying amount of goodwill at December 31, 2022, and 2021 and changes to the goodwill are summarized as follows:

Schedule of Goodwill

|  | December 31, |
(In thousands) |  | 2022 |  |  | 2021 |
Balance—beginning of year |  | $ | 14,637 |  |  | $ | 14,637 |
Acquired Goodwill |  |  | — |  |  |  | — |
Impairment |  |  | — |  |  |  | — |
Balance, end of year |  | $ | 14,637 |  |  | $ | 14,637 |

Note 8—OTHER REAL ESTATE OWNED

The following summarizes the activity in the other real estate owned for the years ended December 31, 2022 and 2021.

Schedule of Other Real Estate Owned

|  | December 31, |
(In thousands) |  | 2022 |  |  | 2021 |
Balance—beginning of year |  | $ | 1,165 |  |  | $ | 1,194 |
Additions—foreclosures |  |  | — |  |  |  | 145 |
Write-downs |  |  | (69 | ) |  |  | (50 | )
Sales |  |  | (162 | ) |  |  | (124 | )
Balance, end of year |  | $ | 934 |  |  | $ | 1,165 |

Note 9—DEPOSITS

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

Schedule of Deposits

|  | December 31, |  |  | December 31, |
(Dollars in thousands) |  | 2022 |  |  | 2021 |
Non-interest bearing deposits |  | $ | 461,010 |  |  | $ | 444,688 |
Interest bearing demand deposits and money market accounts |  |  | 629,763 |  |  |  | 619,057 |
Savings |  |  | 161,770 |  |  |  | 143,765 |
Time deposits |  |  | 132,839 |  |  |  | 153,781 |
Total deposits |  | $ | 1,385,382 |  |  | $ | 1,361,291 |

At December 31, 2022, the scheduled maturities of time deposits are as follows:

Schedule of Scheduled Maturities of Time Deposits

(Dollars in thousands) |  |  |
2023 |  | $ | 104,563 |
2024 |  |  | 14,326 |
2025 |  |  | 10,308 |
2026 |  |  | 2,687 |
2027 and after |  |  | 955 |
Total |  | $ | 132,839 |

105

Note 9—DEPOSITS (Continued)

Interest paid on time deposits of $100 thousand or more totaled $280 thousand, $538 thousand, and $993 thousand in 2022, 2021, and 2020, respectively.

Time deposits that meet or exceed the FDIC insurance limit of $250 thousand at December 31, 2022 and December 31, 2021 were $25.0 million and $27.9 million, respectively.

Deposits from directors and executive officers and their related interests at December 31, 2022 and 2021 amounted to approximately $24.5 million and $32.0 million, respectively.

The amount of overdrafts classified as loans at December 31, 2022 and 2021 were $162 thousand and $58 thousand, respectively.

Total uninsured deposits were $407.0 million and $392.2 million at December 31, 2022 and December 31, 2021, respectively. Included in uninsured deposits at December 31, 2022 and December 31, 2021 were $59.5 million and $55.2 million of collateralized public funds, respectively.

Note 10—SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND OTHER BORROWED MONEY

Securities sold under agreements to repurchase generally mature within one day to four days from the transaction date. The weighted average interest rate at December 31, 2022 and 2021 was 0.95% and 0.12%, respectively. The maximum month-end balance during 2022 and 2021 was $93.4 million and $72.4 million, respectively. The average outstanding balance during the years ended December 31, 2022 and 2021 amounted to $74.8 million and $62.2 million, respectively, with an average rate paid of 0.30% and 0.14%, respectively. Securities sold under agreements to repurchase are collateralized by securities with fair market values exceeding the total balance of the agreement.

At December 31, 2022 and 2021, the Company had unused short-term lines of credit totaling $70.0 million and $75.0 million respectively.

Note 11—ADVANCES FROM FEDERAL HOME LOAN BANK

As collateral for its advances, the Company has pledged in the form of blanket liens, eligible loans, in the amount of $5.5 million at December 31, 2022. Securities have been pledged as collateral for advances in the amount of $72.6 million as of December 31, 2022. As collateral for its advances, the Company has pledged in the form of blanket liens, eligible loans, in the amount of $22.8 million at December 31, 2021. Securities have been pledged as collateral for advances in the amount of $2.7 million as of December 31, 2021. Advances are subject to prepayment penalties. The average advances during 2022 and 2021 were $9.5 million and $5.0 million, respectively. The average interest rate for 2022 and 2021 was 4.34% and 0.18%, respectively. The maximum outstanding amount at any month end was $50.0 million and $0 million for 2022 and 2021, respectively.

During the years ended December 31, 2022 and December 31, 2021 there were no advances that were prepaid. Accordingly, no losses were realized on early extinguishment.

Note 12—JUNIOR SUBORDINATED DEBT

On September 16, 2004, FCC Capital Trust I (“Trust I”), a wholly owned unconsolidated subsidiary of the Company, issued and sold floating rate securities having an aggregate liquidation amount of $15.0 million. The Trust I securities accrue and pay distributions quarterly at a rate per annum equal to LIBOR plus 257 basis points. The distributions are cumulative and payable in arrears. The Company has the right, subject to events of default, to defer payments of interest on the Trust I securities for a period not to exceed 20 consecutive quarters, provided no extension can extend beyond the maturity date of September 16, 2034. The Trust I securities are mandatorily redeemable upon maturity at September 16, 2034. If the Trust I securities are redeemed on or after September 16, 2009, the redemption price will be 100% of the principal amount plus accrued and unpaid interest. The Trust I security were eligible to be redeemed in whole but not in part, at any time prior to September 16, 2009 following an occurrence of a tax event, a capital treatment event or an investment company event. Currently, these securities qualify under risk-based capital guidelines as Tier 1 capital, subject to certain limitations. The Company has no current intention to exercise its right to defer payments of interest on the Trust I securities. In 2015, the Company redeemed $500 thousand of this Trust I security. This resulted in a gain of $130 thousand received in 2015.

106

Note 13—LEASES

The Company has operating leases on three of its facilities. The leases have maturities ranging from February 2025 to December 2028 some of which include extensions of multiple five-year terms. The right-of-use asset was $2.7 million and $2.8 million at December 31, 2022 and December 31, 2021, respectively. The lease liability was $2.8 million and $3.0 million at December 31, 2022 and December 31, 2021, respectively. During the twelve-month period ended December 31, 2022, the Company made cash payments in the amount of $326.6 thousand for operating leases and the lease liability was reduced by $197.3 thousand. The lease expense recognized during the twelve-month periods ended December 31, 2022, December 31, 2021, December 31, 2020 amounted to $354.8 thousand, $323.0 thousand, and $323.0 thousand, respectively. The weighted average remaining lease term as of December 31, 2022, is 14.38 years and the weighted average discount rate used is 4.37%. The following table shows future undiscounted lease payments for operating leases with initial terms of one year or more as of December 31, 2022.

Schedule of Future Undiscounted Operating Lease Payments

(Dollars in thousands) |  |  |
2022 |  | $ | 262 |
2023 |  |  | 268 |
2024 |  |  | 275 |
2025 |  |  | 281 |
2026 |  |  | 254 |
Thereafter |  |  | 2,520 |
Total undiscounted lease payments |  | $ | 3,860 |
Less effect of discounting |  |  | (1,028 | )
Present value of estimated lease payments (lease liability) |  |  | 2,832 |

In addition to the leases discussed above, the Company has entered into a facility lease agreement that will commence on January 1, 2023. The ROU asset and lease liability are recognized at lease commencement by calculating the present value of lease payments over the lease term. A right-of-use asset of $823.8 thousand and a lease liability of $824.6 thousand will be recognized upon commencement. The term will be sixty-nine months with a discount rate of 3.87%.

