FIRST COMMUNITY CORP /SC/ - Quarter Report: 2022 June (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x	Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended June 30, 2022

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

Commission File 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 Boulevard, Lexington, South Carolina 29072

(Address of principal executive offices) (Zip Code)

(803) 951-2265

(Registrant’s telephone number, including area code)

Not Applicable

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

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

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

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

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

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

Large accelerated filer o		Accelerated filer 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 is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: On August 10, 2022, 7,566,633 shares of the issuer’s common stock, par value $1.00 per share, were issued and outstanding.

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION		1
Item 1.	Financial Statements	1
	Consolidated Balance Sheets	1
	Consolidated Statements of Income	2
	Consolidated Statements of Comprehensive Income (Loss)	4
	Consolidated Statements of Changes in Shareholders’ Equity	5
	Consolidated Statements of Cash Flows	8
	Notes to Consolidated Financial Statements	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	33
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	62
Item 4.	Controls and Procedures	62

PART II – OTHER INFORMATION		63
Item 1.	Legal Proceedings	63
Item 1A.	Risk Factors	63
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	63
Item 3.	Defaults Upon Senior Securities	63
Item 4.	Mine Safety Disclosures	63
Item 5.	Other Information	63
Item 6.	Exhibits	64

SIGNATURES		65

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

FIRST COMMUNITY CORPORATION

CONSOLIDATED BALANCE SHEETS

	June 30,
(Dollars in thousands, except par values)	2022			December 31,
	(Unaudited)			2021
ASSETS
Cash and due from banks	$	27,485		$	21,973
Interest-bearing bank balances		76,918			47,049
Investment securities held-to-maturity, fair value of $229,198 and $0 at June 30, 2022 and December 31, 2021, respectively		233,730			—
Investment securities available-for-sale		337,254			564,839
Other investments, at cost		1,929			1,785
Loans held-for-sale		4,533			7,120
Loans held-for-investment		916,332			863,702
Less, allowance for loan losses		11,220			11,179
Net loans held-for-investment		905,112			852,523
Property and equipment - net		32,251			32,831
Lease right-of-use asset		2,972			2,842
Bank owned life insurance		29,589			29,231
Other real estate owned		984			1,165
Intangible assets		840			919
Goodwill		14,637			14,637
Other assets		16,590			7,594
Total assets	$	1,684,824		$	1,584,508
LIABILITIES
Deposits:
Non-interest bearing	$	476,024		$	444,688
Interest bearing		992,951			916,603
Total deposits		1,468,975			1,361,291
Securities sold under agreements to repurchase		71,800			54,216
Junior subordinated debt		14,964			14,964
Lease liability		3,096			2,950
Other liabilities		8,397			10,089
Total liabilities		1,567,232			1,443,510
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 7,566,633 at June 30, 2022 7,548,638 at December 31, 2021		7,567			7,549
Nonvested restricted stock and stock units		1,093			(294	)
Additional paid in capital		92,487			92,139
Retained earnings		42,988			38,325
Accumulated other comprehensive income (loss)		(26,543	)		3,279
Total shareholders’ equity		117,592			140,998
Total liabilities and shareholders’ equity	$	1,684,824		$	1,584,508

See Notes to Consolidated Financial Statements

FIRST COMMUNITY CORPORATION

CONSOLIDATED STATEMENTS OF INCOME (Unaudited)


(Dollars in thousands, except per share amounts)	Six Months ended June 30,
	2022			2021
Interest and dividend income:
Loans, including fees	$	18,307		$	19,191
Investment securities - taxable		3,453			2,852
Investment securities - non taxable		755			776
Other short term investments and CD’s		193			63
Total interest income		22,708			22,882
Interest expense:
Deposits		642			967
Securities sold under agreement to repurchase		47			47
Other borrowed money		235			209
Total interest expense		924			1,223
Net interest income		21,784			21,659
Provision for (release of) loan losses		(195	)		345
Net interest income after provision for (release of) loan losses		21,979			21,314
Non-interest income:
Deposit service charges		527			458
Mortgage banking income		1,320			2,133
Investment advisory fees and non-deposit commissions		2,393			1,834
Gain (loss) on sale of other assets		(45	)		77
Other		2,188			2,212
Total non-interest income		6,383			6,714
Non-interest expense:
Salaries and employee benefits		12,294			11,912
Occupancy		1,491			1,464
Equipment		661			613
Marketing and public relations		807			709
FDIC Insurance assessments		235			315
Other real estate expense		76			84
Amortization of intangibles		79			109
Other		4,499			4,212
Total non-interest expense		20,142			19,418
Net income before tax		8,220			8,610
Income tax expense		1,601			1,812
Net income	$	6,619		$	6,798

Basic earnings per common share	$	0.88		$	0.91
Diluted earnings per common share	$	0.87		$	0.90

FIRST COMMUNITY CORPORATION

CONSOLIDATED STATEMENTS OF INCOME (Unaudited)


(Dollars in thousands, except per share amounts)	Three Months ended June 30,
	2022			2021
Interest and dividend income:
Loans, including fees	$	9,304		$	9,741
Investment securities - taxable		1,674			1,507
Investment securities - non taxable		375			387
Other short term investments and CD’s		160			29
Total interest income		11,513			11,664
Interest expense:
Deposits		309			448
Securities sold under agreement to repurchase		22			19
Other borrowed money		131			105
Total interest expense		462			572
Net interest income		11,051			11,092
Provision for (release of) loan losses		(70	)		168
Net interest income after provision for (release of) loan losses		11,121			10,924
Non-interest income:
Deposit service charges		262			212
Mortgage banking income		481			1,143
Investment advisory fees and non-deposit commissions		1,195			957
Gain (loss) on sale of other assets		(45	)		—
Other		1,116			1,106
Total non-interest income		3,009			3,418
Non-interest expense:
Salaries and employee benefits		6,175			5,948
Occupancy		786			734
Equipment		329			338
Marketing and public relations		446			313
FDIC Insurance assessments		105			146
Other real estate expense		29			55
Amortization of intangibles		40			52
Other		2,278			2,292
Total non-interest expense		10,188			9,878
Net income before tax		3,942			4,464
Income tax expense		812			921
Net income	$	3,130		$	3,543

Basic earnings per common share	$	0.42		$	0.47
Diluted earnings per common share	$	0.41		$	0.47

See Notes to Consolidated Financial Statements

FIRST COMMUNITY CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)


(Dollars in thousands)	Six months ended June 30,
	2022			2021

Net income	$	6,619		$	6,798

Other comprehensive income:

Unrealized loss during the period on available-for-sale securities, net of tax benefit of $4,447 and $1,021, respectively		(16,730	)		(3,841	)

Unrealized loss during the period on available-for-sale securities transferred to held-to-maturity, net of tax benefit of $3,508 and $0, respectively.		(13,198	)		—

Reclassification adjustment for amortization on unrealized losses on securities transferred from available-for-sale to held-to-maturity, net of tax expense of $28 and $0 respectively.		106			—

Other comprehensive loss		(29,822	)		(3,841	)

Comprehensive income (loss)	$	(23,203	)	$	2,957

(Dollars in thousands)	Three months ended June 30,
	2022			2021

Net income	$	3,130		$	3,543

Other comprehensive income:

Unrealized gain during the period on available-for-sale securities, net of tax expense of $414 and $616, respectively		1,558			2,320

Unrealized loss during the period on available-for-sale securities transferred to held-to-maturity, net of tax benefit of $3,508 and $0, respectively.		(13,198	)		—

Reclassification adjustment for amortization on unrealized losses on securities transferred from available-for-sale to held-to-maturity, net of tax expense of $28 and $0 respectively.		106			—

Other comprehensive income (loss)		(11,534	)		2,320

Comprehensive income (loss)	$	(8,404	)	$	5,863

See Notes to Consolidated Financial Statements

FIRST COMMUNITY CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

Six months ended June 30, 2022 and 2021

(Unaudited)

										Nonvested						Accumulated
	Common						Additional			Restricted						Other
(Dollars and shares in thousands)	Shares			Common			Paid-in			Stock and			Retained			Comprehensive
	Issued			Stock			Capital			Stock Units			Earnings			Income (loss)			Total
Balance, December 31, 2021		7,549		$	7,549		$	92,139		$	(294	)	$	38,325		$	3,279		$	140,998
Net income														6,619						6,619
Other comprehensive loss net of tax benefit of $7,927																	(29,822	)		(29,822	)
Issuance of common stock		1			1			27												28
Issuance of restricted stock		9			9			190			(199	)								—
Amortization of compensation on restricted stock											168									168
Stock units granted											1,418									1,418
Shares forfeited		(2	)		(2	)		(40	)											(42	)
Dividends: Common ($0.26 per share)														(1,956	)					(1,956	)
Dividend reinvestment plan		10			10			171												181
Balance, June 30, 2022		7,567		$	7,567		$	92,487		$	1,093		$	42,988		$	(26,543	)	$	117,592

																Accumulated
	Common						Additional			Nonvested						Other
(Dollars and shares in thousands)	Shares			Common			Paid-in			Restricted			Retained			Comprehensive
	Issued			Stock			Capital			Stock			Earnings			Income (loss)			Total
Balance, December 31, 2020		7,500		$	7,500		$	91,380		$	(283	)	$	26,453		$	11,287		$	136,337
Net income														6,798						6,798
Other comprehensive loss net of tax benefit of $1,021																	(3,841	)		(3,841	)
Issuance of common stock		12			12			124												136
Issuance of restricted stock		21			21			353			(374	)								—
Amortization of compensation on restricted stock											177									177
Shares forfeited		(4	)		(4	)		(66	)											(70
Dividends: Common ($0.24 per share)														(1,794	)					(1,794	)
Dividend reinvestment plan		11			11			173												184
Balance, June 30, 2021		7,540		$	7,540		$	91,964		$	(480	)	$	31,457		$	7,446		$	137,927

See Notes to Consolidated Financial Statements

FIRST COMMUNITY CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)

										Nonvested						Accumulated
	Common						Additional			Restricted						Other
(Dollars in thousands)	Shares			Common			Paid-in			Stock and			Retained			Comprehensive
	Issued			Stock			Capital			Stock Units			Earnings			Income (loss)			Total
Balance, December 31, 2021		7,549		$	7,549		$	92,139		$	(294	)	$	38,325		$	3,279		$	140,998
Net income														3,489						3,489
Other comprehensive loss net of tax benefit of $4,862																	(18,288	)		(18,288	)
Issuance of common stock		1			1			27												28
Issuance of restricted stock		7			7			147			(154	)								—
Amortization of compensation on restricted stock											79									79
Shares forfeited		(2	)		(2	)		(40	)											(42	)
Dividends: Common ($0.13 per share)														(977	)					(977	)
Dividend reinvestment plan		5			5			88												93
Balance, March 31, 2022		7,560		$	7,560		$	92,361		$	(369	)	$	40,837		$	(15,009	)	$	125,380
Net income														3,130						3,130
Other comprehensive income net of tax benefit of $3,066																	(11,534	)		(11,534	)
Issuance of restricted stock		2			2			43			(45	)								—
Amortization of compensation on restricted stock											89									89
Stock units											1,418									1,418
Dividends: Common ($0.13 per share)														(979	)					(979	)
Dividend reinvestment plan		5			5			83												88
Balance, June 30, 2022		7,567		$	7,567		$	92,487		$	1,093		$	42,988		$	(26,543	)	$	117,592

See Notes to Consolidated Financial Statements

FIRST COMMUNITY CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)

																Accumulated
	Common						Additional			Nonvested						Other
(Dollars in thousands)	Shares			Common			Paid-in			Restricted			Retained			Comprehensive
	Issued			Stock			Capital			Stock			Earnings			Income (loss)			Total
Balance, December 31, 2020		7,500		$	7,500		$	91,380		$	(283	)	$	26,453		$	11,287		$	136,337
Net income														3,255						3,255
Other comprehensive loss net of tax of $1,637																	(6,161	)		(6,161	)
Issuance of common stock		2			2			44												46
Issuance of restricted stock		21			21			353			(374	)								—
Amortization of compensation on restricted stock											84									84
Shares retired / forfeited		(4	)		(4	)		(66	)											(70	)
Dividends: Common ($0.12 per share)														(896	)					(896	)
Dividend reinvestment plan		6			6			86												92
Balance, March 31, 2021		7,525		$	7,525		$	91,797		$	(573	)	$	28,812		$	5,126		$	132,687
Net income														3,543						3,543
Other comprehensive income net of tax of $616																	2,320			2,320
Issuance of common stock		10			10			80												90
Amortization of compensation on restricted stock											93									93
Dividends: Common ($0.12 per share)														(898	)					(898	)
Dividend reinvestment plan		5			5			87												92
Balance, June 30, 2021		7,540		$	7,540		$	91,964		$	(480	)	$	31,457		$	7,446		$	137,927

See Notes to Consolidated Financial Statements

FIRST COMMUNITY CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	Six months ended June 30,
(Dollars in thousands)	2022			2021
Cash flows from operating activities:
Net income	$	6,619		$	6,798
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Depreciation		855			853
Net amortization of premium on investment securities available for sale		1,613			1,089
Net amortization of premium on investment securities held-to-maturity		78			—
(Release of) provision for loan losses		(195	)		345
Write-downs of other real estate owned		19			33
Origination of loans held-for-sale		(44,683	)		(76,404	)
Sale of loans held-for-sale		47,270			110,008
(Gain) Loss on sale of other real estate owned		45			(77	)
Amortization of intangibles		79			109
Accretion on acquired loans		(25	)		(64	)
(Gain) Loss on fair value of securities		1			(2	)
(Increase) decrease in other assets		(1,422	)		786
Increase (decrease) in other liabilities		(1,546	)		(2,042	)
Net cash (used in) provided by operating activities		8,708			41,432
Cash flows from investing activities:
Purchase of investment securities available-for-sale		(81,692	)		(139,458	)
Purchase of investment securities held-to-maturity		(6,843	)
Purchase of other investment securities		(144	)		(20	)
Maturity/call of investment securities available-for-sale		40,867			24,424
Maturity/call of investment securities held-to-maturity		1,947
Proceeds from sales of other investments		—			355
Increase in loans		(52,368	)		(34,338	)
Proceeds from sale of other real estate owned		117			201
Purchase of property and equipment		(300	)		(277	)
Net disposal of property and equipment		24			—
Net cash used in investing activities		(98,392	)		(149,113	)
Cash flows from financing activities:
Increase in deposit accounts		107,684			100,470
Increase in securities sold under agreements to repurchase		17,584			19,573
Shares retired / forfeited		(42	)		(70	)
Dividends paid: Common Stock		(1,956	)		(1,794	)
Restricted stock units granted		1,418			—
Proceeds from issuance of Common Stock		28			136
Change in non-vested restricted stock		168			177
Dividend reinvestment plan		181			184
Net cash provided by financing activities		125,065			118,676
Net increase in cash and cash equivalents		35,381			10,995
Cash and cash equivalents at beginning of period		69,022			64,992
Cash and cash equivalents at end of period	$	104,403		$	75,987
Supplemental disclosure:
Cash paid during the period for:
Interest	$	1,028		$	2,396
Income taxes	$	1,867		$	2,837
Non-cash investing and financing activities:
Unrealized loss on securities available-for-sale, net of tax	$	(16,730	)	$	(3,841	)
Unrealized loss on securities held-to-maturity, net of tax		(13,092	)
Transfer of investment securities available-for-sale to held-to-maturity		245,619			—
Transfer of loans to foreclosed property	$	—		$	145

See Notes to Consolidated Financial Statements

Notes to Consolidated Financial Statements (Unaudited)

Note 1—Nature of Business and Basis of Presentation

Basis of Presentation

In the opinion of management, the accompanying unaudited consolidated balance sheets, and the consolidated statements of income, comprehensive income, changes in shareholders’ equity, and the cash flows of First Community Corporation (the “Company”) and its wholly owned subsidiary, First Community Bank (the “Bank”), present fairly in all material respects the Company’s financial position at June 30, 2022 and December 31, 2021, the Company’s results of operations for the three and six months ended June 30, 2022 and 2021, and cash flows for the six months ended June 30, 2022 and 2021. The results of operations for the three and six months ended June 30, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022.

