FIRST COMMUNITY CORP /SC/ (FCCO) FY 2021 MD&A

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

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

Overview

We are
headquartered in Lexington, South Carolina and serve as the bank holding company for the Bank. We engage in a general commercial
and retail banking business characterized by personalized service and local decision making, emphasizing the banking needs of
small to medium-sized businesses, professional concerns and individuals. We operate from our main office in Lexington, South Carolina,
and our 21 full-service offices located in the South Carolina counties of Lexington County (6 offices), Richland County (4 offices),
Newberry County (2 offices), Kershaw County (1 office), Aiken County (1 office), Greenville County (2 offices), Anderson County
(1 office), and Pickens County (1 office); and in the Georgia counties of Richmond County (2 offices) and Columbia County (1 office). On March 1, 2022, we announced the hiring of a team of experienced lenders in Rock Hill, South Carolina. We intend to establish a loan production office in Rock Hill, South Carolina, subject to prior notice and nonobjection from the Office of the Commissioner of Banking of South Carolina. Thereafter, we may open a full-service banking office in Rock Hill, South Carolina, subject to approval by our regulators.

The following
discussion describes our results of operations for 2021, as compared to 2020 and 2019, and also analyzes our financial condition
as of December 31, 2021, as compared to December 31, 2020. Like most community banks, we derive most of our income from interest
we receive on our loans and investments. A primary source of funds for making these loans and investments is our deposits, on
which we pay interest. Consequently, one of the key measures of our success is our amount of net interest income, or the difference
between the income on our interest-earning assets, such as loans and investments, and the expense on our interest-bearing liabilities,
such as deposits and borrowings.

We have included
a number of tables to assist in our description of these measures. For example, the “Average Balances” table shows
the average balance during 2021, 2020 and 2019 of each category of our assets and liabilities, as well as the yield we earned
or the rate we paid with respect to each category. A review of this table shows that our loans typically provide higher interest
yields than do other types of interest earning assets, which is why we intend to channel a substantial percentage of our earning
assets into our loan portfolio. Similarly, the “Rate/Volume Analysis” table helps demonstrate the impact of changing
interest rates and changing volume of assets and liabilities during the years shown. We also track the sensitivity of our various
categories of assets and liabilities to changes in interest rates, and we have included a “Sensitivity Analysis Table”
to help explain this. Finally, we have included a number of tables that provide detail about our investment securities, our loans,
and our deposits and other borrowings.

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

In addition
to earning interest on our loans and investments, we earn income through fees and other expenses we charge to our customers. We
describe the various components of this noninterest income, as well as our noninterest expense, in the following discussion. The
discussion and analysis also identifies significant factors that have affected our financial position and operating results during
the periods included in the accompanying financial statements. We encourage you to read this discussion and analysis in conjunction
with the financial statements and the related notes and the other statistical information also included in this report.

COVID-19 Pandemic

The COVID-19
pandemic and variants of the virus continue to create disruptions to the global economy and financial markets and to businesses
and the lives of individuals throughout the world. The impact of the COVID-19 pandemic and its related variants is fluid and continues
to evolve, adversely affecting many of our customers. Our business, financial condition and results of operations generally rely
upon the ability of our borrowers to repay their loans, the value of collateral underlying our secured loans, and demand for loans
and other products and services we offer, which are highly dependent on the business environment in our primary markets where
we operate and in the United States as a whole. The unprecedented and rapid spread of COVID-19 and its variants and their associated
impacts on trade (including supply chains and export levels), travel, employee productivity, unemployment, consumer spending,
and other economic activities have resulted and continue to result in less economic activity, and volatility and disruption in
financial markets.

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Commercial activity
has improved, but has not returned to the levels existing before the outbreak of the pandemic, which may result in our borrowers’
inability to meet their loan obligations. Economic pressures and uncertainties related to the COVID-19 pandemic have also resulted
in changes in consumer spending behaviors, which may negatively impact the demand for loans and other services we offer. In addition,
our loan portfolio includes customers in industries such as hotels, restaurants and assisted living facilities, all of which have
been significantly impacted by the COVID-19 pandemic. We recognize that these industries may take longer to recover as consumers
may be hesitant to return to full social interaction or may change their spending habits on a more permanent basis as a result
of the pandemic. We continue to monitor these customers closely.

In addition,
due to the COVID-19 pandemic, market interest rates declined to historical lows; however, market interest rates are expected to
increase in 2022 and future periods. The reductions in interest rates, low interest rate environment, and the other effects of
the COVID-19 pandemic have had, and are expected to continue to have, adverse effects on our business, financial condition and
results of operations.

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, including the collateral underlying certain of our loans. 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.

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

Beginning in
March 2020, we proactively offered payment deferrals for up to 90 days to our loan customers regardless of the impact of the pandemic
on their business or personal finances.  As a result of payments being resumed at the conclusion of their payment deferral
period, loans in which payments were being deferred decreased from the peak of $206.9 million to $175.0 million at June 30, 2020,
to $27.3 million at September 30, 2020, to $16.1 million at December 31, 2020, to $8.7 million at March 31, 2021, to $4.5 million
at June 30, 2021, to $4.1 million at September 30, 2021, and to zero at December 31, 2021. We had no loans on which payments have
been deferred at December 31, 2021 compared to $16.1 million at December 31, 2020.

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
December 31, 2021, 1,406 PPP loans totaling $87.0 million (840 PPP loans totaling $51.2 million originated in 2020 and 566 PPP
loans totaling $35.8 million originated in 2021) were forgiven through the SBA PPP forgiveness process.