Note 14—INCOME TAXES

Income tax expense for the years ended December 31, 2022, 2021 and 2020 consists of the following:

Schedule of Income Tax Expenses

|  | Year ended December 31 |
(Dollars in thousands) |  | 2022 |  |  | 2021 |  |  | 2020 |
Current |  |  |  |  |  |  |  |  |
Federal |  | $ | 3,429 |  |  | $ | 3,653 |  |  | $ | 2,758 |
State |  |  | 735 |  |  |  | 749 |  |  |  | 523 |
Total Current |  |  | 4,164 |  |  |  | 4,402 |  |  |  | 3,281 |
Deferred |  |  |  |  |  |  |  |  |  |  |  |
Federal |  |  | (323 | ) |  |  | (167 | ) |  |  | (751 | )
State |  |  | (43 | ) |  |  | (53 | ) |  |  | (34 | )
Total Deferred |  |  | (366 | ) |  |  | (220 | ) |  |  | (785 | )
Income tax expense |  | $ | 3,798 |  |  | $ | 4,182 |  |  | $ | 2,496 |

Reconciliation from expected federal tax expense to effective income tax expense for the periods indicated are as follows:

|  | Year ended December 31 |
(Dollars in thousands) |  | 2022 |  |  | 2021 |  |  | 2020 |
Expected federal income tax expense |  | $ | 3,866 |  |  | $ | 4,126 |  |  | $ | 2,645 |
State income tax net of federal benefit |  |  | 547 |  |  |  | 550 |  |  |  | 386 |
Tax exempt interest |  |  | (404 | ) |  |  | (396 | ) |  |  | (316 | )
Increase in cash surrender value life insurance |  |  | (151 | ) |  |  | (146 | ) |  |  | (153 | )
Valuation allowance |  |  | 27 |  |  |  | 32 |  |  |  | 32 |
Life Insurance Proceeds |  |  | — |  |  |  | — |  |  |  | (65 | )
Excess tax benefit of stock compensation |  |  | (5 | ) |  |  | (11 | ) |  |  | (1 | )
Other |  |  | (82 | ) |  |  | 27 |  |  |  | (32 | )
Total |  | $ | 3,798 |  |  | $ | 4,182 |  |  | $ | 2,496 |

107

Note 14—INCOME TAXES (Continued)

The following is a summary of the tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities:

Schedule of Deferred Tax Assets and Liabilities

|  | December 31, |
(Dollars in thousands) |  | 2022 |  |  | 2021 |
Assets: |  |  |  |  |  |
Allowance for loan losses |  | $ | 2,464 |  |  | $ | 2,415 |
Excess tax basis of deductible intangible assets |  |  | 60 |  |  |  | 98 |
Net operating loss carry forward |  |  | 840 |  |  |  | 792 |
Excess tax basis of assets acquired |  |  | 18 |  |  |  | 28 |
Unrealized losses on available-for-sale securities |  |  | 5,169 |  |  |  | — |
Unrealized losses on held-to-maturity securities |  |  | 3,291 |  |  |  | — |
Compensation expense deferred for tax purposes |  |  | 1,348 |  |  |  | 1,221 |
Deferred loss on other-than-temporary-impairment charges |  |  | 5 |  |  |  | 5 |
FASB 91 - Origination Income & Costs |  |  | 405 |  |  |  | 296 |
Tax credit carry-forwards |  |  | — |  |  |  | 33 |
Other Real Estate Owned |  |  | 231 |  |  |  | 230 |
Other |  |  | 299 |  |  |  | 183 |
Total deferred tax asset |  |  | 14,130 |  |  |  | 5,301 |
Valuation reserve |  |  | 916 |  |  |  | 889 |
Total deferred tax asset net of valuation reserve |  |  | 13,214 |  |  |  | 4,412 |
Liabilities: |  |  |  |  |  |  |  |
Tax depreciation in excess of book depreciation |  |  | 619 |  |  |  | 612 |
Excess financial reporting basis of assets acquired |  |  | 938 |  |  |  | 969 |
Unrealized gain on available-for-sale securities |  |  | — |  |  |  | 1,021 |
Total deferred tax liabilities |  |  | 1,557 |  |  |  | 2,602 |
Net deferred tax asset / (liability) recognized |  | $ | 11,657 |  |  | $ | 1,810 |

At December 31, 2022 the Company has approximately $21.3 million in State net operating losses. A valuation allowance is established to fully offset the deferred tax asset related to these net operating losses of the holding company. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which the temporary differences become deductible. Management considers the scheduled reversal of deferred income tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Additional amounts of these deferred tax assets considered to be realizable could be reduced in the near term if estimates of future taxable income during the carry forward period are reduced. The net deferred asset is included in other assets on the consolidated balance sheets.

A portion of the change in the net deferred tax asset relates to unrealized gains/losses on securities available-for-sale and held-to-maturity. The tax benefit related to the change of $9.5 million has been recorded directly to accumulated other comprehensive income within shareholders' equity. The balance in the change in net deferred tax asset results from the current period deferred tax benefit of $366 thousand. At December 31, 2022, the Company had no federal net operating loss carryforward.

Tax returns for 2019 and subsequent years are subject to examination by taxing authorities.

As of December 31, 2022, the Company had no material unrecognized tax benefits or accrued interest and penalties. It is the Company’s policy to account for interest and penalties accrued relative to unrecognized tax benefits as a component of income tax expense.

Note 15—COMMITMENTS, CONCENTRATIONS OF CREDIT RISK AND CONTINGENCIES

The Bank is party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated balance sheets.

The Bank’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual amount of these instruments. The Bank uses the same credit policies in making commitments as for on-balance sheet instruments. At December 31, 2022 and 2021, the Bank had commitments to extend credit including lines of credit of $156.9 million and $137.4 million, respectively.

108

Note 15—COMMITMENTS, CONCENTRATIONS OF CREDIT RISK AND CONTINGENCIES (Continued)

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require a payment of a fee. Since commitments may expire without being drawn upon, the total commitments do not necessarily represent future cash requirements. The Bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management’s credit evaluation of the party. Collateral held varies but may include inventory, property and equipment, residential real estate and income producing commercial properties.

The primary market areas served by the Bank include the Midlands Region of South Carolina to include Lexington, Richland, Newberry and Kershaw Counties; the Central Savannah River Region include Aiken County, South Carolina and Richmond and Columbia Counties in Georgia. With the acquisition of Cornerstone, we also serve Greenville, Anderson and Pickens Counties in South Carolina which we refer to as the Upstate Region. In 2022, the Company opened a branch in Rock Hill, South Carolina which is located in York County and referred to as the Piedmont Region. Management closely monitors its credit concentrations and attempts to diversify the portfolio within its primary market area. The Company considers concentrations of credit risk to exist when pursuant to regulatory guidelines, the amounts loaned to multiple borrowers engaged in similar business activities represent 25% or more of the Bank’s risk based capital, or approximately $39.2 million.

Based on this criteria, the Bank had five such concentrations at December 31, 2022, including $299.3 million (30.5% of total loans) to lessors of non-residential property, $124.3 million (12.6% of total loans) to lessors of residential properties, $63.0 million (6.4% of total loans) to private households, $60.2 million (6.1% of total loans) to other activities related to real estate and $45.9 million to hotels (4.7% of total loans). As reflected above, lessors of non-residential properties and lessors of residential buildings equate to approximately 190.8% and 79.2% of total regulatory capital, respectively. The risk in these portfolios is diversified over a large number of loans approximately 471 for lessors of non-residential properties and 394 loans for lessors of residential buildings. Commercial real estate loans and commercial construction loans represent $788.9 million, or 80.4%, of the portfolio. Approximately $267.6 million, or 33.8%, of the total commercial real estate loans are owner occupied, which can tend to reduce the risk associated with these credits. Although the Bank’s loan portfolio, as well as existing commitments, reflects the diversity of its market areas, a substantial portion of its debtor’s ability to honor their contracts is dependent upon the economic stability of these areas.

The nature of the business of the Company and Bank may at times result in a certain amount of litigation. The Bank is involved in certain litigation that is considered incidental to the normal conduct of business. Management believes that the liabilities, if any, resulting from the proceedings will not have a material adverse effect on the consolidated financial position, consolidated results of operations or consolidated cash flows of the Company.

Note 16—REVENUE RECOGNITION

In accordance with Topic 606, revenues are recognized when control of promised goods or services is transferred to customers in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of Topic 606, the Company performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the Company satisfies a performance obligation.

The Company only applies the five-step model to contracts when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, once the contract is determined to be within the scope of Topic 606, the Company assesses the goods or services that are promised within each contract and identifies those that contain performance obligations, and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.

Deposit Service Charges: The Bank earns fees from its deposit customers for account maintenance, transaction-based and overdraft services. Account maintenance fees consist primarily of account fees and analyzed account fees charged on deposit accounts on a monthly basis. The performance obligation is satisfied and the fees are recognized on a monthly basis as the service period is completed. Transaction-based fees on deposits accounts are charged to deposit customers for specific services provided to the customer, such as non-sufficient funds fees, overdraft fees, and wire fees. The performance obligation is completed as the transaction occurs and the fees are recognized at the time each specific service is provided to the customer.

109

Note 16—REVENUE RECOGNITION (Continued)

Check Card Fee Income: Check card fee income represents fees earned when a debit card issued by the Bank is used. The Bank earns interchange fees from debit cardholder transactions through the Mastercard payment network. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided to the cardholder. The performance obligation is satisfied and the fees are earned when the cost of the transaction is charged to the card. Certain expenses directly associated with the debit card are recorded on a net basis with the fee income. This income is recognized within “Other” below.

Gains/Losses on OREO Sales: Gains/losses on the sale of OREO are included in non-interest income and are generally recognized when the performance obligation is complete. This is typically at delivery of control over the property to the buyer at the time of each real estate closing.