In the opinion of management, all adjustments necessary to fairly present the consolidated financial position and consolidated results of operations have been made. All such adjustments are of a normal, recurring nature. All significant intercompany accounts and transactions have been eliminated in consolidation. The consolidated financial statements and notes thereto are presented in accordance with the instructions for Quarterly Reports on Form 10-Q. The information included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 should be referred to in connection with these unaudited interim financial statements.

Risk and Uncertainties

The COVID-19 pandemic and variants of the virus continue to create disruptions to the global economy and financial markets and to businesses and the lives of individuals throughout the world. As the COVID-19 pandemic has evolved from its emergence in early 2020, so has its impact. While vaccine availability and uptake has increased, the longer-term macro-economic effects on global supply chains, inflation, labor shortages and wage increases continue to impact many industries. Moreover, with the potential for new strains of COVID-19 to emerge, governments and businesses may re-impose aggressive measures to help slow its spread in the future. For this reason, among others, as the COVID-19 pandemic continues, the potential or lasting impacts on our business, financial condition and results of operations remains uncertain and difficult to assess. Our business, financial condition and results of operations generally rely upon the ability of our borrowers to repay their loans, the value of collateral underlying our secured loans, and demand for loans and other products and services we offer, which are highly dependent on the business environment in our primary markets where we operate and in the United States as a whole. The unprecedented and rapid spread of COVID-19 and its variants and their associated impacts on trade (including supply chains and export levels), travel, employee productivity, unemployment, consumer spending, and other economic activities have resulted and continue to result in volatility and disruption in financial markets.

In addition, due to the COVID-19 pandemic, market interest rates declined to historical lows and the reductions in interest rates, low interest rate environment, and the other effects of the COVID-19 pandemic had an adverse effect on our business, financial condition and results of operations. However, during 2022, market interest rates have started to increase. The Federal Open Market Committee (FOMC) made the following increases to the target range of federal funds during the first six months of 2022:

0.25% on March 16, 2022;

0.50% on May 4, 2022; and

0.75% on June 15, 2022.

The target range of federal funds was 1.50% - 1.75% at June 30, 2022 compared to 0.25% - 0.50% at March 31, 2022, and compared to 0.00% - 0.25% at December 31, 2021 and June 30, 2021. 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.

Note 2—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

(In thousands except average market price and per share data)


	Six months				Three months
	Ended June 30,				Ended June 30,
	2022		2021		2022		2021

Numerator (Net income available to common shareholders)	$	6,619	$	6,798	$	3,130	$	3,543
Denominator
Weighted average common shares outstanding for:
Basic shares		7,522		7,478		7,526		7,486
Dilutive securities:
Deferred compensation		31		28		29		29
Restricted stock – Treasury stock method		52		22		52		22
Diluted shares		7,605		7,528		7,607		7,537
Earnings per common share:
Basic		0.88		0.91		0.42		0.47
Diluted		0.87		0.90		0.41		0.47
The average market price used in calculating assumed number of shares	$	20.25	$	18.95	$	19.50	$	19.44

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 for all periods presented.

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

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. At June 30, 2022 and December 31, 2021, there were 90,446 and 85,765 units in the plan, respectively. The equity related to the plan at June 30, 2022 and December 31, 2021 amounted to $1.2 million and $1.1 million, respectively, and is included in “Nonvested restricted stock and stock units” on the balance sheet.

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 June 30, 2022, December 31, 2021 and June 30, 2021. 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. The unrecognized compensation cost at June 30, 2022 and December 31, 2021 for non-vested employee restricted shares amounted to $199.4 thousand and $293.9 thousand, respectively. The related compensation expense for restricted shares is expensed over the vesting period and was $44.2 thousand and $93.4 thousand for the three months ended June 30, 2022, and June 30, 2021, respectively. The related compensation expense for restricted shares was $94.5 thousand and $177.6 thousand for the six months ended June 30, 2022 and June 30, 2021, respectively. Each unit is convertible into one share of common stock at the time the unit vests. The related compensation cost for time-based units (“TRSUs”) is expensed over the vesting period and was $4.8 thousand and $8.3 thousand respectively, for the three months ended June 30, 2022 and June 30, 2021. The related compensation cost for TRSUs for the six months periods ended June 30, 2022 and June 30, 2021 was $11.9 thousand and $16.6 thousand, respectively. The unrecognized compensation cost for non-vested TRSUs at June 30, 2022 and December 31, 2021 was $44.6 thousand and $35.1 thousand, respectively.

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. The Company granted 13,302 performance-based restricted stock units (“PRSUs”) with a fair value of $234.0 thousand during 2021. The related compensation cost for the PRSUs is expensed over the vesting period and was $19.5 thousand and $19.5 thousand, respectively, for the three months ended June 30, 2022 and June 30, 2021. The related compensation cost for PRSUs for the six months ended June 30, 2022 and June 30, 2021 were $39.0 thousand and $26.0 thousand, respectively. The unrecognized compensation expense related to the PRSUs was $104.0 thousand and $65.0 thousand at June 30, 2022 and December 31, 2021, respectively.

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. No awards were granted under the 2021 Plan as of June 30, 2021. During the six months ended June 30, 2022, the Company granted 7,358 restricted stock awards to Directors with a fair value of $154 thousand. The restricted stock awards will fully vest on January 1, 2023. During the six months ended June 30, 2022, the Company granted 2,201 restricted stock awards to officers with a fair value of $36.6 thousand and vesting periods ranging from one to three years. The related compensation expense for all restricted shares is expensed over the vesting period and was $48.0 thousand and $73.7 thousand for the three and six months ended June 30, 2022, respectively. At June 30, 2022 the unrecognized compensation cost for non-vested shares amounted to $125.9 thousand. During the six months ended June 30, 2022, the Company granted 11,738 TRSUs and 11,738 PRSUs with a total fair value of $245.7 thousand and $245.7 thousand, respectively. The related compensation cost for TRSUs and PRSUs is expensed over the vesting period and was $20.5 thousand and $20.5 thousand respectively, for the three months ended June 30, 2022. The related compensation cost for the six months ended June 30, 2022, was $34.1 thousand and $34.1 thousand, respectively. At June 30, 2022, the Company had 186,094 shares reserved for future grants under the 2021 Plan.

Note 3—Investment Securities

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

AVAILABLE-FOR-SALE:

			Gross		Gross
	Amortized		Unrealized		Unrealized
(Dollars in thousands)	Cost		Gains		Losses			Fair Value
June 30, 2022
US Treasury securities	$	60,454	$	—	$	(3,131	)	$	57,323
Government Sponsored Enterprises		2,500		—		(311	)		2,189
Mortgage-backed securities		256,725		29		(12,933	)		243,821
Small Business Administration pools		25,830		148		(415	)		25,563
State and local government				—		—			—
Corporate and other securities		8,773		47		(462	)		8,358
Total	$	354,282	$	224	$	(17,252	)	$	337,254

			Gross		Gross
	Amortized		Unrealized		Unrealized
(Dollars in thousands)	Cost		Gains		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

HELD-TO-MATURITY:

Schedule of Held to Maturity

			Gross		Gross
	Amortized		Unrealized		Unrealized
(Dollars in thousands)	Cost		Gains		Losses			Fair Value
June 30, 2022
US Treasury securities	$	—	$	—	$	—		$	—
Government Sponsored Enterprises		—		—		—			—
Mortgage-backed securities		131,209		18		(2,698	)		128,529
Small Business Administration pools		—		—		—			—
State and local government		102,521		12		(1,864	)		100,669
Corporate and other securities		—		—		—			—
Total	$	233,730	$	30	$	(4,562	)	$	229,198

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 $16.6 million ($13.1 million net of tax) at June 30, 2022.

During the six months ended June 30, 2022 and 2021, the Company did not receive any proceeds from the sale of investment securities available-for-sale. For the six months ended June 30, 2022, and 2021 there were no gross realized gains from the sale of investment securities available-for-sale and no gross realized losses.

At June 30, 2022, corporate and other securities available-for-sale included the following at fair value: corporate fixed-to-float bonds at $8.3 million, mutual funds at $10.7 thousand, and foreign debt of $10.0 thousand. As required by Accounting Standards Update (“ASU”) 2016-01-Financial Instruments-Overall (Subtopic 825-10), the Company measured its equity investments at fair value with changes in the fair value recognized through net income. For the six months ended June 30, 2022 and 2021, a $0.9 thousand loss and a $1.7 thousand gain were recognized on a mutual fund, respectively. At December 31, 2021, corporate and other securities available-for-sale included the following at fair value: corporate fixed-to-float bonds at $8.0 million, mutual fund at $11.6 thousand and foreign debt of $10.0 thousand. Other investments, at cost, include Federal Home Loan Bank (“FHLB”) stock in the amount of $792.1 thousand and corporate stock in the amount of $1.0 million, and a venture capital fund in the amount of $136.7 thousand at June 30, 2022. The Company held $698.4 thousand of FHLB stock and $1.0 million in corporate stock, and a venture capital fund in the amount of $86.7 thousand at December 31, 2021.

The following tables show gross unrealized losses and fair values, aggregated by investment category and length of time that individual securities have been in a continuous loss position, at June 30, 2022 and December 31, 2021.


(Dollars in thousands)	Less than 12 months				12 months or more				Total
June 30, 2022	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
Available-for-sale securities:	Value		Loss		Value		Loss		Value		Loss

US Treasury Securities	$	52,212	$	2,364	$	5,111	$	767	$	57,323	$	3,131
Government Sponsored Enterprise		2,189		311		—		—		2,189		311
Mortgage-backed securities		136,130		7,569		87,525		5,364		223,655		12,933
Small Business Administration pools		11,738		367		2,488		48		14,226		415
State and local government		—		—		—		—		—		—
Corporate and other securities		3,413		344		882		118		4,295		462
Total	$	205,682	$	10,955	$	96,006	$	6,297	$	301,688	$	17,252

(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


(Dollars in thousands)	Less than 12 months				12 months or more				Total
June 30, 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		106,897		2,127		19,346		571		126,243		2,698
Small Business Administration pools		—		—		—		—		—		—
State and local government		94,196		1,783		2,621		81		96,817		1,864
Corporate and other securities		—		—		—		—		—		—
Total	$	201,093	$	3,910	$	21,967	$	652	$	223,060	$	4,562

Government Sponsored Enterprise, Mortgage-Backed Securities: The Company owned mortgage-backed securities (“MBSs”), including collateralized mortgage obligations (“CMOs”), issued by government sponsored enterprises (“GSEs”) with an amortized cost of 413.8 million and $429.0 million and approximate fair value of $397.9 million and $429.0 million at June 30, 2022 and December 31, 2021, respectively. The total amortized cost of $413.8 million and approximate fair value of $397.9 million includes $282.6 million amortized cost and $269.4 million fair value in available-for-sale and $131.2 million amortized cost and 128.5 million fair value in held-to-maturity at June 30, 2022. Unrealized losses on certain of these investments are not considered to be “other than temporary,” and the Company has the intent and ability to hold these until they mature or recover the current book value. The contractual cash flows of the investments are guaranteed by the GSEs. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost of the Company’s investment. Because the Company does not intend to sell these securities and it is more likely than not that the Company will not be required to sell these securities before a recovery of its amortized cost, which may be maturity, the Company does not consider the investments to be other-than-temporarily impaired at June 30, 2022.

Non-agency Mortgage Backed Securities: The Company held private label mortgage-backed securities (“PLMBSs”), including CMOs, at June 30, 2022 with an amortized cost of $41.5 thousand and approximate fair value of $41.7 thousand. The Company held PLMBSs, including CMOs, at December 31, 2021 with an amortized cost of $48.2 thousand and approximate fair value of $46.4 thousand. Management monitors each of these securities on a quarterly basis to identify any deterioration in the credit quality, collateral values and credit support underlying the investments. The Company does not consider these securities to be other-than-temporarily impaired at June 30, 2022.

State and Local Governments and Other: Management monitors these securities on a quarterly basis to identify any deterioration in the credit quality. Included in the monitoring is a review of the credit rating, a financial analysis and certain demographic data on the underlying issuer. The Company does not consider these securities to be other-than-temporarily impaired at June 30, 2022.

The following sets forth the amortized cost and fair value of investment securities at June 30, 2022 by contractual maturity. Expected maturities differ from contractual maturities because borrowers may have the right to call or prepay the obligations with or without prepayment penalties. MBSs are based on average life at estimated prepayment speeds.

	Available-for-sale
June 30, 2022	Amortized		Fair
(Dollars in thousands)	Cost		Value
Due in one year or less	$	6,832	$	6,522
Due after one year through five years		175,177		169,707
Due after five years through ten years		147,310		137,015
Due after ten years		24,962		24,011
Total	$	354,282	$	337,254

	Held-to-maturity
June 30, 2022	Amortized		Fair
(Dollars in thousands)	Cost		Value
Due in one year or less	$	12,393	$	12,344
Due after one year through five years		67,028		65,640
Due after five years through ten years		117,800		115,672
Due after ten years		36,509		35,542
Total	$	233,730	$	229,198

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 $1.6 million and $1.4 million as of June 30, 2022 and December 31, 2021, respectively.

Schedule of Loan Portfolio

	June 30,		December 31,
(Dollars in thousands)	2022		2021
Commercial, financial and agricultural	$	69,989	$	69,952
Real estate:
Construction		94,159		94,969
Mortgage-residential		46,767		45,498
Mortgage-commercial		662,779		617,464
Consumer:
Home equity		27,348		27,116
Other		15,290		8,703
Total loans, net of deferred loan fees and costs	$	916,332	$	863,702

Commercial, financial, and agricultural category includes $0.2 million and $1.5 million in PPP loans, net of deferred fees and costs, as of June 30, 2022 and December 31, 2021, respectively.

