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

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,”~~company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.

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,~~May 11, 2023, ~~7,566,633~~7,587,509 shares of the issuer’s common stock, par value $1.00 per share, were issued and outstanding.

~~Six months~~Three Months ended ~~June 30,~~March 31, 2023 and March 31, 2022 ~~and 2021~~

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~~March 31, 2023 and December 31, ~~2021,~~2022, and the Company’s results of operations ~~for the three and six months ended June 30, 2022 and 2021,~~ and cash flows for the ~~six~~three months ended ~~June 30, 2022~~March 31, 2023 and ~~2021.~~2022. The results of operations for the three ~~and six~~ months ended ~~June 30,~~March 31, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, ~~2022.~~2023.

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~~2022 should be referred to in connection with these unaudited interim financial statements.

~~Risk and Uncertainties~~Application of New Accounting Guidance Adopted in 2023

On January 1, 2023, the Company adopted ASU 2016-13 Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which replaced the incurred loss methodology that delayed recognition until it is probable a loss has been incurred with an expected loss methodology that is referred to as the current expected credit loss (“CECL”) methodology. The measurement of expected losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities. It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments) and net investments in leases recognized by a lessor in accordance with Topic 842 on leases. Additionally, Accounting Standards Codification (“ASC”) 326 made changes to the accounting for available-for-sale debt securities. One such change is to require credit losses to be presented as an allowance rather than a write-down on available-for-sale debt securities management does not intend to sell or believes that it is more likely than not they will be required to sell.

The ~~COVID-19 pandemic~~Company adopted ASC 326 and ~~variants~~all related subsequent amendments thereto effective January 1, 2023 using the modified retrospective approach for all financial assets measured at amortized cost and off-balance sheet credit exposures. The transition adjustment of the ~~virus~~adoption of CECL included a decrease in the allowance for credit losses on loans of $14.3 thousand, which is presented as a reduction to net loans outstanding, and an increase in the allowance for credit losses on unfunded loan commitments of $397.9 thousand, which is recorded within Other Liabilities. The Company recorded an allowance for credit losses for held to maturity securities of $43.5 thousand, which is presented as a reduction to held to maturity securities outstanding. The Company recorded a net decrease to retained earnings of $337.4 thousand as of January 1, 2023 for the cumulative effect of adopting CECL, which reflects the transition adjustments noted above, net of the applicable deferred tax assets recorded. Results for reporting periods beginning after January 1, 2023 are presented under CECL while prior period amounts continue to ~~create disruptions~~be reported in accordance with previously applicable accounting standards (“Incurred Loss”).

The Company adopted ASC 326 using the prospective transition approach for debt securities for which other-than-temporary impairment had been recognized prior to January 1, 2023. As of December 31, 2022, the Company did not have any other-than-temporarily impaired available-for-sale investment securities. Therefore, upon adoption of ASC 326, the Company determined that an allowance for credit losses on available-for-sale securities was not deemed material.

The following table illustrates the impact on the allowance for credit losses from the adoption of ASC 326:

Schedule of impact on the allowance for credit losses from the adoption of ASC 326

The Company elected not to measure an allowance for credit losses for accrued interest receivable and instead elected to reverse interest income on loans or securities that are placed on non-accrual status, which is generally when the instrument is 90 days past due, or earlier if the Company believes the collection of interest is doubtful. The Company has concluded that this policy results in the timely reversal of uncollectible interest.

Management measures expected credit losses on held-to-maturity debt securities on a collective basis by major security type. Accrued interest receivable on held-to-maturity debt securities totaled $1.2 million at March 31, 2023 and was excluded from the estimate of credit losses. The held-to-maturity portfolio consists of mortgage-backed and municipal securities. Securities are generally rated BBB- or higher. Securities are analyzed individually to establish a CECL reserve.

The estimate of expected credit losses is primarily based on the ratings assigned to the ~~global economy and financial markets and to businesses~~securities by debt rating agencies and the average of the annual historical loss rates associated with those ratings. The Company then multiplies those loss rates, as adjusted for any modifications to reflect current conditions and reasonable and supportable forecasts as considered necessary, by the remaining lives of ~~individuals throughout~~each individual security to arrive at a lifetime expected loss amount. Management classifies the ~~world.~~held-to-maturity portfolio into the following major security types: mortgage-backed securities or state and local governments.

All the mortgage-backed securities (“MBS”) held by the Company are issued by government-sponsored corporations. These securities are either explicitly or implicitly guaranteed by the U.S. government, are highly rated by major rating agencies and have a long history of no credit losses. As a result, no allowance for credit losses was recorded on held-to-maturity MBS at the ~~COVID-19 pandemic~~adoption of CECL or as of March 31, 2023. The state and local governments securities held by the Company are highly rated by major rating agencies. Based on the methodology described above, a $1 provision for credit losses was recognized for the three months ended March 31, 2023, resulting in an increase of the ACL for investments from $42 thousand at adoption on January 1, 2023 to $43 thousand at March 31, 2023.

For available-for-sale securities, management evaluates all investments in an unrealized loss position on a quarterly basis, and more frequently when economic or market conditions warrant such evaluation. If the Company has ~~evolved from its emergence~~the intent to sell the security or it is more likely than not that the Company will be required to sell the security, the security is written down to fair value and the entire loss is recorded in ~~early 2020, so has its impact. While vaccine availability and uptake has increased,~~earnings.

If either of the ~~longer-term macro-economic effects~~above criteria is not met, the Company evaluates whether the decline in fair value is the result of credit losses or other factors. In making the assessment, the Company may consider various factors including the extent to which fair value is less than amortized cost, performance 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 spreadany underlying collateral, downgrades in the ~~future. For~~ratings of the security by a rating agency, the failure of the issuer to make scheduled interest or principal payments and adverse conditions specifically related to the security. If the assessment indicates that a credit loss exists, the present value of cash flows expected to be collected are compared to the amortized cost basis of the security and any excess is recorded as an allowance for credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any amount of unrealized loss that has not been recorded through an allowance for credit loss is recognized in other comprehensive income.

Changes in the allowance for credit loss are recorded as provision for (or reversal of) credit loss expense. Losses are charged against the allowance for credit loss when management believes an available-for-sale security is confirmed to be uncollectible or when either of the criteria regarding intent or requirement to sell is met. At March 31, 2023, there was no allowance for credit loss related to the available-for-sale securities portfolio.

Accrued interest receivable on available-for-sale debt securities totaled $990.8 thousand at March 31, 2023 and was excluded from the estimate of credit losses.

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at amortized cost. Amortized cost is the principal balance outstanding, net of purchase premiums and discounts and deferred fees and costs. Accrued interest receivable related to loans totaled $2.7 million at March 31, 2023 and was reported in other assets on the consolidated balance sheets. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using methods that approximate a level yield without anticipating prepayments.

The accrual of interest is generally discontinued when a loan becomes 90 days past due and is not well collateralized and in the process of collection, or when management believes, after considering economic and business conditions and collection efforts, that the principal or interest will not be collectible in the normal course of business. Past due status is based on contractual terms of the loan. A loan is considered to be past due when a scheduled payment has not been received 30 days after the contractual due date.

All accrued interest is reversed against interest income when a loan is placed on non-accrual status. Interest received on such loans is accounted for using the cost-recovery method, until qualifying for return to accrual. Under the cost-recovery method, interest income is not recognized until the loan balance is reduced to zero. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current, there is a sustained period of repayment performance, and future payments are reasonably assured.

The allowance for credit losses is a valuation account that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on the loans. Loans are charged off against the allowance when management believes the uncollectibility of a loan balance is confirmed. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off. Accrued interest receivable is excluded from the estimate of credit losses.

The allowance for credit losses represents management’s estimate of lifetime credit losses inherent in loans as of the balance sheet date. The allowance for credit losses is estimated by management using relevant available information, from both internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. The Company measures expected credit losses for loans on a pooled basis when similar risk characteristics exist. Generally, collectively assessed loans are grouped by call report code and then risk grade grouping. Risk grade is grouped within each call report code by pass, watch, special mention, substandard, and doubtful. Other loan types are separated into their own cohorts due to specific risk characteristics for that pool of loans.

The Company has elected a non-discounted cash flow methodology with probability of default (“PD”) and loss given default (“LGD”) for all call report code cohorts (“cohorts”). The PD calculation looks at the historical loan portfolio at particular points in time (each month during the lookback period) to determine the probability that loans in a certain cohort will default over the next 12-month period. A default is defined as a loan that has moved to past due 90 days and greater, non-accrual status, or experienced a charge-off during the period. Currently, the Company’s historical data is insufficient due to a minimal amount of default activity or zero defaults, therefore, management uses index PDs comprised of rates derived from the PD experience of other community banks in place of the Company’s historical PDs.

The LGD calculation looks at actual losses (net charge-offs) experienced over the entire lookback period for each cohort of loans. The aggregate loss amount is divided by the exposure at default to determine an LGD rate. All defaults (non-accrual, charge-off, or greater than 90 days past due) occurring during the lookback period are included in the denominator, whether a loss occurred or not and exposure at default is determined by the loan balance immediately preceding the default event (i.e. non-accrual or charge-off). Due to very limited charge-off history, management uses index LGDs comprised of rates derived from the LGD experience of other community banks in place of the Company’s historical LGDs.

The Company utilizes reasonable and supportable forecasts of future economic conditions when estimating the allowance for credit losses on loans. The calculation includes a 12-month PD forecast based on the peer index regression model comparing peer defaults to the national unemployment rate. After the forecast period, PD rates revert on a straight-line basis back to long-term historical average rates over a 12-month period.

The Company recognizes that all significant factors that affect the collectability of the loan portfolio must be considered to determine the estimated credit losses as of the evaluation date. Furthermore, the methodology, in and of itself and even when selectively adjusted by comparison to market and peer data, does not provide a sufficient basis to determine the estimated credit losses. The Company adjusts the modeled historical losses by a qualitative adjustment to incorporate all significant risks to form a sufficient basis to estimate the credit losses. These qualitative adjustments may increase or reduce reserve levels and include adjustments for lending management experience, loan review and audit results, asset quality and portfolio trends, loan portfolio growth and concentrations, trends in underlying collateral, as well as external factors and economic conditions not already captured.

Loans that do not share risk characteristics are evaluated on an individual basis. Generally, this ~~reason, among others, as~~population includes loan relationships exceeding $500,000 and on non-accrual status, however they can also include any loan that does not share risk characteristics with its respective pool. When management determines that foreclosure is probable and the ~~COVID-19 pandemic continues,~~borrower is experiencing financial difficulty, the ~~potential or lasting impacts~~expected credit losses are based 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~~fair value of collateral at the reporting date unadjusted for selling costs as appropriate. When the expected source of repayment is from a source other than the underlying ~~our secured~~collateral, impairment will generally be measured based upon the present value of expected proceeds discounted at the contractual interest rate.

Financial instruments include off-balance sheet credit instruments, such as commitments to make 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~~commercial letters of credit issued to meet customer financing needs. The Company’s exposure to credit loss in the ~~United States as a whole. The unprecedented and rapid spread~~event 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~~nonperformance by the other ~~economic activities have resulted and continue to result in volatility and disruption in financial markets.~~

~~In addition, due~~party to the ~~COVID-19 pandemic, market interest rates declined to historical lows and~~financial instrument for off-balance sheet loan commitments is represented by the ~~reductions in interest rates, low interest rate environment, and the other effects~~contractual amount of ~~the COVID-19 pandemic had an adverse effect on our business,~~those instruments. Such 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:

The ~~target range of federal funds was 1.50% - 1.75%~~Company records an allowance for credit losses on off-balance sheet credit exposures, unless the commitments to extend credit are unconditionally cancelable, through a charge to provision for unfunded commitments in the Company’s income statements. The allowance for credit losses on off-balance sheet credit exposures is estimated by loan segment 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~~each balance sheet date under the current expected credit loss model using the same methodologies as portfolio loans, taking into consideration the likelihood that funding will occur as well as any third-party guarantees. The allowance for unfunded commitments is included in ~~market interest rates can have a significant impact~~other liabilities 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.Company’s consolidated balance sheets.

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

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.~~

Under the Company’s Non-Employee Director Deferred Compensation Plan, as amended and restated effective as of January 1, 2021, a director may elect to defer all or any part of annual retainer and monthly meeting fees payable with respect to service on the board of directors or a committee of the board. Units of common stock are credited to the director’s account as of the last day of such calendar quarter during which the compensation is earned and are included in dilutive securities in the table above. The non-employee director’s account balance is distributed by issuance of common stock within 30 days following such director’s separation from service from the board of directors.

The table below shows the following information related to First Community Corporation’s Non-Employee Director Deferred Compensation Plan: accumulated share units and accrued liability at March 31, 2023 and December 31, ~~2021, there were 90,446 and 85,765 units in the plan, respectively.~~2022.

The ~~equity~~table below shows related director compensation related to First Community Corporation’s Non-Employee Director Deferred Compensation Plan for the ~~plan at June 30,~~three months ended March 31, 2023 and March 31, 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.~~

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,~~March 31, 2023 and December 31, ~~2021 and June 30, 2021.~~2022. 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.

In 2021, the Company and its shareholders adopted ~~an omnibus equity incentive plan~~First Community Corporation 2021 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

The table below shows stock awards ~~were~~granted during the three months ended March 31, 2023 and March 31, 2022.

The table below shows the fair value of stock awards granted during the three months ended March 31, 2023 and March 31, 2022.

The table below shows the compensation expense related to stock awards for the three months ended March 31, 2023 and March 31, 2022.

Schedule of Compensation Expense Related to Stock Awards Granted Table TextBlock

The table below shows the 2021 Plan initial reserve at May 19, 2021; stock awards 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 from its inception through March 31, 2023; 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 ha~~d 186,094 shares reserved for future grants under~~ the 2021 ~~Plan.~~Plan remaining reserve at March 31, 2023.

The amortized cost and estimated fair values of investment securities are summarized ~~below:~~below. For the three months ended March 31, 2023, there was no allowance for credit losses on available-for-sale securities.

~~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~~three months ended ~~June 30,~~March 31, 2023 and 2022, ~~and 2021,~~ the Company did not receive any proceeds from the sale of investment securities available-for-sale. For the ~~six~~three months ended ~~June 30,~~March 31, 2023, and 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 of available-for-sale securities for which an allowance for credit losses has not been recorded, aggregated by investment category and length of time that individual securities have been in a continuous loss position, at ~~June 30, 2022 and December~~March 31, ~~2021.~~2023.