Our asset quality
metrics as of December 31, 2021 remained sound.  At December 31, 2021, our non-performing assets were not yet materially
impacted by the economic pressures of the COVID-19 pandemic. The non-performing asset ratio was 0.09% of total assets with the
nominal level of $1.4 million in non-performing assets at December 31, 2021 compared to 0.50% and $7.0 million at December 31,
2020. The decline in the non-performing asset ratio was related to the successful resolution of several non-accrual and accruing
loans past due of 90 days or more. Non-accrual loans declined $4.3 million to $250 thousand at December 31, 2021 from $4.6 million
at December 31, 2020. We had no accruing loans past due 90 days or more at December 31, 2021 compared to $1.3 million at December
31, 2021. Loans past due 30 days or more represented 0.03% of the loan portfolio at December 31, 2021 compared to 0.23% at December
31, 2020.  The ratio of classified loans plus OREO and repossessed assets declined to 6.27% of total bank regulatory risk-based
capital at December 31, 2021 from 6.89% at December 31, 2020.  During the twelve months ended December 31, 2021, we experienced
net loan recoveries of $478 thousand and net overdraft charge-offs of $22 thousand.

We are also monitoring
the impact of the COVID-19 pandemic 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 December 31, 2021. However, because of changing economic and market conditions
affecting issuers, we may be required to recognize future impairments on the securities we hold as well as reductions in other
comprehensive income. We cannot currently determine the ultimate impact of the pandemic on the long-term value of our portfolio.

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Capital and Liquidity

Our capital remained
strong.  Each of the regulatory capital ratios for the Bank exceeds the well capitalized minimum levels currently required
by regulatory statute at December 31, 2021 and December 31, 2020. Based on our strong capital, conservative underwriting, and
internal stress testing, we expect to remain well capitalized throughout the COVID-19 pandemic. However, the Bank’s reported
regulatory capital ratios could be adversely impacted by future credit losses related to the COVID-19 pandemic. We intend to monitor
developments and potential impacts on our capital.

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

Critical Accounting Estimates

We have adopted
various accounting policies that govern the application of accounting principles generally accepted in the United States and with
general practices within the banking industry in the preparation of our financial statements. Our significant accounting policies
are described in the notes to our consolidated financial statements in this report.

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

Allowance for Loan Losses

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

As discussed
above, the CECL model will become effective for us on January 1, 2023. However, for now, we account for our allowance for loan
losses under the incurred loss model. We perform an analysis quarterly to assess the risk within the loan portfolio. The portfolio
is segregated into similar risk components for which historical loss ratios are calculated and adjusted for identified changes
in current portfolio characteristics. Historical loss ratios are calculated by product type and by regulatory credit risk classification
(See Note 4 to the Consolidated Financial Statements). The annualized weighted average loss ratios over the last 36 months for
loans classified as substandard, special mention and pass have been approximately 0.18%, 0.03% and 0.00%, respectively. The allowance
consists of an allocated and unallocated allowance. The allocated portion is determined by types and ratings of loans within the
portfolio. The unallocated portion of the allowance is established for losses that exist in the remainder of the portfolio and
compensates for uncertainty in estimating the loan losses. The allocated portion of the allowance is based on historical loss
experience as well as certain qualitative factors as explained above. The qualitative factors have been established based on certain
assumptions made as a result of the current economic conditions and are adjusted as conditions change to be directionally consistent
with these changes. The unallocated portion of the allowance is composed of factors based on management’s evaluation of
various conditions that are not directly measured in the estimation of probable losses through the experience formula or specific
allowances.

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

Income Taxes, Deferred Tax Assets,
and Deferred Tax Liabilities

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

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

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

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Financial Highlights

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

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

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Results of Operations

Year Ended December 31, 2021 and
2020

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

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Year Ended December 31, 2020 and
2019

Our net income
for the twelve months ended December 31, 2020 was $10.1 million, or $1.35 diluted earnings per common share, as compared to $11.0
million, or $1.45 diluted earnings per common share, for the twelve months ended December 31, 2019. The $872 thousand decrease
in net income between the two periods is primarily due to increases in provision for loan losses expense of $3.5 million and non-interest
expense of $2.9 million, partially offset by an increase in net interest income of $3.2 million, an increase in non-interest income
of $2.0 million, and a decrease in income tax expense of $362 thousand.

Net Interest Income

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

Year Ended December 31, 2021 and
2020

Net interest
income increased $5.3 million, or 13.1%, to $45.3 million for the twelve months ended December 31, 2021 from $40.0 million for
the twelve months ended December 31, 2020. Our net interest income has been trending up over the last two years as net interest
income totaled $45.3 million in 2021, $40.0 million in 2020, and $36.8 million in 2019. The yield on earning assets was 3.35%,
3.65%, and 4.19% in 2021, 2020, and 2019, respectively. The rate paid on interest-bearing liabilities was 0.24%, 0.46%, and 0.80%
in 2021, 2020, and 2019, respectively. The fully taxable equivalent net interest margin was 3.23% in 2021, 3.37% in 2020, and
3.65% in 2019.