Schedule of Revenue Recognition

(Dollars in thousands) |  | December 31, |  |  | December 31, |
Non-Interest Income |  | 2022 |  |  | 2021 |
Deposit service charges |  | $ | 960 |  |  | $ | 977 |
Mortgage banking income(1) |  |  | 1,900 |  |  |  | 4,319 |
Investment advisory fees and non-deposit commissions(1) |  |  | 4,479 |  |  |  | 3,995 |
Gain (loss) on sale of other real estate owned |  |  | (45 | ) |  |  | 77 |
Gain (loss) on sale of other assets |  |  | (73 | ) |  |  | 117 |
Non-recurring income |  |  | 7 |  |  |  | 171 |
Other (2) |  |  | 4,341 |  |  |  | 4,248 |
Total non-interest income |  |  | 11,569 |  |  |  | 13,904 |

(1) | Not within the scope of ASC 606

(2) | Includes Check Card Fee income discussed above. No other items are within the scope of ASC 606.

Note 17—OTHER INCOME AND OTHER EXPENSE

A summary of the components of other non-interest income is as follows:

Schedule of Components of Other Non-Interest Income

|  | Year ended December 31, |
(In thousands) |  | 2022 |  |  | 2021 |  |  | 2020 |
ATM debit card income |  | $ | 2,706 |  |  | $ | 2,669 |  |  | $ | 2,257 |
Recurring income on bank owned life insurance |  |  | 721 |  |  |  | 693 |  |  |  | 724 |
Rental income |  |  | 322 |  |  |  | 311 |  |  |  | 271 |
Loan late charges |  |  | 68 |  |  |  | 68 |  |  |  | 101 |
Safe deposit fees |  |  | 56 |  |  |  | 59 |  |  |  | 55 |
Wire transfer fees |  |  | 132 |  |  |  | 118 |  |  |  | 93 |
Other |  |  | 336 |  |  |  | 330 |  |  |  | 313 |
Total |  | $ | 4,341 |  |  | $ | 4,248 |  |  | $ | 3,814 |

A summary of the components of other non-interest expense is as follows:

Schedule of Components of Other Non-Interest Expenses

|  | Year ended December 31, |
(Dollars in thousands) |  | 2022 |  |  | 2021 |  |  | 2020 |
Core banking/electronic processing and services |  | $ | 2,371 |  |  | $ | 2,310 |  |  | $ | 2,065 |
ATM/debit card processing |  |  | 885 |  |  |  | 694 |  |  |  | 588 |
Software subscriptions and services |  |  | 896 |  |  |  | 733 |  |  |  | 396 |
Wire processing fees |  |  | 98 |  |  |  | 87 |  |  |  | 75 |
Supplies |  |  | 134 |  |  |  | 116 |  |  |  | 138 |
Telephone |  |  | 354 |  |  |  | 365 |  |  |  | 350 |
Courier |  |  | 279 |  |  |  | 181 |  |  |  | 176 |
Correspondent services |  |  | 303 |  |  |  | 280 |  |  |  | 272 |
Insurance |  |  | 358 |  |  |  | 325 |  |  |  | 316 |
Debit card and Fraud losses |  |  | 285 |  |  |  | 160 |  |  |  | 119 |
Investment advisory and non-deposit expense |  |  | 409 |  |  |  | 420 |  |  |  | 330 |
Loan processing and closing costs |  |  | 266 |  |  |  | 329 |  |  |  | 360 |
Director fees |  |  | 488 |  |  |  | 500 |  |  |  | 336 |
Legal and Professional fees |  |  | 1,177 |  |  |  | 878 |  |  |  | 1,058 |
Shareholder expense |  |  | 221 |  |  |  | 212 |  |  |  | 192 |
Other |  |  | 834 |  |  |  | 777 |  |  |  | 780 |
Total |  | $ | 9,358 |  |  | $ | 8,367 |  |  | $ | 7,551 |

110

Note 18—STOCK OPTIONS, RESTRICTED STOCK, RESTRICTED STOCK UNITS, AND DEFERRED COMPENSATION

Reclassification of Stock Units

In June 2022, all of the Company’s stock units were reclassified from “Other liabilities” to “Nonvested restricted stock and stock units” and are included in “Nonvested restricted stock and restricted stock and stock units” on the Balance Sheet.

The table below shows the balance as of June 30, 2022 for each type of stock unit reclassified.

Schedule of stock unit reclassified

(Dollars in thousands) |  |  |
Type of stock unit |  | Balance |
Nonemployee Director deferred compensation stock units |  |  | 1,201 |
Time-Based Restricted Stock Units |  |  | 79 |
Performance-Based Restricted Stock Units |  |  | 138 |
Total stock units reclassified |  |  | 1,418 |

The table below shows the components of “nonvested restricted stock and stock units” as of the years ended December 31, 2022, 2021, and 2020.

Schedule of nonvested restricted stock and stock units

(Dollars in thousands) |  | Year ended December 31, |
Nonvested restricted stock and stock units |  | 2022 |  |  | 2021 |  |  | 2020 |
Non-employee director deferred compensation stock plan deferred stock units |  |  | 1,260 |  |  |  | — | 1 |  |  | — | 1
Time-based restricted stock units - officer |  |  | 129 |  |  |  | — | 2 |  |  | — | 2
Performance-based restricted stock units - officer |  |  | 218 |  |  |  | — |  |  |  | — |
Restricted stock – officer and director |  |  | (146 | ) |  |  | (294 | ) |  |  | (283 | )
Total nonvested restricted stock and stock units |  |  | 1,461 |  |  |  | (294 | ) |  |  | (283 | )

1 | In June 2022, all of the Company’s stock units were reclassified from “Other liabilities”. At December 31, 2021 and December 31, 2020, $1.107 million was $1.056 million, respectively, were included in “Other liabilities”.

2 | In June 2022, all of the Company’s stock units were reclassified from “Other liabilities”. At December 31, 2021 and December 31, 2020, $144 thousand was $107 thousand, respectively, were included in “Other liabilities”.

Non-Employee Director Deferred Compensation Plan

Under the Company’s Non-Employee Director Deferred Compensation Plan, as amended and restated effective as of January 1, 2021, 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 as of the last day of such calendar quarter during which the 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 within 30 days following such director’s separation from service from the board of directors.

The table below shows the following information related to First Community Corporation’s Non-Employee Director Deferred Compensation Plan: accumulated share units and accrued liability as of the years ended December 31, 2022, 2021, and 2020; and the related director compensation expense for the twelve months ended 2022, 2021, and 2020.

|  | Year ended December 31, |
|  | 2022 |  |  | 2021 |  |  | 2020 |
Non-employee director deferred compensation plan accumulated share units |  |  | 93,488 |  |  |  | 85,764 |  |  |  | 88,411 |
Accrued liability (dollars in thousands)1 |  |  | 1,260 |  |  |  | 1,107 |  |  |  | 1,056 |
Related director compensation expense (dollars in thousands) |  |  | 153 |  |  |  | 140 |  |  |  | 148 |

1 | Recorded in “Nonvested restricted stock and stock units” effective June 2022; recorded in “Other liabilities” prior to June 2022.

111

Note 18—STOCK OPTIONS, RESTRICTED STOCK, RESTRICTED STOCK UNITS, AND DEFERRED COMPENSATION (Continued)

First Community Corporation 2011 Stock Incentive Plan

In 2011, the Company and its shareholders adopted a stock incentive plan whereby 350,000 shares were reserved for issuance by the Company upon the grant of stock options or restricted stock awards under the plan (the “2011 Plan”). The 2011 Plan provided 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 the date of grant. There were no stock options outstanding and exercisable at December 31, 2022, December 31, 2021 and December 31, 2020. The 2011 Plan expired on March 15, 2021 and no new awards may be granted under the 2011 Plan. However, any awards outstanding under the 2011 Plan will continue to be outstanding and governed by the provisions of the 2011 Plan.

Under the 2011 Plan, the employee restricted shares and units generally cliff vest over a three-year period and the non-employee director shares vest approximately one year after issuance. Historically, the Company granted time-based equity awards that vested based on continued service. Beginning in 2021 and in addition to time-based equity awards, the Company began granting performance-based equity awards in the form of performance-based restricted stock units, with the target number of performance-based restricted stock units for the Company’s Chief Executive Officer and other executive officers representing 50% of total target equity awards. These performance-based restricted stock units cliff vest over three years and include conditions based on the following performance measures: total shareholder return, return on average equity, and non-performing assets.

First Community Corporation 2021 Omnibus Equity Incentive Plan

In 2021, the Company and its shareholders adopted an omnibus equity incentive plan whereby 225,000 shares were reserved for issuance by the Company to help the company attract, retain and motivate directors, officers, employees, consultants and advisors of the Company and its subsidiaries (the “2021 Plan”). The 2021 Plan replaced the 2011 Plan.

The table below shows stock awards granted during the twelve months ended December 31, 2022, 2021, and 2020.

