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Item 7. Management’s Discussion and Analysis

2023-02-13 compared with 2022-03-04 · 333 added, 441 removed, 641 unchanged (55% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Management’s Discussion and

Analysis of Financial Condition and Results of Operations

The following discussion and analysis identifies

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of $3.61 and $5.85 for the years ended December 31, 2022 and 2021, respectively.

The increase in net income resulted primarily from a

decrease in our provision for loan losses and an increase in net interest income, partially offset by a decrease in noninterest income

and an increase in income tax expense.

The decrease in net income resulted primarily from an

increase in our provision for credit losses, a decrease in noninterest income and an increase in noninterest expenses, partially offset

by an increase in net interest income.

In addition, our net income available to shareholders was $18.3 million, or EPS of $2.34 for the

year ended December 31, 2020.

Our mortgage banking segment reported pre-tax income

of $3.8 million and $11.1 million for the years ended December 31, 2021 and 2020, respectively.

Noninterest income, which consists mainly

of realized and unrealized gains associated with the fair value of commitments and loans held for sale, was $11.4 million as compared

to $19.8 million for the years ended December 31, 2021 and 2020, respectively.

The $8.4 million decrease during the 2021 period was driven

by a decline in sales activity combined with a decrease in the fair value of derivatives associated with mortgage loan commitments.

expense consists mainly of salaries, commissions and benefits for mortgage employees, professional fees and outside services and data

processing costs.

Noninterest expense was $8.8 million and $9.9 million for the years ended December 31, 2021 and 2020, respectively.

The $1.1 million decrease during 2021 was driven by a decrease in salaries and benefits expense primarily related to commissions paid

on sales activity.

COVID-19 UPDATE

Our historically careful underwriting practices

and diverse loan portfolio has helped minimize the adverse impact of the pandemic on the Company.

In addition, the combination of the

vaccine rollout, government stimulus payments, and reduced spending during the pandemic are likely contributing factors mitigating the

impact of the pandemic on our business, financial condition, results of operations, and our clients as of December 31, 2021.

as economic forecasts improved in 2021, we recaptured a portion of our provision for loan losses, compared with higher provision expense

However, there are continuing concerns that indicate a slower return to pre-pandemic routines, such as concerns relate to increases

in new COVID-19 cases, hospitalizations and deaths leading to additional government imposed restrictions;

refusals to receive the vaccine

along with concerns related to new strains of the virus;

supply chain issues remaining unresolved longer than anticipated;

labor shortages

and wage increases continuing to impact many industries;

consumer confidence and spending falls;

and rising geopolitical tensions.

the ongoing and dynamic nature of the circumstances surrounding the pandemic, it is difficult to predict its future adverse financial

impact to the

Company, although we expect to continue to be impacted

by the pandemic in 2022.

Specifically, we expect the following balance sheet and income statement categories could be affected:

our net interest income and net interest margin may

continue to be negatively affected by the low interest rate environment until the level of general interest rates rise;

although the economy has experienced a certain level

of recovery in 2021, economic assumptions used to calculate our allowance for loan losses may deteriorate causing us to increase our allowance,

which may be exacerbated by our adoption of CECL, expected on January 1, 2022, which is anticipated to create more volatility in the level

of our allowance, as compared to the “incurred loss” standard that we currently use.

Today, the majority of our team has returned to

working in the office at this time;

however, we maintain the ability to shift to working remotely as needed.

Our offices operate as they

did prior to the COVID-19 pandemic with in-person meetings with clients.

We believe this strategy, combined with our digital technology,

has been extremely effective in serving our clients, and allowed us to consolidate our three Columbia, South Carolina offices into one

The sale of our two Columbia office buildings was completed on October 9, 2020.

We are focused on servicing the financial needs

of our commercial and consumer clients and have offered flexible loan payment arrangements, including short-term loan modifications or

forbearance payments, and reduced or waived certain fees on deposit accounts.

We continue to assist clients with these accommodations

on a case by case basis.

Future governmental actions may require these and other types of client-related responses.

Through December 31, 2020, we had granted deferrals

on loan payments for 864 loans, with aggregate outstanding principal balances of approximately $599.6 million as of December 31, 2020,

of which 91% were commercial loans.

As of December 31, 2020, 98% of these loans had reached the end of their deferral period and had begun

to resume normal payments.

During 2021, we granted short-term deferrals or modifications on five loans, all within our hotel portfolio,

with aggregate outstanding principal balances of $20.0 million, of which all have returned to normal payment status at December 31, 2021.

At the onset of the pandemic, we began to monitor

our commercial clients in the tourism and hospitality industries closely as we considered these industries to be at higher risk for credit

loss due to business shut-downs and travel restrictions.