Loans typically
provide a higher yield than other types of earning assets and, thus, one of our goals continues to be growing the loan portfolio
as a percentage of earning assets in order to improve the overall yield on earning assets and the net interest margin. Our average
loan portfolio (including loans held-for-sale) as a percentage of average earning assets was 62.6% in 2021, 69.7% in 2020, and
72.2% in 2019. Loans held-for-investment as a percentage of earning assets declined to 58.2% at December 31, 2021 from 65.1% at
December 31, 2020. Our loan (including loans held-for-sale) to deposit ratio on average during 2021 was 68.8%, as compared to
76.8% during 2020, and 78.7% during 2019. The loan to deposit ratio declined to 64.0% at December 31, 2021 as compared to 74.8%
at December 31, 2020. This decline was due to our deposit growth of $171.9 million exceeding our loan (including loans held-for-sale)
decline of $18.4 million and loan (excluding loans held-for-sale) growth of $19.5 million from December 31, 2020 to December 31,
2021.

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

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

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

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

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

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Year Ended December 31, 2020 and
2019

Net interest
income increased $3.2 million, or 8.6%, to $40.0 million for the twelve months ended December 31, 2020 from $36.8 million for
the twelve months ended December 31, 2019. Our net interest margin declined by 28 basis points to 3.34% during the twelve months
of 2020 from 3.62% during the twelve months of 2019. Our net interest margin, on a taxable equivalent basis, was 3.37% for the
twelve months of 2020 compared to 3.65% for the twelve months of 2019. Average earning assets increased $180.4 million, or 17.7%,
to $1.2 billion for the twelve months ended December 31, 2020 as compared to $1.0 billion in the same period of 2019. 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 loans, securities, and other short-term investments primarily due
to Non-PPP loan growth, PPP loans, organic deposit growth, and excess liquidity from PPP loan proceeds and other stimulus funds
related to the COVID-19 pandemic. The decline in net interest margin was primarily due to the Federal Reserve reducing the target
range of the federal funds rate three times totaling 75 basis points during 2019 and two times totaling 150 basis points during
the first quarter of 2020, lower yields on PPP loans, and the excess liquidity generated from PPP loan proceeds and other stimulus
funds related to the COVID-19 pandemic being deployed in lower yielding securities and other short-term investments. Lower market
rates, the competitive loan pricing environment, and the COVID-19 pandemic put downward pressure on our net interest margin during
2020.

Average loans
increased $99.7 million, or 13.6%, to $835.1 million for the twelve months of 2020 from $735.3 million for the twelve months of
2019. Average PPP loans increased $32.3 million and average Non-PPP loans increased $67.4 million to $32.3 million and $802.8
million, respectively, for the twelve months of 2020. We had no PPP loans at December 31, 2019. Average loans represented 69.7%
of average earning assets during the twelve months of 2020 compared to 72.2% of average earning assets during the twelve months
of 2019. The decline in average loans as a percentage of average earning assets was primarily due to increases in deposits of
$152.5 million and securities sold under agreements to repurchase of $14.1 million. The growth in our deposits and securities
sold under agreements to repurchase was higher than the growth in our loans, which resulted in the excess funds being deployed
in our securities portfolio and other short-term investments and to reduce our Federal Home Loan Bank advances. The yield on loans
declined 38 basis points to 4.44% in the twelve months of 2020 from 4.82% in the twelve months of 2019. The yield on PPP loans
was 3.32% and the yield on Non-PPP loans was 4.48% in the twelve months of 2020. Average securities and average other short-term
investments for the twelve months ended December 31, 2020 increased $43.3 million and $37.3 million, respectively, from the prior
year period.

The yield on
our securities portfolio declined to 2.15% for the twelve months ended December 31, 2020 from 2.58% for the same period in 2019
while the yield on our other short-term investments declined to 0.44% for the twelve months ended December 31, 2020 from 2.14%
for the same period in 2019. These declines were primarily related to the Federal Reserve reducing the target range of the federal
funds rate as described above. The yield on earning assets for the twelve months ended December 31, 2020 and 2019 was 3.65% and
4.19%, respectively. The cost of interest-bearing liabilities was at 46 basis points in the twelve months of 2020 compared to
80 basis points in the twelve months of 2019. We continue to focus on growing our pure deposits (demand deposits, interest-bearing
transaction accounts, savings deposits and money market accounts) as these accounts tend to be low-cost deposits and assist us
in controlling our overall cost of funds. In the twelve months of 2020, these deposits averaged 84.7% of total deposits as compared
to 81.1% in the same period of 2019.

48

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.

49

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

Market Risk and Interest
Rate Sensitivity

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

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

50

The following
table illustrates our interest rate sensitivity at December 31, 2021.

Interest Sensitivity Analysis

Based
on the many factors and assumptions used in simulating the effect of changes in interest rates, the following table estimates
the hypothetical percentage change in net interest income at December 31, 2021 and 2020 over the subsequent 12 months. At December
31, 2021, we are asset sensitive. As a result, our modeling reflects an increase in net interest income in a rising interest rate
environment and a reduction in net interest income in a declining interest rate environment. In a declining rate environment,
the decline in net interest income is primarily due to the current level of interest rates being paid on our interest bearing
transaction accounts as well as money market accounts. The interest rates on these accounts are at a level where they cannot be
repriced in proportion to the change in interest rates. The increase and decrease of 100 and 200 basis points, respectively, reflected
in the table below assume a simultaneous and parallel change in interest rates along the entire yield curve.

Net
Interest Income Sensitivity

During the second 12-month period
after 100 basis point and 200 basis point simultaneous and parallel increases in interest rates along the entire yield curve,
our net interest income is projected to increase 7.82% and 15.00%, respectively.