The detailed activity in the allowance for loan losses and the recorded investment in loans receivable as of and for the three months ended and six months June 30, 2022 and June 30, 2021 and for the year ended December 31, 2021 is as follows:


(Dollars in thousands)	Commercial			Real estate Construction			Real estate Mortgage Residential			Real estate Mortgage Commercial			Consumer Home equity			Consumer Other			Unallocated			Total
Three months ended June 30, 2022
Allowance for loan losses:
Beginning balance March 31, 2022	$	849		$	91		$	513		$	8,508		$	331		$	150		$	621		$	11,063
Charge-offs		—			—			—			—			—			(19	)		—			(19	)
Recoveries		—			—			1			237			4			4			—			246
Provisions		(32	)		(7	)		32			(106	)		(20	)		67			(4	)		(70	)
Ending balance June 30, 2022	$	817		$	84		$	546		$	8,639		$	315		$	202		$	617		$	11,220

							Real estate			Real estate			Consumer
				Real estate			Mortgage			Mortgage			Home			Consumer
(Dollars in thousands)	Commercial			Construction			Residential			Commercial			equity			Other			Unallocated			Total
Six months ended June 30, 2022
Allowance for loan losses:
Beginning balance December 31, 2021	$	853		$	113		$	560		$	8,570		$	333		$	126		$	624		$	11,179
Charge-offs		—			—			—			—			—			(33	)		—			(33	)
Recoveries		11			—			1			243			7			7			—			269
Provisions		(47	)		(29	)		(15	)		(174	)		(25	)		102			(7	)		(195	)
Ending balance June 30, 2022	$	817		$	84		$	546		$	8,639		$	315		$	202		$	617		$	11,220

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

Collectively evaluated for impairment		817		$	84		$	546		$	8,639		$	315		$	202		$	617		$	11,220

June 30, 2022 Loans receivable:
Ending balance-total	$	69,989		$	94,159		$	46,767		$	662,779		$	27,348		$	15,290		$	—		$	916,332

Ending balances:
Individually evaluated for impairment		—			—			38			4,275			163			—			—			4,476

Collectively evaluated for impairment	$	69,989		$	94,159		$	46,729		$	658,504		$	27,185		$	15,290		$	—		$	911,856


(Dollars in thousands)	Commercial			Real estate Construction			Real estate Mortgage Residential			Real estate Mortgage Commercial			Consumer Home equity			Consumer Other			Unallocated			Total
Three months ended June 30, 2021
Allowance for loan losses:
Beginning balance March 31, 2021	$	758		$	134		$	480		$	8,137		$	309		$	124		$	621		$	10,563
Charge-offs		—			—			—			(110	)		—			(11	)		—			(121	)
Recoveries		2			—			—			7			5			14			—			28
Provisions		134			(9	)		62			(8	)		8			(16	)		(3	)		168
Ending balance June 30, 2021	$	894		$	125		$	542		$	8,026		$	322		$	111		$	618		$	10,638

						Real estate		Real estate			Consumer
			Real estate			Mortgage		Mortgage			Home			Consumer
(Dollars in thousands)	Commercial		Construction			Residential		Commercial			equity			Other			Unallocated			Total
Six months ended June 30, 2021
Allowance for loan losses:
Beginning balance December 31, 2020	$	778	$	145		$	541	$	7,855		$	324		$	125		$	621		$	10,389
Charge-offs		—		—			—		(110	)		—			(36	)		—			(146	)
Recoveries		3		—			—		11			6			30			—			50
Provisions		113		(20	)		1		270			(8	)		(8	)		(3	)		345
Ending balance June 30, 2021	$	894	$	125		$	542	$	8,026		$	322		$	111		$	618		$	10,638

Ending balances:
Individually evaluated for impairment	$	—	$	—		$	—	$	2		$	—		$	—		$	—		$	2

Collectively evaluated for impairment		894		125			542		8,024			322			111			618			10,636

June 30, 2021 Loans receivable:
Ending balance-total	$	111,449	$	95,865		$	44,594	$	592,099		$	26,662		$	7,649		$	—		$	878,318

Ending balances:
Individually evaluated for impairment		—		—			310		5,163			21			—			—			5,494

Collectively evaluated for impairment	$	111,449	$	95,865		$	44,284	$	586,936		$	26,641		$	7,649		$	—		$	872,824

(Dollars in thousands)	Commercial		Real estate Construction			Real estate Mortgage Residential		Real estate Mortgage Commercial			Consumer Home equity			Consumer Other			Unallocated		Total
December 31, 2021
Allowance for loan losses:
Beginning balance December 31, 2020	$	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 December 31, 2021	$	853	$	113		$	560	$	8,570		$	333		$	126		$	624	$	11,179

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

Collectively evaluated for impairment		853		113			560		8,569			333			126			624		11,179

December 31, 2021 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

Current Expected Credit Loss (CECL) The Company is currently (i) evaluating the impact the CECL model will have on our accounting, (ii) planning for the transition, and (iii) expect to recognize a one-time cumulative-effect adjustment to our allowance for loan losses as of the beginning of the first quarter of 2023—the first reporting period in which the new standard is effective. At this time, we cannot yet reasonably determine the magnitude of such one-time cumulative adjustment, if any, or of the overall impact of the new standard on our business, financial condition or results of operations.

The following tables are by loan category and present June 30, 2022, June 30, 2021, and December 31, 2021 loans individually evaluated and considered impaired under FASB ASC 310 “Accounting by Creditors for Impairment of a Loan.” Impairment includes performing TDRs.

							Six months ended				Three months ended
			Unpaid				Average		Interest		Average		Interest
(Dollars in thousands)	Recorded		Principal		Related		Recorded		Income		Recorded		Income
June 30, 2022	Investment		Balance		Allowance		Investment		Recognized		Investment		Recognized
With no allowance recorded:
Commercial, financial, agricultural	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Real estate:
Construction		—		—		—		—		—		—		—
Mortgage-residential		38		54		—		42		1		37		1
Mortgage-commercial		4,275		9,784		—		4,289		244		4,274		122
Consumer:
Home equity		163		163		—		164		4		163		2
Other		—		—		—		—		—		—		—

With an allowance recorded:
Commercial, financial, agricultural		—		—		—		—		—		—		—
Real estate:
Construction		—		—		—		—		—		—		—
Mortgage-residential		—		—		—		—		—		—		—
Mortgage-commercial		—		—		—		—		—		—		—
Consumer:
Home equity		—		—		—		—		—		—		—
Other		—		—		—		—		—		—		—

Total:
Commercial, financial, agricultural	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Real estate:
Construction		—		—		—		—		—		—		—
Mortgage-residential		38		54		—		42		1		37		1
Mortgage-commercial		4,275		9,784		—		4,289		244		4,274		122
Consumer:
Home equity		163		163		—		164		4		163		2
Other		—		—		—		—		—		—		—
	$	4,476		10,001	$	—	$	4,495	$	249	$	4,474	$	125

							Six months ended				Three months ended
			Unpaid				Average		Interest		Average		Interest
(Dollars in thousands)	Recorded		Principal		Related		Recorded		income		Recorded		Income
June 30, 2021	Investment		Balance		Allowance		Investment		Recognized		Investment		Recognized
With no allowance recorded:
Commercial, financial, agricultural	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Real estate:
Construction		—		—		—		—		—		—		—
Mortgage-residential		310		361		—		315		7		310		4
Mortgage-commercial		5,062		7,689		—		5,332		188		5,168		94
Consumer:
Home equity		21		25		—		21		1		20		—
Other		—		—		—		—		—		—		—

With an allowance recorded:
Commercial, financial, agricultural		—		—		—		—		—		—		—
Real estate:
Construction		—		—		—		—		—		—		—
Mortgage-residential		—		—		—		—		—		—		—
Mortgage-commercial		101		101		2		111		3		101		1
Consumer:
Home equity		—		—		—		—		—		—		—
Other		—		—		—		—		—		—		—

Total:
Commercial, financial, agricultural	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Real estate:
Construction		—		—		—		—		—		—		—
Mortgage-residential		310		361		—		315		7		310		4
Mortgage-commercial		5,163		7,790		2		5,443		191		5,269		95
Consumer:
Home equity		21		25		—		21		1		20		—
Other		—		—		—		—		—		—		—
	$	5,494		8,176	$	2	$	5,779	$	199	$	5,599	$	99

			Unpaid				Average		Interest
(Dollars in thousands)	Recorded		Principal		Related		Recorded		Income
December 31, 2021	Investment		Balance		Allowance		Investment		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

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

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

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

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

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered as pass rated loans. Based on the most recent analysis performed, the risk category of loans by class of loans is shown in the table below as of June 30, 2022 and December 31, 2021. As of June 30, 2022 and December 31, 2021, no loans were classified as doubtful.

(Dollars in thousands)
June 30, 2022	Pass		Special Mention		Substandard		Doubtful		Total
Commercial, financial & agricultural	$	69,899	$	90	$	—	$	—	$	69,989
Real estate:
Construction		94,159		—		—		—		94,159
Mortgage – residential		46,352		368		47		—		46,767
Mortgage – commercial		657,513		28		5,238		—		662,779
Consumer:
Home Equity		25,984		176		1,188		—		27,348
Other		15,031		22		237		—		15,290
Total	$	908,938	$	684	$	6,710	$	—	$	916,332

(Dollars in thousands)
December 31, 2021	Pass		Special 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

At June 30, 2022 and December 31, 2021, non-accrual loans totaled $4.4 million and $250 thousand, respectively.

TDRs that are still accruing and included in impaired loans at June 30, 2022 and at December 31, 2021 amounted to $125 thousand and $1.4 million, respectively.

There were no loans greater than 90 days delinquent and still accruing interest at June 30, 2022 and December 31, 2021. The following tables are by loan category and present loans past due and on non-accrual status as of June 30, 2022 and December 31, 2021:

					Greater than
(Dollars in thousands)	30-59 Days		60-89 Days		90 Days and				Total
June 30, 2022	Past Due		Past Due		Accruing		Nonaccrual		Past Due		Current		Total Loans

Commercial	$	242	$	513	$	—	$	4,150	$	4,905	$	65,084	$	69,989
Real estate:
Construction		—		—		—		—		—		94,159		94,159
Mortgage-residential		81		275		—		38		394		46,373		46,767
Mortgage-commercial		—		—		—		0		—		662,779		662,779
Consumer:
Home equity		1,043		5		—		163		1,211		26,137		27,348
Other		—		1		—		—		1		15,289		15,290
Total	$	1,366	$	794	$	—	$	4,351	$	6,511	$	909,821	$	916,332

					Greater than
(Dollars in thousands)	30-59 Days		60-89 Days		90 Days and				Total
December 31, 2021	Past Due		Past Due		Accruing		Nonaccrual		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

The CARES Act and Initiatives Related to COVID-19. On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act, was signed into law. The CARES Act provided for approximately $2.2 trillion in direct economic relief in response to the public health and economic impacts of COVID-19. Many of the CARES Act’s programs were dependent upon the direct involvement of financial institutions like the Bank. These programs were implemented through rules and guidance adopted by federal departments and agencies, including the U.S. Department of Treasury, the Federal Reserve and other federal bank regulatory authorities, including those with direct supervisory jurisdiction over the Company and the Bank. The relief period provided in the CARES Act expired on January 1, 2022.

COVID-19 Related Troubled Debt Restructurings and Loan Modifications for Affected Borrowers. The CARES Act, as extended by certain provisions of the Consolidated Appropriations Act, 2021, permitted banks to suspend requirements under generally accepted accounting principles (“GAAP”) for loan modifications to borrowers affected by COVID-19 that may otherwise be characterized as troubled debt restructurings, or TDRs, and suspend 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.

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 three-month periods ended June 30, 2022 and June 30, 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.

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.

A summary of changes in the accretable yield for purchased credit-impaired loans for the three months ended June 30, 2022 and June 30, 2021 are as follows:

(Dollars in thousands)	Three Months Ended June 30, 2022			Three Months Ended June 30, 2021

Accretable yield, beginning of period	$	56		$	86
Accretion		(7	)		(7	)
Accretable yield, end of period	$	49		$	79

(Dollars in thousands)	Six Months Ended June 30, 2022			Six Months Ended June 30, 2021

Accretable yield, beginning of period	$	64		$	93
Accretion		(15	)		(14	)
Accretable yield, end of period	$	49		$	79

At June 30, 2022 and December 31, 2021, the recorded investment in purchased impaired loans was $108 thousand and $109 thousand, respectively. The unpaid principal balance was $142 thousand and $152 thousand at June 30, 2022 and December 31, 2021, respectively. At June 30, 2022 and December 31, 2021, these loans were all secured by commercial real estate.

Note 5—Recently Issued Accounting Pronouncements

The following is a summary of recent authoritative pronouncements:

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

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

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

In March 2020, the FASB issued guidance that makes narrow-scope improvements to various aspects of the financial instrument guidance, including the CECL guidance issued in 2016. For public business entities, the amendments were effective upon issuance of the final ASU. For all other entities, the amendments were effective for fiscal years beginning after December 15, 2019, and are effective for interim periods within those fiscal years beginning after December 15, 2020. The effective date of the amendments to ASU 2016-01 were effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. For the amendments related to ASU 2016-13, public business entities that meet the definition of an SEC filer, excluding eligible smaller reporting companies (as defined by the SEC), should adopt the amendments in ASU 2016-13 during 2020. All other entities should adopt the amendments in ASU 2016-13 during 2023. Early adoption is permitted. For entities that have not yet adopted the guidance in ASU 2016-13, the effective dates and the transition requirements for these amendments are the same as the effective date and transition requirements in ASU 2016-13. For entities that have adopted the guidance in ASU 2016-13, the amendments were effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. For those entities, the amendments should be applied on a modified-retrospective basis by means of a cumulative-effect adjustment to opening retained earnings in the statement of financial position as of the date that an entity adopted the amendments in ASU 2016-13. During 2021, the Company established a CECL Team to begin the process of implementing CECL. The Company selected Valuant’s ValuCast as its CECL solution. In conjunction with Valuant, the Company developed a detailed roadmap and implementation plan; collected and validated data; and selected loss methodologies. Currently, the Company and Valuant are working on the reasonable and supportable forecast and qualitative factors. The Company plans to perform mock runs during 2022. Forvis, (formerly Dixon Hughes Goodman, LLP) has been engaged to perform model validation services prior to implementation. The implementation of CECL may have a material effect on the Company’s financial statements.

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

In August 2020, the FASB issued guidance to improve financial reporting associated with accounting for convertible instruments and contracts in an entity’s own equity. The amendments will be effective the Company for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020. The Company does not expect these amendments to have a material effect on its financial statements.

In October 2020, the FASB issued amendments to clarify the Accounting Standards Codification and make minor improvements that are not expected to have a significant effect on current accounting practice or create a significant administrative cost to most entities. The amendments became effective for the Company for annual periods beginning after December 15, 2020 and did not have a material impact on the Company’s financial statements.

In October 2021, the FASB amended the Business Combinations topic in the Accounting Standard Codification to require entities to apply guidance in the Revenue topic to recognize and measure contract assets and contract liabilities acquired in a business combination. The amendments are effective for the fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The amendments are applied prospectively to business combinations occurring on or after the effective date of the amendments. Early adoption of the amendments is permitted, including adoption in an interim period. The Company does not expect these amendments to have a material effect on its financial statements.

In November 2021, the FASB added a topic to the Accounting Standards Codification, Government Assistance, to require certain annual disclosures about transactions with a government that are accounted for by applying grant or contribution accounting model by analogy to other accounting guidance. The guidance is effective for financial statements issued for annual periods beginning after December 15, 2021. The Company does not expect these amendments to have a material effect on its financial statements.

In March 2022, the FASB issued amendments which are intended to improve the decision usefulness of information provided to investors about certain loan re-financings, 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.

Note 6—Fair Value of Financial Instruments

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

Level l	Quoted prices in active markets for identical assets or liabilities.

Level 2	Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

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

FASB ASC 825-10-50 “Disclosure about Fair Value of Financial Instruments”, requires the Company to disclose estimated fair values for its financial instruments. The Company’s 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.