As of December 31, 2020, loans related to hotels and restaurants totaled $123.5

million, of which approximately $61.5 million had received deferral arrangements and 78% had returned to normal payments.

none of these loans were past due 30 days or more or on nonaccrual status as of December 31, 2020.

During the first quarter of 2021, we

downgraded ten loans in our hotel portfolio to special mention and substandard, so that we could continue to monitor these loans for risk

of credit loss due to the pandemic.

As of December 31, 2021, loans related to hotels and restaurants totaled $124.5 million.

We will continue

to review and evaluate the current financial performance and other relevant factors in order to determine the appropriate risk ratings

for these loans.

We continue to monitor unfunded commitments through

the pandemic, including home equity lines of credit, for evidence of increased credit exposure as borrowers utilize these lines for liquidity

We are also monitoring the impact of the COVID-19

pandemic on the operations and value of our investments.

We mark to market our publicly traded investments and review our investment portfolio

for impairment at each period end.

Because of changing economic and market conditions affecting issuers, we may be required to recognize

further 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 investment portfolio.

We believe there could be potential stresses on

liquidity management as a result of the COVID-19 pandemic.

For instance, as clients manage their own liquidity stress, we could experience

an increase in the utilization of existing lines of credit.

As of December 31, 2021, all of our capital ratios,

and the Bank’s capital ratios, were in excess of all regulatory requirements.

While we believe that we have sufficient capital to

withstand an extended economic recession brought about by the COVID-19 pandemic, our reported and regulatory capital ratios could be adversely

impacted by further credit losses.

We maintain access to multiple sources of liquidity, including a $15.0 million holding company line

of credit with another bank which could be used to support capital ratios at the Bank.

SELECTED FINANCIAL DATA

The following

table sets forth our selected historical consolidated financial information for the periods and as of the dates indicated.

our balance sheet and income statement data for the years ended December 31, 2021, 2020, and 2019 from our audited consolidated financial

You should read this information together with “Management’s Discussion and Analysis of Financial Condition and

Results of Operations” and our audited consolidated financial statements and the related notes thereto, which are included elsewhere

in this Annual Report on Form 10-K.

The following table sets forth our selected historical

consolidated financial information for the periods and as of the dates indicated.

We derived our balance sheet and income statement data

for the years ended December 31, 2022, 2021, and 2020 from our audited consolidated financial statements.

You should read this information

together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited

consolidated financial statements and the related notes thereto, which are included elsewhere in this Annual Report on Form 10-K.

Years Ended December 31,

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Investment securities

Allowance for loan losses

Allowance for credit losses

FHLB advances and other borrowings

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Net interest income

Provision for loan losses

Net interest income after provision for loan losses

Provision for credit losses

Net interest income after provision for credit losses

Noninterest income

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Return on average common equity

Net interest margin,

tax equivalent (2)

Net interest margin, tax equivalent (2)

Efficiency ratio (3)

Asset Quality Ratios:

Nonperforming assets

to total loans (1)

Nonperforming assets to total loans (1)

Nonperforming assets to total assets

Net charge-offs to average total loans

Allowance for loan losses to nonperforming loans

Allowance for loan losses to total loans

Allowance for credit losses to nonperforming loans

Allowance for credit losses to total loans

Holding Company Capital Ratios:

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Leverage ratio

Common equity tier

Tangible common

Common equity tier 1 ratio (4)

Tangible common equity (5)

Growth Ratios:

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Change in earnings per common share - diluted

loans held for sale.

The tax-equivalent

adjustment to net interest income adjusts the yield for assets earning tax-exempt income to a comparable yield on a taxable basis.

expense divided by the sum of net interest income and noninterest income.

equity tier 1 ratio is calculated as the sum of common equity divided by risk-weighted assets.

equity ratio is calculated as total equity less preferred stock divided by total assets.

Footnotes to table:

Excludes loans held for sale.

The tax-equivalent adjustment to net interest income adjusts the yield for assets earning tax-exempt income to a comparable yield on a taxable basis.

Noninterest expense divided by the sum of net interest income and noninterest income.

The common equity tier 1 ratio is calculated as the sum of common equity divided by risk-weighted assets.

The common equity ratio is calculated as total equity less preferred stock divided by total assets.

CRITICAL ACCOUNTING ESTIMATES

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We have identified

the determination of the allowance for loan losses, the fair valuation of financial instruments and income taxes to be the accounting

the determination of the allowance for credit losses, the fair valuation of financial instruments and income taxes 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

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Audit Committee.

Allowance for Loan Losses

The allowance for loan loss is management’s

estimate of credit losses that will result from the inability of our borrowers to make required loan payments.