Schedule of Stock Awards Granted

|  | 1 |  |  | 2 |  |  | 2 |
(In shares/units) |  | Twelve Months ended December 31, |
Stock awards |  | 20221 |  |  | 20212 |  |  | 20202 |
Time-based restricted stock units - officer |  |  | 11,738 |  |  |  | — |  |  |  | — |
Performance-based restricted stock units – officer3 |  |  | 11,738 |  |  |  | 13,301 |  |  |  | — |
Restricted stock – officer |  |  | 2,201 |  |  |  | 13,301 |  |  |  | 13,267 |
Restricted stock – director |  |  | 7,359 |  |  |  | 7,960 |  |  |  | 2,662 |

| 1 | Stock awards in 2022 were granted under the First Community Corporation 2021 Omnibus Equity Incentive Plan.

| 2 | Stock awards in 2021 and 2020 were granted under the First Community Corporation 2011 Stock Incentive Plan.

| 3 | 11,738 units represent the target payout with a maximum payout of 17,608 units.

The table below shows the fair value of stock awards granted during the twelve months ended December 31, 2022, 2021, and 2020.

Schedule of Fair Value of Stock Awards Granted

|  | 1 |  |  | 2 |  |  | 2 |
(Dollars in thousands) |  | Twelve months ended December 31, |
Fair value of stock awards on grant date |  | 20221 |  |  | 20212 |  |  | 20202 |
Time-based restricted stock units - officer |  |  | 246 |  |  |  | — |  |  |  | — |
Performance-based restricted stock units – officer3 |  |  | 246 |  |  |  | 234 |  |  |  | — |
Restricted stock – officer |  |  | 46 |  |  |  | 234 |  |  |  | 261 |
Restricted stock – director |  |  | 154 |  |  |  | 140 |  |  |  | 55 |

1 | Stock awards in 2022 were granted under the First Community Corporation 2021 Omnibus Equity Incentive Plan.

2 | Stock awards in 2021 and 2020 were granted under the First Community Corporation 2011 Stock Incentive Plan.

3 | $246 thousand represents the target payout with a maximum payout of $369 thousand.

112

Note 18—STOCK OPTIONS, RESTRICTED STOCK, RESTRICTED STOCK UNITS, AND DEFERRED COMPENSATION (Continued)

The table below shows the compensation expense related to stock awards granted during the twelve months ended December 31, 2022, 2021, and 2020.

Schedule of Compensation Expense Related to Stock Awards Granted Table TextBlock

(Dollars in thousands) |  | Year ended December 31, |
Compensation expense related to stock awards |  | 2022 |  |  | 2021 |  |  | 2020 |
Time-based restricted stock units – officer1 |  |  | 94 |  |  |  | 19 |  |  |  | 16 |
Performance-based restricted stock units – officer2 |  |  | 153 |  |  |  | 65 |  |  |  | — |
Restricted stock – officer3 |  |  | 206 |  |  |  | 223 |  |  |  | 197 |
Restricted stock – director4 |  |  | 141 |  |  |  | 140 |  |  |  | 55 |

1 | Expense in 2022 consists of $75.1 thousand related stock awards granted under the First Community Corporation 2021 Omnibus Equity Incentive Plan and $19.1 thousand related stock awards granted under the First Community Corporation 2011 Stock Incentive Plan. Expenses in 2021 and 2020 were related to stock awards granted under the First Community Corporation 2011 Stock Incentive Plan.

2 | Expense in 2022 consists of $75.1 thousand related stock awards granted under the First Community Corporation 2021 Omnibus Equity Incentive Plan and $78.0 thousand related stock awards granted under the First Community Corporation 2011 Stock Incentive Plan. Expenses in 2021 and 2020 were related to stock awards granted under the First Community Corporation 2011 Stock Incentive Plan.

3 | Expense in 2022 consists of $23.8 thousand related stock awards granted under the First Community Corporation 2021 Omnibus Equity Incentive Plan and $182.1 thousand related stock awards granted under the First Community Corporation 2011 Stock Incentive Plan. Expenses in 2021 and 2020 were related to stock awards granted under the First Community Corporation 2011 Stock Incentive Plan.

4 | Expense in 2022 was related to stock awards granted under the Community Corporation 2021 Omnibus Equity Incentive Plan. Expenses in 2021 and 2020 were related to stock awards granted under the First Community Corporation 2011 Stock Incentive Plan.

The table below shows the First Community Corporation 2021 Omnibus Equity Incentive Plan (“2021 Incentive Plan”) initial reserve at May 19, 2021; stock awards granted under the 2021 Incentive Plan from its inception through December 31, 2022; and the 2021 Incentive Plan remaining reserve at December 31, 2022.

(In shares / units) |  |  |
First Community Corporation 2021 Omnibus Equity Incentive Plan |  | 2022 |
Initial reserve – May 19, 2021 |  |  | 225,000 |
Shares / units granted |  |  |  |
Time-based restricted stock units - officer |  |  | (11,738 | )
Performance-based restricted stock units – officer1 |  |  | (17,608 | )
Restricted stock – officer |  |  | (2,201 | )
Restricted stock – director |  |  | (7,359 | )
Total nonvested restricted stock and stock units |  |  | 186,094 |

1 | Performance-based restricted stock units are initially granted and expensed at target levels; however, they are reserved at maximum levels.

113

Note 19—EMPLOYEE BENEFIT PLANS

The Company maintains a 401(k) plan, which covers substantially all employees. Participants may contribute up to the maximum allowed by the regulations. During the years ended December 31, 2022, 2021 and 2020, the plan expense amounted to $608 thousand , $581 thousand, and $552 thousand , respectively. The Company matches 100% of the employee’s contribution up to 3% and 50% of the employee’s contribution on the next 2% of the employee’s contribution.

The Company acquired various single premium life insurance policies from DutchFork Bancshares that are used to indirectly fund fringe benefits to certain employees and officers. A salary continuation plan was established payable for two key individuals upon attainment of age 63. The plan provides for monthly benefits of $2,500 each for seventeen years for two individuals.

The company acquires various life insurance policies to fund fringe benefits to certain key employees. The cash surrender value at December 31, 2022 and 2021 of all bank owned life insurance was $30.0 million and $29.2 million, respectively. Expenses accrued for the anticipated benefits under the salary continuation plans for the year ended December 31, 2022, 2021 and 2020 amounted to $492 thousand, $516 thousand, and $514 thousand, respectively.

114

Note 20—EARNINGS PER COMMON SHARE

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

Schedule of Earning Per Common Share

|  | Year ended December 31, |
(Amounts in thousands) |  | 2022 |  |  | 2021 |  |  | 2020 |
Numerator (Included in basic and diluted earnings per share) |  | $ | 14,613 |  |  | $ | 15,465 |  |  | $ | 10,099 |
Denominator |  |  |  |  |  |  |  |  |  |  |  |
Weighted average common shares outstanding for: |  |  |  |  |  |  |  |  |  |  |  |
Basic earnings per common share |  |  | 7,529 |  |  |  | 7,491 |  |  |  | 7,446 |
Dilutive securities: |  |  |  |  |  |  |  |  |  |  |  |
Deferred compensation |  |  | 79 |  |  |  | 58 |  |  |  | 36 |
Diluted common shares outstanding |  |  | 7,608 |  |  |  | 7,549 |  |  |  | 7,482 |
Basic earnings per common share |  | $ | 1.94 |  |  | $ | 2.06 |  |  | $ | 1.36 |
Diluted earnings per common share |  | $ | 1.92 |  |  | $ | 2.05 |  |  | $ | 1.35 |
The average market price used in calculating assumed number of shares |  | $ | 19.52 |  |  | $ | 19.68 |  |  | $ | 15.89 |

Note 21—SHAREHOLDERS’ EQUITY, CAPITAL REQUIREMENTS AND DIVIDEND RESTRICTIONS

The Company and Bank are subject to various federal and state regulatory requirements, including regulatory capital requirements. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary, actions that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and Bank must meet specific guidelines that involve quantitative measures of the Company’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Company and Bank capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weighting, and other factors. The Bank is required to maintain minimum Tier 1 capital, Common Equity Tier I (CET1) capital, total risked based capital and Tier 1 leverage ratios of 6%, 4.5%, 8% and 4%, respectively.

Regulatory capital rules adopted in July 2013 and fully-phased in as of January 1, 2019, which we refer to Basel III, impose minimum capital requirements for bank holding companies and banks. The Basel III rules apply to all national and state banks and savings associations regardless of size and bank holding companies and savings and loan holding companies other than “small bank holding companies,” generally holding companies with consolidated assets of less than $3 billion (such as the Company). 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 our minimum risk-based capital requirements. This buffer must consist solely of common equity Tier 1, but the buffer applies to all three measurements (common equity Tier 1, Tier 1 capital and total capital). The capital conservation buffer consists of an additional amount of CET1 equal to 2.5% of risk-weighted assets.

Based on the foregoing, as a small bank holding company, we are generally not subject to the capital requirements unless otherwise advised by the Federal Reserve; however, our Bank remains subject to the capital requirements.