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

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

Loans - 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.

Securities Sold Under Agreements to Repurchase - 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 Debt - The fair value of junior subordinated debt is estimated by using discounted cash flow analyses based on incremental borrowing rates for similar types of instruments. These are classified as Level 2.

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

Commitments to Extend Credit - The fair value of these commitments is immaterial because their underlying interest rates approximate market.

The carrying amount and estimated fair value by classification level of the Company’s financial instruments as of June 30, 2022 and December 31, 2021 are as follows:


	June 30, 2022
	Carrying		Fair Value
(Dollars in thousands)	Amount		Total		Level 1		Level 2		Level 3
Financial Assets:
Cash and short term investments	$	104,403	$	104,403	$	104,403	$	—	$	—
Held-to-maturity securities		233,730		229,198		3,333		225,865
Available-for-sale securities		337,254		377,254		21,920		315,334		—
Other investments, at cost		1,929		1,929		—		—		1,929
Loans held for sale		4,533		4,533		—		4,533		—
Net loans receivable		905,112		878,708		—		—		878,708
Accrued interest		4,290		4,290		4,290		—		—
Financial liabilities:
Non-interest bearing demand	$	476,024	$	476,024	$	—	$	476,024	$	—
Interest bearing demand deposits and money market accounts		672,306		672,306		—		672,306		—
Savings		170,557		170,557		—		170,557		—
Time deposits		150,088		150,180		—		150,180		—
Total deposits		1,468,975		1,469,068		—		1,469,068		—
Short term borrowings		71,800		71,800		—		71,800		—
Junior subordinated debentures		14,964		14,415		—		14,415		—
Accrued interest payable		300		300		300		—		—

	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		—		—

The following tables summarize quantitative disclosures about the fair value for each category of assets carried at fair value as of June 30, 2022 and December 31, 2021 that are measured on a recurring basis. There were no liabilities carried at fair value as of June 30, 2022 or December 31, 2021 that are measured on a recurring basis.

(Dollars in thousands)

Description	June 30, 2022		(Level 1)		(Level 2)		(Level 3)
Available- for-sale securities
US Treasury Securities	$	57,323	$	—	$	57,323	$	—
Government Sponsored Enterprises		2,189		—		2,189		—
Mortgage-backed securities		243,821		21,920		221,901		—
Small Business Administration pools		25,563		—		25,563		—
State and local government		—		—		—		—
Corporate and other securities		8,358		—		8,358		—
Total Available-for-sale securities		337,254		21,920		315,334		—
Loans held for sale		4,533		—		4,533		—
Total	$	341,787	$	21,920	$	319,867	$	—

(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 pools		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 June 30, 2022 and December 31, 2021 that are measured on a non-recurring basis. There were no Level 3 financial instruments for the three months ended June 30, 2022 and June 30, 2021 measured on a recurring basis.

(Dollars in thousands)
Description	June 30, 2022		(Level 1)		(Level 2)		(Level 3)
Impaired loans:
Commercial & Industrial	$	—	$	—	$	—	$	—
Real estate:
Mortgage-residential		38		—		—		38
Mortgage-commercial		4,275		—		—		4,275
Consumer:
Home equity		163		—		—		163
Other		—		—		—		—
Total impaired		4,476		—		—		4,476
Other real estate owned:
Construction		894		—		—		894
Mortgage-commercial		90		—		—		90
Total other real estate owned		984		—		—		984
Total	$	5,460	$	—	$	—	$	5,460

(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		1,560		—		—		1,560
Consumer:
Home equity		—		—		—		—
Other		—		—		—		—
Total impaired		1,693		—		—		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 consists of evaluating the underlying collateral to independently obtained comparable properties. With respect to less complex or smaller credits, an internal evaluation may be performed. Generally, the independent and internal evaluations are updated annually. Factors considered in determining the fair value include, among others, geographic sales trends, the value of comparable surrounding properties and the condition of the property. The aggregate amount of impaired loans was $4.5 million and $1.7 million as of June 30, 2022 and December 31, 2021, respectively.

For Level 3 assets and liabilities measured at fair value on a non-recurring basis as of June 30, 2022 and December 31, 2021, the significant unobservable inputs used in the fair value measurements were as follows:

(Dollars in thousands)	Fair Value as of June 30, 2022		Valuation Technique	Significant Observable Inputs	Significant Unobservable Inputs
OREO	$	984	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	$	4,476	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

Note 7—Deposits

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

Schedule of Total Deposits

	June 30,		December 31,
(Dollars in thousands)	2022		2021
Non-interest bearing demand deposits	$	476,024	$	444,688
Interest bearing demand deposits and money market accounts		672,306		619,057
Savings		170,557		143,765
Time deposits		150,088		153,781
Total deposits	$	1,468,975	$	1,361,291

As of June 30, 2022, and December 31, 2021, the Company had time deposits that exceed the $250,000 FDIC insurance limit of $29.1 million and $27.9 million, respectively.

Note 8—Reportable Segments

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

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

Mortgage Banking: This segment provides mortgage origination services for loans that will be sold to investors in the secondary market 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. The Mortgage Banking financial information presented below includes consumer mortgage loans held-for-investment for all periods presented. Beginning in June 2022, a provision for loan loss has 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 the Bank.

The following tables present selected financial information for the Company’s reportable business segments for the three and six months ended June 30, 2022 and June 30, 2021.

(Dollars in thousands)	Commercial					Investment
Six months ended June 30, 2022	and Retail			Mortgage		advisory and
	Banking			Banking		non-deposit		Corporate			Eliminations			Consolidated

Dividend and Interest Income	$	21,832		$	869	$	—	$	2,173		$	(2,166	)	$	22,708
Interest expense		689			—		—		235			—			924
Net interest income	$	21,143		$	869	$	—	$	1,938		$	(2,166	)	$	21,784
Provision for loan losses		(235	)		40		—		—			—			(195	)
Noninterest income		2,667			1,323		2,393		—			—			6,383
Noninterest expense		16,323			1,876		1,538		405			—			20,142
Net income before taxes	$	7,722		$	276	$	855	$	1,533		$	(2,166	)	$	8,220
Income tax provision (benefit)		1,739			—		—		(138	)		—			1,601
Net income (loss)	$	5,983		$	276	$	855	$	1,671		$	(2,166	)	$	6,619

(Dollars in thousands)	Commercial						Investment
Six months ended June 30, 2021	and Retail			Mortgage			advisory and
	Banking			Banking			non-deposit		Corporate			Eliminations			Consolidated

Dividend and Interest Income	$	21,802		$	1,074		$	—	$	2,014		$	(2,008	)	$	22,882
Interest expense		1,014			—			—		209			—			1,223
Net interest income	$	20,788		$	1,074		$	—	$	1,805		$	(2,008	)	$	21,659
Provision for loan losses		345			—			—		—			—			345
Noninterest income		2,745			2,135			1,834		—			—			6,714
Noninterest expense		15,484			2,335			1,180		419			—			19,418
Net income before taxes	$	7,704		$	874		$	654	$	1,386		$	(2,008	)	$	8,610
Income tax provision (benefit)		1,931			—			—		(119	)		—			1,812
Net income (loss)	$	5,773		$	874		$	654	$	1,505		$	(2,008	)	$	6,798

(Dollars in thousands)	Commercial						Investment
Three months ended June 30, 2022	and Retail			Mortgage			advisory and
	Banking			Banking			non-deposit		Corporate			Eliminations			Consolidated

Dividend and Interest Income	$	11,090		$	415		$	—	$	1,089		$	(1,081	)	$	11,513
Interest expense		331			—			—		131			—			462
Net interest income	$	10,759		$	415		$	—	$	958		$	(1,081	)	$	11,051
Provision for loan losses		(110	)		40			—		—			—			(70	)
Noninterest income		1,332			482			1,195		—			—			3,009
Noninterest expense		8,334			858			775		221			—			10,188
Net income before taxes	$	3,867		$	(1	)	$	420	$	737		$	(1,081	)	$	3,942
Income tax provision (benefit)		890			—			—		(78	)		—			812
Net income	$	2,977		$	(1	)	$	420	$	815		$	(1,081	)	$	3,130

(Dollars in thousands)	Commercial						Investment
Three months ended June 30, 2021	and Retail			Mortgage			advisory and
	Banking			Banking			non-deposit		Corporate			Eliminations			Consolidated

Dividend and Interest Income	$	11,167		$	494		$	—	$	1,008		$	(1,005	)	$	11,664
Interest expense		467			—			—		105			—			572
Net interest income	$	10,700		$	494		$	—	$	903		$	(1,005	)	$	11,092
Provision for loan losses		168			—			—		—			—			168
Noninterest income		1,317			1,144			957		—			—			3,418
Noninterest expense		7,872			1,148			596		262			—			9,878
Net income before taxes	$	3,977		$	490		$	361	$	641		$	(1,005	)	$	4,464
Income tax provision (benefit)		997			—			—		(76	)		—			921
Net income	$	2,980		$	490		$	361	$	717		$	(1,005	)	$	3,543

	Commercial						Investment
(Dollars in thousands)	and Retail			Mortgage			advisory and
	Banking			Banking			non-deposit		Corporate			Eliminations			Consolidated
Total Assets as of June 30, 2022	$	1,642,245		$	41,760		$	1	$	153,063		$	(152,245	)	$	1,684,824
Total Assets as of December 31, 2021	$	1,542,553		$	41,194		$	2	$	152,928		$	(152,169	)	$	1,584,508

Note 9—Leases

The Company has operating leases on four of its facilities. The leases have maturities ranging from September 2024 to December 2038, some of which include extensions of multiple five-year terms. The following tables present information about the Company’s leases:

Schedule of Lease Information

(dollars in thousands)	June 30, 2022			December 31, 2021
Right-of-use assets	$	2,972		$	2,842
Lease liabilities	$	3,096		$	2,950
Weighted average remaining lease term		14.01 years			15.08 years
Weighted average discount rate		4.35	%		4.42	%


	Three Months Ended June 30,				Six Months Ended June 30,
Lease cost (dollars in thousands)	2022		2021		2022		2021

Operating lease cost	$	87.3	$	80.8	$	168.0	$	161.5
Cash paid for amounts included in the measurement of lease liabilities	$	75.5	$	74.1	$	150.7	$	148.0

The following table shows future undiscounted lease payments for operating leases with initial terms of one year or more as of June 30, 2022, are as follow:

(Dollars in thousands)					Liability
Year	Cash		Lease Expense		Reduction
2022	$	176	$	66	$	110
2023		357		124		233
2024		333		115		218
2025		275		107		168
2026		281		100		181
Thereafter		2,774		588		2186
Total	$	4,196	$	1,100	$	3,096

Note 10—Subsequent Events

Subsequent events are events or transactions that occur after the balance sheet date but before financial statements are issued. Recognized subsequent events are events or transactions that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements. Non-recognized subsequent events are events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after that date. Management has reviewed events occurring through the date the financial statements were available to be issued and no subsequent events occurred requiring accrual or that require disclosure and have not been disclosed in the footnotes to the Company’s unaudited consolidated financial statements as of June 30, 2022.

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

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 business of our company. Forward-looking statements are based on many assumptions and estimates and are not guarantees of future performance. Our actual results may differ materially from those anticipated in any forward-looking statements, as they will depend on many factors about which we are unsure, including many factors which are beyond our control. The words “may,” “approximately,” “is likely,” “would,” “could,” “should,” “will,” “expect,” “anticipate,” “predict,” “project,” “potential,” “continue,” “assume,” “believe,” “intend,” “plan,” “forecast,” “goal,” and “estimate,” as well as similar expressions, are meant to identify such forward-looking statements. Potential risks and uncertainties that could cause our actual results to differ materially from those anticipated in our forward-looking statements include, without limitation, those described under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021 as filed with the U.S. Securities and Exchange Commission (the “SEC”) on March 16, 2022 and the following:

the continuing impact of COVID-19 and its variants, on our business, including the impact of the virus on the United States economy, and the resulting effect of these items on our operations, liquidity and capital position, and on the financial condition of our borrowers and other customers;

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 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 expenses, which may have an adverse impact on our financial performance;

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

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

changes in deposit flows;

changes in technology;

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

changes in monetary and tax policies, 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;

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, disruptions in our customers’ supply chains, disruptions in transportation, essential utility outages or trade disputes and related tariffs;

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

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

other risks and uncertainties detailed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2021, in Part II, Item 1A of our Quarterly Report on Form 10-Q, and in our other filings with the SEC.

Because of these and other risks and uncertainties, our actual future results may be materially different from the results indicated by any forward-looking statements. For additional information with respect to factors that could cause actual results to differ from the expectations stated in the forward-looking statements, see “Risk Factors” under Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2021. 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.

Overview

The following discussion describes our results of operations for the six months and three months ended June 30, 2022 as compared to the six months and three months ended June 30, 2021 and analyzes our financial condition as of June 30, 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. Our primary source of funds for making these loans and investments is our deposits, on which we pay interest. Consequently, one of the key measures of our success is our amount of net interest income, or the difference between the income on our interest-earning assets, such as loans and investments, and the expense on our interest-bearing liabilities, such as deposits and borrowings. Another key measure is the spread between the yield we earn on our interest-earning assets and the rate we pay on our interest-bearing liabilities. There are risks inherent in all loans, so we maintain an allowance for loan losses to absorb probable losses on existing loans that may become uncollectible. We establish and maintain this allowance by charging or crediting a provision for loan losses against our operating earnings. In the following section, we have included a discussion of this process, as well as several tables describing our allowance for loan losses and the allocation of this allowance among our various categories of loans.

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

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

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

Recent Events – COVID-19 Pandemic

	-	0.25% on March 16, 2022;
	-	0.50% on May 4, 2022; and
	-	0.75% on June 15, 2022.

Lending Operations and Accommodations to Borrowers; Impact of COVID-19 on Asset Quality and Value of Investment Securities

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 $16.1 million at December 31, 2020, to $4.5 million at June 30, 2021, to zero at December 31, 2021. Loan deferrals remained at zero at June 30, 2022.

We were also a small business administration approved lender and participated in the PPP, established under the CARES Act. During 2020 and 2021, we originated 1,417 PPP loans totaling $88.5 million, which includes 843 PPP loans totaling $51.2 million originated in 2020 and 574 PPP loans totaling $37.3 million originated in 2021. Furthermore, during 2020, we facilitated the origination of 111 PPP loans totaling $31.2 million for our customers through a third party prior to establishing our own PPP platform. As of June 30, 2022, 1,414 PPP loans totaling $88.2 million (843 PPP loans totaling $51.2 million originated in 2020 and 571 PPP loans totaling $37.0 million originated in 2021) were forgiven through the SBA PPP forgiveness process.