Schedule of gross unrealized losses and fair values of available-for-sale securities

The following table shows gross unrealized losses by fair values of available-for-sale securities, aggregated by investment category and length of time that individual securities have been in a continuous loss position at December 31, 2022.

The following table shows a rollforward of the allowance for credit losses on held to maturity securities for the three months ended

Schedule of ~~gross unrealized~~allowance for credit losses ~~and fair values, aggregated by investment category and length of time that individual~~on held to maturity ~~have been in a continuous loss position~~securities

~~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:~~ At March 31, 2023, the Company had no securities held-to-maturity that were past due 30 days or more as to principal or interest payments. The Company ~~held private label mortgage-backed~~had no securities ~~(“PLMBSs”), including CMOs,~~held-to-maturity classified as non-accrual 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~~March 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, 2022.2023.

The following ~~sets forth~~table shows the amortized cost and fair value of investment securities at ~~June 30, 2022~~March 31, 2023, by ~~contractual~~expected 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~~Mortgage-backed securities are ~~based on average life at estimated prepayment speeds.~~

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~~$2.0 million and ~~$1.4~~$1.9 million as of ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, respectively.

~~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:

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

~~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.

~~Schedule of loan category and loans individually evaluated and considered impaired~~

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.

The following table presents the Company’s recorded investment in loans by credit quality indicators by year of origination as of March 31, 2023:

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.~~2022. As of ~~June 30, 2022 and~~ December 31, ~~2021,~~2022, no loans were classified as doubtful.

The detailed activity in the allowance for loan losses and the recorded investment in loans receivable as of and for the three months ended March 31, 2023 under CECL methodology:

Prior to the adoption of ASC 326 on January 1, 2023, the Company calculated the allowance for loan losses under the incurred loss methodology. The following tables are disclosures related to the allowance for the three months ended March 31, 2022.

~~At June 30,~~present March 31, 2022, and December 31, ~~2021, non-accrual~~2022 loans ~~totaled $4.4 million~~individually evaluated and ~~$250 thousand, respectively.~~considered impaired under FASB ASC 310 “Accounting by Creditors for Impairment of a Loan.” Impairment includes performing TDRs.

~~TDRs~~The following table presents information related to the average recorded investment and interest income recognized on impaired loans, excluding PCI loans, for the three months ended March 31, 2022.

The following table presents loans individually evaluated for impairment by class of loans, excluding PCI loans, as of December 31, 2022

Loan modifications for borrowers that are in financial distress that are still accruing and included in impaired loans at ~~June 30, 2022~~March 31, 2023 and at December 31, ~~2021~~2022 amounted to $~~125~~$85 thousand and $$88 thousand, respectively.

~~1.4 million, respectively.~~There were no additional loan modifications for borrowers in financial distress for the three months ended March 31, 2023.

~~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~~March 31, 2023 and December 31, ~~2021:~~2022:

Schedule of ~~loan category~~Loan Category and ~~present loans past due and on non-accrual status~~Aging Analysis of Loans

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. Manyfollowing table is a summary of the ~~CARES Act’s programs were dependent upon~~Company’s non-accrual loans by major categories for 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. periods indicated:

~~COVID-19 Related Troubled Debt Restructurings and Loan Modifications for Affected Borrowers~~. Schedule of Nonaccrual Loans

The ~~CARES Act, as extended by certain provisions~~Company recognized $85.5 thousand of interest income on non-accrual loans during 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 Decemberthree months ended March 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. 2023.

~~Beginning in~~For the three months ended March ~~2020,~~31, 2023 less than $1 thousand of accrued interest was written off by reversing interest income.

The Company has certain loans for which repayment is dependent upon the ~~Company proactively offered payment deferrals for up to 90 days to its loan customers regardless~~operation or sale of collateral, as 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 zero at December 31, 2021. Loan deferrals remained at zero at June 30, 2022.borrower is experiencing financial difficulty.

The Company ~~identifies TDRs~~maintains an allowance for off-balance sheet credit exposures such as ~~impaired under~~unfunded balances for existing lines of credit, commitments to extend future credit, as well as both standby and commercial letters of credit when there is a contractual obligation to extend credit and when this extension of credit is not unconditionally cancellable (i.e. commitment cannot be cancelled at any time). The allowance for off-balance sheet credit exposures is adjusted as a provision for credit loss expense. The estimate includes consideration of the ~~guidance in ASC 310-10-35. There were no loans determined~~likelihood that funding will occur, which is based on a historical funding study derived from internal information, and an estimate of expected credit losses on commitments expected to be ~~TDRs that were restructured during~~funded over its estimated life, which are 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 loanssame loss rates that are ~~greater than 90 days past due.~~

~~In the determination of~~used in computing the allowance for credit losses on loans. The allowance for credit losses for unfunded loan ~~losses, all TDRs are reviewed to ensure that one~~commitments of $382 thousand at March 31, 2023 is separately classified on 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.sheet within Other Liabilities.

The following table presents the balance and activity in the allowance 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~~unfunded loan commitments for the three months ended ~~June 30, 2022 and June 30, 2021 are as follows:~~March 31, 2023

Schedule ~~for changes in the accretable yield for PCI loans~~of Unfunded Commitments

~~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.~~

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,~~December 2022, the FASB issued amendments to extend the period of time preparers can use the reference rate reform relief guidance under Accounting Standards Codification (ASC) Topic 848 from December 31, 2022, to ~~improve financial reporting associated with accounting for convertible instruments~~December 31, 2024, to address the fact that all London Interbank Offered Rate (LIBOR) tenors were not discontinued as of December 31, 2021, and ~~contracts in an entity’s own equity.~~some tenors will be published until June 2023. The amendments ~~will be~~are effective ~~the Company~~immediately 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.~~all entities and applied prospectively. 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,~~refinancings, restructurings, and write-offs. The amendments are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. ~~The Company does~~These amendments did not ~~expect these amendments to~~ have a material effect on ~~its~~the Company’s financial ~~statements.~~statements or disclosures. The Company did not have any note modifications requiring disclosure in the three months ended March 31, 2023.

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.

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:

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~~Fair value estimates, methods, and assumptions are set forth below.

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

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

Loans ~~Held-for-Sale~~ - ~~The~~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~~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~~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~~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~~-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~~Receivable-The fair value approximates the carrying value and is classified as Level 1.

~~Deposits -~~ ~~The~~Deposits-The fair value of demand deposits, savings accounts, and money market accounts is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposits is estimated by discounting the future cash flows using rates currently offered for deposits of similar remaining maturities. Deposits are classified as Level 2.

Federal Home Loan Bank Advances-Fair value is estimated based on discounted cash flows using current market rates for borrowings with similar terms and are classified as Level 2.

~~Securities Sold Under Agreements to Repurchase -~~ ~~The~~Short Term Borrowings-The carrying value of short term borrowings (securities sold under agreements to repurchase and demand notes to the Treasury) approximates fair value. These are classified as Level 2.

Junior Subordinated ~~Debt -~~ ~~The~~Debentures-The fair ~~value~~values of junior subordinated ~~debt is~~debentures are estimated by using discounted cash flow analyses based on incremental borrowing rates for similar types of instruments. These are classified as Level 2.

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

Commitments to Extend ~~Credit~~ ~~- The~~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~~March 31, 2023 and December 31, ~~2021~~2022 are as follows:

The following tables summarize quantitative disclosures about the fair value for each category of assets carried at fair value as of ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021~~2022 that are measured on a recurring basis. There were no liabilities carried at fair value as of ~~June 30, 2022~~March 31, 2023 or December 31, ~~2021~~2022 that are measured on a recurring basis.

The following tables summarize quantitative disclosures about the fair value for each category of assets carried at fair value as of ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021~~2022 that are measured on a non-recurring basis. There were no Level 3 financial instruments for the three months ended ~~June 30,~~March 31, 2023 and March 31, 2022 ~~and June 30, 2021~~ measured on a recurring basis.

The Company has a large percentage of loans with real estate serving as collateral. Loans to borrowers which are ~~deemed to be impaired~~experiencing financial difficulty 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~~management determines that the borrower is ~~identified as being impaired~~experiencing financial difficulty 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~~March 31, 2023 and December 31, ~~2021,~~2022, the significant unobservable inputs used in the fair value measurements were as follows:

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

AsTime deposits with balances that exceed the FDIC insurance limit of ~~June 30, 2022,~~$250 thousand at March 31, 2023 and December 31, ~~2021, the Company had time deposits that exceed~~2022 were $27.6 million and $25.0 million, respectively. At March 31, 2023 and December 31, 2022, $9.6 million and $9.5 million, respectively were in excess of the $250,000 FDIC insurance ~~limit of~~limit.

Total uninsured deposits were $~~29.1~~434.4 million and $~~27.9~~411.3 million, at March 31, 2023 and December 31, 2022, respectively. Included in uninsured deposits at March 31, 2023 and December 31, 2022 were $74.7 million and $59.5 million of collateralized public funds, respectively.

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:

The following tables present selected financial information for the Company’s reportable business segments for the three ~~and six~~ months ended ~~June 30, 2022~~March 31, 2023 and ~~June 30, 2021.~~March 31, 2022.

The table below shows total assets for the Company’s reportable business segments at March 31, 2023 and December 31, 2022.

The Company has operating leases on four of its facilities. These leases commenced prior to 2022 except for one which commenced on January 1, 2023. The Right-of-Use (“ROU”) asset and lease liability were recognized at lease commencement by calculating the present value of lease payments over the lease term. A ROU asset of $823.8 thousand and a lease liability of $824.6 thousand were recognized upon commencement. The lease term will be sixty-nine months with a discount rate of 3.87%. The four leases have maturities ranging from ~~September 2024~~May 2027 to December 2038, some of which include extensions of multiple five-year terms. The following tables present information about the Company’s leases:

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:~~March 31, 2023.

The following table presents the changes in each component or accumulated other comprehensive loss net of tax, for the three months ended March 31, 2023.

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. Effective May 5, 2023, we entered into a pay-fixed/receive-floating interest rate swap (the “Pay-Fixed Swap Agreement”) for a notional amount of $150.0 million that was designated as a fair value hedge to hedge the risk of changes in the fair value of the fixed rate loans included in the closed loan portfolio. This fair value hedge converts the hedged loans from a fixed rate to a synthetic floating SOFR rate. The Pay-Fixed Swap Agreement will mature on May 5, 2026 and will pay a fixed coupon rate of 3.58% while receiving the overnight SOFR rate.

Management has reviewed events occurring through the date the financial statements were available to be issued and no other subsequent events occurred requiring accrual or that require disclosure and have not been disclosed in the footnotes to the Company’s unaudited consolidated financial statements as of ~~June 30, 2022.~~March 31, 2023.

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

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~~2022 as filed with the U.S. Securities and Exchange Commission (the “SEC”) on March ~~16, 2022~~22, 2023 and the following:

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.~~2022. 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.

The following discussion describes our results of operations for the ~~six months and~~ three months ended ~~June 30, 2022~~March 31, 2023 as compared to the ~~six months and three months~~three-month period ended ~~June 30, 2021~~March 31, 2022 and analyzes our financial condition as of ~~June 30, 2022~~March 31, 2023 as compared to December 31, ~~2021.~~2022. Like most community banks, we derive most of our income from interest we receive on our loans and investments. Our primary ~~source~~sources of funds for making these loans and investments isare our deposits and borrowings, 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~~credit losses to absorb ~~probable~~our estimate of expected credit losses on existing loans that may become uncollectible. We establish and maintain this allowance by ~~charging or crediting~~recording a provision or recovery for ~~loan~~credit losses against our ~~operating~~ earnings. In the following section, we have included a detailed discussion of this ~~process, as well as several tables describing our allowance for loan losses and the allocation of this allowance among our various categories of loans.~~process.

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.

~~The COVID-19 pandemic and variants~~Effect of ~~the virus continue to create disruptions to the global economy and financial markets and to businesses~~Governmental Monetary Policies. Our earnings are affected by domestic economic conditions and the ~~lives~~monetary and fiscal policies 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~~government and its ~~variants~~agencies. The Federal Reserve’s monetary policies have had, 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~~are likely to continue to ~~result~~have, an important impact on the operating results of commercial banks through its power to implement national monetary policy in ~~volatility~~order, among other things, to curb inflation or combat a recession. The monetary policies of the Federal Reserve have major effects upon the levels of bank loans, investments and ~~disruption~~deposits through its open market operations in ~~financial markets.~~

~~In addition, due to~~United States government securities and through its regulation of the ~~COVID-19 pandemic, market interest rates declined to historical lows~~discount rate on borrowings of member banks and the ~~reductions~~reserve requirements against member bank deposits. It is not possible to predict the nature or impact of future changes in ~~interest rates, low interest rate environment,~~monetary and fiscal policies. During 2022 and the ~~other effects~~first three months of ~~the COVID-19 pandemic had an adverse effect on our business, financial condition and results of operations. However, during 2022,~~2023, market interest rates have ~~started~~increased significantly due to ~~increase.~~an increase in inflation. The Federal Open Market Committee (FOMC) made the following increases to the target range of federal funds during the ~~first six~~twelve months of ~~2022:~~

The target range of federal funds was ~~1.50%~~4.75% - ~~1.75%~~5.00% at ~~June 30, 2022~~March 31, 2023 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.~~2022. Changes in market interest rates can have a significant impact on the level of income and expense recorded on a large portion of our interest-earning assets and interest-bearing liabilities, and on the market value of all interest-earning assets, other than those possessing a short term to maturity. Furthermore, changes in market interest rates can have a significant impact on the level of mortgage originations and related mortgage non-interest income.

~~Lending Operations~~Between March 10, 2023 and ~~Accommodations~~March 12, 2023, two financial institutions unrelated to ~~Borrowers; Impact~~the Company experienced a significant run on deposits, leading to insolvency. Both institutions had deposit concentrations related to higher-risk customer types, such as venture capital and cryptocurrency. Both institutions failed and were placed into receivership by the FDIC. The Federal Reserve determined that these institutions were a systemic risk and therefore, in concert with the FDIC, have determined that all deposits held by these two institutions will be insured. Then, on May 1, 2023, First Republic Bank failed and was placed into receivership by the FDIC. These three bank failures have created market volatility for the financial sector; however, the ultimate ramifications of ~~COVID-19 on Asset Quality and Value~~these events have yet to be seen but will likely result in increased FDIC assessments. These events have not caused any significant changes in deposit balances at the Company since the date of ~~Investment Securities~~the balance sheet.

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.

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”).

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~~March 31, 2023 and our notes included in the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, ~~2021~~2022 as filed with the SEC on March ~~16, 2022.~~22, 2023.