115

Note 21—SHAREHOLDERS’ EQUITY, CAPITAL REQUIREMENTS AND DIVIDEND RESTRICTIONS (Continued)

The Bank exceeded the minimum regulatory capital ratios at December 31, 2022 and 2021, as set forth in the following table:

Schedule of actual capital amounts and ratios as well as minimum amounts for each regulatory defined category for the bank and the company

(In thousands) |  | Minimum Required Amount |  |  | % |  |  | Actual Amount |  |  | % |  |  | Excess Amount |  |  | % |
The Bank(1)(2): |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
December 31, 2022 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Risk Based Capital |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Tier 1 |  | $ | 64,741 |  |  |  | 6.0 | % |  | $ | 145,578 |  |  |  | 13.5 | % |  | $ | 80,837 |  |  |  | 7.5 | %
Total Capital |  | $ | 86,321 |  |  |  | 8.0 | % |  | $ | 156,914 |  |  |  | 14.5 | % |  | $ | 70,593 |  |  |  | 6.5 | %
CET1 |  | $ | 48,555 |  |  |  | 4.5 | % |  | $ | 145,578 |  |  |  | 13.5 | % |  | $ | 97,023 |  |  |  | 9.0 | %
Tier 1 Leverage |  | $ | 67,509 |  |  |  | 4.0 | % |  | $ | 145,578 |  |  |  | 8.6 | % |  | $ | 78,069 |  |  |  | 4.6 | %
December 31, 2021 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Risk Based Capital |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Tier 1 |  | $ | 57,075 |  |  |  | 6.0 | % |  | $ | 132,918 |  |  |  | 14.0 | % |  | $ | 75,843 |  |  |  | 8.0 | %
Total Capital |  | $ | 76,101 |  |  |  | 8.0 | % |  | $ | 144,097 |  |  |  | 15.2 | % |  | $ | 67,996 |  |  |  | 7.1 | %
CET1 |  | $ | 42,807 |  |  |  | 4.5 | % |  | $ | 132,918 |  |  |  | 14.0 | % |  | $ | 90,111 |  |  |  | 9.5 | %
Tier 1 Leverage |  | $ | 62,897 |  |  |  | 4.0 | % |  | $ | 132,918 |  |  |  | 8.5 | % |  | $ | 70,021 |  |  |  | 4.5 | %

(1) | As a small bank holding company, we are generally not subject to the capital requirements unless otherwise advised by the Federal Reserve.

(2) | Ratios do not include the capital conservation buffer of 2.5%.

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 banks 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 the ability of the Company to pay dividends or otherwise engage in capital distributions.

The Company’s principal source of cash flow, including cash flow to pay dividends to its shareholders, is dividends it receives from the Bank. Statutory and regulatory limitations apply to the Bank’s payment of dividends to the Company. As a South Carolina chartered bank, the Bank is subject to limitations on the amount of dividends that it is permitted to pay. Unless otherwise instructed by the S.C. Board, the Bank is generally permitted under South Carolina State banking regulations to pay cash dividends of up to 100% of net income in any calendar year without obtaining the prior approval of the S.C. Board. 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.

If the Bank is not permitted to pay cash dividends to the Company, it is unlikely that we would be able to pay cash dividends on our common stock. Moreover, holders of the Company’s common stock are entitled to receive dividends only when, and if declared by the board of directors. Although the Company has historically paid cash dividends on its common stock, the Company is not required to do so and the board of directors could reduce or eliminate our common stock dividend in the future.

116

Note 22—PARENT COMPANY FINANCIAL INFORMATION

The balance sheets, statements of operations and cash flows for First Community Corporation (Parent Only) follow:

Condensed Balance Sheets

|  | At December 31, |
(Dollars in thousands) |  | 2022 |  |  | 2021 |
Assets: |  |  |  |  |  |
Cash on deposit |  | $ | 3,870 |  |  | $ | 3,335 |
Interest bearing deposits |  |  | — |  |  |  | — |
Securities purchased under agreement to resell |  |  | — |  |  |  | — |
Investment in bank subsidiary |  |  | 128,392 |  |  |  | 151,519 |
Other |  |  | 1,288 |  |  |  | 1,353 |
Total assets |  | $ | 133,550 |  |  | $ | 156,207 |
Liabilities: |  |  |  |  |  |  |  |
Junior subordinated debentures |  | $ | 14,964 |  |  | $ | 14,964 |
Other |  |  | 225 |  |  |  | 245 |
Total liabilities |  |  | 15,189 |  |  |  | 15,209 |
Shareholders’ equity |  |  | 118,361 |  |  |  | 140,998 |
Total liabilities and shareholders’ equity |  | $ | 133,550 |  |  | $ | 156,207 |

Condensed Statements of Operations

|  | Year ended December 31, |
(Dollars in thousands) |  | 2022 |  |  | 2021 |  |  | 2020 |
Income: |  |  |  |  |  |  |  |  |
Interest and dividend income |  | $ | 21 |  |  | $ | 13 |  |  | $ | 17 |
Equity in undistributed earnings of subsidiary |  |  | 11,431 |  |  |  | 12,386 |  |  |  | 6,759 |
Dividend income from bank subsidiary |  |  | 4,463 |  |  |  | 4,019 |  |  |  | 4,158 |
Total income |  |  | 15,915 |  |  |  | 16,418 |  |  |  | 10,934 |
Expenses: |  |  |  |  |  |  |  |  |  |  |  |
Interest expense |  |  | 675 |  |  |  | 416 |  |  |  | 536 |
Other |  |  | 974 |  |  |  | 772 |  |  |  | 518 |
Total expense |  |  | 1,649 |  |  |  | 1,188 |  |  |  | 1,055 |
Income before taxes |  |  | 14,266 |  |  |  | 15,230 |  |  |  | 9,879 |
Income tax benefit |  |  | (347 | ) |  |  | (235 | ) |  |  | (219 | )
Net income |  | $ | 14,613 |  |  | $ | 15,465 |  |  | $ | 10,099 |

117

Note 22—PARENT COMPANY FINANCIAL INFORMATION (Continued)

Condensed Statements of Cash Flows

|  | Year ended December 31, |
(Dollars in thousands) |  | 2022 |  |  | 2021 |  |  | 2020 |
Cash flows from operating activities: |  |  |  |  |  |  |  |  |  |  |  |
Net income |  | $ | 14,613 |  |  | $ | 15,465 |  |  | $ | 10,099 |
Adjustments to reconcile net income to net cash provided by operating activities |  |  |  |  |  |  |  |  |  |  |  |
Equity in undistributed earnings of subsidiary |  |  | (11,431 | ) |  |  | (12,386 | ) |  |  | (6,759 | )
Other-net |  |  | 233 |  |  |  | 145 |  |  |  | 42 |
Net cash provided by operating activities |  |  | 3,415 |  |  |  | 3,224 |  |  |  | 3,382 |
Cash flows from investing activities: |  |  |  |  |  |  |  |  |  |  |  |
Purchase of investments at cost |  |  | (188 | ) |  |  | (87 | ) |  |  | — |
Net cash provided by investing activities |  |  | (188 | ) |  |  | (87 | ) |  |  | — |
Cash flows from financing activities: |  |  |  |  |  |  |  |  |  |  |  |
Dividends paid: common stock |  |  | (3,913 | ) |  |  | (3,593 | ) |  |  | (3,573 | )
Repurchase of common stock |  |  | — |  |  |  | — |  |  |  | — |
Proceeds from issuance of common stock |  |  | 28 |  |  |  | 46 |  |  |  | 4 |
Dividend Reinvestment Plan |  |  | 388 |  |  |  | 368 |  |  |  | 372 |
Change in non-vested restricted stock |  |  | 507 |  |  |  | — |  |  |  | — |
Restricted stock units granted |  |  | 1,447 |  |  |  | — |  |  |  | — |
Restricted shares surrendered |  |  | (42 | ) |  |  | (70 | ) |  |  | (15 | )
Deferred compensation shares |  |  | (1,106 | ) |  |  | 90 |  |  |  | 200 |
Net cash used in financing activities |  |  | (2,691 | ) |  |  | (3,159 | ) |  |  | (3,012 | )
Increase (decrease) in cash and cash equivalents |  |  | 536 |  |  |  | (22 | ) |  |  | 370 |
Cash and cash equivalents at beginning of year |  |  | 3,335 |  |  |  | 3,357 |  |  |  | 2,987 |
Cash and cash equivalents at end of year |  | $ | 3,871 |  |  | $ | 3,335 |  |  | $ | 3,357 |

Note 23—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. Between March 10, 2023 and March 12, 2023, two financial institutions unrelated to the Company experienced a significant run on deposits, leading to insolvency. These institutions failed and were placed into receivership by the FDIC. These institutions also had deposit concentrations related to higher-risk customer types, such as venture capital and cryptocurrency. The Federal Reserve determined that these institutions were a systemic risk and therefore, in concert with the FDIC, have determined that all deposits held by these two institutions will be insured. These events have created market volatility for the financial sector; however, the ongoing ramifications of these events have yet to be seen. These events have not caused any significant changes in deposit balances at the Company since the date of the balance sheet.

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

118

Note 24—QUARTERLY FINANCIAL DATA (UNAUDITED)

The following provides quarterly financial data for 2022, 2021 and 2020 (dollars in thousands, except per share amounts).