Our asset quality metrics as of June 30, 2022 remained sound. At June 30, 2022, our non-performing assets were not materially impacted by the economic pressures of the COVID-19 pandemic. The non-performing asset ratio was 0.32% of total assets with the nominal level of $5.3 million in non-performing assets at June 30, 2022 compared to 0.09% and $1.4 million at December 31, 2021, and compared to 0.62% and $9.3 million at June 30, 2021. Non-accrual loans increased to $4.4 million at June 30, 2022 from $250 thousand at December 31, 2021, and from $4.0 million at June 30, 2021. The increases in both non-performing assets and non-accrual loans from December 31, 2021 to June 30, 2022 were due to one $4.1 million loan that was 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. We had zero accruing loans past due 90 days or more at June 30, 2022 and December 31, 2021 compared to $4.2 million in accruing loans past due 90 days or more at June 30, 2021. Loans past due 30 days or more represented 0.24% of the loan portfolio at June 30, 2022 compared to 0.03% at December 31, 2021, and compared to 0.49% at June 30, 2021. The ratio of classified loans plus OREO and repossessed assets declined to 5.16% of total bank regulatory risk-based capital at June 30, 2022 from 6.27% at December 31, 2021 and from 9.45% at June 30, 2021. During the three months ended June 30, 2022, we experienced net loan recoveries of $242 thousand and net overdraft charge-offs of $15 thousand. During the six months ended June 30, 2022, we experienced net loan recoveries of $262 thousand and net overdraft charge-offs of $26 thousand.

We are also monitoring the impact of the COVID-19 pandemic and the recent increase in market interest rates on the operations and value of our investments. We mark to market our available-for-sale investments and review our investment portfolio for impairment at, a minimum, quarterly. We do not consider any securities in our investment portfolio to be other-than-temporarily impaired at June 30, 2022. However, additional changes in the interest rate environment may temporarily reduce the market value of our available-for-sale investment securities, which temporarily could reduce shareholders’ equity.

Capital and Liquidity

Our capital remained strong. Each of the regulatory capital ratios for the Bank exceeds the well capitalized minimum levels currently required by regulatory statute at June 30, 2022 and December 31, 2021. Based on our strong capital, conservative underwriting, and internal stress testing, we expect to remain well capitalized throughout the COVID-19 pandemic. However, the Bank’s reported regulatory capital ratios could be adversely impacted by future credit losses related to the COVID-19 pandemic. We intend to monitor developments and potential impacts on our capital.

We believe that we have ample liquidity to meet the needs of our customers through our low cost deposits, our ability to borrow against approved lines of credit (federal funds purchased) from correspondent banks, and our ability to obtain advances secured by certain securities and loans from the Federal Home Loan Bank (“FHLB”).

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 footnotes to our unaudited consolidated financial statements as of June 30, 2022 and our notes included in the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2021 as filed with the SEC on March 16, 2022.

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, 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. A brief discussion of each of these areas appears in our 2021 Annual Report on Form 10-K. During the first six months of 2022, we did not significantly alter the manner in which we applied our critical accounting policies or developed related assumptions and estimates.

There have been no significant changes to our critical accounting estimates as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021.

Comparison of Results of Operations for Six Months Ended June 30, 2022 to the Six Months Ended June 30, 2021

Net Income

Our net income for the six months ended June 30, 2022 was $6.6 million, or $0.87 diluted earnings per common share, as compared to $6.8 million, or $0.90 diluted earnings per common share, for the six months ended June 30, 2021. The $179 thousand decline in net income between the two periods is primarily due to a $331 thousand decline in non-interest income and a $724 thousand increase in non-interest expense partially offset by a $125 thousand increase in net interest income, a $540 thousand reduction in provision for loan losses, and a $211 thousand reduction in income tax expense.

	·	The increase in net interest income results from an increase of $150.8 million in average earning assets partially offset by a 29 basis point 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 $813 thousand, gain on sale of other assets of $122 thousand, and other non-recurring income of $91 thousand partially offset by increases in investment advisory fees and non-deposit commissions of $559 thousand, deposit service charges of $69 thousand, ATM/debit card income of $33 thousand, rental income of $13 thousand, income on bank owned life insurance of $13 thousand, and wire transfer fees of $12 thousand,

The reduction in other non-recurring income was related to the collection of a $100 thousand summary judgment related to a loan charged off at a bank, which we subsequently acquired, during the six months ended June 30, 2021. We recorded $9 thousand in other non-recurring income related to gains on insurance proceeds during the six months ended June 30, 2022.

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 six months ended June 30, 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 $382 thousand, increased occupancy expense of $27 thousand, increased equipment expense of $48 thousand, increased marketing and public relations expense of $98 thousand, increased ATM/debit card and data processing expense of $227 thousand, increased travel, meals, and entertainment expense of $35 thousand, increased courier expense of $31 thousand, and increased fraud expense of $119 thousand partially offset by lower FDIC assessment of $80 thousand, lower professional fees of $78 thousand, lower amortization of intangibles of $30 thousand, and lower mortgage loan processing expense of $64 thousand.
	·	Our effective tax rate was 19.5% during the six months ended June 30, 2022 compared to 21.0% during the six months ended June 30, 2021.

The reduction in the effective tax rate was primarily due to a $153 thousand non-recurring reduction to income tax expense during the six months ended June 30, 2022.

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.

Please refer to the table at the end of this Item 2 (Management’s Discussion and Analysis of Financial Condition and Results of Operations) for the average yields on assets and average rates on interest-bearing liabilities during the six-month periods ended June 30, 2022 and 2021, along with average balances and the related interest income and interest expense amounts.

Net interest income increased $125 thousand, or 0.6%, to $21.8 million for the six months ended June 30, 2022 from $21.7 million for the six months ended June 30, 2021. Our net interest margin declined by 29 basis points to 2.89% during the six months ended June 30, 2022 from 3.18% during the six months ended June 30, 2021. Our net interest margin, on a taxable equivalent basis, was 2.92% for the six months ended June 30, 2022 compared to 3.22% for the six months ended June 30, 2021. Average earning assets increased $150.8 million, or 11.0%, to $1.5 billion for the six months ended June 30, 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 have increased in 2022, the decline in net interest margin was primarily due to the Federal Reserve reducing the target range of the federal funds rate two times totaling 150 basis points during the first quarter of 2020 and the 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.

Interest income on PPP loans declined to $46 thousand during the six months ended June 30, 2022 from $1.4 million during the six months ended June 30, 2021 due to a reduction in PPP loans.

Low market rates, the competitive loan pricing environment, and the COVID-19 pandemic put downward pressure on our net interest margin during 2021 and the first six months of 2022.

Interest income on variable rate collateralized mortgage obligations, primarily consisting of GNMA home equity conversion mortgages, declined $530 thousand to negative interest income of $120 thousand during the six months ended June 30, 2022 from positive interest income of $410 thousand during the same period in 2021.

This decline was due to an increase in prepayments, which resulted in accelerated amortization of the premium on these investments.

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 declined $4.5 million, or 0.5%, to $886.5 million for the six months ended June 30, 2022 from $891.0 million for the same period in 2021. Average PPP loans declined $55.1 million and average Non-PPP loans increased $50.7 million to $432 thousand and $886.1 million, respectively, for the six months ended June 30, 2022. Average loans represented 58.2% of average earning assets during the six months ended June 30, 2022 compared to 65.0% of average earning assets during the same period in 2021. The decline in average loans as a percentage of average earning assets was primarily due to increases in deposits of $154.7 million and securities sold under agreements to repurchase of $15.4 million and a $55.1 million reduction in average PPP loans.

The growth in our deposits and securities sold under agreements to repurchase and the decline in our loans resulted in the excess funds being deployed in our securities portfolio. The yield on loans declined 18 basis points to 4.16% during the six months ended June 30, 2022 from 4.34% during the same period in 2021. The yield on Non-PPP loans was 4.16% during the six months ended June 30, 2022. Average securities for the six months ended June 30, 2022 increased $163.8 million, or 40.7%, to $566.1 million from $402.3 million during the same period in 2021. Other short-term investments declined $8.5 million to $70.0 million during the six months ended June 30, 2022 from $78.5 million during the same period in 2021 due to the deployment of lower yielding other short-term investments into higher yielding securities. The yield on our securities portfolio declined to 1.50% for the six months ended June 30, 2022 from 1.82% for the same period in 2021. These declines were primarily related to the low interest rate environment and the reduction in interest income on variable rate collateralized mortgages as described above. The yield on our other short-term investments increased to 0.56% for the six months ended June 30, 2022 from 0.16% for the same period in 2021 due to the following Federal Open Market Committee (FOMC) increases in the target range of federal funds during the first six months of 2022:

	-	0.25% on March 16, 2022;
	-	0.50% on May 4, 2022; and
	-	0.75% on June 15, 2022.

The target range of federal funds was 1.50% - 1.75% at June 30, 2022 compared to 0.25% - 0.50% at March 31, 2022 compared to 0.00% - 0.25% at December 31, 2021 and June 30, 2021.

The yield on earning assets for the six months ended June 30, 2022 and 2021 were 3.01% and 3.36%, respectively.

The cost of interest-bearing liabilities was at 18 basis points during the six months ended June 30, 2022 compared to 27 basis points during the same period in 2021. The cost of deposits, including demand deposits, was nine basis points during the six months ended June 30, 2022 compared to 16 basis points during the same period in 2021. The cost of funds, including demand deposits, was 12 basis points during the six months ended June 30, 2022 compared to 19 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 six months ended June 30, 2022, these deposits averaged 91.7% of total deposits as compared to 90.1% during the same period of 2021.

Provision and Allowance for Loan Losses

We account for our allowance for loan losses under the incurred loss model. At June 30, 2022, the allowance for loan losses was $11.2 million, or 1.22% 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 1.22% of total loans at June 30, 2022 compared to 1.30% of total loans at December 31, 2021. The decline in the allowance for loan losses compared to December 31, 2021 is primarily related to the loss emergence period assumption in the COVID-19 qualitative factor, which was added to our allowance for loan losses methodology during 2020 and discussed below, and reduced to six months at June 30, 2022 from 21 months at December 31, 2021. This reduction was partially offset by loan growth of $52.6 million; $236 thousand in net recoveries; an increase in our economic conditions qualitative factor by 5.6 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 changes in our change in total of past due, rated, and non-accrual loans 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. At June 30, 2022 and December 31, 2021, the COVID-19 qualitative factor represented $680 thousand 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 June 30, 2022 and December 31, 2021, the remaining credit component on loans attributable to acquired loans in the Cornerstone and Savannah River transactions was $104 thousand and $130 thousand, respectively.

Our provision for loan losses was a credit of $195 thousand for the six months ended June 30, 2022 compared to an expense of $345 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 first six months of 2022, partially offset by increases in our economic conditions qualitative factor and loan growth as discussed above.

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 0.57%, 0.06% 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 June 30, 2022 and December 31, 2021, approximately 90.7% 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 0.32% of total assets with the nominal level of $5.3 million in non-performing assets at June 30, 2022 compared to 0.09% and $1.4 million at December 31, 2021, and compared to 0.62% and $9.3 million at June 30, 2021. Non-accrual loans increased to $4.4 million at June 30, 2022 from $250 thousand at December 31, 2021, and from $4.0 million at June 30, 2021. The increases in both non-performing assets and non-accrual loans from December 31, 2021 to June 30, 2022 were due to one $4.1 million loan that was 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. We had no accruing loans past due 90 days or more at June 30, 2022 and December 31, 2021 compared to $4.2 million in accruing loans past due 90 days or more at June 30, 2021. Loans past due 30 days or more represented 0.24% of the loan portfolio at June 30, 2022 compared to 0.03% at December 31, 2021, and compared to 0.49% at June 30, 2021. The ratio of classified loans plus OREO and repossessed assets declined to 5.16% of total bank regulatory risk-based capital at June 30, 2022 from 6.27% at December 31, 2021 and from 9.45% at June 30, 2021.

There were six loans totaling $4.4 million (0.47% of total loans) included on non-performing status (non-accrual loans and loans past due 90 days and still accruing) at June 30, 2022. All six of these loans totaling $4.4 million were on non-accrual status. The largest loan included on non-accrual status is in the amount of $4.1 million and is secured by a first mortgage lien and has a loan-to-value of 76.3% based on an appraisal received in May 2022. The average balance of the remaining five loans on non-accrual status is approximately $59 thousand with a range between $3 and $163 thousand. Three of these loans are secured by first mortgage liens and two loans are secured by second mortgage liens. Furthermore, we had $125 thousand in accruing trouble debt restructurings, or TDRs, at June 30, 2022 compared to $1.4 million at December 31, 2021. This reduction was due to the payoff of one loan. 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 June 30, 2022, we had seven impaired loans totaling $4.4 million compared to 10 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 June 30, 2022 and December 31, 2021. At June 30, 2022, we had 20 loans totaling $2.2 million that were delinquent 30 days to 89 days representing 0.24% of total loans compared to $235 thousand or 0.03% of total loans at December 31, 2021.

Beginning in March 2020, the Company proactively offered payment deferrals for up to 90 days to its 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 $16.1 million at December 31, 2020, to $4.5 million at June 30, 2021, to zero at December 31, 2021. Loan deferrals remained at zero at June 30, 2022. Our management continuously monitors non-performing, classified and past due loans to identify deterioration regarding the condition of these loans and given the ongoing and uncertain impact of the COVID-19 pandemic, we will continue to monitor our loan portfolio for potential risks.

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

Allowance for Loan Losses

	Six Months Ended
	June 30,
(Dollars in thousands)	2022			2021
Average loans outstanding (excluding loans held-for-sale)	$	877,810		$	891,021
Loans outstanding at period end (excluding loans held-for-sale)	$	916,332		$	878,318
Non-performing assets:
Nonaccrual loans	$	4,351		$	3,986
Loans 90 days past due still accruing		—			4,165
Foreclosed real estate		984			1,182
Repossessed-other		—			—
Total non-performing assets	$	5,335		$	9,333

Beginning balance of allowance	$	11,179		$	10,389
Loans charged-off:
Commercial		—			—
Real Estate - Construction		—			—
Real Estate Mortgage - Residential		—			—
Real Estate Mortgage - Commercial		—			110
Consumer - Home Equity		—			—
Consumer - Other		33			37
Total loans charged-off		33			147
Recoveries:
Commercial		11			3
Real Estate - Construction		—			—
Real Estate Mortgage - Residential		1			—
Real Estate Mortgage - Commercial		243			11
Consumer - Home Equity		7			6
Consumer - Other		7			31
Total recoveries		269			51
Net loan charge offs (recoveries)		(236	)		96
(Release of ) provision for loan losses		(195	)		345
Balance at period end	$	11,220		$	10,638

Net charge offs to average loans (annualized)		-0.05	%		0.02	%
Allowance as percent of total loans		1.22	%		1.21	%
Non-performing assets as % of total assets		0.32	%		0.62	%
Allowance as % of non-performing loans		257.87	%		130.51	%
Nonaccrual loans as % of total loans		0.50	%		0.45	%
Allowance as % of nonaccrual loans		257.87	%		266.88	%

The following table details net charge-offs to average loans outstanding by loan category for the six months ended June 30, 2022 and June 30, 2021.

