FIRST COMMUNITY CORP /SC/ (FCCO)

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

CAUTIONARY STATEMENT REGARDING
FORWARD-LOOKING STATEMENTS

This report,
including information included or incorporated by reference in this report, contains statements which constitute “forward-looking
statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. Forward-looking statements may relate to, among other matters, the financial condition, results of operations, plans,
objectives, future performance, and business of our company, including statements regarding the anticipated timing and benefits
of leadership transitions, consulting arrangements with former executives, and the expected roles and responsibilities of the
company’s executive officers. Forward-looking statements are based on many assumptions and estimates and are not guarantees
of future performance. Our actual results may differ materially from those anticipated in any forward-looking statements, as they
will depend on many factors about which we are unsure, including many factors which are beyond our control. The words “may,”
“approximately,” “is likely,” “would,” “could,” “should,” “will,”
“expect,” “anticipate,” “predict,” “project,” “potential,” “continue,”
“assume,” “believe,” “intend,” “plan,” “forecast,” “goal,”
“positions,” “forward,” “future,” and “estimate,” as well as similar expressions,
are meant to identify such forward-looking statements. Potential risks and uncertainties that could cause our actual results to
differ materially from those anticipated in our forward-looking statements include, without limitation, those described under
the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2025 as filed with the
U.S. Securities and Exchange Commission (the “SEC”) on March 16, 2026 and the following:

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Because
of these and other risks and uncertainties, our actual future results may be materially different from the results indicated by
any forward-looking statements. For additional information with respect to factors that could cause actual results to differ from
the expectations stated in the forward-looking statements, see “Risk Factors” under Part I, Item 1A of our Annual
Report on Form 10-K for the year ended December 31, 2025. In addition, our past results of operations do not necessarily indicate
our future results. Therefore, we caution you not to place undue reliance on our forward-looking information and statements.

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

Overview

The following
discussion describes our results of operations for the three and six months ended June 30, 2026, as compared to the three and
six months ended June 30, 2025, and analyzes our financial condition as of June 30, 2026 as compared to December 31, 2025. Like
most community banks, we derive most of our income from interest we receive on our loans and investments. Our primary sources
of funds for making these loans and investments are our deposits and borrowings, on which we pay interest. Consequently, one of
the key measures of our success is our amount of net interest income, or the difference between the income on our interest-earning
assets, such as loans and investments, and the expense on our interest-bearing liabilities, such as deposits and borrowings. Another
key measure is the spread between the yield we earn on our interest-earning assets and the rate we pay on our interest-bearing
liabilities. There are risks inherent in all loans, so we maintain an allowance for credit losses to absorb our estimate of expected
credit losses on existing loans that may become uncollectible. We establish and maintain this allowance by recording a provision
for or release of credit losses against our earnings. In the following section, we have included a detailed discussion of this
process.

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

The following
discussion and analysis 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.

Unless the context
requires other

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

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

Overview

We are headquartered
in Lexington, South Carolina and serve as the bank holding company for the Bank. We engage in a general commercial and retail
banking business characterized by personalized service and local decision making, emphasizing the banking needs of small to medium-sized
businesses, professionals and individuals. We operate from our main office in Lexington, South Carolina, and our 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), Pickens
County (1 office), and York County (1 office); and in the Georgia counties of Richmond County (1 office) and Columbia County (1
office).

The following
discussion describes our results of operations for 2025, as compared to 2024 and 2023, and also analyzes our financial condition
as of December 31, 2025, as compared to December 31, 2024. 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 2025, 2024 and 2023 of each category of our assets and liabilities, as well as the yield we earned
or the rate we paid with respect to each category. A review of this table shows that our loans typically provide higher interest
yields than do other types of interest earning assets, which is why we intend to channel a substantial percentage of our earning
assets into our loan portfolio. Similarly, the “Rate/Volume Analysis” table helps demonstrate the impact of changing
interest rates and changing volume of assets and liabilities during the years shown. We also track the sensitivity of our various
categories of assets and liabilities to changes in interest rates, and we have included a “Sensitivity Analysis Table”
to help explain this. Finally, we have included a number of tables that provide detail about our investment securities, our loans,
our deposits and our borrowings.

There are risks inherent
in all loans, so we maintain an allowance for credit losses to absorb expected losses. We establish and maintain this allowance
by charging a provision for credit losses against our operating earnings. In the following section, we have included a detailed discussion
of this process, as well as several tables describing our allowance for credit 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.

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 credit losses,
income taxes and deferred tax assets and liabilities, goodwill and other intangible assets, and derivative instruments 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.

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Allowance for Credit Losses

As of
January 1, 2023, we adopted Financial Accounting Standards Board (“FASB”) Accounting Standard Update (“ASU”)
2016-13 Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASC
326”), which changed the methodology, accounting policies and inputs used in determining the allowance for credit losses
(“ACL”). We believe the allowance for credit 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 credit losses represents our best estimate of credit losses on financial assets. The allowance for credit losses is assessed
at least quarterly and adjustments are recorded in the provision for credit losses. These losses are estimated using historical
loss rates and a projection of reasonable and supportable macroeconomic forecast, combined with additional qualitative factors.
At December 31, 2025 and 2024, we held an allowance for credit losses for our held-to-maturity investment securities, our loans
held-for-investment and our unfunded commitments that are not unconditionally cancelable.

The allowance
for credit losses represents an amount which we believe will be adequate to absorb expected losses on existing financial assets
that may become uncollectible. Our judgment as to the adequacy of the allowance for credit losses is based on assumptions about
future events, which we believe to be reasonable, but which may or may not prove to be accurate. There can be no assurance that
charge-offs of financial assets in future periods will not exceed the allowance for credit losses as estimated at any point in
time or that provisions for credit losses will not be significant to a particular accounting period.

The allowance
for credit losses represents management’s best estimate for our expected losses at December 31, 2025 and 2024, but significant
downturns in circumstances relating to asset quality and economic conditions could result in a requirement for additional allowance
for credit losses. Likewise, an upturn in asset quality and improved economic conditions may allow a reduction in the required
allowance for credit losses. 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 credit
losses. Such agencies may require us to recognize additions to the allowance for credit losses 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 credit 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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Goodwill and Other Intangible
Assets

Goodwill
represents the cost in excess of fair value of the net assets we acquired (including identifiable intangibles) in purchase transactions.
Other intangible assets represent premiums paid for acquisitions of core deposits (core deposit intangibles).

We
test our goodwill for impairment by evaluating whether the carrying amount exceeds the asset’s fair value. This test is
done annually or more frequently if events and circumstances indicate the asset might be impaired.

Derivative Instruments

We
utilize derivative instruments to manage risks such as interest rate risk or market risk. Our Derivatives Policy prohibits using
derivatives for speculative purposes.

Accounting
for derivatives differs significantly depending on whether a derivative is designated as an accounting hedge, which is a trans

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