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~~credit 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~~2022 Annual Report on Form 10-K. ~~During~~

On January 1, 2023, the ~~first six months~~Company adopted ASU 2016-13 Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which replaced the incurred loss methodology that delayed recognition until it is probable a loss has been incurred with an expected loss methodology that is referred to as the current expected credit loss (“CECL”) methodology. The measurement of expected losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities. It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments) and net investments in leases recognized by a lessor in accordance with Topic 842 on leases. Additionally, Accounting Standards Codification (“ASC”) 326 made changes to the accounting for available-for-sale debt securities. One such change is to require credit losses to be presented as an allowance rather than a write-down on available-for-sale debt securities management does not intend to sell or believes that it is more likely than not they will be required to sell.

The Company adopted ASC 326 and all related subsequent amendments thereto effective January 1, 2023 using the modified retrospective approach for all financial assets measured at amortized cost and off-balance sheet credit exposures. The transition adjustment of the adoption of CECL included a decrease in the allowance for credit losses on loans of $14.3 thousand, which is presented as a reduction to net loans outstanding, and an increase in the allowance for credit losses on unfunded loan commitments of $397.9 thousand, which is recorded within Other Liabilities. The Company recorded an allowance for credit losses for held to maturity securities of $43.5 thousand, which is presented as a reduction to held to maturity securities outstanding. The Company recorded a net decrease to retained earnings of $337.4 thousand as of January 1, 2023 for the cumulative effect of adopting CECL, which reflects the transition adjustments noted above, net of the applicable deferred tax assets recorded. Results for reporting periods beginning after January 1, 2023 are presented under CECL while prior period amounts continue to be reported in accordance with previously applicable accounting standards (“Incurred Loss”).

Refer to the “Application of New Accounting Guidance Adopted in 2023” section in Note 1 for more information about our CECL adoption and methodology.

With the exception of ASC 326, which is discussed above, we did not significantly alter the manner in which we applied our other critical accounting policies or developed related assumptions and estimates.

There have been no other significant changes to our critical accounting estimates as disclosed in our Annual Report on Form 10-K for the year ended December 31, ~~2021.~~2022.

Comparison of Results of Operations for ~~Six~~Three Months Ended ~~June 30, 2022~~March 31, 2023 to the ~~Six~~Three Months Ended ~~June 30, 2021~~March 31, 2022

Our net income for the ~~six~~three months ended ~~June 30, 2022~~March 31, 2023 was ~~$6.6~~$3.5 million, or ~~$0.87~~$0.45 diluted earnings per common share, as compared to ~~$6.8~~$3.5 million, or ~~$0.90~~$0.46 diluted earnings per common share, for the ~~six~~three months ended ~~June 30, 2021.~~March 31, 2022. The ~~$179~~$26 thousand decline in net income between the two periods is primarily due to a ~~$331~~$799 thousand decline in non-interest income, ~~and~~ a ~~$724~~$482 thousand increase in non-interest expense, a $195 thousand increase in provision for credit losses, and a $174 thousand increase in income tax expense partially offset by a ~~$125 thousand~~$1.6 million increase in net interest ~~income, a $540 thousand reduction in provision for loan losses, and a $211 thousand reduction in income tax expense.~~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~~three-month periods ended ~~June 30,~~March 31, 2023 and 2022, ~~and 2021,~~ along with average balances and the related interest income and interest expense amounts.

Net interest income increased ~~$125 thousand,~~$1.6 million, or ~~0.6%~~15.1%, to ~~$21.8~~$12.4 million for the ~~six~~three months ended ~~June 30, 2022~~March 31, 2023 from ~~$21.7~~$10.7 million for the ~~six~~three months ended ~~June 30, 2021.~~March 31, 2022. Our net interest margin ~~declined~~increased by 2930 basis points to ~~2.89%~~3.17% during the ~~six~~three months ended ~~June 30, 2022~~March 31, 2023 from ~~3.18%~~2.87% during the ~~six~~three months ended ~~June 30, 2021.~~March 31, 2022. Our net interest margin, on a taxable equivalent basis, was ~~2.92%~~3.19% for the ~~six~~three months ended ~~June 30, 2022~~March 31, 2023 compared to ~~3.22%~~2.91% for the ~~six~~three months ended ~~June 30, 2021.~~March 31, 2022. Average earning assets increased ~~$150.8~~$66.4 million, or ~~11.0%~~4.4%, to ~~$1.5~~$1.6 billion for the ~~six~~three months ended ~~June 30, 2022~~March 31, 2023 compared to ~~$1.4~~$1.5 billion in the same period of ~~2021.~~

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:

The target range of federal funds was ~~1.50%~~4.75% - ~~1.75%~~5.00% at ~~June 30, 2022~~March 31, 2023 compared to 0.25% - 0.50% at March 31, ~~2022~~2022.

Average loans increased $110.2 million, or 12.6%, to $986.5 million for the three months ended March 31, 2023 from $876.3 million for the same period in 2022. Average loans represented 62.4% of average earning assets during the three months ended March 31, 2023 compared to ~~0.00%~~57.8% of average earning assets during the same period in 2022. Our loan (including loans held-for-sale) to deposit ratio on average during the three months ended March 31, 2023 was 71.4%, as compared to 63.7% during same period in 2022. Our average growth in loans of $110.2 million from March 31, 2022 to March 31, 2023 exceeded our growth in deposits of $6.9 million during the same period. The loan to deposit ratio (including loans held-for-sale) increased to 69.99% at March 31, 2023 as compared to 62.1% at March 31, 2022. Our growth in loans of $106.1 million from March 31, 2022 to March 31, 2023 exceeded our decline in deposits of $10.6 million during the same period.

The growth in our average loans exceeding the growth in our deposits resulted in reductions in our securities and short-term investments and an increase in borrowings. The yield on loans increased 42 basis points to 4.59% during the three months ended March 31, 2023 from 4.17% during the same period in 2022 due to an increased in market interest rates. Average securities for the three months ended March 31, 2023 declined $6.7 million, or 1.2%, to $565.1 million from $571.8 million during the same period in 2022. Short-term investments declined $37.1 million to $30.1 million during the three months ended March 31, 2023 from $67.2 million during the same period in 2022 due to the deployment of lower yielding short-term investments and securities into higher yielding loans. The yield on our securities portfolio increased to 3.18% for the three months ended March 31, 2023 from 1.53% for the same period in 2022. The yield on our short-term investments increased to 3.97% for the three months ended March 31, 2023 from 0.20% for the same period in 2022 due to the FOMC increasing the target range of federal funds a total of 475 basis points during 2022 and the first three months of 2023. The target range of federal funds was 4.75% - 5.00% at March 31, 2023 compared to 0.25% - 0.50% at ~~December~~March 31, ~~2021 and June 30, 2021.~~2022.

The yield on earning assets for the ~~six~~three months ended ~~June 30,~~March 31, 2023 and 2022 were 4.07% and ~~2021 were 3.01% and 3.36%~~3.00%, respectively.

The cost of interest-bearing liabilities was ~~at 18~~130 basis points during the ~~six~~three months ended ~~June 30, 2022~~March 31, 2023 compared to 2718 basis points during the same period in ~~2021.~~2022. The cost of deposits, including demand deposits, was ~~nine~~58 basis points during the ~~six~~three months ended ~~June 30, 2022~~March 31, 2023 compared to 1610 basis points during the same period in ~~2021.~~2022. The cost of funds, including demand deposits, was 1292 basis points during the ~~six~~three months ended ~~June 30, 2022~~March 31, 2023 compared to 1913 basis points during the same period in ~~2021.~~2022. 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~~three months ended ~~June 30, 2022,~~March 31, 2023, these pure deposits averaged ~~91.7%~~92.4% of total deposits as compared to ~~90.1%~~91.3% during the same period of ~~2021.~~2022.

~~We account for our allowance for loan losses under~~On January 1, 2023, we adopted the ~~incurred loss model. At June 30, 2022,~~CECL accounting standard, which resulted in a day one reduction of $14.3 thousand to the allowance for ~~loan~~credit losses on loans offset by increases of $397.9 thousand to the allowance for credit losses on unfunded commitments and $43.5 thousand to the allowance for credit losses on held-to-maturity investments. Furthermore, deferred tax assets increased $89.7 thousand and retained earnings declined $337.4 thousand. Compared to the day one CECL results, the allowance for credit losses on loans increased $98.3 thousand to $11.4 million at March 31, 2023 from $11.3 million at January 1, 2023; the allowance for credit losses on unfunded commitments declined $16.0 thousand to $381.9 thousand at March 31, 2023 from $397.9 thousand at January 1, 2023; and the allowance for credit losses on held-to-maturity investments declined $1.4 thousand to $42.0 thousand at March 31, 2023 from $43.5 thousand at January 1, 2023. At March 31, 2023, the combined allowance for credit losses for loans, unfunded commitments, and investments was ~~$11.2~~$11.8 million ~~or 1.22% of total loans (excluding loans held-for-sale),~~ compared to ~~$11.2~~$11.8 million ~~or 1.29% of total loans (excluding loans held-for-sale)~~at January 1, 2023 and $11.3 million 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~~credit losses on ~~existing~~ loans ~~that may become uncollectible. Our judgment~~ as a percentage of total loans held-for-investment was 1.15% at March 31, 2023, 1.15% at January 1, 2023, and 1.16% at December 31, 2022.

Refer to the ~~adequacy~~“Application of ~~the allowance~~New Accounting Guidance Adopted in 2023” section in Note 1 for ~~loan losses is based on assumptions~~more information 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,our CECL adoption 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.methodology.

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~~March 31, 2023 and December 31, ~~2021,~~2022, approximately ~~90.7% and 90.9%, respectively,~~91.2% 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~~credit losses as estimated at any point in time or that provisions for ~~loan~~credit 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%~~0.29% of total assets with the nominal level of ~~$5.3~~$5.1 million in non-performing assets at ~~June 30, 2022~~March 31, 2023 compared to ~~0.09%~~0.35% and ~~$1.4~~$5.8 million at December 31, ~~2021, and compared~~2022. Non-accrual loans declined to ~~0.62% and $9.3~~$4.1 million at ~~June 30, 2021. Non-accrual loans increased to $4.4~~March 31, 2023 from $4.9 million ~~at June 30, 2022 from $250 thousand~~ at December 31, ~~2021, and from $4.0 million at June 30, 2021.~~2022. The ~~increases~~declines in both non-performing assets and non-accrual loans from December 31, ~~2021~~2022 to ~~June 30, 2022~~March 31, 2023 were due to ~~one $4.1 million~~non-accrual loan ~~that was moved~~payoffs and paydowns primarily due to the successful resolution of two customer relationships with three non-accrual ~~status in June 2022. This loan has a loan-to-value~~loans totaling $716 thousand, which paid-off during the first quarter of ~~76.3% based on an appraisal received in May 2022.~~2023. We had ~~no accruing loans past due 90 days or more at June 30, 2022 and December 31, 2021 compared to $4.2 million~~zero in accruing loans past due 90 days or more at ~~June 30, 2021.~~March 31, 2023 compared to $2 thousand at December 31, 2022. Loans past due 30 days or more represented ~~0.24%~~0.02% of the loan portfolio at ~~June 30, 2022~~March 31, 2023 compared to ~~0.03%~~0.06% at December 31, ~~2021, and compared to 0.49% at June 30, 2021.~~2022. The ratio of classified loans plus OREO and repossessed assets declined to ~~5.16%~~3.92% of total bank regulatory risk-based capital at ~~June 30, 2022~~March 31, 2023 from ~~6.27%~~4.47% at December 31, ~~2021~~2022. During the three months ended March 31, 2023, we experienced net loan recoveries of $15 thousand (charge-offs of $2 thousand less recoveries of $17 thousand) and ~~from 9.45% at June 30, 2021.~~net overdraft charge-offs of zero (charge-offs of $7 thousand and recoveries of $7 thousand).

There were ~~six~~seven loans totaling ~~$4.4~~$4.1 million ~~(0.47%~~(0.42% of total loans) included on non-performing status (non-accrual loans and loans past due 90 days and still accruing) at ~~June 30, 2022.~~March 31, 2023. All ~~six~~ of these loans totaling ~~$4.4~~$4.1 million were on non-accrual status. The largest loan included on non-accrual status is in the amount of ~~$4.1~~$3.9 million and is secured by a first mortgage lien and ~~has~~had a loan-to-value of 76.3% at the time it was moved to non-accrual based on an appraisal received in May 2022. The average balance of the remaining ~~five~~six loans on non-accrual status is approximately ~~$59~~$40 thousand with a range between $3$2 and ~~$163~~$156 thousand. Three of these loans are secured by first mortgage liens, ~~and two loans are~~one loan is secured by second mortgage ~~liens.~~liens, one loan is secured by equipment, and one loan is secured by an automobile. Furthermore, we had ~~$125~~$86 thousand in accruing trouble debt restructurings, or TDRs, at ~~June 30, 2022~~March 31, 2023 compared to ~~$1.4 million~~$88 thousand at December 31, ~~2021. This reduction was~~2022. We had no loans that were accruing loans past due to90 days or more at March 31, 2023. At March 31, 2023, we considered loan relationships exceeding $500,000 and on non-accrual status as individually assessed loans for the ~~payoff of~~allowance for credit losses. At March 31, 2023, we had one ~~loan. We consider~~individually assessed loan totaling $3.9 million. At December 31, 2022, we considered 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~~Non-accrual loans and accruing TDRs ~~are~~were considered impaired. At ~~June 30,~~December 31, 2022, we had ~~seven~~11 impaired loans totaling ~~$4.4 million compared to 10 impaired~~$5.0 million. The specific allowance for individually assessed loans ~~totaling $1.7 million at December 31, 2021. These loans were measured for impairment under~~is based on 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~~credit losses on our ~~impaired~~individually assessed loans at ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021.~~2022. At ~~June 30, 2022,~~March 31, 2023, we had 20$149 thousand in loans ~~totaling $2.2 million~~ that were delinquent 30 days to 89 days representing ~~0.24%~~0.02% of total loans compared to ~~$235~~$565 thousand or ~~0.03%~~0.06% of total loans at December 31, ~~2021.~~2022.