Schedule of Unaudited Quarterly Financial Data

2022 |  | Total |  |  | Fourth Quarter |  |  | Third Quarter |  |  | Second Quarter |  |  | First Quarter |
Interest income |  | $ | 51,117 |  |  | $ | 15,057 |  |  | $ | 13,352 |  |  | $ | 11,513 |  |  | $ | 11,195 |
Interest expense |  |  | 3,174 |  |  |  | 1,692 |  |  |  | 558 |  |  |  | 462 |  |  |  | 462 |
Net interest income |  |  | 47,943 |  |  |  | 13,365 |  |  |  | 12,794 |  |  |  | 11,051 |  |  |  | 10,733 |
Provision for (release of) loan losses |  |  | (152 | ) |  |  | 25 |  |  |  | 18 |  |  |  | (70 | ) |  |  | (125 | )
Net interest income after provision |  |  | 48,095 |  |  |  | 13,340 |  |  |  | 12,776 |  |  |  | 11,121 |  |  |  | 10,858 |
Noninterest income |  |  | 11,569 |  |  |  | 2,513 |  |  |  | 2,673 |  |  |  | 3,009 |  |  |  | 3,374 |
Noninterest expense |  |  | 41,253 |  |  |  | 10,694 |  |  |  | 10,417 |  |  |  | 10,188 |  |  |  | 9,954 |
Income before income taxes |  |  | 18,411 |  |  |  | 5,159 |  |  |  | 5,032 |  |  |  | 3,942 |  |  |  | 4,278 |
Taxes |  |  | 3,798 |  |  |  | 1,116 |  |  |  | 1,081 |  |  |  | 812 |  |  |  | 789 |
Net income |  | $ | 14,613 |  |  |  | 4,043 |  |  |  | 3,951 |  |  |  | 3,130 |  |  |  | 3,489 |
Net income available to common shareholders |  | $ | 14,613 |  |  |  | 4,043 |  |  |  | 3,951 |  |  |  | 3,130 |  |  |  | 3,489 |
Net income per share, basic |  | $ | 1.94 |  |  | $ | 0.54 |  |  | $ | 0.52 |  |  | $ | 0.42 |  |  | $ | 0.46 |
Net income per share, diluted |  | $ | 1.92 |  |  | $ | 0.53 |  |  | $ | 0.52 |  |  | $ | 0.41 |  |  | $ | 0.46 |

2021 |  | Total |  |  | Fourth Quarter |  |  | Third Quarter |  |  | Second Quarter |  |  | First Quarter |
Interest income |  | $ | 47,520 |  |  | $ | 11,656 |  |  | $ | 12,982 |  |  | $ | 11,664 |  |  | $ | 11,218 |
Interest expense |  |  | 2,241 |  |  |  | 492 |  |  |  | 526 |  |  |  | 572 |  |  |  | 651 |
Net interest income |  |  | 45,279 |  |  |  | 11,164 |  |  |  | 12,456 |  |  |  | 11,092 |  |  |  | 10,567 |
Provision for (release of) loan losses |  |  | 335 |  |  |  | (59 | ) |  |  | 49 |  |  |  | 168 |  |  |  | 177 |
Net interest income after provision |  |  | 44,944 |  |  |  | 11,223 |  |  |  | 12,407 |  |  |  | 10,924 |  |  |  | 10,390 |
Noninterest income |  |  | 13,904 |  |  |  | 3,626 |  |  |  | 3,564 |  |  |  | 3,418 |  |  |  | 3,296 |
Noninterest expense |  |  | 39,201 |  |  |  | 9,878 |  |  |  | 9,905 |  |  |  | 9,878 |  |  |  | 9,540 |
Income before income taxes |  |  | 19,647 |  |  |  | 4,971 |  |  |  | 6,066 |  |  |  | 4,464 |  |  |  | 4,146 |
Taxes |  |  | 4,182 |  |  |  | 1,052 |  |  |  | 1,318 |  |  |  | 921 |  |  |  | 891 |
Net income |  | $ | 15,465 |  |  |  | 3,919 |  |  |  | 4,748 |  |  |  | 3,543 |  |  |  | 3,255 |
Net income available to common shareholders |  | $ | 15,465 |  |  |  | 3,919 |  |  |  | 4,748 |  |  |  | 3,543 |  |  |  | 3,255 |
Net income per share, basic |  | $ | 2.06 |  |  | $ | 0.52 |  |  | $ | 0.63 |  |  | $ | 0.47 |  |  | $ | 0.44 |
Net income per share, diluted |  | $ | 2.05 |  |  | $ | 0.52 |  |  | $ | 0.63 |  |  | $ | 0.47 |  |  | $ | 0.43 |

2020 |  | Total |  |  | Fourth Quarter |  |  | Third Quarter |  |  | Second Quarter |  |  | First Quarter |
Interest income |  | $ | 43,778 |  |  | $ | 11,426 |  |  | $ | 10,976 |  |  | $ | 10,666 |  |  | $ | 10,710 |
Interest expense |  |  | 3,755 |  |  |  | 739 |  |  |  | 800 |  |  |  | 923 |  |  |  | 1,293 |
Net interest income |  |  | 40,023 |  |  |  | 10,687 |  |  |  | 10,176 |  |  |  | 9,743 |  |  |  | 9,417 |
Provision for loan losses |  |  | 3,663 |  |  |  | 276 |  |  |  | 1,062 |  |  |  | 1,250 |  |  |  | 1,075 |
Net interest income after provision |  |  | 36,360 |  |  |  | 10,411 |  |  |  | 9,114 |  |  |  | 8,493 |  |  |  | 8,342 |
Noninterest income |  |  | 13,769 |  |  |  | 3,604 |  |  |  | 3,850 |  |  |  | 3,387 |  |  |  | 2,928 |
Noninterest expense |  |  | 37,534 |  |  |  | 9,651 |  |  |  | 9,714 |  |  |  | 9,131 |  |  |  | 9,038 |
Income before income taxes |  |  | 12,595 |  |  |  | 4,364 |  |  |  | 3,250 |  |  |  | 2,749 |  |  |  | 2,232 |
Taxes |  |  | 2,496 |  |  |  | 928 |  |  |  | 598 |  |  |  | 532 |  |  |  | 438 |
Net income |  | $ | 10,099 |  |  |  | 3,436 |  |  |  | 2,652 |  |  |  | 2,217 |  |  |  | 1,794 |
Net income available to common shareholders |  | $ | 10,099 |  |  |  | 3,436 |  |  |  | 2,652 |  |  |  | 2,217 |  |  |  | 1,794 |
Net income per share, basic |  | $ | 1.36 |  |  | $ | 0.46 |  |  | $ | 0.36 |  |  | $ | 0.30 |  |  | $ | 0.24 |
Net income per share, diluted |  | $ | 1.35 |  |  | $ | 0.46 |  |  | $ | 0.35 |  |  | $ | 0.30 |  |  | $ | 0.24 |

119

Note 25—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 and consumer mortgage loans that will be held-for-investment. In the second quarter of 2022, management made the decision to include consumer mortgage held-for-investment loans in this segment. Prior to the second quarter of 2022, consumer mortgage loans held-for-investment were included in the Commercial and Retail Banking segment. Non-interest income for loans held-for-sale and loans held-for-investment is included in Mortgage Banking income and other income, respectively on the income statement1. The Mortgage Banking financial information presented below includes consumer mortgage loans held-for-investment for all periods presented. Beginning in 2022, a provision for loan loss, a cost of funds and other operating costs have been allocated to this segment.

| · | 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”).

120

Note 25—REPORTABLE SEGMENTS (Continued)

The following tables present selected financial information for the Company’s reportable business segments for the years ended December 31, 2022, December 31, 2021 and December 31, 2020.

Schedule of Company’s Reportable Segment

Year ended December 31, 2022 (Dollars in thousands) |  | Commercial and Retail Banking |  |  | Mortgage Banking |  |  | Investment advisory and non-deposit |  |  | Corporate |  |  | Eliminations |  |  | Consolidated |
Dividend and Interest Income |  | $ | 49,238 |  |  | $ | 1,858 |  |  | $ | — |  |  | $ | 4,484 |  |  | $ | (4,463 | ) |  | $ | 51,117 |
Interest expense |  |  | 2,403 |  |  |  | 96 |  |  |  | — |  |  |  | 675 |  |  |  | — |  |  |  | 3,174 |
Net interest income |  | $ | 46,835 |  |  | $ | 1,762 |  |  | $ | — |  |  | $ | 3,809 |  |  | $ | (4,463 | ) |  | $ | 47,943 |
Provision for (release of) loan losses |  |  | (392 | ) |  |  | 240 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (152 | )
Noninterest income |  |  | 5,184 |  |  |  | 1,906 |  |  |  | 4,479 |  |  |  | — |  |  |  | — |  |  |  | 11,569 |
Noninterest expense |  |  | 33,629 |  |  |  | 3,689 |  |  |  | 2,961 |  |  |  | 974 |  |  |  | — |  |  |  | 41,253 |
Net income (loss) before taxes |  | $ | 18,782 |  |  | $ | (261 | ) |  | $ | 1,518 |  |  | $ | 2,835 |  |  | $ | (4,463 | ) |  | $ | 18,411 |
Income tax expense (benefit) |  |  | 4,145 |  |  |  | — |  |  |  | — |  |  |  | (347 | ) |  |  | — |  |  |  | 3,798 |
Net income (loss) |  | $ | 14,637 |  |  | $ | (261 | ) |  | $ | 1,518 |  |  | $ | 3,182 |  |  | $ | (4,463 | ) |  | $ | 14,613 |