51

We perform a
valuation analysis projecting future cash flows from assets and liabilities to determine the Present Value of Equity (“PVE”)
over a range of changes in market interest rates. The sensitivity of PVE to changes in interest rates is a measure of the sensitivity
of earnings over a longer time horizon. At December 31, 2021 and 2020, the PVE exposure in a plus 200 basis point increase in
market interest rates was estimated to be 9.73% and 11.47%, respectively. The PVE exposure in a down 100 basis point decrease
was estimated to be (9.86)% at December 31, 2021 compared to (14.32)% at December 31, 2020.

Provision and Allowance
for Loan Losses

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

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

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

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

52

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

We perform an
analysis quarterly to assess the risk within the loan portfolio. The portfolio is segregated into similar risk components for
which historical loss ratios are calculated and adjusted for identified changes in current portfolio characteristics. Historical
loss ratios are calculated by product type and by regulatory credit risk classification (See Note 4 to the Consolidated Financial
Statements). The annualized weighted average loss ratios over the last 36 months for loans classified as substandard, special
mention and pass have been approximately 0.18%, 0.03% and 0.00%, respectively. The allowance consists of an allocated and unallocated
allowance. The allocated portion is determined by types and ratings of loans within the portfolio. The unallocated portion of
the allowance is established for losses that exist in the remainder of the portfolio and compensates for uncertainty in estimating
the loan losses. The allocated portion of the allowance is based on historical loss experience as well as certain qualitative
factors as explained above. The qualitative factors have been established based on certain assumptions made as a result of the
current economic conditions and are adjusted as conditions change to be directionally consistent with these changes. The unallocated
portion of the allowance is composed of factors based on management’s evaluation of various conditions that are not directly
measured in the estimation of probable losses through the experience formula or specific allowances. The overall risk as measured
in our three-year lookback, both quantitatively and qualitatively, does not encompass a full economic cycle. Net charge-offs in
the 2009 to 2011 period averaged 63 basis points annualized in our loan portfolio. Over the most recent three-year period, our
net charge-offs have experienced a modest net recovery. We currently believe the unallocated portion of our allowance represents
potential risk associated throughout a full economic cycle; however, the COVID-19 pandemic and the government and economic responses
thereto may materially affect the risk within our loan portfolios.

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

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

53

We continue to
monitor the impact of the COVID-19 pandemic on our customer base of local businesses and professionals. There were seven loans
totaling $250 thousand (0.03% of total loans) included on non-performing status (non-accrual loans and loans past due 90 days and
still accruing) at December 31, 2021. All seven of these loans were on non-accrual status. The largest loan included on non-accrual
status is in the amount of $103 thousand. The average balance of the remaining six loans on non-accrual status is approximately $25
thousand with a range between $3 and $87 thousand, and the majority of these loans are secured by first mortgage liens. Furthermore,
we had $1.4 million in accruing trouble debt restructurings, or TDRs, at December 31, 2021 compared to $1.6 million at December 31,
2020. We consider a loan impaired when, based on current information and events, it is probable that we will be unable to collect
all amounts due, including both principal and interest, according to the contractual terms of the loan agreement. Nonaccrual loans
and accruing TDRs are considered impaired. At December 31, 2021, we had 10 impaired loans totaling $1.7 million compared to 23
impaired loans totaling $6.1 million at December 31, 2020. These loans were measured for impairment under the fair value of
collateral method or present value of expected cash flows method. For collateral dependent loans, the fair value of collateral
method is used and the fair value is determined by an independent appraisal less estimated selling costs. At December 31, 2021, we
had loans totaling $235 thousand that were delinquent 30 days to 89 days representing 0.03% of total loans compared to $665 thousand
or 0.08% of total loans at December 31, 2020.

Beginning in
March 2020, we proactively offered payment deferrals for up to 90 days to our loan customers regardless of the impact of the pandemic
on their business or personal finances.  As a result of payments being resumed at the conclusion of their payment deferral
period, loans in which payments were being deferred decreased from the peak of $206.9 million to $175.0 million at June 30, 2020,
to $27.3 million at September 30, 2020, to $16.1 million at December 31, 2020, to $8.7 million at March 31, 2021, to $4.5 million
at June 30, 2021, to $4.1 million at September 30, 2021, and to zero at December 31, 2021. We had no loans on which payments have
been deferred at December 31, 2021 compared to $16.1 million at December 31, 2020. The $16.1 million in deferrals at December
31, 2020 consisted of seven loans on which only principal was being deferred. Our management continuously monitors non-performing,
classified and past due loans to identify deterioration regarding the condition of these loans and given the ongoing and uncertain
impact of the COVID-19 pandemic, we will continue to monitor our loan portfolio for potential risks.

54

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

Allowance for Loan Losses

55

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

56

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

Allocation of the Allowance for
Loan Losses

Loans
acquired in the Cornerstone transaction are excluded from our evaluation of the adequacy of the allowance as they were measured
at fair value at acquisition. The assumptions used in this evaluation included a credit component and an interest rate component.
These loans amounted to approximately $9.5 million and $16.7 million at December 31, 2021 and 2020, respectively.

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

Non-interest Income and
Expense

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

Non-interest
income during the twelve months ended December 31, 2021 was $13.9 million compared to $13.8 million during the same period in
2020. Deposit service charges declined $144 thousand during the twelve months ended December 31, 2021 compared to the same period
in 2020 primarily due to lower overdraft fees. Mortgage banking income declined by $1.2 million to $4.3 million during the twelve
months ended December 31, 2021 from $5.6 million during the same period in 2020 due to a reduction in mortgage production partially
offset by an increase in the gain-on-sale margin. Mortgage production during the twelve months ended December 31, 2021 was $142.1
million compared to $199.3 million during the same period in 2020. The gain on sale margin was 3.04% in the twelve months ended
December 31, 2021 compared to 2.79% during the same period in 2020. The gain on sale margin was limited during 2020 and the first
quarter of 2021 as we worked on certain loans not yet sold, in an effort to resolve processing and delivery issues. We anticipate
the future gain-on-sale margin will be approximately 3.25%.