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.41

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

Allowance for ~~Loan~~Credit Losses - Loans

	Six Months Ended						Three Months Ended
	June 30,						March 31,
(Dollars in thousands)	2022			2021			2023			2022
Average loans outstanding (excluding loans held-for-sale)	$	877,810		$	891,021		$	985,485		$	867,216
Loans outstanding at period end (excluding loans held-for-sale)	$	916,332		$	878,318		$	992,720		$	875,797
Non-performing assets:
Nonaccrual loans	$	4,351		$	3,986
Non-accrual loans							$	4,125		$	148
Loans 90 days past due still accruing		—			4,165			—			174
Foreclosed real estate		984			1,182			934			1,146
Repossessed-other		—			—			—			—
Total non-performing assets	$	5,335		$	9,333		$	5,059		$	1,468

Beginning balance of allowance	$	11,179		$	10,389		$	11,336		$	11,179
Adjustment to allowance for adopting ASU 2016-13								(14	)		—
Loans charged-off:
Commercial		—			—
Real Estate - Construction		—			—
Real Estate Mortgage - Residential		—			—
Real Estate Mortgage - Commercial		—			110
Consumer - Home Equity		—			—
Consumer - Other		33			37			9			14
Total loans charged-off		33			147			9			14
Recoveries:
Commercial		11			3			2			11
Real Estate - Construction		—			—
Real Estate Mortgage - Residential		1			—
Real Estate Mortgage - Commercial		243			11
Consumer - Home Equity		7			6
Consumer - Other		7			31
Real Estate Mortgage – Commercial								11			6
Consumer – Home Equity								3			3
Consumer – Other								4			3
Total recoveries		269			51			20			23
Net loan charge offs (recoveries)		(236	)		96
(Release of ) provision for loan losses		(195	)		345
Net loan charge offs								11			9
Provision for credit/loan losses¹								87			(125	)
Balance at period end	$	11,220		$	10,638		$	11,420		$	11,063

Net charge offs to average loans (annualized)		-0.05	%		0.02	%		(0.01	)%		0.00	%
Allowance as percent of total loans		1.22	%		1.21	%		1.15	%		1.26	%
Non-performing assets as % of total assets		0.32	%		0.62	%		0.29	%		0.09	%
Allowance as % of non-performing loans		257.87	%		130.51	%		278.78	%		3,435.71	%
Nonaccrual loans as % of total loans		0.50	%		0.45	%
Allowance as % of nonaccrual loans		257.87	%		266.88	%
Non-accrual loans as % of total loans								0.42	%		0.02	%
Allowance as % of non-accrual loans								278.78	%		7,475.00	%

The following table details net charge-offs to average loans outstanding by loan category for the ~~six~~three months ended ~~June 30, 2022 and June 30, 2021.~~March 31,

	Six Months Ended June 30,																Three Months Ended March 31,
	2022								2021								2023							2022
	Net Charge- Offs (Recoveries)			Average Loans HFI⁽¹⁾		Net Charge-Off Ratio			Net Charge- Offs (Recoveries)			Average Loans HFI		Net Charge-Off Ratio			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	%		(2)		75,821		0.00	%		(11)		71,149		-0.02	%
Real estate:
Construction		—			94,044		0.00	%		—			101,675		0.00	%		—		91,571		0.00	%		—		96,824		0.00	%
Mortgage-residential		(1	)		44,421		0.00	%		—			41,350		0.00	%		—		66,041		0.00	%		—		44,695		0.00	%
Mortgage-commercial		(243	)		637,963		-0.04	%		99			586,495		0.02	%		(11)		709,521		0.00	%		(6)		619,680		0.00	%
Consumer:
Home Equity		(8	)		26,866		-0.03	%		(6	)		25,388		-0.02	%		(3)		29,219		-0.01	%		(3)		26,716		-0.01	%
Other		27			13,819		0.20	%		6			7,816		0.08	%		5		13,312		0.04	%		11		8,152		0.13	%
Total:		(236	)		888,287		-0.03	%		96			878,777		0.01	%		(11)		985,485		0.00	%		(9)		867,216		0.00	%

⁽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~~Credit Losses - Loans

(Dollars in thousands)	June 30, 2022					December 31, 2021					March 31, 2023					December 31, 2022
			% of allowance in					% of allowance in					% of allowance in					% of allowance in
	Amount		Category			Amount		Category			Amount		Category			Amount		Category
Commercial, Financial and Agricultural	$	817		7.3	%	$	853		7.6	%	$	996		8.7	%	$	849		7.5	%
Real Estate – Construction		84		0.7	%		113		1.0	%		1,080		9.5	%		75		.7	%
Real Estate Mortgage:
Residential		546		4.9	%		560		5.0	%		790		6.9	%		723		6.4	%
Commercial		8639		77.0	%		8,570		76.7	%		7,927		69.4	%		8,569		75.6	%
Consumer:
Home Equity		315		2.8	%		333		3.0	%		424		3.7	%		314		2.8	%
Other		202		1.8	%		126		1.1	%		203		1.8	%		170		1.5	%
Unallocated		617		5.5	%		624		5.6	%		—		—			636		5.6	%
Total	$	11,220		100.0	%	$	11,179		100.0	%	$	11,420		100.0	%	$	11,336		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~~non-accrual status when it becomes 90 days or more past due. At the time a loan is placed in ~~nonaccrual~~non-accrual status, all interest, which has been accrued on the loan but remains unpaid is reversed and deducted from earnings as a reduction of reported interest income. No additional interest is accrued on the loan balance until the collection of both principal and interest becomes reasonably certain.

Non-interest Income and Non-interest Expense

Non-interest income during the ~~six~~three months ended ~~June 30, 2022~~March 31, 2023 was ~~$6.4~~$2.6 million compared to ~~$6.7~~$3.4 million during the same period in ~~2021.~~2022. Deposit service charges ~~increased $69~~declined $33 thousand to ~~$527~~$232 thousand during the ~~six~~three months ended ~~June 30, 2022~~March 31, 2023 from ~~$458~~$265 thousand during the same period in ~~2021~~2022 primarily due to ~~higher~~lower 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~~$684 thousand to ~~$1.3 million~~$155 thousand during the ~~six~~three months ended ~~June 30, 2022~~March 31, 2023 from ~~$2.1~~$839 thousand during the same period in 2022. Secondary mortgage production during the three months ended March 31, 2023 was $5.2 million compared to $30.0 million during the same period in ~~2021. Mortgage production during~~2022 while 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%~~2.97% during the ~~six~~three months ended ~~June 30, 2022~~March 31, 2023 from ~~2.79%~~2.80% during the same period in ~~2021.~~2022. The reduction in mortgage production was primarily due to low levels of home inventories and a higher interest rate ~~environment and low housing inventory.~~ environment.

With the headwinds of rising interest rates, we began to market an ~~ARM~~adjustable rate mortgage (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. Furthermore, we added a new construction residential real estate team and product during the latter part of 2022. Total mortgage production during the three months ended March 31, 2023 was $23.1 million, $5.2 million of the production was originated to be sold in the secondary market, $5.4 million of the loan production was originated as ARM loans for our loans held-for-investment portfolio, and $12.5 million of the loan production was commitments for new construction residential real estate loans. As these ARM and new construction residential real estate 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~~declined $131 thousand to ~~$2.4~~$1.1 million during the ~~six~~three months ended ~~June 30, 2022~~March 31, 2023 from ~~$1.8~~$1.2 million during the same period in ~~2021.~~2022. Total assets under management declined to ~~$524.3~~$621.7 million at ~~June 30, 2022~~March 31, 2023 compared to ~~$650.9~~$632.8 million at March 31, 2022. Total assets under management were $558.8 million at December 31, ~~2021, and from $577.5~~2022. Our net new assets were $11.0 million ~~at June 30, 2021. While revenue in our financial planning and investment management line of business increased~~ during the ~~first six~~three months ofended March 31, 2023. Furthermore, our investment performance for the three-month period from December 31, 2022 to March 31, 2023 was 9.3% compared to 7.0% for the ~~same~~S&P 500; and our investment performance for the 12-month period ~~in 2021, assets under management (AUM) have declined due~~from March 31, 2022 to March 31, 2023 was (9.0%) compared to (9.3%) for 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 continuesS&P 500. We continue 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~~increased $53 thousand during the ~~six~~three months ended ~~June 30, 2022~~March 31, 2023 compared to the same period in ~~2021~~2022 primarily due to ~~a decline in other non-recurring~~increases ATM debit card income of ~~$91~~$38 thousand, bankcard fees of $12 thousand, and rental income of $8 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,~~lower loan late charges and ~~wire transfer~~other loan fees of ~~$12~~$10 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,				Three months ended March 31,
	2022		2021		2023		2022
ATM debit card income	$	1,356	$	1,323	$	694	$	656
Income on bank owned life insurance		358		345
Recurring income on bank owned life insurance						180		179
Rental income		162		149		89		81
Other service fee and safe deposit box fees		122		118
Other service fees including safe deposit box fees						58		61
Loan late charges and other loan fees						12		22
Wire transfer fees		68		56		30		34
Other		122		221		58		35
Total	$	2,188	$	2,212	$	1,121	$	1,068

Non-interest expense increased ~~$724~~$482 thousand during the ~~six~~three months ended ~~June 30, 2022~~March 31, 2023 to ~~$20.1~~$10.4 million compared to ~~$19.4~~$10.0 million during the same period in ~~2021.~~2022. The ~~$724~~$482 thousand increase in non-interest expense is primarily related to ~~increased~~increases in salaries and employee benefits expense of ~~$382~~$212 thousand, ~~increased~~ occupancy expense of ~~$27~~$125 thousand, ~~increased equipment~~FDIC assessment of $52 thousand, legal and professional expenses of $51 thousand, core banking / electronic processing and services of $47 thousand, ATM / debit card processing of $42 thousand, director fees of $42 thousand, software subscriptions and services of $33 thousand, loan processing and closing costs of $22 thousand, correspondent services of $21 thousand, operating errors expense of ~~$48~~$20 thousand, ~~increased~~telephone expense of $19 thousand, contributions expense of $12 thousand, travel and entertainment expense of $11 thousand, and supplies expense of $10 thousand partially offset by lower other real estate expenses of $180 thousand, lower debit card and fraud losses of $87 thousand, and lower 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$15 thousand.

Salary and benefit expense increased ~~$382~~$212 thousand to ~~$12.3~~$6.3 million during the ~~six~~three months ended ~~June 30, 2022~~March 31, 2023 from ~~$11.9~~$6.1 million during the same period in ~~2021.~~2022. This increase is primarily a result of normal salary adjustments, the addition of six employees in our York County, South Carolina office, which opened as a loan production office on March 14, 2022 and converted to a full-service branch on October 20, 2022, the addition of new mortgage lenders during the third quarter of 2022, increased compensation levels for banking office employees implemented at the beginning of the third quarter of 2022 partially offset by lower mortgage banking and 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.~~commissions. We had ~~242~~259 full time equivalent employees at ~~June 30, 2022~~March 31, 2023 compared to ~~249~~251 at ~~June 30, 2021.~~March 31, 2022.

Occupancy expense increased ~~$27~~$125 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~~$830 thousand during the ~~six~~three months ended ~~June 30, 2022~~March 31, 2023 compared to ~~$613~~$705 thousand during the same period in ~~2021~~2022 primarily ~~due~~related to ~~increases~~our York County, South Carolina office, which opened as a loan production office on March 14, 2022 and converted to a full-service branch on October 20, 2022, the expansion of our Southlake operations and support location in ~~the ATM~~Lexington, South Carolina, building and ~~security monitoring service agreements.~~yard maintenance, and inflation partially offset by lower expense for janitorial services.

Marketing and public relations expense ~~increased $98~~declined $15 thousand to ~~$807~~$346 thousand during the ~~six~~three months ended ~~June 30, 2022~~March 31, 2023 compared to ~~$709~~$361 thousand during the same period in ~~2021~~2022 due to ~~larger~~the timing of planned media ~~schedules including activity in our new York County, South Carolina market.~~campaigns.

FDIC assessments ~~declined $80~~increased $52 thousand to ~~$235~~$182 thousand during the ~~six~~three months ended ~~June 30, 2022~~March 31, 2023 compared to ~~$315~~$130 thousand during the same period in ~~2021~~2022 due to ~~a reduction~~an increase in ~~our~~industrywide FDIC assessment ~~rate.~~rates.

Other real estate expenses declined $8$180 thousand to ~~$76~~$133 thousand in contra expenses or credits during the ~~six~~three months ended ~~June 30, 2022~~March 31, 2023 compared to ~~$84~~$47 thousand in expenses during the same period in ~~2021~~2022 primarily due to ~~a $19 thousand write-down on one other~~the reduction in an accrual for 2022 real estate ~~owned property during~~taxes on a non-accrual loan, which were paid by the ~~six months ended June 30, 2022 compared $33 thousand on one property during the same period in 2021.~~borrower.

Amortization of intangibles ~~declined $30 thousand to $79~~was $39 thousand during both the ~~six~~three months ended ~~June 30, 2022 compared to $109 thousand during the same period in 2021.~~March 31, 2023 and March 31, 2022.

Other expense increased ~~$287~~$284 thousand to ~~$4.5~~$2.5 million during the ~~six~~three months ended ~~June 30, 2022~~March 31, 2023 compared to ~~$4.2~~$2.2 million during the same period in ~~2021.~~2022, which included

	o	Core banking/electronic processing and services increased $47 thousand primarily due to higher customer activity and enhanced technology solutions.
	o	ATM/debit card ~~and data~~ processing ~~expense~~ increased ~~$227~~$42 thousand ~~primarily~~ due to higher ATM ~~debit card customer activity, core processing system expenses, and enhanced technology solutions.~~volume.

~~Fraud expense~~Software subscriptions and services increased ~~$119~~$33 thousand primarily ~~related~~due to ~~an isolated fraud incident.~~additional services and normal cost adjustments.

~~Travel, meals, and entertainment~~Telephone expenses increased ~~$35~~$19 thousand primarily due to ~~more in-person meetings from eased COVID-19 restrictions.~~added services, our York County, South Carolina office, which opened as a loan production office on March 14, 2022 and converted to a full-service branch on October 20, 2022, and the expansion of our Southlake operations and support location in Lexington, South Carolina during the fourth quarter of 2022.

	o	~~Courier expense~~Correspondent services increased ~~$31~~$21 thousand primarily due to ~~higher fuel~~our York County, South Carolina office, which opened as a loan production office on March 14, 2022 and converted to a full-service branch on October 20, 2022 and enhanced payroll services.
	o	Debit card and fraud losses declined $87 thousand primarily due to an isolated fraud incident during the three months ended March, 31, 2022.
	o	Loan processing and closing costs increased $22 thousand primarily due to mortgage loan processing costs.
	o	~~Legal and professional~~Director fees ~~declined $78~~increased $42 thousand primarily due to ~~lower legal, audit, and accounting fees.~~an increase in director stock awards.
	o	~~Loan closing costs/~~Legal and professional fees ~~declined $67~~increased $51 thousand primarily due to higher attorney, audit, and accounting fees.
	o	Travel and entertainment expense increased $11 thousand due to higher meals and entertainment costs partially offset by lower amounts of travel.
	o	Contributions to charitable organizations and events increased $12 thousand.
	o	Operating errors increased $20 thousand to $9 thousand in expenses during the three months ended March 31, 2023 from $11 thousand in contra expenses or credits during the same period in 2022 primarily due to secondary market mortgage ~~loan processing costs.~~investor recoveries of previous incurred expenses.