Year ended December 31, 2021 (Dollars in thousands) |  | Commercial and Retail Banking |  |  | Mortgage Banking |  |  | Investment advisory and non-deposit |  |  | Corporate |  |  | Eliminations |  |  | Consolidated |
Dividend and Interest Income |  | $ | 46,499 |  |  | $ | 1,008 |  |  | $ | — |  |  | $ | 4,032 |  |  | $ | (4,019 | ) |  | $ | 47,520 |
Interest expense |  |  | 1,825 |  |  |  | — |  |  |  | — |  |  |  | 416 |  |  |  | — |  |  |  | 2,241 |
Net interest income |  | $ | 44,674 |  |  | $ | 1,008 |  |  | $ | — |  |  | $ | 3,616 |  |  | $ | (4,019 | ) |  | $ | 45,279 |
Provision for (release of) loan losses |  |  | 335 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 335 |
Noninterest income |  |  | 5,590 |  |  |  | 4,319 |  |  |  | 3,995 |  |  |  | — |  |  |  | — |  |  |  | 13,904 |
Noninterest expense |  |  | 31,275 |  |  |  | 4,694 |  |  |  | 2,460 |  |  |  | 772 |  |  |  | — |  |  |  | 39,201 |
Net income before taxes |  | $ | 18,654 |  |  | $ | 633 |  |  | $ | 1,535 |  |  | $ | 2,844 |  |  | $ | (4,019 | ) |  | $ | 19,647 |
Income tax expense (benefit) |  |  | 4,417 |  |  |  | — |  |  |  | — |  |  |  | (235 | ) |  |  | — |  |  |  | 4,182 |
Net income |  | $ | 14,237 |  |  | $ | 633 |  |  | $ | 1,535 |  |  | $ | 3,079 |  |  | $ | (4,019 | ) |  | $ | 15,465 |

Year ended December 31, 2020 (Dollars in thousands) |  | Commercial and Retail Banking |  |  | Mortgage Banking |  |  | Investment advisory and non-deposit |  |  | Corporate |  |  | Eliminations |  |  | Consolidated |
Dividend and Interest Income |  | $ | 42,024 |  |  | $ | 1,737 |  |  | $ | — |  |  | $ | 4,175 |  |  | $ | (4,158 | ) |  | $ | 43,778 |
Interest expense |  |  | 3,219 |  |  |  | — |  |  |  | — |  |  |  | 536 |  |  |  | — |  |  |  | 3,755 |
Net interest income |  | $ | 38,805 |  |  | $ | 1,737 |  |  | $ | — |  |  | $ | 3,639 |  |  | $ | (4,158 | ) |  | $ | 40,023 |
Provision for (release of) loan losses |  |  | 3,663 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 3,663 |
Noninterest income |  |  | 5,492 |  |  |  | 5,557 |  |  |  | 2,720 |  |  |  | — |  |  |  | — |  |  |  | 13,769 |
Noninterest expense |  |  | 30,111 |  |  |  | 4,993 |  |  |  | 1,912 |  |  |  | 518 |  |  |  | — |  |  |  | 37,534 |
Net income before taxes |  | $ | 10,523 |  |  | $ | 2,301 |  |  | $ | 808 |  |  | $ | 3,121 |  |  | $ | (4,158 | ) |  | $ | 12,595 |
Income tax expense (benefit) |  |  | 2,715 |  |  |  | — |  |  |  | — |  |  |  | (219 | ) |  |  | — |  |  |  | 2,496 |
Net income |  | $ | 7,808 |  |  | $ | 2,301 |  |  | $ | 808 |  |  | $ | 3,340 |  |  | $ | (4,158 | ) |  | $ | 10,099 |

(Dollars in thousands) |  | Commercial and Retail Banking |  |  | Mortgage Banking |  |  | Investment advisory and non-deposit |  |  | Corporate |  |  | Eliminations |  |  | Consolidated |
Total Assets as of December 31, 2022 |  | $ | 1,663,139 |  |  | $ | 8,879 |  |  | $ | — |  |  | $ | 165,937 |  |  | $ | (165,009 | ) |  | $ | 1,672,946 |
Total Assets as of December 31, 2021 |  | $ | 1,566,949 |  |  | $ | 16,798 |  |  | $ | 2 |  |  | $ | 152,928 |  |  | $ | (152,169 | ) |  | $ | 1,584,508 |

121

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

None.

Item 9A. Controls and Procedures.

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2022, in accordance with Rule 13a-15 of the Exchange Act. We applied our judgment in the process of reviewing these controls and procedures, which, by their nature, can provide only reasonable assurance regarding our control objectives. Based upon that evaluation, our Chief Executive Officer and the Chief Financial Officer concluded that our disclosure controls and procedures as of December 31, 2022, were effective to provide reasonable assurance regarding our control objectives.

Management’s Report on Internal Controls over Financial Reporting

Management is responsible for establishing and maintaining an effective system of internal control over financial reporting (as such term is defined in Rules 13A-15(f) and 15d-15(f) under the Exchange Act). The Company’s system of internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. There are inherent limitations in the effectiveness of any system of internal control over financial reporting, including the possibility of human error and circumvention or overriding of controls. Accordingly, even an effective system of internal control over financial reporting can provide only reasonable assurance with respect to financial statement preparation. Projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.

Management has assessed the Company’s internal control over financial reporting as of December 31, 2022. This assessment was based on criteria for effective internal control over financial reporting described in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management believes that, as of December 31, 2022, the Company maintained effective internal control over financial reporting based on those criteria.

Changes in Internal Controls

There were no changes in our internal controls over financial reporting that occurred during our most recent fiscal quarter that materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

Item 9B. Other Information.

None.

Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.

Not applicable.

122

PART III

Item 10. Directors, Executive Officers and Corporate Governance.

The information required to be disclosed by this item will be disclosed in our definitive proxy statement to be filed no later than 120 days after December 31, 2022 in connection with our 2023 annual meeting of shareholders. The information required by Item 10 is hereby incorporated by reference from our proxy statement for our 2023 annual meeting of shareholders to be held on May 17, 2023.

We have adopted a Code of Ethics that applies to our directors, executive officers (including our principal executive officer and principal financial officer) and employees in accordance with the Sarbanes-Oxley Corporate Responsibility Act of 2002. The Code of Ethics is available on our web site at www.firstcommunitysc.com. We will disclose any future amendments to, or waivers from, provisions of these ethics policies and standards on our website as promptly as practicable, as and to the extent required under NASDAQ Stock Market listing standards and applicable SEC rules.

Item 11. Executive Compensation.

The information required to be disclosed by this item will be disclosed in our definitive proxy statement to be filed no later than 120 days after December 31, 2022 in connection with our 2023 annual meeting of shareholders. The information required by Item 11 is hereby incorporated by reference from our proxy statement for our 2023 annual meeting of shareholders to be held on May 17, 2023.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters.

There are no outstanding options as of December 31, 2022.

The additional information required to be disclosed by this item will be disclosed in our definitive proxy statement to be filed no later than 120 days after December 31, 2022 in connection with our 2023 annual meeting of shareholders. The information required by this Item 12 is set forth under “Security Ownership of Certain Beneficial Owners and Management” and hereby incorporated by reference from our proxy statement for our 2023 annual meeting of shareholders to be held on May 17, 2023.

Item 13. Certain Relationships and Related Transactions, and Director Independence.

The information required to be disclosed by this item will be disclosed in our definitive proxy statement to be filed no later than 120 days after December 31, 2022 in connection with our 2023 annual meeting of shareholders. The information required by Item 13 is hereby incorporated by reference from our proxy statement for our 2023 annual meeting of shareholders to be held on May 17, 2023.

Item 14. Principal Accountant Fees and Services.

The information required to be disclosed by this item will be disclosed in our definitive proxy statement to be filed no later than 120 days after December 31, 2022, in connection with our 2023 annual meeting of shareholders. The information required by Item 14 is hereby incorporated by reference from our proxy statement for our 2023 annual meeting of shareholders to be held on May 17, 2023.

123

PART IV

Item 15. Exhibits, Financial Statement Schedules.

(a)(1) Financial Statements

The following consolidated financial statements are located in Item 8 of this report.

| · | Report of Independent Registered Public Accounting Firm

| · | Consolidated Balance Sheets as of December 31, 2022 and 2021

| · | Consolidated Statements of Income for the years ended December 31, 2022, 2021 and 2020

| · | Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2022, 2021 and 2020

| · | Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2022, 2021 and 2020

| · | Consolidated Statements of Cash Flows for the years ended December 31 for 2022, 2021 and 2020

| · | Notes to the Consolidated Financial Statements

(a)(2) Financial Statement Schedules

These schedules have been omitted because they are not required, are not applicable or have been included in our consolidated financial statements.