	Six Months Ended June 30,
	2022								2021
	Net Charge- Offs (Recoveries)			Average Loans HFI⁽¹⁾		Net Charge-Off Ratio			Net Charge- Offs (Recoveries)			Average Loans HFI		Net Charge-Off Ratio
Commercial, financial & agricultural		(11	)		71,174		-0.02	%		(3	)		116,054		0.00	%
Real estate:
Construction		—			94,044		0.00	%		—			101,675		0.00	%
Mortgage-residential		(1	)		44,421		0.00	%		—			41,350		0.00	%
Mortgage-commercial		(243	)		637,963		-0.04	%		99			586,495		0.02	%
Consumer:
Home Equity		(8	)		26,866		-0.03	%		(6	)		25,388		-0.02	%
Other		27			13,819		0.20	%		6			7,816		0.08	%
Total:		(236	)		888,287		-0.03	%		96			878,777		0.01	%

⁽¹⁾	Average loans exclude loans held for sale

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

Composition of the Allowance for Loan Losses

(Dollars in thousands)	June 30, 2022					December 31, 2021
			% of allowance in					% of allowance in
	Amount		Category			Amount		Category
Commercial, Financial and Agricultural	$	817		7.3	%	$	853		7.6	%
Real Estate – Construction		84		0.7	%		113		1.0	%
Real Estate Mortgage:
Residential		546		4.9	%		560		5.0	%
Commercial		8639		77.0	%		8,570		76.7	%
Consumer:
Home Equity		315		2.8	%		333		3.0	%
Other		202		1.8	%		126		1.1	%
Unallocated		617		5.5	%		624		5.6	%
Total	$	11,220		100.0	%	$	11,179		100.0	%

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

Non-interest Income and Non-interest Expense

Non-interest income during the six months ended June 30, 2022 was $6.4 million compared to $6.7 million during the same period in 2021. Deposit service charges increased $69 thousand to $527 thousand during the six months ended June 30, 2022 from $458 thousand during the same period in 2021 primarily due to higher non-sufficient funds (NSF) and overdraft fees. 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 $813 thousand to $1.3 million during the six months ended June 30, 2022 from $2.1 million during the same period in 2021. Mortgage production during the six months ended June 30, 2022 was $51.0 million, $45.9 million of the production was originated to be sold in the secondary market and $5.0 million of the production was originated as adjustable rate mortgage (ARM) loans for our loans held-for-investment portfolio, compared to $76.4 million, which was all produced to be sold in the secondary market during the same period in 2021. The gain on sale margin increased to 2.87% during the six months ended June 30, 2022 from 2.79% 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 $559 thousand to $2.4 million during the six months ended June 30, 2022 from $1.8 million during the same period in 2021. Total assets under management declined to $524.3 million at June 30, 2022 compared to $650.9 million at December 31, 2021, and from $577.5 million at June 30, 2021. While revenue in our financial planning and investment management line of business increased during the first six months of 2022 compared to the same period in 2021, assets under management (AUM) have declined due to the stock market performance in the first six months of 2022. Our investment advisory fees trail changes in AUM, therefore, we anticipate that these fees will decline during the third quarter of 2022. 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 assets was a loss of $45 thousand during the six months ended June 30, 2022 compared to a gain of $77 thousand during the same period in 2021. The $45 thousand loss on sale of other assets was related to the sale of one other real estate owned property during the six months ended June 20, 2022.

Non-interest income, other declined $24 thousand during the six months ended June 30, 2022 compared to the same period in 2021 primarily due to a decline in other non-recurring income of $91 thousand partially offset by increases in ATM/debit card income of $33 thousand, income on bank owned life insurance of $13 thousand, rental income of $13 thousand, and wire transfer fees of $12 thousand. The reduction in other non-recurring income was related to the collection of a $100 thousand summary judgment related to a loan charged off at a bank, which we subsequently acquired, during the six months ended June 30, 2021. We recorded $9 thousand in other non-recurring income related to gains on insurance proceeds during the six months ended June 30, 2022.

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

(Dollars in thousands)	Six months ended June 30,
	2022		2021
ATM debit card income	$	1,356	$	1,323
Income on bank owned life insurance		358		345
Rental income		162		149
Other service fee and safe deposit box fees		122		118
Wire transfer fees		68		56
Other		122		221
Total	$	2,188	$	2,212

Non-interest expense increased $724 thousand during the six months ended June 30, 2022 to $20.1 million compared to $19.4 million during the same period in 2021. The $724 thousand increase in non-interest expense is primarily related to increased salaries and employee benefits expense of $382 thousand, increased occupancy expense of $27 thousand, increased equipment expense of $48 thousand, increased marketing and public relations expense of $98 thousand, and increased other expense of $287 thousand partially offset by a lower FDIC assessment of $80 thousand, lower other real estate expense of $8 thousand, and lower amortization of intangibles of $30 thousand.

Salary and benefit expense increased $382 thousand to $12.3 million during the six months ended June 30, 2022 from $11.9 million during the same period in 2021. This increase is primarily a result of normal salary adjustments, financial planning and investment advisory commissions, and the addition of four employees in our new loan production office in York County, South Carolina partially offset by lower mortgage commissions and open positions. We had 242 full time equivalent employees at June 30, 2022 compared to 249 at June 30, 2021.

Occupancy expense increased $27 thousand to $1.5 million during the six months ended June 30, 2022 compared to $1.5 million during the same period in 2021 primarily related to some major maintenance projects, our new loan production office in York County, South Carolina, and higher janitorial services partially offset by lower bank premises taxes due to the sale of two bank owned properties in 2021.

Equipment expense increased $48 thousand to $661 thousand during the six months ended June 30, 2022 compared to $613 thousand during the same period in 2021 primarily due to increases in the ATM and security monitoring service agreements.

Marketing and public relations expense increased $98 thousand to $807 thousand during the six months ended June 30, 2022 compared to $709 thousand during the same period in 2021 due to larger media schedules including activity in our new York County, South Carolina market.

FDIC assessments declined $80 thousand to $235 thousand during the six months ended June 30, 2022 compared to $315 thousand during the same period in 2021 due to a reduction in our FDIC assessment rate.

Other real estate expenses declined $8 thousand to $76 thousand during the six months ended June 30, 2022 compared to $84 thousand during the same period in 2021 due to a $19 thousand write-down on one other real estate owned property during the six months ended June 30, 2022 compared $33 thousand on one property during the same period in 2021.

Amortization of intangibles declined $30 thousand to $79 thousand during the six months ended June 30, 2022 compared to $109 thousand during the same period in 2021.

Other expense increased $287 thousand to $4.5 million during the six months ended June 30, 2022 compared to $4.2 million during the same period in 2021.

ATM/debit card and data processing expense increased $227 thousand primarily due to higher ATM debit card customer activity, core processing system expenses, and enhanced technology solutions.

Fraud expense increased $119 thousand primarily related to an isolated fraud incident.

Travel, meals, and entertainment increased $35 thousand due to more in-person meetings from eased COVID-19 restrictions.

	o	Courier expense increased $31 thousand due to higher fuel costs.
	o	Legal and professional fees declined $78 thousand primarily due to lower legal, audit, and accounting fees.
	o	Loan closing costs/fees declined $67 thousand due to lower mortgage loan processing costs.

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

	Six months ended
(Dollars in thousands)	June 30,
	2022		2021
ATM/debit card and data processing*	$	2,042	$	1,816
Telephone		166		190
Correspondent services		151		146
Insurance		172		159
Legal and professional fees		529		607
Investment advisory fees		212		210
Director fees		174		191
Shareholder expense		116		116
Dues		84		80
Loan closing costs/fees		98		165
Other		755		532
	$	4,499	$	4,212

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

Income Tax Expense

We incurred income tax expense of $1.6 million and $1.8 million for the six months ended June 30, 2022 and 2021, respectively. Our effective tax rate was 19.5% and 21.0% for the six months ended June 30, 2022 and 2021, respectively. The reduction in the effective tax rate was primarily due to a $153 thousand non-recurring reduction to income tax expense during the six months ended June 30, 2022.

Comparison of Results of Operations for Three Months Ended June 30, 2022 to the Three Months Ended June 30, 2021

Net Income

Our net income for the three months ended June 30, 2022 was $3.1 million, or $0.41 diluted earnings per common share, as compared to $3.5 million, or $0.47 diluted earnings per common share, for the three months ended June 30, 2021. The $413 thousand decline in net income between the two periods is primarily due to a $409 thousand decline in non-interest income, a $310 thousand increase in non-interest expense, and a $41 thousand decline in net interest income partially offset by a $238 thousand reduction in provision for loan losses and a $109 thousand reduction in income tax expense partially.

The increase in net interest income results from an increase of $125.6 million in average earning assets partially offset by a 27 basis point decline in the net interest margin between the two periods.

The decline in non-interest income is primarily related to a decline in mortgage banking income of $662 thousand and gain (loss) on sale of other assets of $45 thousand partially offset by increases in investment advisory fees non-deposit commissions of $238 thousand, deposit service charges of $50 thousand, and other non-recurring income of $5 thousand,

We recorded $5 thousand in other non-recurring income related to gains on insurance proceeds during the three months ended June 30, 2022.

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 three months ended June 30, 2022 partially offset by increases in our economic conditions qualitative factor due to inflation, supply chain bottlenecks, labor shortages in certain industries; by 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 by loan growth.

The increase in non-interest expense is primarily related to increased salaries and employee benefits expense of $227 thousand, increased occupancy expense of $52 thousand, and increased marketing and public relations expense of $133 thousand partially offset by lower FDIC assessment of $41 thousand, lower other real estate expenses of $26 thousand, lower amortization of intangibles of $12 thousand, and lower other expenses of $14 thousand.

Our effective tax rate was 20.6% during the three months ended June 30, 2022 compared to 20.6% during the three months ended June 30, 2021.

Net Interest Income

Please refer to the table at the end of this Item 2 (Management’s Discussion and Analysis of Financial Condition and Results of Operations) for the average yields on assets and average rates on interest-bearing liabilities during the three-month periods ended June 30, 2022 and 2021, along with average balances and the related interest income and interest expense amounts.

Net interest income declined $41 thousand, or 0.4%, to $11.1 million for the three months ended June 30, 2022 from $11.1 million for the three months ended June 30, 2021. Our net interest margin declined by 27 basis points to 2.90% during the three months ended June 30, 2022 from 3.17% during the three months ended June 30, 2021. Our net interest margin, on a taxable equivalent basis, was 2.93% for the three months ended June 30, 2022 compared to 3.20% for the three months ended June 30, 2021. Average earning assets increased $125.6 million, or 8.9%, to $1.5 billion for the three months ended June 30, 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.

·	Interest income on PPP loans declined to $1 thousand during the three months ended June 30, 2022 from $756 thousand during the three months ended June 30, 2021 due to a reduction in PPP loans.

Low market rates, the competitive loan pricing environment, the COVID-19 pandemic, and a larger percent of our earning assets in lower yielding securities and other short-term investments put downward pressure on our net interest margin during 2021 and the first six months of 2022 even though interest rates have increased starting in March 2022.

Interest income on variable rate collateralized mortgage obligations, primarily consisting of GNMA home equity conversion mortgages, declined $467 thousand to negative interest income of $202 thousand during the three months ended June 30, 2022 from positive interest income of $265 thousand during the same period in 2021.

This decline was due to an increase in prepayments, which resulted in accelerated amortization of the premium on these investments. Also, a $4.1 million loan was moved to non-accrual status in June 2022, which resulted in a $51 thousand reversal to interest income in June 2022.

Average loans increased $1.0 million, or 0.1%, to $896.6 million for the three months ended June 30, 2022 from $895.6 million for the same period in 2021. Average PPP loans declined $55.3 million and average Non-PPP loans increased $56.4 million to $256 thousand and $896.4 million, respectively, for the three months ended June 30, 2022. Average loans represented 58.6% of average earning assets during the three months ended June 30, 2022 compared to 63.8% of average earning assets during the same period in 2021. The decline in average loans as a percentage of average earning assets was primarily due to increases in deposits of $142.9 million and securities sold under agreements to repurchase of $11.7 million; and a $55.3 million reduction in average PPP loans. The $154.6 million growth in our deposits and securities sold under agreements to repurchase compared to the $1.0 million increase in our loans resulted in the excess funds being deployed in our securities portfolio. The yield on loans declined 20 basis points to 4.16% during the three months ended June 30, 2022 from 4.36% during the same period in 2021. The yield on Non-PPP loans was 4.16% during the three months ended June 30, 2022. Average securities for the three months ended June 30, 2022 increased $129.6 million, or 30.1%, to $560.4 million from $430.9 million during the same period in 2021. Other short-term investments declined $4.9 million to $72.8 million during the three months ended June 30, 2022 from $77.8 million during the same period in 2021 due to the deployment of lower yielding other short-term investments into higher yielding securities. The yield on our securities portfolio declined to 1.47% for the three months ended June 30, 2022 from 1.76% for the same period in 2021. These declines were primarily related to the reduction in interest income on variable rate collateralized mortgages and the low interest rate environment described above. The yield on our other short-term investments increased to 0.88% for the three months ended June 30, 2022 from 0.15% for the same period in 2021 due to the following Federal Open Market Committee (FOMC) increases in the target range of federal funds during the first six months of 2022:

0.25% on March 16, 2022;

0.50% on May 4, 2022; and

0.75% on June 15, 2022.

The target range of federal funds was 1.50% - 1.75% at June 30, 2022 compared to 0.25% - 0.50% at March 31, 2022 compared to 0.00% - 0.25% at December 31, 2021 and June 30, 2021.

The yield on earning assets for the three months ended June 30, 2022 and 2021 were 3.02% and 3.33%, respectively.

The cost of interest-bearing liabilities was at 18 basis points during the three months ended June 30, 2022 compared to 24 basis points during the same period in 2021. The cost of deposits, including demand deposits, was nine basis points during the three months ended June 30, 2022 compared to 14 basis points during the same period in 2021. The cost of funds, including demand deposits, was 12 basis points during the three months ended June 30, 2022 compared to 17 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 three months ended June 30, 2022, these deposits averaged 91.9% of total deposits as compared to 90.4% during the same period of 2021.

Non-interest Income and Non-interest Expense

Non-interest income during the three months ended June 30, 2022 was $3.0 million compared to $3.4 million during the same period in 2021. Deposit service charges increased $50 thousand to $262 thousand during the three months ended June 30, 2022 from $212 thousand during the same period in 2021 primarily due to higher non-sufficient funds (NSF) and overdraft fees. Effective July 1, 2022, we increased the NSF de minimis 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 $662 thousand to $481 thousand during the three months ended June 30, 2022 from $1.1 million during the same period in 2021. Mortgage production during the three months ended June 30, 2022 was $21.0 million, $16.0 million of the production was originated to be sold in the secondary market and $5.0 million of the production was originated as adjustable rate mortgage (ARM) loans for our loans held-for-investment portfolio, compared to $33.7 million, which was all produced to be sold in the secondary market during the same period in 2021. The gain on sale margin increased to 3.01% during the three months ended June 30, 2022 from 2.32% 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 $238 thousand to $1.2 million during the three months ended June 30, 2022 from $1.0 million during the same period in 2021. Total assets under management declined to $524.3 million at June 30, 2022 compared to $650.9 million at December 31, 2021, and from $577.5 million at June 30, 2021. While revenue in our financial planning and investment management line of business increased during the three months ended June 30, 2022 compared to the same period in 2021, assets under management (AUM) have declined due to the stock market performance in the first six months of 2022. Our investment advisory fees trail changes in AUM, therefore, we anticipate that these fees will decline during the third quarter of 2022. 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 assets was a loss of $45 thousand during the three months ended June 30, 2022 compared to zero during the same period in 2021. The $45 thousand loss on sale of other assets was related to the sale of one other real estate owned property during the three months ended June 20, 2022.

Non-interest income, other increased $10 thousand during the three months ended June 30, 2022 compared to the same period in 2021 primarily due to an increase in other non-recurring income of $5 thousand related to gains on insurance proceeds during the three months ended June 30, 2022.