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

	Three months ended March 31,
(Dollars in thousands)	2023		2022
Core banking/electronic processing and services	$	627	$	580
ATM/debit card processing		249		207
Software subscriptions and services		231		198
Wire processing fees		20		22
Supplies		42		32
Telephone		99		80
Courier		65		62
Correspondent services		92		71
Insurance		94		85
Debit card and Fraud losses		60		147
Investment advisory and non-deposit expense		101		114
Loan processing and closing costs		58		36
Director fees		145		103
Legal and Professional fees		85		34
Shareholder expense		51		50
Other		486		400
Total	$	2,505	$	2,221

Income Tax Expense

We incurred income tax expense of ~~$1.6 million~~$963 thousand and ~~$1.8 million~~$789 thousand for the ~~six~~three months ended ~~June 30,~~March 31, 2023 and 2022, ~~and 2021,~~ respectively. Our effective tax rate was ~~19.5%~~21.76% and ~~21.0%~~18.44% for the ~~six~~three months ended ~~June 30,~~March 31, 2023 and 2022, ~~and 2021,~~ respectively. The ~~reduction~~increase in the effective tax rate was primarily due to a $153 thousand non-recurring reduction to income tax expense during the ~~six~~three months ended ~~June 30,~~March 31, 2022.

Financial Position

Assets totaled $1.7 billion at both March 31, 2023 and December 31, 2022. Loans (excluding loans held-for-sale) increased $11.9 million, or 1.2% (4.9% annualized), to $992.7 million at March 31, 2023 from $980.9 million at December 31, 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~~Total loan production, excluding mortgage secondary market and new construction residential real estate, was ~~$3.1~~$31.1 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~~March 31, 2023 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.~~

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 $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 portfolio2022. Loans held-for-sale 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%~~$1.3 million at March 31, ~~2022 compared to 0.00% - 0.25%~~2023 from $1.8 million 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 2021.2022. Mortgage production during the three months ended ~~June 30, 2022~~March 31, 2023 was ~~$21.0~~$23.1 million, ~~$16.0~~$5.2 million of the production was originated to be sold in the secondary market, ~~and $5.0~~$5.4 million of the loan production was originated as ~~adjustable rate mortgage (ARM)~~ARM loans for our loans held-for-investment portfolio, ~~compared to $33.7~~and $12.5 million of the loan production was commitments for new construction residential real estate loans. Mortgage production during the three months ended March 31, 2022 was $30.0 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.~~market. 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~~March 31, 2023 and December 31, ~~2021~~2022 was ~~62.7%~~70.0% and ~~64.0%~~70.9%, respectively. The loan-to-deposit ratio (excluding loans held-for-sale) at ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021~~2022 was ~~62.4%~~69.9% and ~~63.4%~~70.8%, 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						March 31, 2023						December 31, 2022
	Amount			Percent			Amount			Percent			Amount			Percent			Amount			Percent
Commercial, financial & agricultural	$	69,989			7.6	%	$	69,952			8.1	%	$	73,898			7.4	%	$	72,409			7.4	%
Real estate:
Construction		94,159			10.3	%		94,969			11.0	%		84,442			8.5	%		91,223			9.3	%
Mortgage – residential		46,767			5.1	%		45,498			5.3	%		68,983			6.9	%		65,759			6.7	%
Mortgage – commercial		662,779			72.3	%		617,464			71.5	%		722,602			72.9	%		709,218			72.3	%
Consumer:
Home Equity		27,348			3.0	%		27,116			3.1	%		29,525			3.0	%		28,723			2.9	%
Other		15,290			1.7	%		8,703			1.0	%		13,270			1.3	%		13,525			1.4	%
Total gross loans		916,332			100.0	%		863,702			100.0	%		992,720			100.0	%		980,857			100.0	%
Allowance for loan losses		(11,220	)					(11,179	)					(11,420	)					(11,336	)
Total net loans	$	905,112					$	852,523					$	981,300					$	969,521

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.~~March 31, 2023.

Loan Maturity Schedule and Sensitivity to Changes in Interest Rates

	June 30, 2022										March 31, 2023
(In thousands)	One Year or Less		Over One Year Through Five Years		Over Five Years Through Fifteen years		Over Fifteen Years		Total		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	$	10,256	$	35,838	$	27,804	$	—	$	73,898
Real estate:
Construction		36,149		29,187		28,823		0		94,159		14,486		25,293		44,663		—		84,442
Mortgage-residential		1,541		15,002		2,834		27,390		46,767		1,331		14,869		3,938		48,845		68,983
Mortgage-commercial		44,907		383,672		231,092		3,108		662,779		43,646		359,840		317,741		1,375		722,602
Consumer:
Home equity		1,645		7,418		18,285		0		27,348		1,226		7,159		21,140		—		29,525
Other		2,652		11,952		288		398		15,290		4,772		6,154		1,957		387		13,270
Total	$	94,009	$	486,020	$	305,407	$	30,896	$	916,332	$	75,717	$	449,153	$	417,243	$	50,607	$	992,720

Loans maturing after one year with:

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

Variable Rate	$	106,285
Fixed Rate		810,718
	$	917,003

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,~~Investment securities increased $566 thousand to $565.3 million, net of allowance for credit losses on investments of $12 thousand, at ~~amortized cost, the expected maturities and weighted average yield, which is calculated using amortized cost as the weight and tax-equivalent book yield,~~March 31, 2023 from $564.8 million, net 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 %

~~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,~~allowance for credit losses on investments of ~~Available-For-Sale securities held~~zero, at December 31, ~~2021:~~

(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 %

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 Held-To-Maturity 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
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~~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~~$15.3 million ($~~13.1~~12.1 million net of tax) at ~~June 30, 2022. With~~March 31, 2023. Our HTM investments totaled $223.1 million and represented approximately 39% of our total investments at March 31, 2023. Our AFS investments totaled $336.5 million or approximately 60% of our total investments with a modified duration of 3.39 at March 31, 2023. Our investments at cost totaled $5.8 million or approximately 1% of our total investments at March 31, 2023. The unrealized losses on our investment securities are related to an increase in market interest rates, which has a temporary negative impact on the ~~addition~~fair value of our investment securities portfolio and on accumulated other ~~purchased~~comprehensive income (loss), which is included in shareholders’ equity.

Other short-term investments ~~classified as HTM~~increased $47.7 million to $60.6 million at March 31, 2023 from $12.9 million at December 31, 2022 due to deposit growth exceeding loan growth and due to higher borrowings during the three months ended March 31, 2023.

(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	$	29,873		1.76	%	$	15,950		1.45	%		14,777		1.24	%	$	—		—
Government sponsored enterprises		—		—			—		—			2,500		2.00	%		—		—
Small Business Administration pools		145		3.89	%		16,791		6.08	%		2,611		6.58	%		252		6.21	%
Mortgage-backed securities		690		1.99	%		32,280		4.14	%		203,374		4.10	%		30,486		2.68	%
State and local government		—		—			—		—			—		—			—		—
Corporate and other securities		10		3.70	%		1,987		4.66	%		6,763		3.76	%		—		—
Total investment securities available-for-sale	$	30,718		1.84	%	$	67,008		4.00	%	$	230,025		3.91	%	$	30,738		2.71	%

(In thousands)
	Within One					After One But					After Five But					After Ten
	Year					Within Five Years					Within Ten Years					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		1,477		2.46	%		18,481		3.45	%		74,281		3.27	%		23,470		2.81	%
State and local government		3,125		2.43	%		21,248		2.56	%		56,947		3.31	%		24,110		3.80	%
Corporate and other securities		—		—			—		—			—		—			—		—
Total investment securities held-to-maturity	$	4,602		2.44	%	$	39,729		2.92	%	$	131,228		3.30	%	$	47,580		3.31	%

(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	$	—		—		$	45,781		1.67	%	$	14,770		1.21	%	$	—		—
Government sponsored enterprises		—		—			2,500		2.00	%		—		—			—		—
Small Business Administration pools		335		0.60	%		19,085		4.50	%		2,237		3.76	%		—		—
Mortgage-backed securities		870		0.70	%		40,461		2.18	%		202,863		2.92	%		19,517		2.91	%
State and local government		—		—			—		—			—		—			—		—	%
Corporate and other securities		10		3.70	%		5,764		3.85	%		2,986		4.19	%		9		3.70	%
Total investment securities available-for-sale	$	1,215		0.70	%	$	113,591		2.44	%	$	222,856		2.83	%	$	19,526		2.91	%

(In thousands)
	Within One					After One But					After Five But					After Ten
	Year					Within Five Years					Within Ten Years					Years
Held-to-Maturity:	Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield
US Treasury Securities	$	—		—		$	—		—		$	—		—		$	—		—
Government sponsored enterprises		—		—		$	—		—			—		—			—		—
Small Business Administration pools	$	—		—			—		—			—		—			—		—
Mortgage-backed securities		3,228		1.71	%		24,520		3.45	%		81,646		3.27	%		12,381		3.11	%
State and local government		3,236		0.95	%		14,664		2.56	%		61,567		3.31	%		27,462		3.81	%
Corporate and other securities		—		—			—		—			—		—			—		—
Total investment securities held-to-maturity	$	6,464		1.33	%	$	39,184		3.12	%	$	143,213		3.29	%	$	39,843		3.59	%

Deposits increased $34.8 million, or 2.5% (10.2% annualized), to $1.4 billion at March 31, 2023 compared to $1.4 billion at December 31, 2022. Our pure deposits, which are defined as total deposits less certificates of deposits, increased $22.6 million, or 1.8% (7.2% annualized), to $1.3 billion at March 31, 2023 from $1.3 billion at December 31, 2022. We continue to focus on growing our pure deposits as a percentage of total deposits in order to better manage our overall cost of funds. Total uninsured deposits were $434.4 million and $407.0 million at March 31, 2023 and December 31, 2022, respectively. Included in uninsured deposits at March 31, 2023 and December 31, 2022 were $74.7 million and $59.5 million of deposits of states or political subdivisions in the U.S., which are secured or collateralized, respectively. Total uninsured deposits, excluding these deposits that are secured or collateralized, totaled $359.7 million, or 25.3%, of total deposits at March 31, 2023 and $347.5 million, or 25.1%, of total deposits at December 31, 2022. The average balance of all customer deposit accounts at March 31, 2023 was $29,393. The average balance for consumer accounts was $16,247 and the average balance for non-consumer accounts was $65,074. We had no brokered deposits and no listing services deposits at March 31, 2023 and December 31, 2022.

The following table sets forth the deposits by category:

	March 31,					December 31,
	2023					2022
			% of					% of
(In thousands)	Amount		Deposits			Amount		Deposits
Demand deposit accounts	$	458,882		32.3	%	$	461,010		33.3	%
Interest bearing checking accounts		323,832		22.7	%		334,540		24.1	%
Money market accounts		351,900		24.8	%		295,223		21.3	%
Savings accounts		141,713		10.0	%		161,770		11.7	%
Time deposits less than $100,000		67,603		4.8	%		66,410		4.8	%
Time deposits more than $100,000		76,227		5.4	%		66,429		4.8	%
	$	1,420,157		100.0	%	$	1,385,382		100.0	%

Maturities of Certificates of Deposit and Other Time Deposit with balances greater than $250,000

The tables below show at March 31, 2023 and December 31, 2022, maturities of certificates and other time deposits greater than $250,000.:

	March 31, 2023
	Within Three		After Three Through		After Six Through		After Twelve
(In thousands)	Months		Six Months		Twelve Months		Months		Total
Certificates and time deposits greater than $250,000	$	2,820	$	4,564	$	17,055	$	3,165	$	27,604

	December 31, 2022
	Within Three		After Three Through		After Six Through		After Twelve
(In thousands)	Months		Six Months		Twelve Months		Months		Total
Certificates and time deposits greater than $250,000	$	6,586	$	3,119	$	11,565	$	3,726	$	24,996

Of the $27,604 and $24,996 of time deposits greater than $250,000 at March 31, 2023 and December 31, 2022, $9.6 million and $9.5 million, respectively were in excess of the $250,000 FDIC insurance limit.

Total uninsured deposits were $434.4 million and $407.0 million at March 31, 2023 and December 31, 2022, respectively. Included in uninsured deposits at March 31, 2023 and December 31, 2022 were $74.7 million and $59.5 million of collateralized public funds, respectively.

Borrowed funds. Borrowed funds consist of fed funds purchased, securities sold under agreements to repurchase, FHLB advances and long-term debt, which is a result of issuing $15.0 million in trust preferred securities. Short-term borrowings in the form of securities sold under agreements to repurchase averaged $86.5 million, $73.3 million and $82.6 million during the three months ended March 31, 2023, December 31, 2022 and March 31, 2022, respectively. The average rates paid during these periods were 1.67%, 0.80% and 0.12%, respectively. The balances of securities sold under agreements to repurchase were $77.0 million and $68.7 million at March 31, 2023 and December 31, 2022, respectively. The repurchase agreements all mature within one to four days and are generally originated with customers that have other relationships with us and tend to provide a stable and predictable source of funding. Federal funds purchased averaged $2.7 million, $5.7 million and zero during the three months ended March 31, 2023, December 31, 2022 and March 31, 2022, respectively. The average rates paid during these periods were 4.58%, 3.57% and 0.00%, respectively. The balances of federal funds purchased were zero and $22.0 million at March 31, 2023 and December 2022, respectively. As a member of the FHLB, the Bank has access to advances from the FHLB for various terms and amounts. FHLB advances averaged $75.4 million, $37.5 million and zero during the three months ended March 31, 2023, December 31, 2022 and March 31, 2022, respectively. The average rates paid during these periods were 4.75%, 3.91% and 0.00%, respectively. The balances of FHLB advances were $85.0 million and $50.0 million at March 31, 2023 and December 31, 2022, respectively.