(a)(3) Exhibits

The following exhibits are required to be filed with this Report on Form 10-K by Item 601 of Regulation S-K.

Exhibit Index

Exhibit No. |  | Description of Exhibit
2.1 |  | Agreement and Plan of Merger, dated as of April 11, 2017, by and between First Community Corporation and Cornerstone Bancorp (incorporated by reference to Exhibit 2.1 to the Company’s Form 8-K filed with the SEC on April 12, 2017).
3.1 |  | Restated Articles of Incorporation (incorporated by reference to Exhibit 3.1 to the Company’s Form 8-K filed with the SEC on June 27, 2011).
3.2 |  | Articles of Amendment (incorporated by reference to Exhibit 3.1 to the Company’s Form 8-K filed with the SEC on May 23, 2019).
3.3 |  | Amended and Restated Bylaws dated May 21, 2019 (incorporated by reference to Exhibit 3.1 to the Company’s Form 8-K filed with the SEC on May 22, 2019).
4.1 |  | Description of the Company’s Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1934 (incorporated by reference to Exhibit 4.1 of the Company’s Form 10-K for the period ended December 31, 2019).
10.4 |  | Dividend Reinvestment Plan dated July 7, 2003 (incorporated by reference to Form S-3/D filed with the SEC on July 14, 2003, File No. 333-107009, April 20, 2011, File No. 333-173612, and January 31, 2019, File No. 333-229442).**
10.5 |  | Form of Salary Continuation Agreement dated August 2, 2006 (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed with the SEC on August 3, 2006).**
10.6 |  | Non-Employee Director Deferred Compensation Plan approved September 30, 2006 and Form of Deferred Compensation Agreement (incorporated by reference to Exhibits 10.1 and 10.2 to the Company’s Form 8-K filed with the SEC on October 4, 2006).
10.7 |  | First Community Corporation Non-Employee Director Deferred Compensation Plan, as amended and restated effective as of January 1, 2021 (incorporated by reference to Exhibit 10.1 to the Company’s Form 10-Q for the period ended June 30, 2021).
10.7 |  | Employment Agreement by and between Michael C. Crapps and First Community Corporation dated December 8, 2015 (incorporated by reference to Exhibit 10.7 of the Company’s Form 10-K for the period ended December 31, 2015).**
10.8 |  | Employment Agreement by and between Joseph G. Sawyer and First Community Corporation dated December 8, 2015 (incorporated by reference to Exhibit 10.8 of the Company’s Form 10-K for the period ended December 31, 2015).**
10.9 |  | Employment Agreement by and between David K. Proctor and First Community Corporation dated December 8, 2015 (incorporated by reference to Exhibit 10.9 of the Company’s Form 10-K for the period ended December 31, 2015).**

10.10 |  | Employment Agreement by and between Robin D. Brown and First Community Corporation dated December 8, 2015 (incorporated by reference to Exhibit 10.10 of the Company’s Form 10-K for the period ended December 31, 2015).**
10.11 |  | Employment Agreement by and between J. Ted Nissen and First Community Corporation dated December 8, 2015 (incorporated by reference to Exhibit 10.11 of the Company’s Form 10-K for the period ended December 31, 2015).**
10.12 |  | Employment Agreement by and between Tanya A. Butts and First Community Corporation dated April 22, 2019 (incorporated by reference to Exhibit 10.12 of the Company’s Form 10-K for the period ended December 31, 2019).**
10.13 |  | Employment Agreement by and between Donald Shawn Jordan and First Community Corporation dated November 12, 2019 (incorporated by reference to Exhibit 10.13 of the Company’s Form 10-K for the period ended December 31, 2019).**
10.14 |  | First Community Corporation 2011 Stock Incentive Plan and Form of Stock Option Agreement and Form of Restricted Stock Agreement (incorporated by reference to Appendix A to the Company’s Proxy Statement filed with April 7, 2011).**
10.15 |  | Amendment No. 1 to the First Community Corporation 2011 Stock Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed with the SEC on April 22, 2016).**

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10.16 |  | Form of Restricted Stock Unit Agreement (incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K filed with the SEC on April 22, 2016).**
10.17 |  | First Community Corporation Annual Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed with the SEC on December 16, 2019).**
10.18 |  | First Community Corporation 2021 Omnibus Equity Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company’s Form S-8 (File No. 333-257550) filed with the SEC on June 30, 2021)**
10.19 |  | Form of Time-based Restricted Stock Unit Agreement under the First Community Corporation 2021 Omnibus Equity Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed with the SEC on February 16, 2022)**
10.20 |  | Form of Performance-based Restricted Stock Unit Agreement under the First Community Corporation 2021 Omnibus Equity Incentive Plan (incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K filed with the SEC on February 16, 2022)**
10.21 |  | Form of Restricted Stock Agreement for Directors under the First Community Corporation 2021 Omnibus Equity Incentive Plan (incorporated by reference to Exhibit 10.3 to the Company’s Form 8-K filed with the SEC on February 16, 2022)**
10.22 |  | Form of Restricted Stock Agreement for Employees under the First Community Corporation 2021 Omnibus Equity Incentive Plan (incorporated by reference to Exhibit 10.4 to the Company’s Form 8-K filed with the SEC on February 16, 2022)**
21.1 |  | Subsidiaries of the Company.*
23.1 |  | Consent of Independent Registered Public Accounting Firm—Elliott Davis, LLC.*
24.1 |  | Power of Attorney (contained on the signature page hereto).*
31.1 |  | Rule 13a-14(a) Certification of the Chief Executive Officer.*
31.2 |  | Rule 13a-14(a) Certification of the Chief Financial Officer.*
32 |  | Section 1350 Certifications.*
101 |  | The following materials from the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, formatted in eXtensible Business Reporting Language (XBRL): (i) the Consolidated Balance Sheets as December 31, 2022 and December 31, 2021; (ii) Consolidated Statements of Income for the years ended December 31, 2022, 2021 and 2020; (iii) Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2022, 2021 and 2020; (iv) Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2022, 2021 and 2020; (v) Consolidated Statements of Cash Flows for the years ended December 31, 2022, 2021 and 2020; and (vi) Notes to the Consolidated Financial Statements.*
104 |  | Cover Page Interactive Data File (embedded within the Inline XBRL document)*

The Exhibits listed above will be furnished to any security holder free of charge upon written request to the Corporate Secretary, First Community Corporation, 5455 Sunset Blvd., Lexington, South Carolina 29072.

* | Filed herewith.

** | Management contract or compensatory plan or arrangement required to be filed as an Exhibit to this Annual Report on Form 10-K.

(b) | See listing of Exhibits above for an indication of exhibits filed herewith.

(c) | Not applicable.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

Date: March 22, 2023 | FIRST COMMUNITY CORPORATION
| By: | /s/ Michael C. Crapps
|  | Michael C. Crapps
|  | President and Chief Executive Officer
|  | (Principal Executive Officer)

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Michael C. Crapps, his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this report, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite or necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that attorney-in-fact and agent, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature |  | Title |  | Date
/s/ Thomas C. Brown |  | Director |  | March 22, 2023
Thomas C. Brown |  |  |  |
/s/ Chimin J. Chao |  | Director and Chairman of the Board |  | March 22, 2023
Chimin J. Chao |  |  |  |
/s/ Michael C. Crapps |  | Director, President, & Chief Executive Officer |  | March 22, 2023
Michael C. Crapps |  | (Principal Executive Officer) |  |
/s/ W. James Kitchens, Jr. |  | Director and Vice Chairman of the Board |  | March 22, 2023
W. James Kitchens, Jr. |  |  |  |
/s/ Ray E. Jones |  | Director |  | March 22, 2023
Ray E. Jones |  |  |  |
/s/ Jan H. Hollar |  | Director |  | March 22, 2023
Jan H. Hollar |  |  |  |
/s/ Mickey Layden |  | Director |  | March 22, 2023
Mickey Layden |  |  |  |
/s/ E. Leland Reynolds |  | Director |  | March 22, 2023
E. Leland Reynolds |  |  |  |
/s/ Alexander Snipe, Jr. |  | Director |  | March 22, 2023
Alexander Snipe, Jr. |  |  |  |
/s/ Jane Sosebee |  | Director |  | March 22, 2023
Jane Sosebee |  |  |  |
/s/ Edward J. Tarver |  | Director |  | March 22, 2023
Edward J. Tarver |  |  |  |
/s/ Roderick M. Todd, Jr. |  | Director |  | March 22, 2023
Roderick M. Todd, Jr. |  |  |  |
/s/ D. Shawn Jordan |  | Chief Financial Officer |  | March 22, 2023
D. Shawn Jordan |  | (Principal Financial and Accounting Officer) |  |

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