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

(Dollars in thousands)	Three months ended June 30,
	2022		2021
ATM debit card income	$	699	$	696
Income on bank owned life insurance		179		179
Rental income		82		78
Other service fees and safe deposit box fees		62		57
Wire transfer fees		34		30
Other		60		66
Total	$	1,116	$	1,106

Non-interest expense increased $310 thousand during the three months ended June 30, 2022 to $10.2 million compared to $9.9 million during the same period in 2021. The $310 thousand increase in non-interest expense is primarily related to increased salaries and employee benefits expense of $227 thousand, increased occupancy expense of $52 thousand, and increased marketing and public relations expense of $133 thousand, partially offset by a lower FDIC assessment of $41 thousand, lower other real estate expenses of $26 thousand, lower amortization of intangibles of $12 thousand, lower equipment expense of $9 thousand, and lower other expenses of $14 thousand.

Salary and benefit expense increased $227 thousand to $6.2 million during the three months ended June 30, 2022 from $5.9 million during the same period in 2021. This increase is primarily a result of normal salary adjustments, financial planning and investment advisory commissions, and the addition of four employees in our new loan production office in York County, South Carolina partially offset by lower mortgage commissions and open positions. We had 242 full time equivalent employees at June 30, 2022 compared to 249 at June 30, 2021.

Occupancy expense increased $52 thousand to $786 thousand during the three months ended June 30, 2022 compared to $734 thousand during the same period in 2021 primarily related to some major maintenance projects and our new loan production office in York County, South Carolina partially offset by lower janitorial services and lower bank premises taxes due to the sale of two bank owned properties in 2021.

Equipment expense declined $9 thousand to $329 thousand during the three months ended June 30, 2022 compared to $338 thousand during the same period in 2021.

Marketing and public relations expense increased $133 thousand to $446 thousand during the three months ended June 30, 2022 compared to $313 thousand during the same period in 2021 due to larger media schedules including activity in our new Piedmont Region.

FDIC assessments declined $41 thousand to $105 thousand during the three months ended June 30, 2022 compared to $146 thousand during the same period in 2021 due to a reduction in our FDIC assessment rate.

Other real estate expenses declined $26 thousand to $29 thousand during the three months ended June 30, 2022 compared to $55 thousand during the same period in 2021 due to $33 thousand in write-downs on one property during the three months ended June 30, 2021.

Amortization of intangibles declined $12 thousand to $40 thousand during the three months ended June 30, 2022 compared to $52 thousand during the same period in 2021.

Other expense declined $14 thousand to $2.3 million during the three months ended June 30, 2022 compared to $2.3 million during the same period in 2021.

ATM/debit card and data processing expense increased $76 thousand primarily due to higher ATM debit card customer activity, core processing system expenses, and enhanced technology solutions.

Operating errors and fraud expense increased $19 thousand.

Travel, meals, and entertainment increased $21 thousand due to more in-person meetings from eased COVID-19 restrictions.

	o	Contributions increased $13 thousand.
	o	Professional fees declined $72 thousand primarily due higher legal and other professional fees.
	o	Loan closing costs/fees declined $58 thousand due to lower mortgage loan processing costs.
	o	Other Director benefits declined $28 thousand.
	o	Telephone expense declined $15 thousand.

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

(Dollars in thousands)	Three months ended
	June 30,
	2022		2021
ATM/debit card and data processing*	$	1,036	$	960
Telephone		86		101
Correspondent services		80		75
Insurance		86		79
Legal and professional fees		272		344

Investment advisory fees		98		97
Director fees		97		96
Shareholder expense		65		67
Dues		42		40
Loan closing costs/fees		62		115
Other		354		318
	$	2,278	$	2,292

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

Financial Position

Assets totaled $1.7 billion at June 30, 2022 and $1.6 billion at December 31, 2021. Loans (excluding loans held-for-sale) increased $52.6 million to $916.3 million at June 30, 2022 from $863.7 million at December 31, 2021.

Total loan production excluding PPP loans and a PPP related credit facility was $80.3 million during the three months ended June 30, 2022 and $135.6 million during the six months ended June 30, 2022 compared to $61.1 million and $101.3 million during the same periods in 2021. Loans held-for-sale declined to $4.5 million at June 30, 2022 from $7.1 million at June 30, 2021. Mortgage production during the three months ended June 30, 2022 was $21.0 million, $16.0 million of the production was originated to be sold in the secondary market and $5.0 million of the production was originated as adjustable rate mortgage (ARM) loans for our loans held-for-investment portfolio, compared to $33.7 million, which was all produced to be sold in the secondary market during the same period in 2021. Mortgage production during the six months ended June 30, 2022 was $51.0 million, $45.9 million of the production was originated to be sold in the secondary market and $5.0 million of the production was originated as ARM loans for our loans held-for-investment portfolio, compared to $76.4 million, which was all produced to be sold in the secondary market during the same period in 2021. The loan-to-deposit ratio (including loans held-for-sale) at June 30, 2022 and December 31, 2021 was 62.7% and 64.0%, respectively. The loan-to-deposit ratio (excluding loans held-for-sale) at June 30, 2022 and December 31, 2021 was 62.4% and 63.4%, respectively.

Investment securities increased to $572.9 million at June 30, 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 $16.6 million ($13.1 million net of tax) at June 30, 2022. With the addition of other purchased investments classified as HTM during the three months ended June 30, 2022, our HTM investments totaled $233.7 million and represented approximately 41% of our total investments at June 30, 2022. Our AFS investments totaled $337.3 million with a modified duration of 2.84 at June 30, 2022. Other short-term investments increased to $76.9 million at June 30, 2022 from $47.0 million at December 31, 2021. The increases in investments and other short-term investments are primarily due to organic deposit growth and excess liquidity from customer’s PPP loan proceeds and other stimulus funds related to the COVID-19 pandemic.

Non-PPP loans increased $53.8 million to $916.1 million at June 30, 2022 from $862.2 million at December 31, 2021. PPP loans declined $1.2 million to $269 thousand at June 30, 2022 from $1.5 million at December 31, 2021. During 2020 and 2021, we originated 1,417 PPP loans totaling $88.5 million, which includes 843 PPP loans totaling $51.2 million originated in 2020 and 574 PPP loans totaling $37.3 million originated in 2021. Furthermore, during 2020, we facilitated the origination of 111 PPP loans totaling $31.2 million for our customers through a third party prior to establishing our own PPP platform. As of June 30, 2022, 1,414 PPP loans totaling $88.2 million (843 PPP loans totaling $51.2 million originated in 2020 and 571 PPP loans totaling $37.0 million originated in 2021) were forgiven through the SBA PPP forgiveness process.

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.

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

(Dollars in thousands)	June 30, 2022						December 31, 2021
	Amount			Percent			Amount			Percent
Commercial, financial & agricultural	$	69,989			7.6	%	$	69,952			8.1	%
Real estate:
Construction		94,159			10.3	%		94,969			11.0	%
Mortgage – residential		46,767			5.1	%		45,498			5.3	%
Mortgage – commercial		662,779			72.3	%		617,464			71.5	%
Consumer:
Home Equity		27,348			3.0	%		27,116			3.1	%
Other		15,290			1.7	%		8,703			1.0	%
Total gross loans		916,332			100.0	%		863,702			100.0	%
Allowance for loan losses		(11,220	)					(11,179	)
Total net loans	$	905,112					$	852,523

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

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 June 30, 2022.

Loan Maturity Schedule and Sensitivity to Changes in Interest Rates

	June 30, 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	$	7,115	$	38,789	$	24,085	$	0	$	69,989
Real estate:
Construction		36,149		29,187		28,823		0		94,159
Mortgage-residential		1,541		15,002		2,834		27,390		46,767
Mortgage-commercial		44,907		383,672		231,092		3,108		662,779
Consumer:
Home equity		1,645		7,418		18,285		0		27,348
Other		2,652		11,952		288		398		15,290
Total	$	94,009	$	486,020	$	305,407	$	30,896	$	916,332

Loans maturing after one year with:

Variable Rate	$	86,024
Fixed Rate		736,299
	$	822,323

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 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 Available-For-Sale securities held at June 30, 2022:

(In thousands)	Within One Year					Over One Year and less than Five					Over Five Years and less than Ten					Over Ten years
Available-for-Sale:	Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield
US Treasury Securities	$	—		—		$	44,703		1.67	%		15,750		1.21	%	$	—		—
Government sponsored enterprises		2,500		0.58	%		—		—			—		—			—		—
Small Business Administration pools		801		0.09	%		22,787		2.12	%		2,242		2.37	%		—		—
Mortgage-backed securities		3,531		0.22	%		101,910		-0.05	%		126,334		2.14	%		24,953		2.42	%
State and local government		—		—			—		—			—		—			—		—
Corporate and other securities		—		—			5,777		4.18	%		2,984		4.19	%		9		3.70	%
Total investment securities available-for-sale	$	6,832		0.33	%	$	175,177		0.81	%	$	147,310		2.09	%	$	24,962		2.42	%

(In thousands)	Within One Year					Over One Year and less than Five					Over Five Years and less than Ten					Over Ten years
Available-for-Sale:	Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield
US Treasury Securities	$	—		—		$	—		—		$	15,736		1.21	%	$	—		—
Government sponsored enterprises		2,499		0.58	%		—		—			—		—			—		—
Small Business Administration pools		466		1.90	%		22,398		1.84	%		5,613		2.27	%		2,359		1.87	%
Mortgage-backed securities		12,828		2.04	%		129,221		1.31	%		135,147		1.65	%		120,931		1.08	%
State and local government		4,244		1.35	%		18,667		2.99	%		78,435		2.33	%		4,123		3.18	%
Corporate and other securities		—		—			5,029		3.82	%		2,984		4.18	%		9		3.70	%
Total investment securities available-for-sale	$	20,037		1.71	%	$	175,315		1.63	%	$	237,915		1.89	%	$	127,422		1.16	%

(In thousands)	Within One Year					Over One Year and less than Five					Over Five Years and less than Ten					Over 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		10,861		2.45	%		51,311		3.01	%		64,227		2.28	%		4,809		3.59	%
State and local government		1,532		1.51	%		15,717		2.53	%		53,573		3.29	%		31,700		3.77	%
Corporate and other securities		—		—			—		—			—		—			—		—
Total investment securities held-to-maturity	$	12,393		2.33	%	$	67,028		2.90	%	$	117,800		2.74	%	$	36,509		3.74	%

Deposits increased $107.7 million to $1.5 billion at June 30, 2022 compared to $1.4 billion at December 31, 2021. Our pure deposits, which are defined as total deposits less certificates of deposits plus customer cash management repurchase agreements, increased $132.9 million to $1.4 billion at June 30, 2022 from $1.3 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 June 30, 2022. Our securities sold under agreements to repurchase, which are related to our customer cash management accounts and included in pure deposits, increased $17.6 million to $71.8 million at June 30, 2022 from $54.2 million at December 31, 2021.

The following table sets forth the deposits by category:

	June 30,					December 31,
	2022					2021
			% of					% of
(In thousands)	Amount		Deposits			Amount		Deposits
Demand deposit accounts	$	476,024		32.4	%	$	444,688		32.6	%
Interest bearing checking accounts		357,326		24.3	%		331,638		24.4	%
Money market accounts		314,980		21.5	%		287,419		21.1	%
Savings accounts		170,557		11.6	%		143,765		10.6	%
Time deposits less than $100,000		71,552		4.9	%		74,489		5.5	%
Time deposits more than $100,000		78,536		5.3	%		79,292		5.8	%
	$	1,468,975		100.0	%	$	1,361,291		100.0	%

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

At June 30, 2022, time deposits in excess of the FDIC insurance limit were as follows:

	June 30, 2022
	Within Three		After Three Through		After Six Through		After Twelve
(In thousands)	Months		Six Months		Twelve Months		Months		Total
Time deposits of $250,000 or more	$	5,240	$	9,832	$	9,560	$	4,484	$	29,116

Total uninsured deposits amounted to $454.5 million and $392.2 million at June 30, 2022 and December 31, 2021, respectively.

At December 31, 2021, time deposits in excess of the FDIC insurance limit were as follows:

	December 31, 2021
	Within Three		After Three Through		After Six Through		After Twelve
(In thousands)	Months		Six Months		Twelve Months		Months		Total
Time deposits of $250,000 or more	$	5,836	$	5,899	$	4,208	$	11,955	$	27,898

Total shareholders’ equity declined $23.4 million, or 16.6%, to $117.6 million at June 30, 2022 from $141.0 million at December 31, 2021. The $23.4 million decline in shareholders’ equity was due to a $29.8 million reduction in accumulated other comprehensive income (loss) partially offset by a $4.6 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 $0.2 million increase due to employee and director stock awards, and a $0.2 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 $16.6 million ($13.1 million net of tax) at June 30, 2022. With the addition of other purchased investments classified as HTM during the three months ended June 30, 2022, our HTM investments totaled $233.7 million and represented approximately 41% of our total investments at June 30, 2022. Our AFS investments totaled $337.3 million with a modified duration of 2.84 at June 30, 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”). 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 7,566,633 shares outstanding as of June 30, 2022. No repurchases have been made under the 2022 Repurchase Plan. The 2022 Repurchase Plan expires at the market close on December 31, 2023.

Market Risk Management

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

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

Based on the many factors and assumptions used in simulating the effect of changes in interest rates, the following table estimates the hypothetical percentage change in net interest income at June 30, 2022 and December 31, 2021 over the subsequent 12 months. At June 30, 2022 and 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 current level of interest rates being paid on our interest bearing transaction accounts as well as money market accounts. The interest rates on these accounts are at a level where they cannot be repriced in proportion to the change in interest rates. The increase and decrease of 100 and 200 basis points, respectively, reflected in the table below assume a simultaneous and parallel change in interest rates along the entire yield curve.

Net Interest Income Sensitivity

Change in short-term interest rates	Hypothetical percentage change in net interest income
	June 30, 2022			December 31, 2021
+200bp		+1.53	%		+3.04	%
+100bp		+0.96	%		+2.12	%
Flat		—			—
-100bp		+0.28	%		-5.12	%
-200bp		-7.11	%		-9.81	%

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 5.08% and 9.87%, respectively, at June 30, 2022 compared to 7.82% and 15.00%, 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 June 30, 2022 and December 31, 2021, the PVE exposure in a plus 200 basis point increase in market interest rates was estimated to be 3.88% and 9.73%, respectively. The PVE exposure in a down 100 basis point decrease was estimated to be (5.46)% at June 30, 2022 compared to (9.86)% at December 31, 2021.

Liquidity and Capital Resources

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

We had no brokered deposits and no listing services deposits at June 30, 2022. 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 7.0% of total assets at June 30, 2022 from 8.9% at December 31, 2021 due to total asset growth of $100.3 million compared to total shareholders’ equity decline of $23.4 million. The growth in total assets was primarily due to excess liquidity from customer’s PPP loans, other stimulus funds related to the COVID-19 pandemic, organic deposit growth, and loan growth. The $23.4 million decline in shareholders’ equity was due to a $29.8 million reduction in accumulated other comprehensive income (loss) partially offset by a $4.6 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 $0.2 million increase due to employee and director stock awards, and a $0.2 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 $16.6 million ($13.1 million net of tax) at June 30, 2022. With the addition of other purchased investments classified as HTM during the three months ended June 30, 2022, our HTM investments totaled $233.7 million and represented approximately 41% of our total investments at June 30, 2022. Our AFS investments totaled $337.3 million with a modified duration of 2.84 at June 30, 2022. The Bank maintains federal funds purchased lines in the total amount of $60.0 million with two financial institutions, although these were not utilized at June 30, 2022, and $10 million through the Federal Reserve Discount Window. The FHLB of Atlanta has approved a line of credit of up to 25% of the Bank’s assets, which, when utilized, is collateralized by a pledge against specific investment securities and/or eligible loans.