At March 31, 2023, FHLB advance maturities were as follows:

	March 31, 2023
(In thousands)	Within Three Months		After Three Through Six Months		After Six Through Twelve Months		After Twelve Months		Total
FHLB Advances	$	55,000	$	—	$	30,000	$	—	$	85,000

The $85.0 million in FHLB advances at March 31, 2023 had maturity dates between April 6, 2023 and March 14, 2024 with interest rates between 4.78% and 5.08%.

In addition to the above borrowings, we issued $15.5 million in trust preferred securities on September 16, 2004. During the fourth quarter of 2015, we redeemed $500 thousand of these securities. The securities accrue and pay distributions quarterly at a rate of three month LIBOR plus 257 basis points. The remaining debt may be redeemed in full anytime with notice and matures on September 16, 2034. Trust preferred securities averaged $15.0 million during the three months ended March 31, 2023, December 31, 2022 and March 31, 2022. The average rates paid during these periods were 7.34%, 6.58% and 2.82%, respectively. The balances of trust preferred securities were $15.0 million at March 31, 2023 and December 31, 2022.

Total shareholders’ equity increased $5.2 million, or 4.4%, to $123.6 million at March 31, 2023 from $118.4 million at December 31, 2022. Shareholders’ equity increased to 7.12% of total assets at March 31, 2023 from 7.08% at December 31, 2022 due to total asset growth of $62.5 million, or 3.7%, compared to total shareholders’ equity growth of $5.2 million, or 4.4%. The growth in total assets was primarily due to increases of $50.3 million in cash and interest-bearing bank balances and $11.9 million in loans. The $5.2 million increase in shareholders’ equity was due to a $2.9 million improvement in accumulated other comprehensive loss, a $2.1 million increase in retention of earnings due to $3.5 million in net income less $1.1 million in dividends and a $0.3 million adjustment related to the implementation of CECL on January 1, 2023, a $0.1 million increase due to employee and director stock awards, and a $0.1 million increase due to dividend reinvestment plan (DRIP) purchases. The improvement in accumulated other comprehensive loss was due to a decrease in market interest rates, which affects the fair value of our investment securities portfolio and accumulated other comprehensive (loss) income, which is included in shareholders’ equity. On June ~~30,~~1, 2022, ~~our~~we reclassified $224.5 million in investments to held-to-maturity (HTM) from available-for-sale (AFS). These securities were transferred at fair value at the time of the transfer, which became the new cost basis for the securities held to maturity. The pretax unrealized net holding loss on the available-for-sale securities on the date of transfer totaled approximately $16.7 million, and continued to be reported as a component of accumulated other comprehensive loss. This net unrealized loss is being amortized to interest income over the remaining life of the securities as a yield adjustment. There were no gains or losses recognized as a result of this transfer. The remaining pretax unrealized net holding loss on these investments was $15.3 million ($12.1 million net of tax) at March 31, 2023. Our HTM investments totaled ~~$233.7~~$223.1 million and represented approximately ~~41%~~39% of our total investments at ~~June 30, 2022.~~March 31, 2023. Our AFS investments totaled ~~$337.3~~$336.5 million or approximately 60% of our total investments with a modified duration of ~~2.84~~3.39 at ~~June 30, 2022.~~March 31, 2023. Our investments at cost totaled $5.8 million or approximately 1% of our total investments at March 31, 2023.

On April 12, 2021, we announced that our Board of Directors approved the repurchase of up to 375,000 shares of our common stock (the “2021 Repurchase Plan”)., which represents approximately 5% of our 7,559,760 shares outstanding as of March 31, 2022. No share repurchases were made under the 2021 Repurchase Plan prior to its expiration at the market close on March 31, 2022. On April 20, 2022, we announced that our Board of Directors approved the repurchase of up to 375,000 shares of our common stock (the “2022 Repurchase Plan”), which represented approximately 5% of our ~~7,566,633~~7,587,763 shares outstanding as of ~~June 30, 2022.~~March 31, 2023. 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, 200, 300, and ~~200~~400 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%, 15%, 20%, and ~~15%~~20%, respectively, in a 100, 200, 300, and ~~200~~400 basis point change in interest rates over athe first 12-month ~~period.~~period subsequent to interest rate changes. 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~~March 31, 2023 and at December 31, ~~2021~~2022 over the subsequent 12 months. At ~~June 30, 2022~~March 31, 2023 and at December 31, ~~2021,~~2022, we ~~are asset~~were liability sensitive. As a result, our modeling reflects ~~an increase~~a decrease in net interest income in a rising interest rate environment during the first 12-month period subsequent to interest rate changes. The negative impact of rising rates reverses and net interest income is favorably impacted during the second 12-month period subsequent to interest rate changes. In a ~~reduction~~declining interest rate environment, the model reflects increases in net interest income in ~~a declining interest rate environment. In a declining rate environment,~~ the ~~decline~~down 100 basis point and down 200 basis point scenarios and declines in net interest income in the down 300 basis point and 400 basis point scenarios during the first 12-month period subsequent to interest rate changes. The positive impact of declining rates reverses and net interest income is ~~primarily due~~negatively impacted during the second 12-month period subsequent 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.rate changes. The increase and decrease of 100, 200, 300, and ~~200~~400 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 %

Change in short-term interest rates	Hypothetical percentage change in net interest income
	March 31, 2023			December 31, 2022
+400bp		-7.02	%		-8.99	%
+300bp		-4.66	%		-6.21	%
+200bp		-2.81	%		-3.74	%
+100bp		-1.14	%		-1.82	%
Flat		—			—
-100bp		+1.78	%		+3.13	%
-200bp		+0.31	%		+1.12	%
-300bp		-2.28	%		-3.86	%
-400bp		-4.75	%		-7.25	%

D~~uring~~During the second 12-month period after 100 basis point, 200 basis point, 300 basis point, and ~~200~~400 basis point simultaneous and parallel increases in interest rates along the entire yield curve, our net interest income is projected to increase ~~5.08%~~4.22%, 7.04%, 9.34%, and ~~9.87%~~10.88%, respectively, at ~~June 30, 2022 compared to 7.82%~~March 31, 2023, and ~~15.00%~~3.44%, 6.13%, 8.23%, and 9.58%, respectively, at December 31, ~~2021.~~2022. During the second 12-month period after 100 basis point, 200 basis point, 300 basis point, and 400 basis point simultaneous and parallel reduction in interest rates along the entire yield curve, our net interest income is projected to decline 5.13%, 11.28%, 17.94%, and 21.38%, respectively, at March 31, 2023, and to decline 4.92%, 12.86%, 21.14%, and 26.33%, respectively, at December 31, 2022.

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~~Policies have been established in an effort to maintain the maximum anticipated negative impact of these modeled changes in PVE at no more than 15%, 20%, 25%, and ~~December 31, 2021, the PVE exposure~~25%, respectively, in a ~~plus~~100, 200, 300, and 400 basis point ~~increase~~change in market interest ~~rates was estimated to be 3.88%~~rates. Based on PVE, we were asset sensitive at March 31, 2023 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.~~2022.

Present Value of Equity Sensitivity

Change in short-term interest rates	Hypothetical percentage change in net interest income
	March 31, 2023			December 31, 2022
+400bp		+3.29	%		+1.43	%
+300bp		+4.03	%		+2.61	%
+200bp		+3.99	%		+3.13	%
+100bp		+2.67	%		+2.33	%
Flat		—			—
-100bp		-3.39	%		-3.83	%
-200bp		-9.00	%		-10.00	%
-300bp		-18.29	%		-18.44	%
-400bp		-11.52	%		-25.23	%

Effective May 5, 2023, we entered into a pay-fixed/receive-floating interest rate swap (the “Pay-Fixed Swap Agreement”) for a notional amount of $150.0 million that was designated as a fair value hedge to hedge the risk of changes in the fair value of the fixed rate loans included in the closed loan portfolio. This fair value hedge converts the hedged loans from a fixed rate to a synthetic floating SOFR rate. The Pay-Fixed Swap Agreement will mature on May 5, 2026 and will pay a fixed coupon rate of 3.58% while receiving the overnight SOFR rate.

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, to borrow on a secured basis through the Federal Reserve Discount Window, and to borrow on a secured basis through securities sold under agreements to repurchase. ~~The~~Furthermore, 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,~~March 31, 2023 and at December 31, 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, our ability to borrow on a secured basis through the Federal Reserve Discount Window, 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~~increased to ~~7.0%~~7.12% of total assets at ~~June 30, 2022~~March 31, 2023 from ~~8.9%~~7.08% at December 31, ~~2021~~2022 due to total asset growth of ~~$100.3~~$62.5 million or 3.7% compared to total shareholders’ equity ~~decline~~growth of ~~$23.4 million.~~$5.2 million or 4.4%. 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,~~increases of $50.3 million in cash and ~~loan growth.~~interest-bearing bank balances and $11.9 million in loans. The ~~$23.4~~$5.2 million ~~decline~~increase in shareholders’ equity was due to a ~~$29.8~~$2.9 million ~~reduction~~improvement in accumulated other comprehensive ~~income (loss) partially offset by~~loss, a ~~$4.6~~$2.1 million increase in retention of earnings ~~less dividends paid, the transfer of $1.2~~due to $3.5 million in ~~deferred board compensation stock units from other liabilities to shareholders’ equity, the transfer of $0.2~~net income less $1.1 million in ~~restricted stock units from other liabilities~~dividends and a $0.3 million adjustment related to ~~shareholder’s equity,~~the implementation of CECL on January 1, 2023, a ~~$0.2~~$0.1 million increase due to employee and director stock awards, and a ~~$0.2~~$0.1 million increase due to dividend reinvestment plan (DRIP) purchases. The ~~decline~~improvement in accumulated other comprehensive ~~income~~loss was due to ~~an increase~~a decrease in market interest rates, which ~~has a temporary negative impact on~~affects the fair value of our investment securities portfolio and on accumulated other comprehensive (loss) 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~~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~~$15.3 million ($~~13.1~~12.1 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~~March 31, 2023. Our HTM investments totaled ~~$233.7~~$223.1 million and represented approximately ~~41%~~39% of our total investments at ~~June 30, 2022.~~March 31, 2023. Our AFS investments totaled ~~$337.3~~$336.5 million or approximately 60% of our total investments with a modified duration of ~~2.84~~3.39 at ~~June 30, 2022.~~March 31, 2023. Our investments at cost totaled $5.8 million or approximately 1% of our total investments at March 31, 2023.

The Bank maintains federal funds purchased lines in the total amount of ~~$60.0~~$65.0 million with ~~two~~three financial institutions ~~although these were not utilized at June 30, 2022,~~ and $10 million through the Federal Reserve Discount Window. We utilized zero of our federal funds purchased lines at March 31, 2023 compared to $22 million at December 31, 2022. The FHLB of Atlanta has approved a line of credit of up to 25% of the Bank’s assets, which, when utilized, is collateralized by a pledge against specific investment securities and/or eligible loans. We had $85.0 million in FHLB advances at March 31, 2023 compared to $50.0 at December 31, 2022. The $85.0 million in FHLB advances at March 31, 2023 had maturity dates between April 6, 2023 and March 14, 2024 with interest rates between 4.78% and 5.08%. At March 31, 2023, we have remaining credit availability under this facility in excess of $330 million, subject to collateral requirements. Combined, the company has total remaining credit availability in excess of $405 million as compared to uninsured deposits of $359.7 million as noted above.

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,~~March 31, 2023, we had issued commitments to extend unused credit of ~~$145.5~~$171.8 million, including ~~$44.4~~$49.3 million in unused home equity lines of credit, through various types of lending arrangements. At December 31, ~~2021,~~2022, we had issued commitments to extend unused credit of ~~$137.4~~$156.9 million, including ~~$42.9~~$47.3 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~~organizations-generally those organizations with $250 billion or more in total consolidated assets or $10 billion or more in total foreign ~~exposures applicable to advanced approaches banking organizations.~~exposures.

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

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

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

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

a leverage ratio of 4%.

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

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~~As part of its response to 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~~COVID-19 pandemic, in the first quarter of ~~2023—~~2020, U.S. federal regulatory authorities issued an interim final rule that provided banking organizations that adopted the ~~first reporting~~CECL during the 2020 calendar year with the option to delay for two years the estimated impact of CECL on regulatory capital relative to regulatory capital determined under the prior incurred loss methodology, followed by a three-year transition period ~~in which~~to phase out the ~~new standard is effective. At this time, we cannot yet reasonably determine the magnitude of such one-time cumulative adjustment, if any, or~~aggregate amount of the ~~overall impact~~capital benefit provided during the initial two-year delay (i.e., a five-year transition in total). On January 1, 2023, we adopted the CECL accounting standard, which resulted in a day one reduction of $14.3 thousand to the ~~new standard~~allowance for credit losses on loans offset by increases of $397.9 thousand to the allowance for credit losses on unfunded commitments and $43.5 thousand to the allowance for credit losses on held-to-maturity investments. Furthermore, deferred tax assets increased $89.7 thousand and retained earnings declined $337.4 thousand. Compared to the day one CECL results, the allowance for credit losses on loans increased $98.3 thousand to $11.4 million at March 31, 2023 from $11.3 million at January 1, 2023; the allowance for credit losses on unfunded commitments declined $16.0 thousand to $381.9 thousand at March 31, 2023 from $397.9 thousand at January 1, 2023; and the allowance for credit losses on held-to-maturity investments declined $1.4 thousand to $42.0 thousand at March 31, 2023 from $43.5 thousand at January 1, 2023. At March 31, 2023, the combined allowance for credit losses for loans, unfunded commitments, and investments was $11.8 million compared to $11.8 million at January 1, 2023 and $11.3 million at December 31, 2022. In connection with our ~~business, financial condition~~adoption of CECL on January 1, 2023, we did not elect to utilize the three-year phase-in period for the day-one adverse regulatory capital effects or ~~results of operations.~~

the five-year CECL transition.