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

57

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

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

Non-interest
income was $13.8 million in 2020 as compared to $11.7 million during the same period in 2019. Deposit service charges decreased
$528 thousand during the twelve months of 2020 as compared to the same period in 2019 primarily due to customers holding higher
balances in their deposit accounts due to proceeds from PPP loans and other stimulus funds related to the COVID-19 pandemic. Mortgage
banking income increased by $1.0 million from $4.6 million in 2019 to $5.6 million in 2020. Mortgage production including loans
held-for-sale and portfolio loans in 2020 was $199.3 million as compared to $139.7 million in the same period of 2019. With the
decline in mortgage interest rates, refinance activity increased during 2020 and represented 55.5% of production. The gain on
sale margin declined to 2.79% from 3.26% due to disruptions in the mortgage market causing certain loans not to be sold. As capacity
rebuilds, this issue will be mitigated. Investment advisory fees increased $699 thousand to $2.7 million in 2020 from $2.0 million
in 2019. Total assets under management, or AUM, were $502 million at December 31, 2020 as compared to $370 million at December
31, 2019. Management continues to focus on increasing both the mortgage banking income as well as the investment advisory fees
and commissions. Gain on sale of securities was $99 thousand in 2020 compared to $136 thousand in 2019. Gain on sale of other
assets was $147 thousand in 2020 compared to a $3 thousand loss on sale of other assets in 2019. The $147 thousand gain on sale
of other assets in 2020 is primarily due to the sale of an other real estate owned property. The $311 thousand in non-recurring
BOLI income was due to insurance benefits on two former members of the boards of directors of acquired banks who passed away during
the third quarter of 2020. Noninterest income other increased $154 thousand to $3.8 million in 2020 from $3.7 million in 2019
primarily due to increases in ATM debit card income and recurring BOLI income.

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

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

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

58

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

Non-interest
expense increased $2.9 million to $37.5 million in 2020 from $34.6 million in 2019 primarily due to increases in salaries and
benefits expense, FDIC assessments, other real estate owned expense, data processing expense, insurance, legal and professional
fees, and COVID-19 related expenses partially offset by lower equipment expense, marketing and public relations, amortization
of intangibles, telephone expense, subscriptions, and loss on limited partnership interest. Salary and benefit expense increased
$2.8 million from $21.2 million in 2019 to $24.0 million in 2020 primarily due to increased production and new hires in the mortgage
line of business, normal salary adjustments, temporary bonuses related to the COVID-19 pandemic paid to certain employees, and
the opening of our full-service de novo office in June 2019 in Evans, Georgia in Columbia County, a suburb of Augusta, Georgia,
which was partially offset by a reduction in salaries and benefits related to deferred origination costs on PPP loans originated
in 2020. We had 244 full time equivalent employees at December 31, 2020 compared to 237 at December 31, 2019. Furthermore, we
incurred COVID-19 related expenses in occupancy expense for additional cleaning of our offices and personal protective equipment
for our employees and offices and in equipment expense for laptops and other technology to promote a remote work environment.
FDIC assessments increased $347 thousand due to a higher assessment rate in 2020 related to a reduction in our leverage ratio
and an increase in our assessment base due to higher average assets. Both the reduction in our leverage ratio and the increase
in our assessment base were partially related to PPP loans and the excess liquidity generated from PPP loan proceeds and other
stimulus funds related to the COVID-19 pandemic. Furthermore, we received more FDIC small bank assessment credits during the twelve
months in 2019 compared to the twelve months in 2020. The FDIC small bank assessment credits were fully utilized during the first
quarter of 2020. Other real estate owned expense increased $120 thousand in 2020 compared to 2019 primarily due to write-downs
on several other real estate owned properties.

Non-interest
expense, other increased $159 thousand in 2020 as compared to the same period in 2019 primarily due to higher data processing
expense, which includes ATM debit card expense, insurance, and legal and professional fees.

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

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

59

Income Tax Expense

Our income tax
expense for 2021 was $4.2 million as compared to income tax expense for the year ended December 31, 2020 of $2.5 million and $2.9
million for the year ended December 31, 2019 (see Note 14 “Income Taxes” to the Consolidated Financial Statements
for additional information). We recognize deferred tax assets for future deductible amounts resulting from differences in the
financial statement and tax bases of assets and liabilities and operating loss carry forwards. The deferred tax assets are established
based on the amounts expected to be paid/recovered at existing tax rates. A valuation allowance is established to reduce the deferred
tax asset to the level that it is more likely than not that the tax benefit will be realized. As a result of our current level of tax-exempt securities in our investment portfolio and our BOLI holdings,
assuming the current corporate rate remains unchanged, our effective tax rate is expected to be approximately 21.25% to 21.75%.

Financial Position

Assets totaled
$1.6 billion at December 31, 2021 and $1.4 billion at December 31, 2020. Loans (excluding loans held-for-sale) increased $19.5
million to $863.7 million at December 31, 2021 from $844.2 million at December 31, 2020.