Through the operations of our Bank, we have made contractual commitments to extend credit in the ordinary course of our business activities. These commitments are legally binding agreements to lend money to our customers at predetermined interest rates for a specified period of time. At June 30, 2022, we had issued commitments to extend unused credit of $145.5 million, including $44.4 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.

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, $10 billion or more in total foreign exposures applicable to advanced approaches banking organizations.

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.

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.

On December 21, 2018, the federal banking agencies issued a joint final rule to revise their regulatory capital rules to (i) address the upcoming implementation of a new credit impairment model, the Current Expected Credit Loss, or CECL model, an accounting standard under GAAP; (ii) provide an optional three-year phase-in period for the day-one adverse regulatory capital effects that banking organizations are expected to experience upon adopting CECL; and (iii) require the use of CECL in stress tests beginning with the 2023 capital planning and stress testing cycle for certain banking organizations that are subject to stress testing. We are currently (i) evaluating the impact the CECL model will have on our accounting, (ii) planning for the transition, and (iii) expect to recognize a one-time cumulative-effect adjustment to our allowance for loan losses as of the beginning of the first quarter of 2023—the first reporting period in which the new standard is effective. At this time, we cannot yet reasonably determine the magnitude of such one-time cumulative adjustment, if any, or of the overall impact of the new standard on our business, financial condition or results of operations.

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.

As outlined above, we are generally not subject to the Federal Reserve capital requirements unless advised otherwise because we qualify as a small bank holding company. Our Bank remains subject to capital requirements including a minimum leverage ratio and a minimum ratio of “qualifying capital” to risk weighted assets. As of June 30, 2022, the Bank met all capital adequacy requirements under the rules on a fully phased-in basis.

Dollars in thousands				Prompt Corrective Action (PCA) Requirements						Excess Capital $s of PCA Requirements
Capital Ratios	Actual			Well Capitalized			Adequately Capitalized			Well Capitalized		Adequately Capitalized
June 30, 2022
Leverage Ratio		8.34	%		5.00	%		4.00	%	$	55,190	$	71,734
Common Equity Tier 1 Capital Ratio		13.47	%		6.50	%		4.50	%		71,370		91,844
Tier 1 Capital Ratio		13.47	%		8.00	%		6.00	%		56,015		76,489
Total Capital Ratio		14.57	%		10.00	%		8.00	%		46,761		67,235
December 31, 2021
Leverage Ratio		8.45	%		5.00	%		4.00	%	$	54,297	$	70,021
Common Equity Tier 1 Capital Ratio		13.97	%		6.50	%		4.50	%		71,086		90,111
Tier 1 Capital Ratio		13.97	%		8.00	%		6.00	%		56,817		75,843
Total Capital Ratio		15.15	%		10.00	%		8.00	%		48,971		67,996

The Bank’s risk-based capital ratios of leverage ratio, Tier 1, and total capital were 8.34%, 13.47% and 14.57%, respectively, at June 30, 2022 as compared to 8.45%, 13.97%, and 15.15%, respectively, at December 31, 2021. The Bank’s Common Equity Tier 1 ratio at June 30, 2022 was 13.47% and at December 31, 2021 was 13.97%. Under the Basel III rules, we anticipate that the Bank will remain a well capitalized institution for at least the next 12 months. Furthermore, based on our strong capital, conservative underwriting, and internal stress testing, we believe that we will have access to adequate capital to support the long-term operations of the Bank. However, the Bank’s reported and regulatory capital ratios could be adversely impacted by future credit losses related to an economic recession.

As a bank holding company, our ability to declare and pay dividends is dependent on certain federal and state regulatory considerations, including the guidelines of the Federal Reserve. The Federal Reserve has issued a policy statement regarding the payment of dividends by bank holding companies. In general, the Federal Reserve’s policies provide that dividends should be paid only out of current earnings and only if the prospective rate of earnings retention by the bank holding company appears consistent with the organization’s capital needs, asset quality and overall financial condition. The Federal Reserve’s policies also require that a bank holding company serve as a source of financial strength to its subsidiary bank(s) by standing ready to use available resources to provide adequate capital funds to those banks during periods of financial stress or adversity and by maintaining the financial flexibility and capital-raising capacity to obtain additional resources for assisting its subsidiary banks where necessary. In addition, under the prompt corrective action regulations, the ability of a bank holding company to pay dividends may be restricted if a subsidiary bank becomes undercapitalized. These regulatory policies could affect our ability to pay dividends or otherwise engage in capital distributions. Our Board of Directors approved a cash dividend for the second quarter of 2022 of $0.13 per common share. This dividend is payable on August 16, 2022 to shareholders of record of our common stock as of August 2, 2022.

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

Average Balances, Income Expenses and Rates. The following 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.

FIRST COMMUNITY CORPORATION

Yields on Average Earning Assets and
Rates on Average Interest-Bearing Liabilities

	Six months ended June 30, 2022								Six months ended June 30, 2021
	Average			Interest		Yield/			Average			Interest		Yield/
	Balance			Earned/Paid		Rate			Balance			Earned/Paid		Rate
Assets
Earning assets
Loans
PPP loans	$	432		$	46		21.47	%	$	55,570		$	1,440		5.23	%
Non-PPP loans		886,108			18,261		4.16	%		835,451			17,751		4.28	%
Total loans		886,540			18,307		4.16	%		891,021			19,191		4.34	%
Non-taxable securities		52,352			755		2.91	%		55,033			776		2.84	%
Taxable securities		513,740			3,453		1.36	%		347,228			2,852		1.66	%
Int bearing deposits in other banks		70,011			193		0.56	%		77,412			63		0.16	%
Fed funds sold		9			—		0.00	%		1,131			—		0.00	%
Total earning assets		1,522,652			22,708		3.01	%		1,371,825			22,882		3.36	%
Cash and due from banks		28,444								21,797
Premises and equipment		32,581								34,227
Goodwill and other intangibles		15,516								15,700
Other assets		45,171								38,683
Allowance for loan losses		(11,218	)							(10,548	)
Total assets	$	1,633,146							$	1,471,684

Liabilities
Interest-bearing liabilities
Interest-bearing transaction accounts	$	337,059		$	90		0.05	%	$	291,511		$	109		0.08	%
Money market accounts		304,387			228		0.15	%		261,137			250		0.19	%
Savings deposits		150,039			42		0.06	%		129,223			38		0.06	%
Time deposits		152,213			282		0.37	%		159,724			570		0.72	%
Fed funds purchased		—			—		NA			—			—		NA
Securities sold under agreements to repurchase		77,308			47		0.12	%		61,878			47		0.15	%
Other short-term debt		—			—		NA			—			—		NA
Other long-term debt		14,964			235		3.17	%		14,964			209		2.82	%
Total interest-bearing liabilities		1,035,970			924		0.18	%		918,437			1,223		0.27	%
Demand deposits		457,842								405,209
Other liabilities		12,736								12,637
Shareholders’ equity		126,598								135,401
Total liabilities and shareholders’ equity	$	1,633,146							$	1,471,684

Cost of deposits, including demand deposits							0.09	%							0.16	%
Cost of funds, including demand deposits							0.12	%							0.19	%
Net interest spread							2.83	%							3.09	%
Net interest income/margin				$	21,784		2.89	%				$	21,659		3.18	%
Net interest income/margin (tax equivalent)				$	22,044		2.92	%				$	21,890		3.22	%

FIRST COMMUNITY CORPORATION

Yields on Average Earning Assets and

Rates on Average Interest-Bearing Liabilities

	Three months ended June 30, 2022								Three months ended June 30, 2021
	Average			Interest		Yield/			Average			Interest		Yield/
	Balance			Earned/Paid		Rate			Balance			Earned/Paid		Rate
Assets
Earning assets
Loans
PPP loans	$	256		$	1		1.57	%	$	55,599		$	756		5.45	%
Non-PPP loans		896,363			9,303		4.16	%		840,013			8,985		4.29	%
Total loans		896,619			9,304		4.16	%		895,612			9,741		4.36	%
Non-taxable securities		52,064			375		2.89	%		54,791			387		2.83	%
Taxable securities		508,353			1,674		1.32	%		376,074			1,507		1.61	%
Int bearing deposits in other banks		72,813			160		0.88	%		76,242			29		0.15	%
Fed funds sold		3			—		0.00	%		1,517			—		0.00	%
Total earning assets		1,529,852			11,513		3.02	%		1,404,236			11,664		3.33	%
Cash and due from banks		28,379								25,128
Premises and equipment		32,442								34,105
Goodwill and other intangibles		15,496								15,674
Other assets		48,950								39,235
Allowance for loan losses		(11,211	)							(10,670	)
Total assets	$	1,643,908							$	1,507,708

Liabilities
Interest-bearing liabilities
Interest-bearing transaction accounts	$	342,289		$	45		0.05	%	$	305,393		$	51		0.07	%
Money market accounts		313,141			117		0.15	%		267,788			109		0.16	%
Savings deposits		154,687			22		0.06	%		132,429			19		0.06	%
Time deposits		151,549			125		0.33	%		159,133			269		0.68	%
Fed funds purchased		—			—		NA			2			—		0.00	%
Securities sold under agreements to repurchase		72,120			22		0.12	%		60,468			19		0.13	%
Other short-term debt		—			—		NA			—			—		NA
Other long-term debt		14,964			131		3.51	%		14,964			105		2.81	%
Total interest-bearing liabilities		1,048,750			462		0.18	%		940,177			572		0.24	%
Demand deposits		466,309								420,358
Other liabilities		12,782								11,950
Shareholders’ equity		116,067								135,223
Total liabilities and shareholders’ equity	$	1,643,908							$	1,507,708

Cost of deposits, including demand deposits							0.09	%							0.14	%
Cost of funds, including demand deposits							0.12	%							0.17	%
Net interest spread							2.84	%							3.09	%
Net interest income/margin				$	11,051		2.90	%				$	11,092		3.17	%
Net interest income/margin (tax equivalent)				$	11,180		2.93	%				$	11,215		3.20	%

The table below sets forth the relative impact on net interest income of changes in the volume of earning assets and interest-bearing liabilities and changes in rates earned and paid by the Company on such assets and liabilities.

	Six Months Ended June 30,
	2022 versus 2021
	Increase (Decrease) Due to Changes in (1)
	Volume			Rate			Total
	(in thousands)
Interest income:
Loans	$	(96	)	$	(788	)	$	(884	)
Non-taxable securities		(38	)		17			(21	)
Taxable securities		1,187			(586	)		601
Interest bearing deposits in other banks		(7	)		137			130
Total interest income		1,046			(1,220	)		(174	)

Interest expense:
Interest-bearing transaction accounts		15			(34	)		(19	)
Money market accounts		38			(60	)		(22	)
Savings deposits		6			(2	)		4
Time deposits		(26	)		(262	)		(288	)
Securities sold under agreements to repurchase		10			(10	)		—
Other long-term debt		—			26			26
Total interest expense		43			(342	)		(299	)
Total net interest income	$	1,003		$	(878	)	$	125

	Three Months Ended June 30,
	2022 versus 2021
	Increase (Decrease) Due to Changes in (1)
	Volume			Rate			Total
	(in thousands)
Interest income:
Loans	$	11		$	(448	)	$	(437	)
Non-taxable securities		(20	)		8			(12	)
Taxable securities		467			(300	)		167
Interest bearing deposits in other banks		(1	)		132			131
Total interest income		457			(608	)		(151	)

Interest expense:
Interest-bearing transaction accounts		6			(12	)		(6	)
Money market accounts		17			(9	)		8
Savings deposits		3			—			3
Time deposits		(12	)		(132	)		(144	)
Securities sold under agreements to repurchase		4			(1	)		3
Other long-term debt		—			26			26
Total interest expense		18			(128	)		(110	)
Total net interest income	$	439		$	(480	)	$	(41	)

(1)	The change in interest due to both volume and rate has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Not applicable.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

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

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

Changes in Internal Control over Financial Reporting

There has been no change in our internal control over financial reporting during the three months ended June 30, 2022 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II -

OTHER INFORMATION

Item 1. Legal Proceedings.

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

Item 1A. Risk Factors.

Investing in shares of our common stock involves certain risks, including those identified and described in Item 1A. of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, as well as cautionary statements contained in this Quarterly Report on Form 10-Q, including those under the caption “Cautionary Statement Regarding Forward-Looking Statements” set forth in Part I, Item 2 of this Quarterly Report on Form 10-Q, risks and matters described elsewhere in this Quarterly Report on Form 10-Q and in our other filings with the SEC.

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

	(a)	Under the Company’s Non-Employee Director Deferred Compensation Plan, as amended and restated effective as of January 1, 2021, during the three and six months ended June 30, 2022, we credited an aggregate of 1,698 and 4,681 deferred stock units, respectively, to accounts for directors who elected to defer monthly fees. 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.
	(b)	Not Applicable.
	(c)	No share repurchases were made during the three months and six months ended June 30, 2022; however, zero and 2,065 shares were withheld to satisfy tax withholding obligations applicable to the vesting of restricted stock during the three months and six months ended June 30, 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”). 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 7,566,633 shares outstanding as of June 30, 2022. The 2022 Repurchase Plan expires at the market close on December 31, 2023.

Item 3. Defaults Upon Senior Securities.

Not Applicable.

Item 4. Mine Safety Disclosures.

Not Applicable.

Item 5. Other Information.

None.

Item 6. Exhibits.

Exhibit		Description

3.1		Restated Articles of Incorporation (incorporated by reference to Exhibit 3.1 to the Company’s Form 8-K filed on June 27, 2011).

3.2		Articles of Amendment (incorporated by reference to Exhibit 3.1 to the Company’s Form 8-K filed 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 on May 22, 2019).

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

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

32		Section 1350 Certifications

101		The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2022, formatted in iXBRL (inline eXtensible Business Reporting Language; (i) Consolidated Balance Sheets at June 30, 2022 and December 31, 2021, (ii) Consolidated Statements of Income for the three and six months ended June 30, 2022 and 2021, (iii) Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2022 and 2021 (iv) Consolidated Statements of Changes in Shareholders’ Equity for the three and six months ended June 30, 2022 and 2021, (v) Consolidated Statements of Cash Flows for the six months ended June 30, 2022 and 2021, and (vi) Notes to Consolidated Financial Statements.

104		Cover Page Interactive Data File (the cover page XBRL tags are embedded within the iXBRL document).

SIGNATURES

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

	FIRST COMMUNITY CORPORATION
		(REGISTRANT)

Date: August 10, 2022	By:	/s/ Michael C. Crapps
		Michael C. Crapps
		President and Chief Executive Officer
		(Principal Executive Officer)

Date: August 10, 2022	By:	/s/ D. Shawn Jordan
		D. Shawn Jordan
		Executive Vice President and Chief Financial Officer
		(Principal Financial and Accounting Officer)