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

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,~~March 31, 2023, 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

Dollars in thousands				Prompt Corrective Action (PCA) Requirements						Excess Capital $s of PCA Requirements
Capital Ratios	Actual			Well Capitalized			Adequately Capitalized			Well Capitalized		Adequately Capitalized
March 31, 2023
Leverage Ratio		8.68	%		5.00	%		4.00	%	$	62,679	$	79,719
Common Equity Tier 1 Capital Ratio		13.55	%		6.50	%		4.50	%		76,926		98,757
Tier 1 Capital Ratio		13.55	%		8.00	%		6.00	%		60,552		82,384
Total Capital Ratio		14.63	%		10.00	%		8.00	%		50,565		72,396
December 31, 2022
Leverage Ratio		8.63	%		5.00	%		4.00	%	$	61,191	$	78,069
Common Equity Tier 1 Capital Ratio		13.49	%		6.50	%		4.50	%		75,442		97,023
Tier 1 Capital Ratio		13.49	%		8.00	%		6.00	%		59,257		80,837
Total Capital Ratio		14.54	%		10.00	%		8.00	%		49,013		70,593

The Bank’s risk-based capital ratios of leverage ratio, Tier 1, and total capital were ~~8.34%~~8.68%, ~~13.47%~~13.55% and ~~14.57%~~14.63%, respectively, at ~~June 30, 2022~~March 31, 2023 as compared to ~~8.45%~~8.63%, ~~13.97%~~13.49%, and ~~15.15%~~14.54%, respectively, at December 31, ~~2021.~~2022. The Bank’s Common Equity Tier 1 ratio at ~~June 30, 2022~~March 31, 2023 was ~~13.47%~~13.55% and at December 31, ~~2021~~2022 was ~~13.97%~~13.49%. 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~~first quarter of ~~2022~~2023 of ~~$0.13~~$0.14 per common share. This dividend is payable on ~~August~~May 16, ~~2022~~2023 to shareholders of record of our common stock as of ~~August~~May 2, ~~2022.~~2023.

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								Three months ended March 31, 2023								Three months ended March 31, 2022
	Average			Interest		Yield/			Average			Interest		Yield/			Average			Interest		Yield/			Average			Interest		Yield/
	Balance			Earned/Paid		Rate			Balance			Earned/Paid		Rate			Balance			Earned/Paid		Rate			Balance			Earned/Paid		Rate
Assets
Earning assets
Loans
PPP loans	$	256		$	1		1.57	%	$	55,599		$	756		5.45	%	$	209		$	1		1.94	%	$	609		$	45		29.97	%
Non-PPP loans		896,363			9,303		4.16	%		840,013			8,985		4.29	%		986,291			11,158		4.59	%		875,740			8,958		4.15	%
Total loans		896,619			9,304		4.16	%		895,612			9,741		4.36	%		986,500			11,159		4.59	%		876,349			9,003		4.17	%
Non-taxable securities		52,064			375		2.89	%		54,791			387		2.83	%		51,563			375		2.95	%		52,644			380		2.93	%
Taxable securities		508,353			1,674		1.32	%		376,074			1,507		1.61	%		513,553			4,061		3.21	%		519,187			1,779		1.39	%
Int bearing deposits in other banks		72,813			160		0.88	%		76,242			29		0.15	%		30,010			294		3.97	%		67,179			33		0.20	%
Fed funds sold		3			—		0.00	%		1,517			—		0.00	%		126			1		3.22	%		15			—		0.00	%
Total earning assets		1,529,852			11,513		3.02	%		1,404,236			11,664		3.33	%		1,581,752			15,890		4.07	%		1,515,374			11,195		3.00	%
Cash and due from banks		28,379								25,128								26,012								28,511
Premises and equipment		32,442								34,105								31,375								32,722
Goodwill and other intangibles		15,496								15,674								15,378								15,536
Other assets		48,950								39,235								52,551								41,348
Allowance for loan losses		(11,211	)							(10,670	)
Allowance for credit losses - investments																		(43	)							—
Allowance for credit losses - loans																		(11,371	)							(11,226	)
Total assets	$	1,643,908							$	1,507,708							$	1,695,654							$	1,622,265

Liabilities
Interest-bearing liabilities
Interest-bearing transaction accounts	$	342,289		$	45		0.05	%	$	305,393		$	51		0.07	%	$	320,487		$	223		0.28	%	$	331,772		$	45		0.06	%
Money market accounts		313,141			117		0.15	%		267,788			109		0.16	%		311,383			1,328		1.73	%		295,536			112		0.15	%
Savings deposits		154,687			22		0.06	%		132,429			19		0.06	%		152,989			60		0.16	%		145,340			20		0.06	%
Time deposits		151,549			125		0.33	%		159,133			269		0.68	%		138,229			382		1.12	%		152,884			156		0.41	%
Fed funds purchased		—			—		NA			2			—		0.00	%		2,655			30		4.58	%		—			—		NA
Securities sold under agreements to repurchase		72,120			22		0.12	%		60,468			19		0.13	%		86,476			356		1.67	%		82,553			25		0.12	%
Other short-term debt		—			—		NA			—			—		NA			75,433			883		4.75	%		—			—		NA
Other long-term debt		14,964			131		3.51	%		14,964			105		2.81	%		14,964			271		7.34	%		14,964			104		2.82	%
Total interest-bearing liabilities		1,048,750			462		0.18	%		940,177			572		0.24	%		1,102,616			3,533		1.30	%		1,023,049			462		0.18	%
Demand deposits		466,309								420,358								458,620								449,281
Allowance for credit losses - unfunded commitments																		398								—
Other liabilities		12,782								11,950								13,964								12,690
Shareholders’ equity		116,067								135,223								120,056								137,245
Total liabilities and shareholders’ equity	$	1,643,908							$	1,507,708							$	1,695,654							$	1,622,265

Cost of deposits, including demand deposits							0.09	%							0.14	%							0.58	%							0.10	%
Cost of funds, including demand deposits							0.12	%							0.17	%							0.92	%							0.13	%
Net interest spread							2.84	%							3.09	%							2.77	%							2.82	%
Net interest income/margin				$	11,051		2.90	%				$	11,092		3.17	%				$	12,357		3.17	%				$	10,733		2.87	%
Net interest income/margin (tax equivalent)				$	11,180		2.93	%				$	11,215		3.20	%				$	12,455		3.19	%				$	10,864		2.91	%

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,									Three Months Ended March 31,
	2022 versus 2021									2023 versus 2022
	Increase (Decrease) Due to Changes in (1)									Increase (Decrease) Due to Changes in (1)
	Volume			Rate			Total			Volume			Rate		Total
	(in thousands)									(in thousands)
Interest income:
Loans	$	(96	)	$	(788	)	$	(884	)	$	1,196		$	960	$	2,156
Non-taxable securities		(38	)		17			(21	)		(8	)		3		(5	)
Taxable securities		1,187			(586	)		601			(20	)		2,302		2,282
Interest bearing deposits in other banks		(7	)		137			130			(28	)		289		261
Federal Funds sold											—			1		1
Total interest income		1,046			(1,220	)		(174	)		1,140			3,555		4,695

Interest expense:
Interest-bearing transaction accounts		15			(34	)		(19	)		(2	)		180		178
Money market accounts		38			(60	)		(22	)		6			1,210		1,216
Savings deposits		6			(2	)		4			1			39		40
Time deposits		(26	)		(262	)		(288	)		(16	)		242		226
Federal Funds purchased											15			15		30
Securities sold under agreements to repurchase		10			(10	)		—			1			330		331
Other short-term debt											442			441		883
Other long-term debt		—			26			26			—			167		167
Total interest expense		43			(342	)		(299	)		447			2,624		3,071
Total net interest income	$	1,003		$	(878	)	$	125		$	693		$	931	$	1,624

	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~~March 31, 2023 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,~~2022, 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.

We are providing this additional risk factor to supplement the risk factors contained in Item 1A. of our Annual Report on Form 10-K for the year ended December 31, 2022.

The Federal Reserve has implemented significant economic strategies that have affected interest rates, inflation, asset values, and the shape of the yield curve.

In 2020, in response to economic disruption associated with the COVID-19 pandemic, the Federal Reserve quickly reduced short-term rates to extremely low levels and acted to influence the markets to reduce long-term rates as well. During 2021, the Federal Reserve significantly reduced such “easing” actions that held down long-term rates. During 2022, the Federal Reserve switched to a tightening policy. It raised short term rates significantly and rapidly throughout the year. Those actions triggered a significant decline in the values of most categories of U.S. stocks and bonds; significantly raised recessionary expectations for the U.S.; and inverted the yield curve in the U.S. for much of the last two quarters of 2022.

Effects on the yield curve often are most pronounced at the short end of the curve, which is of particular importance to us and other banks. Among other things, easing strategies are intended to lower interest rates, expand the money supply, and stimulate economic activity, while tightening strategies are intended to increase interest rates, discourage borrowing, tighten the money supply, and restrain economic activity. However, in 2022, short term rates rose faster than long term rates to the point that the yield curve inverted for much of the final two quarters of 2022. This sort of phenomenon-where short term rates rise more strongly and rapidly than long-term rates can follow-is relatively common.

It is unclear when long term rates are likely to catch up. Many external factors may interfere with the effects of these plans or cause them to be changed, sometimes quickly. Such factors include significant economic trends or events as well as significant international monetary policies and events. For 2023, the Federal Reserve has not yet indicated when it will stop, or at least pause, raising short term rates, although the rate of increases has slowed.

These economic strategies have had, and will continue to have, a significant impact on our business and on many of our customers. As exemplified by the March 2023 bank failures in the U.S., such strategies also can affect the U.S. and world-wide financial systems in ways that may be difficult to predict.

Adverse developments affecting the financial services industry, such as recent bank failures or concerns involving liquidity, may have a material adverse effect on the Company’s operations.

The recent high-profile bank failures involving Silicon Valley Bank, Signature Bank, and First Republic Bank have caused general uncertainty and concern regarding the liquidity adequacy of the banking sector. Although we were not directly affected by these bank failures, the resulting speed and ease in which news, including social media commentary, led depositors to withdraw or attempt to withdraw their funds from these and other financial institutions caused the stock prices of many financial institutions to become volatile. Additional bank failures could have an adverse effect on our financial condition and results of operations, either directly or through an adverse impact on certain of our customers.

In response to these bank failures and the resulting market reaction, the Secretary of the Treasury approved actions enabling the FDIC to complete its resolutions of the failed banks in a manner that fully protects depositors by utilizing the Deposit Insurance Fund, including the use of Bridge Banks to assume all of the deposit obligations of the failed banks, while leaving unsecured lenders and equity holders of such institutions exposed to losses. In addition, the Federal Reserve announced it would make available additional funding to eligible depository institutions under a Bank Term Funding Program to help assure banks have the ability to meet the needs of all their depositors. In an effort to strengthen public confidence in the banking system and protect depositors, regulators announced that any losses to the Deposit Insurance Fund to support uninsured depositors will be recovered by a special assessment on banks, as required by law, which will increase our FDIC insurance assessment and will increase our costs of doing business. However, it is uncertain whether these steps by the government will be sufficient to calm the financial markets, reduce the risk of significant depositor withdrawals at other institutions and thereby reduce the risk of additional bank failures. As a result of this uncertainty, we face the potential for reputational risk, deposit outflows, increased costs and competition for liquidity, and increased credit risk which, individually or in the aggregate, could have a material adverse effect on our business, financial condition and results of operations.

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,~~March 31, 2023, we credited an aggregate of ~~1,698 and 4,681~~3,638 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;~~March 31, 2023; however, ~~zero and 2,065~~5,533 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.stock. 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~~7,587,763 shares outstanding as of ~~June 30, 2022.~~March 31, 2023. 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,~~March 31, 2023, formatted in iXBRL (inline eXtensible Business Reporting Language; (i) Consolidated Balance Sheets at ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, (ii) Consolidated Statements of Income for the three ~~and six~~ months ended ~~June 30,~~March 31, 2023 and 2022, ~~and 2021,~~ (iii) Consolidated Statements of Comprehensive Income (Loss) for the three ~~and six~~ months ended ~~June 30,~~March 31, 2023 and 2022 ~~and 2021~~ (iv) Consolidated Statements of Changes in Shareholders’ Equity for the three ~~and six~~ months ended ~~June 30,~~March 31, 2023 and 2022, ~~and 2021,~~ (v) Consolidated Statements of Cash Flows for the ~~six~~three months ended ~~June 30,~~March 31, 2023 and 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~~May 11, 2023	By:	/s/ Michael C. Crapps
		Michael C. Crapps
		President and Chief Executive Officer
		(Principal Executive Officer)

Date: ~~August 10, 2022~~May 11, 2023	By:	/s/ D. Shawn Jordan
		D. Shawn Jordan
		Executive Vice President and Chief Financial Officer
		(Principal Financial and Accounting Officer)

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.)

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

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

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)	43
	Consolidated Statements of Changes in Shareholders’ Equity	54
	Consolidated Statements of Cash Flows	85
	Notes to Consolidated Financial Statements	96
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	3335
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	6260
Item 4.	Controls and Procedures	6260

PART II – OTHER INFORMATION		6361
Item 1.	Legal Proceedings	6361
Item 1A.	Risk Factors	6361
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	6362
Item 3.	Defaults Upon Senior Securities	6362
Item 4.	Mine Safety Disclosures	6362
Item 5.	Other Information	6362
Item 6.	Exhibits	6463

SIGNATURES		6564

	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; NaN 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

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~~March 31, 2023

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


(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

										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

(Dollars in thousands)	January 1, 2023 As Reported Under ASC 326		December 31, 2022 Pre-ASC 326 Adoption December		Impact of ASC 326 Adoption
Assets:
Held to maturity securities, at amortized cost	$	106,929	$	106,929	$	—

Allowance for credit losses on held to maturity securities:
State and local governments		43		—		43
Allowance for credit losses on held-to-maturity securities	$	43	$	—	$	43

Loans, at amortized cost	$	980,857	$	980,857	$	—

Allowance for credit losses on loans:
Commercial		1,042		849		193
Real Estate Construction		1,150		75		1,075
Real Estate Mortgage Residential		755		723		32
Real Estate Mortgage Commercial		7,686		8,569		(883	)
Consumer Home Equity		480		314		166
Consumer Other		209		170		39
Unallocated		—		636		(636	)
Allowance for credit losses on loans	$	11,322	$	11,336	$	(14	)

Liabilities:
Allowance for credit losses for unfunded commitments	$	398	$	—	$	398


	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

~~(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~~

	March 31, 2023		December 31, 2022
Non-employee director deferred compensation plan accumulated share units		97,126		93,488
Accrued liability (dollars in thousands)¹		1,331		1,260

	For the three months ended
Dollars in thousands	March 31, 2023		March 31, 2022
Related director compensation expense (dollars in thousands)		59		153


(In shares/units)	Three Months ended March 31,
Stock based awards	2023		2022
Time-based restricted stock units – officer		11,738		11,738
Performance-based restricted stock units – officer¹		16,750		11,738
Restricted stock – officer		—		—
Restricted stock – director		7,590		7,359