Total loan production
excluding PPP loans and a PPP related credit facility was $217.1 million during the twelve months ended December 31, 2021 compared
to $177.1 million during the same period in 2020. Loans held-for-sale declined to $7.1 million at December 31, 2021 from $45.0
million at December 31, 2020 due to an improvement in mortgage processing, which has resulted in a reduction in the number of
days to sell loans to investors, and the movement of 30 loans totaling $7.6 million to loans held-for-investment. Mortgage production
was $142.1 million during the twelve months ended December 31, 2021 compared to $199.3 million during the same period in 2020.
The loan-to-deposit ratio (including loans held-for-sale) at December 31, 2021 and December 31, 2020 was 64.0% and 74.8%, respectively.
The loan-to-deposit ratio (excluding loans held-for-sale) at December 31, 2021 and December 31, 2020 was 63.4% and 71.0%, respectively.
Investment securities increased to $566.6 million at December 31, 2021 from $361.9 million at December 31, 2020. Other short-term
investments increased to $47.0 million at December 31, 2021 from $46.1 million at December 31, 2020. The increases in investments
and other short-term investments are primarily due to organic deposit growth, excess liquidity from customer’s PPP loan
proceeds and other stimulus funds related to the COVID-19 pandemic, and from forgiven PPP loans.

Non-PPP loans
increased $60.3 million to $862.2 million at December 31, 2021 from $801.9 million at December 31, 2020. PPP loans declined $40.8
million to $1.5 million at December 31, 2021 from $42.2 million at December 31, 2020. PPP loans totaled $1.5 million gross of
deferred fees and costs and $1.5 million net of deferred fees and costs at December 31, 2021. The $55 thousand in PPP deferred
fees net of deferred costs at December 31, 2021 will be recognized as interest income over the remaining life of the PPP loans.

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
December 31, 2021, 1,406 PPP loans totaling $87.0 million (840 PPP loans totaling $51.2 million originated in 2020 and 566 PPP
loans totaling $35.8 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.

Deposits increased
$171.9 million to $1.4 billion at December 31, 2021 compared to $1.2 billion at December 31, 2020.  Our pure deposits, which are
defined as total deposits less certificates of deposits, increased $177.9 million to $1.2 billion at December 31, 2021 from $1.1 billion
at December 31, 2020.  We continue to focus on growing our pure deposits as a percentage of total deposits in order to better manage
our overall cost of funds. We had no brokered deposits and no listing services deposits at December 31, 2021.  Our securities sold
under agreements to repurchase, which are related to our customer cash management accounts, increased $13.3 million to $54.2 million
at December 31, 2021 from $40.9 million at December 31, 2020.

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Total shareholders’
equity increased $4.7 million, or 3.4%, to $141.0 million at December 31, 2021 from $136.3 million at December 31, 2020. The $4.7
million increase was due to an $11.9 million increase in retention of earnings less dividends paid, a $0.3 million increase due
to employee and director stock awards, and a $0.4 million increase due to dividend reinvestment plan (DRIP) purchases partially
offset by an $8.0 million reduction in accumulated other comprehensive income. The decline in accumulated other comprehensive
income was due to an increase in longer-term market interest rates, which resulted in a reduction in the net unrealized gains
in our investment securities portfolio.

During the third
quarter of 2019, we completed the repurchase of 300,000 shares of our outstanding common stock at a cost of approximately $5.6
million with an average price per share of $18.79.  We also announced during the third quarter of 2019 the approval of a new
repurchase plan of up to 200,000 shares of our outstanding common stock.  No share repurchases were made under this repurchase
plan prior to its expiration on December 31, 2020. On April 12, 2021, we announced that our Board of Directors approved the
repurchase of up to 375,000 shares of our common stock (the “2021 Repurchase Plan”), which represents approximately 5%
of our 7,548,638 shares outstanding as of December 31, 2021. No share repurchases have been made under the 2021 Repurchase Plan as
of December 31, 2021. The 2021 Repurchase Plan expires at the market close on March 31, 2022. We intend to seek approval in 2022 for
a new repurchase plan of up to 375,000 shares of common stock to replace the expiring 2021 Repurchase Plan.

Earning Assets

Loans and loans held for
sale

Loans typically
provide higher yields than the other types of earning assets. During 2021, loans accounted for 62.6% of average earning assets.
The loan portfolio (including held-for-sale) averaged $889.0 million in 2021 as compared to $835.1 million in 2020. Quality loan
portfolio growth continued to be a strategic focus of ours in 2021. However, with the higher loan yields, there are inherent credit
and liquidity risks, which we attempt to control and counterbalance. One of our goals as a community bank continues to be to grow
our assets through quality loan growth by providing credit to small and mid-size businesses, as well as individuals within the
markets we serve. In 2021, we funded new loans (excluding loans originated for sale, PPP loans, and a PPP related credit facility)
of approximately $217.1 million, as compared to $177.1 million in 2020. We originated $37.3 million in PPP loans in 2021; and $51.7 million in PPP loans and $10.0 million
in a PPP related credit facility in 2020. PPP loans net of deferred fees and costs were $1.5 million and the PPP related credit
facility was $0 at December 31, 2021 compared to $42.2 million and $5.2 million, respectively, at December 31, 2020. We remain
committed to meeting the credit needs of our local markets, but adverse national and local economic conditions, as well as deterioration
of our asset quality, could significantly impact our ability to grow our loan portfolio. Significant increases in regulatory capital
expectations beyond the traditional “well capitalized” ratios and significantly increased regulatory burdens could
impede our ability to leverage our balance sheet and expand the loan portfolio.