(Dollars in thousands)	Three months ended March 31,
Fair value of stock awards on grant date	2023¹		2022
Time-based restricted stock units – officer		255		246
Performance-based restricted stock units – officer¹		340		246
Restricted stock – officer		—		—
Restricted stock – director		154		154


(Dollars in thousands)	Three months ended March 31,
Compensation expense related to stock awards	2023		2022
Restricted stock and stock units – officer¹		150		107
Restricted stock – director²		28		26


(In shares / units)
First Community Corporation 2021 Omnibus Equity Incentive Plan	2023
Initial reserve – May 19, 2021		225,000
Shares / units granted
Time-based restricted stock units – officer		(24,300	)
Performance-based restricted stock units – officer¹		(51,108	)
Restricted stock – officer		(2,201	)
Restricted stock – director		(22,539	)
Remaining Reserve-March 31, 2023		124,852

			Gross		Gross
	Amortized		Unrealized		Unrealized
(Dollars in thousands)	Cost		Gains		Losses			Fair Value
March 31, 2023
US Treasury securities	$	60,600	$	—	$	(3,796	)	$	56,804
Government Sponsored Enterprises		2,500		—		(373	)		2,127
Mortgage-backed securities		266,829		250		(17,115	)		249,964
Small Business Administration pools		19,798		162		(426	)		19,534
Corporate and other securities		8,771		11		(754	)		8,028
Total	$	358,498	$	423	$	(22,464	)	$	336,457

			Gross		Gross
	Amortized		Unrealized		Unrealized
(Dollars in thousands)	Cost		Gains		Losses			Fair Value
December 31, 2022
US Treasury securities	$	60,552	$	—	$	(4,569	)	$	55,983
Government Sponsored Enterprises		2,500		—		(426	)		2,074
Mortgage-backed securities		263,704		10		(19,114	)		244,600
Small Business Administration pools		21,657		60		(630	)		21,087
Corporate and other securities		8,772		12		(666	)		8,118
Total	$	357,185	$	82	$	(25,405	)	$	331,862


(Dollars in thousands)	Less than 12 months				12 months or more				Total
March 31, 2023	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
Available-for-sale securities:	Value		Loss		Value		Loss		Value		Loss

US Treasury Securities	$	—	$	—	$	56,804	$	3,796	$	56,804	$	3,796
Government Sponsored Enterprise		—		—		2,127		373		2,127		373
Mortgage-backed securities		46,501		1,474		191,670		15,641		238,171		17,115
Small Business Administration pools		6,768		116		5,977		310		12,745		426
Corporate and other securities		1,204		76		4,072		678		5,276		754
Total	$	54,473	$	1,666	$	260,650	$	20,798	$	315,123	$	22,464

	Government
March 31, 2023	Sponsored		Mortgage-		State and
Held-to-Maturity securities	Enterprise		backed		local			Corporate
(Dollars in thousands)	securities		Securities		government			Bonds

Allowance for Credit Losses on Held-to-Maturity Securities:
Beginning Balance	$	—		—		—			—
Adjustment for adoption of ASU 2016-13		—		—		(43	)		—
Provision for credit losses		—		—		1			—

Ending balance March 31, 2023	$	—		—		(42	)		—

	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


(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

							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


	Term Loans by year of Origination
($ in thousands)	2019		2020		2021		2022		2023		Prior		Revolving		Revolving Converted to Term		Total
Commercial, Financial & Agriculture
Pass	$	1,954	$	1,893		26,328		12,852		2,334		10,505		17,900		—		73,766
Special Mention		—		—		62		—		—		25		—		—		87
Substandard		—		20		25		—		—		—		—		—		45
Total Commercial, Financial & Agriculture		1,954		1,913		26,415		12,852		2,334		10,530		17,900		—		73,898

Current period gross write-offs		—		—		—		—		—		—		—		—		—

Real estate Construction
Pass		8,543		12,629		17,328		32,263		4,896		212		8,571		—		84,442
Total Real estate Construction		8,543		12,629		17,328		32,263		4,896		212		8,571		—		84,442

Current period gross write-offs		—		—		—		—		—		—		—		—		—

Real estate Mortgage-residential
Pass		2,670		11,323		7,023		31,311		5,965		9,366		365		497		68,520
Special Mention		—		28		—		—		—		403		—		—		431
Substandard		—		—		—		—		—		32		—		—		32
Total Real estate Mortgage-residential		2,670		11,351		7,023		31,311		5,965		9,801		365		497		68,983

Current period gross write-offs		—		—		—		—		—		—		—		—		—

Real estate Mortgage-commercial
Pass		49,718		93,745		136,731		194,651		13,548		217,917		12,117		—		718,427
Special Mention		—		—		—		—		—		23		—		—		23
Substandard		—		—		—		—		—		4,153		—		—		4,153
Total Real estate Mortgage-commercial		49,718		93,745		136,731		194,651		13,548		222,093		12,117		—		722,603

Current period gross write-offs		—		—		—		—		—		—		—		—		—

Consumer - Home Equity
Pass		—		—		—		—		—		—		28,364		—		28,364
Special Mention		—		—		—		—		—		—		88		—		88
Substandard		—		—		—		—		—		—		1,072		—		1,072
Total Consumer - Home Equity		—		—		—		—		—		—		29,524		—		29,524

Current period gross write-offs		—		—		—		—		—		—		—		—		—

Consumer - Other
Pass		484		726		892		3,154		669		965		6,362		—		13,252
Special Mention		—		10		—		—		—		8		—		—		18
Substandard		—		—		—		—		—		—		—		—		—
Total Consumer - Other		484		736		892		3,154		669		973		6,362		—		13,270

Current period gross write-offs		—		—		—		—		—		—		2		—		2

					Greater than														Greater than
(Dollars in thousands)	30-59 Days		60-89 Days		90 Days and				Total						30-59 Days		60-89 Days		90 Days and				Total
June 30, 2022	Past Due		Past Due		Accruing		Nonaccrual		Past Due		Current		Total Loans
March 31, 2023															Past Due		Past Due		Accruing		Non-accrual		Past Due		Current		Total Loans

Commercial	$	242	$	513	$	—	$	4,150	$	4,905	$	65,084	$	69,989	$	11	$	—	$	—	$	45	$	56	$	73,842	$	73,898
Real estate:
Construction		—		—		—		—		—		94,159		94,159		—		—		—		—		—		84,442		84,442
Mortgage-residential		81		275		—		38		394		46,373		46,767		—		—		—		32		32		68,951		68,983
Mortgage-commercial		—		—		—		0		—		662,779		662,779		63		—		—		4,044		4,107		718,496		722,603
Consumer:
Home equity		1,043		5		—		163		1,211		26,137		27,348		—		—		—		4		4		29,520		29,524
Other		—		1		—		—		1		15,289		15,290		9		—		—		—		9		13,261		13,270
Total	$	1,366	$	794	$	—	$	4,351	$	6,511	$	909,821	$	916,332	$	83	$	—	$	—	$	4,125	$	4,208	$	988,512	$	992,720

																			Greater than
(Dollars in thousands)															30-59 Days		60-89 Days		90 Days and				Total
December 31, 2022															Past Due		Past Due		Accruing		Non-accrual		Past Due		Current		Total Loans

Commercial															$	87	$	—	$	—	$	29	$	116	$	72,293	$	72,409
Real estate:
Construction																—		—		—		—		—		91,223		91,223
Mortgage-residential																327		—		—		34		361		65,398		65,759
Mortgage-commercial																46		8		—		4,664		4,718		704,500		709,218
Consumer:
Home equity																—		—		—		168		168		28,555		28,723
Other																96		—		2		—		98		13,427		13,525
Total															$	556	$	8	$	2	$	4,895	$	5,461	$	975,396	$	980,857


	CECL						Incurred Loss
	March 31, 2023						December 31, 2022
($ in thousands)	Non-accrual Loans with No Allowance		Non-accrual Loans with an Allowance		Total Non-accrual Loans		Non-accrual Loans
Commercial, Financial & Agriculture	$	—		45		45		29
Real Estate Construction		—		—		—		—
Real Estate Mortgage Residential		—		32		32		34
Real Estate Mortgage Commercial		3,882		162		4,044		4,664
Consumer Home Equity		—		4		4		168
Consumer Other		—		—		—		—
Total Loans	$	3,882	$	243	$	4,125	$	4,895

($ in thousands)	For the Three Months Ended March 31, 2023
Commercial	$	45
Real Estate:
Mortgage - Residential		32
Mortgage - Commercial		4,044
Consumer:
Home Equity		4
Total Loans	$	4,125

(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

($ in thousands)	Total Allowance for Credit Losses - Unfunded Commitments
Balance, December 31, 2022		—
Adjustment to allowance for unfunded commitments for adoption of ASU 2016-13		398
Provision for (release of) unfunded commitments		(16	)
Balance, March 31, 2023	$	382

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.


	June 30, 2022										March 31, 2023
	Carrying		Fair Value								Carrying		Fair Value
(Dollars in thousands)	Amount		Total		Level 1		Level 2		Level 3		Amount		Total		Level 1		Level 2		Level 3
Financial Assets:
Cash and short term investments	$	104,403	$	104,403	$	104,403	$	—	$	—	$	87,673	$	87,673	$	87,673	$	—	$	—
Available-for-sale securities												336,457		336,457		—		336,457		—
Held-to-maturity securities		233,730		229,198		3,333		225,865				223,137		213,040		—		213,040		—
Available-for-sale securities		337,254		377,254		21,920		315,334		—
Other investments, at cost		1,929		1,929		—		—		1,929		5,768		5,768		—		—		5,768
Loans held for sale		4,533		4,533		—		4,533		—		1,312		1,312		—		1,312		—
Net loans receivable		905,112		878,708		—		—		878,708		992,720		952,010		—		—		952,010
Accrued interest		4,290		4,290		4,290		—		—		4,954		4,954		4,954		—		—
Financial liabilities:
Non-interest bearing demand	$	476,024	$	476,024	$	—	$	476,024	$	—	$	458,882	$	458,882	$	—	$	458,882	$	—
Interest bearing demand deposits and money market accounts		672,306		672,306		—		672,306		—		675,732		675,732		—		675,732		—
Savings		170,557		170,557		—		170,557		—		141,713		141,713		—		141,713		—
Time deposits		150,088		150,180		—		150,180		—		143,830		143,811		—		143,811		—
Total deposits		1,468,975		1,469,068		—		1,469,068		—		1,420,157		1,420,138		—		1,420,138		—
Federal Home Loan Bank Advances												85,000		85,000		—		85,000		—
Short term borrowings		71,800		71,800		—		71,800		—		76,975		76,975		—		76,975		—
Junior subordinated debentures		14,964		14,415		—		14,415		—		14,964		12,301		—		12,301		—
Accrued interest payable		300		300		300		—		—		916		916		916		—		—

	December 31, 2021										December 31, 2022
	Carrying		Fair Value								Carrying		Fair Value
(Dollars in thousands)	Amount		Total		Level 1		Level 2		Level 3		Amount		Total		Level 1		Level 2		Level 3
Financial Assets:
Cash and short term investments	$	69,022	$	69,022	$	69,022	$	—	$	—	$	37,401	$	37,401	$	37,401	$	—	$	—
Available-for-sale securities		564,839		564,839		39,829		525,010		—		331,862		331,862		—		331,862		—
Held-to-maturity securities												228,701		213,613		—		213,613		—
Other investments, at cost		1,785		1,785		—		—		1,785		4,191		4,191		—		—		4,191
Loans held for sale		7,120		7,120		—		7,120		—		1,779		1,779		—		1,779		—
Net loans receivable		852,523		851,822		—		—		851,822		969,521		943,498		—		—		943,498
Accrued interest		3,927		3,927		3,927		—		—		5,217		5,217		5,217		—		—
Financial liabilities:
Non-interest bearing demand	$	444,688	$	444,688	$	—	$	444,688	$	—	$	461,010	$	461,010	$	—	$	461,010	$	—
Interest bearing demand deposits and money market accounts		619,057		619,057		—		619,057		—		629,763		629,763		—		629,763		—
Savings		143,765		143,765		—		143,765		—		161,770		161,770		—		161,770		—
Time deposits		153,781		154,030		—		154,030		—		132,839		132,825		—		132,825		—
Total deposits		1,361,291		1,361,540		—		1,361,540		—		1,385,382		1,385,368		—		1,385,368		—
Federal Home Loan Bank Advances												50,000		50,000		—		50,000		—
Short term borrowings		54,216		54,216		—		54,216		—		90,743		90,743		—		90,743		—
Junior subordinated debentures		14,964		15,015		—		15,015		—		14,964		13,402		—		13,402		—
Accrued interest payable		404		404		404		—		—		520		520		520		—		—

Description	June 30, 2022		(Level 1)		(Level 2)		(Level 3)		March 31, 2023		(Level 1)		(Level 2)		(Level 3)
Available- for-sale securities
US Treasury Securities	$	57,323	$	—	$	57,323	$	—	$	56,804	$	—	$	56,804	$	—
Government Sponsored Enterprises		2,189		—		2,189		—		2,127		—		2,127		—
Mortgage-backed securities		243,821		21,920		221,901		—		249,964		—		249,964		—
Small Business Administration pools		25,563		—		25,563		—		19,534		—		19,534		—
State and local government		—		—		—		—
Corporate and other securities		8,358		—		8,358		—		8,028		—		8,028		—
Total Available-for-sale securities		337,254		21,920		315,334		—		336,457		—		336,457		—
Loans held for sale		4,533		—		4,533		—		1,312		—		1,312		—
Total	$	341,787	$	21,920	$	319,867	$	—	$	337,769	$	—	$	337,769	$	—

(Dollars in thousands)
Description	December 31, 2021		(Level 1)		(Level 2)		(Level 3)		December 31, 2022		(Level 1)		(Level 2)		(Level 3)
Available- for-sale securities
US Treasury Securities	$	15,436	$	—	$	15,436	$	—	$	55,983	$	—	$	55,983	$	—
Government Sponsored Enterprises		2,501		—		2,501		—		2,074		—		2,074		—
Mortgage-backed securities		397,729		25,934		371,796		—		244,600		—		244,600		—
Small Business Administration pools		31,273		—		31,273		—		21,087		—		21,087		—
State and local government		109,848		12,896		96,952		—
Corporate and other securities		8,052		1,000		7,052		—		8,118		—		8,118		—
Total Available-for-sale securities		564,839		39,830		525,010		—		331,862		—		331,862		—
Loans held for sale		7,120		—		7,120		—		1,779		—		1,779		—
Total	$	571,959	$	39,830	$	532,130	$	—	$	333,641	$	—	$	333,641	$	—


	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