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

In the
context of this discussion, a real estate mortgage loan is defined as any loan, other than loans for construction purposes, secured
by real estate, regardless of the purpose of the loan. We follow the common practice of financial institutions in our market area
of obtaining a security interest in real estate whenever possible, in addition to any other available collateral. This collateral
is taken to reinforce the likelihood of the ultimate repayment of the loan and tends to increase the magnitude of the real estate
loan components. Generally, we limit the loan-to-value ratio to 80%. The principal components of our loan portfolio at year-end
2021 and 2020 were commercial mortgage loans in the amount of $617.5 million and $573.3 million, respectively, representing 71.5%
and 67.9% of the portfolio, respectively, excluding loans held for sale. Significant portions of these commercial mortgage loans
are made to finance owner-occupied real estate. We continue to maintain a conservative philosophy regarding our underwriting guidelines,
and believe it will reduce the risk elements of the loan portfolio through strategies that diversify the lending mix.

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

The repayment
of loans in the loan portfolio as they mature is a source of liquidity. The following table sets forth the loans maturing within
specified intervals at December 31, 2021.

Loan Maturity Schedule
and Sensitivity to Changes in Interest Rates

Loans
maturing after one year with:

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.

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Investment
Securities

Our investment
securities portfolio is a significant component of our total earning assets. Total investment securities averaged $456.8 million
in 2021, as compared to $300.9 million in 2020, which represents 32.2% and 25.1% of the average earning assets for the years ended
December 31, 2021 and 2020, respectively. At December 31, 2021 and 2020, our investment securities portfolio amounted to $564.8
million and $359.9 million, respectively. The increase in investment securities in 2021 is 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.

At December
31, 2021, the estimated weighted average life of our investment portfolio was approximately 6.8 years, duration of approximately
3.6, and a weighted average tax equivalent yield of approximately 1.73%. At December 31, 2020, the estimated weighted average
life of our investment portfolio was approximately 5.3 years, duration of approximately 3.7, and a weighted average tax equivalent
yield of approximately 2.16%.

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

The following
table shows the investment portfolio composition.

We hold other investments carried
at cost totaling $1.8 million and $2.1 million at December 31, 2021 and 2020, respectively, which includes our investment in FHLB stock.
Our investment in FHLB stock amounted to $698.4 thousand and $1.1 million at December 31, 2021 and 2020, respectively.

Investment
Securities Maturity Distribution and Yields

The following
table shows, at amortized cost, the expected maturities and weighted average yield, which is calculated using amortized cost as
the weight and tax-equivalent book yield, of securities held at December 31, 2021:

Short-Term Investments

Short-term investments, which consist
of federal funds sold, securities purchased under agreements to resell and interest bearing deposits, averaged $73.4 million in 2021,
as compared to $62.9 million in 2020. The increase in short-term investments in 2021 is primarily due to organic deposit growth, excess
liquidity from customer’s PPP loan proceeds and other stimulus funds related to the COVID-19 pandemic, and forgiven PPP loans. We
maintain the majority of our short-term overnight investments in our account at the Federal Reserve rather than in federal funds at various
correspondent banks due to the lower regulatory capital risk weighting. At December 31, 2021, short-term investments including funds on
deposit at the Federal Reserve totaled $45.9 million. These funds are an immediate source of liquidity and are generally invested in an
earning capacity on an overnight basis.

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Deposits and Other Interest-Bearing
Liabilities

Deposits.
Average deposits were $1.3 billion during 2021, compared to $1.1 billion during 2020. Average interest-bearing deposits were
$869.7 million during 2021, as compared to $743.4 million during 2020. These increases are primarily due to organic deposit growth
and PPP loan proceeds and other stimulus funds related to the COVID-19 pandemic being held in customers deposit accounts.

The following
table sets forth the deposits by category:

Large certificate
of deposit customers, whom we identify as those of $100 thousand or more, tend to be extremely sensitive to interest rate levels,
making these deposits less reliable sources of funding for liquidity planning purposes than core deposits. Core deposits, which
exclude time deposits of $100 thousand or more, provide a relatively stable funding source for the loan portfolio and other earning
assets. Core deposits were $1.3 billion and $1.1 billion at December 31, 2021 and 2020, respectively. Time deposits greater than
$250 thousand, the FDIC deposit insurance coverage limit, amounted to $27.9 million and $28.6 million at December 31, 2021 and
December 31, 2020, respectively.

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

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

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

Borrowed
funds. Borrowed funds consist of fed funds purchased, securities sold under agreements to repurchase, FHLB advances and long-term debt as 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 $62.2 million, $49.5 million and $34.2 million during 2021, 2020 and 2019, respectively. The maximum month-end
balances during 2021, 2020 and 2019 were $72.4 million, $73.0 million and $36.7 million, respectively. The average rates paid
during these periods were 0.14%, 0.38% and 1.12%, respectively. The balances of securities sold under agreements to repurchase
were $54.2 million and $40.9 million at December 31, 2021 and 2020, 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. As a member of the FHLB, the Bank has access to advances from the FHLB for various terms and
amounts. During 2021 and 2020, the average outstanding advances amounted to $0 and $2.0 million, respectively.

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There
were no FHLB Advances scheduled to mature as of December 31, 2021 and 2020:

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.

Capital
Adequacy and Dividend Policy

Capital
Adequacy

Our capital remained
strong and exceeded the well-capitalized regulatory requirements at December 31, 2021.  Total shareholders’ equity
increased $4.7 million, or 3.4%, to $141.0 million at December 31, 2021 from $136.3 million at December 31, 2020. The $4.7 million
increase was due to an $11.9 million increase in retention of earnings less dividends paid, a $0.3 million increase due to employee
and director stock awards, and a $0.4 million increase due to dividend reinvestment plan (DRIP) purchases partially offset by
a $8.0 million reduction in accumulated other comprehensive income. The decline in accumulated other comprehensive income was
due to an increase in longer-term market interest rates, which resulted in a reduction in the net unrealized gains in our investment
securities portfolio.

During the third
quarter of 2019, we completed the repurchase of 300,000 shares of our outstanding common stock at a cost of approximately $5.6
million with an average price per share of $18.79.  We also announced during the third quarter of 2019 the approval of a
new repurchase plan of up to 200,000 shares of our outstanding common stock.  No share repurchases were made under the new
repurchase plan prior to its expiration on December 31, 2020. On April 12, 2021, we announced that our Board of Directors approved
the repurchase of up to 375,000 shares of our common stock (the “2021 Repurchase Plan”), which represents approximately
5% of our 7,548,638 shares outstanding as of December 31, 2021. No share repurchases have been made under the 2021 Repurchase
Plan as of December 31, 2021. The 2021 Repurchase Plan expires at the market close on March 31, 2022. We intend to seek approval in 2022 for a new repurchase plan of up to 375,000
shares of common stock to replace the expiring 2021 Repurchase Plan.

During each
quarter in 2019, we paid an $0.11 per share dividend on our common stock. During each quarter in 2020 and 2021, we paid an $0.12 per
share dividend on our common stock. On January 19, 2022, we announced a $0.13 per share dividend payable on February 15, 2022 to
shareholders of record of our common stock on February 1, 2022.

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

The following
table shows the return on average assets (net income divided by average total assets), return on average equity (net income divided
by average equity), and equity to assets ratio for the three years ended December 31, 2021.

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

The Bank
exceeded the regulatory capital ratios at December 31, 2021 and 2020, as set forth in the following table:

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Dividend
Policy

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

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

Liquidity Management

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

As of December
31, 2021, we have not experienced any unusual pressure on our deposit balances or our liquidity position as a result of the COVID-19
pandemic. We had no brokered deposits and no listing services deposits at December 31, 2021. We believe that we have ample
liquidity to meet the needs of our customers through our low cost deposits, our ability to borrow against approved lines of credit
(federal funds purchased) from correspondent banks, and our ability to obtain advances secured by certain securities and loans
from the FHLB.

We generally maintain
a high level of liquidity and adequate capital, which along with continued retained earnings, we believe will be sufficient to fund the
operations of the Bank for at least the next 12 months.   Furthermore, we believe that we will have access to adequate liquidity
and capital to support the long-term operations of the Bank. Shareholders’ equity declined to 8.9% of total assets at December
31, 2021 from 9.8% at December 31, 2020 due to total asset growth of $189.1 million compared to total shareholders’ equity growth
of $4.7 million. The growth in total assets was primarily due to excess liquidity from customer’s PPP loans, other stimulus funds
related to the COVID-19 pandemic, organic deposit growth, and loan growth. The $4.7 million increase in shareholder’s equity
was due to an $11.9 million increase
in retention of earnings less dividends paid, a $0.3 million increase due to employee and director stock awards, and a $0.4 million increase
due to dividend reinvestment plan (DRIP) purchases partially offset by a $8.0 million reduction in accumulated other comprehensive income.
The decline in accumulated other comprehensive income was due to an increase in longer-term market interest rates, which resulted in
a reduction in the net unrealized gains in our investment securities portfolio. The Bank maintains federal funds purchased lines in the
total amount of $60.0 million with two financial institutions, although these were not utilized at December 31, 2021 and $10 million
through the Federal Reserve Discount Window. The FHLB of Atlanta has approved a line of credit of up to 25% of the Bank’s assets,
which, when utilized, is collateralized by a pledge against specific investment securities and/or eligible loans.

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Through the operations
of our Bank, we have made contractual commitments to extend credit in the ordinary course of our business activities. These commitments
are legally binding agreements to lend money to our customers at predetermined interest rates for a specified period of time.
At December 31, 2021, we had issued commitments to extend unused credit of $137.4 million, including $42.9 million in unused home
equity lines of credit, through various types of lending arrangements. At December 31, 2020, we had issued commitments to extend
unused credit of $142.6 million, including $42.3 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.
Although uncertain, we may encounter stress on liquidity management as a direct result of the COVID-19 pandemic and the Bank’s
prior participation in the PPP as a participating lender. We had PPP loans totaling $1.5 million gross of deferred fees and costs
and $1.5 million net of deferred fees and costs at December 31, 2021 compared to $43.3 million gross of deferred fees and costs
and $42.2 million net of deferred fees and costs at December 31, 2020. As customers manage their own liquidity stress, we could
experience an increase in the utilization of existing lines of credit.

Off-Balance Sheet Arrangements

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

Impact of Inflation

Unlike
most industrial companies, the assets and liabilities of financial institutions such as the Company and the Bank are primarily
monetary in nature. Therefore, interest rates have a more significant effect on our performance than do the effects of changes
in the general rate of inflation and change in prices. In addition, interest rates do not necessarily move in the same direction
or in the same magnitude as the prices of goods and services. As discussed previously, we continually seek to manage the relationships
between interest sensitive assets and liabilities in order to protect against wide interest rate fluctuations, including those
resulting from inflation.