The allowance for loan

losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the

loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s

ability to repay, estimated value of any underlying collateral and prevailing economic conditions.

The allowance for loan losses is established

as losses are estimated to have occurred through a provision for loan losses charged to earnings.

The allowance consists

of general and specific components.

For purposes of establishing the general reserve, we segment the loan portfolio into homogeneous groups

of loans that possess similar risk characteristics and calculate the estimated loss based on historical loss percentages.

loans that do not share risk characteristics with other loans, such as impaired loans, are evaluated on an individual, or loan-by-loan,

basis to determine whether a reserve is required based on the estimated cash flows or fair value of a collateral dependent loan.

Our allowance

levels are influenced by loan volume, loan grade or delinquency status, historic loss experience and other economic conditions.

Allowance for Credit Losses

The allowance for credit

losses (“ACL”) is management’s current estimate of expected credit losses that will result from the inability of our

borrowers to make required loan payments, with particular applicability on our balance sheet to loans and unfunded loan commitments.

the amount of the ACL requires significant judgment and the use of estimates related to historical experience, current conditions, reasonable

and supportable forecasts, and the value of collateral on collateral-dependent loans.

Credit losses are charged against the allowance,

while recoveries of amounts previously charged off are credited to the allowance.

A provision for credit losses is charged to operations

based on management’s periodic evaluation of the factors previously mentioned, as well as other pertinent factors.

There are many factors

affecting the ACL;

some are quantitative while others require qualitative judgment.

Although management believes its process for determining

the allowance adequately considers all the potential factors that could potentially result in credit losses, the process includes subjective

elements and is susceptible to significant change.

To the extent actual outcomes are worse than management estimates, additional provision

for credit losses could be required that could adversely affect our earnings or financial position in future periods.

See Note 1 – Summary

of Significant Accounting Policies and Activities for further detailed descriptions of our estimation process and methodology related

See also Note 4 – Loans and Allowance for Credit Losses and “Provision for Credit Losses” in this MD&A.

Fair Valuation of Financial Instruments

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The $9.9 million, or 11.3%, increase in net interest

income during 2021, compared to 2020, was driven by a $249.1 million increase in average earning assets, partially offset by a $69.7 million

increase in our average interest-bearing liabilities.

The increase in average earning assets was primarily related to an increase in average

loans, while the increase in average interest-bearing liabilities was primarily driven by an increase in interest-bearing deposits.

2020, our net interest income increased $12.5 million, or 18.6%, compared to 2019, while average interest-earning assets increased $328.1

income during 2022, compared to 2021, was driven by a $525.0 million increase in average earning assets, partially offset by a $401.0

million increase in our average interest-bearing liabilities.

The increase in average earning assets was primarily related to an increase

in average loans, while the increase in average interest-bearing liabilities was primarily driven by an increase in interest-bearing deposits.

During 2021, our net interest income increased $7.9 million, or 9.9%, compared to 2020, while average interest-earning assets increased

$249.1 million and average interest-bearing liabilities increased $69.7 million.

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2022, 2021, and 2020 was $117.7 million, $93.2 million, and $94.8 million, respectively.

A significant portion of our interest income relates

to our strategy to maintain a large portion of our assets in higher earning loans compared to lower yielding investments and federal funds

A significant portion of our interest income

relates to our strategy to maintain a large portion of our assets in higher earning loans compared to lower yielding investments and federal

As such, 97.1% of our interest income related to interest on loans during 2022, compared to 98.3% during 2021 and 98.2% during

Also, included in interest income on loans was $1.7 million related to the net amortization of loan fees and capitalized loan origination

costs for the years ended December 31, 2021 and 2020 and $1.2 million for the year ended December 31, 2019.

costs for the year ended December 31, 2022 and $1.4 million for the years ended December 31, 2021 and 2020.

Interest expense was $20.0 million, $5.4 million,

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of total interest expense for 2022, compared to 28.1% for 2021, and 13.0% for 2020.

The decrease in interest expense on deposits during

2021 resulted from a decrease in deposit rates.

The increase in interest expense on deposits during

2022 resulted from an increase in the rate paid on deposit balances which relates to the Federal Reserve’s 425 basis point increase

in the federal funds rate.

We have included a number of tables to assist in

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Average Balances, Income and Expenses, Yields and

Ended December 31,

(dollars in thousands)

the Year Ended December 31,

in thousands)

Interest-earning

Federal funds sold and

interest-bearing deposits with banks

Federal funds

sold and interest-bearing deposits with banks

Investment securities, taxable

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Total earning assets

Nonearning assets

Interest-bearing

Savings & money market

Time deposits

Total interest-bearing deposits

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Shareholders’

Total liabilities

and shareholders’ equity

liabilities and shareholders’ equity

Net interest spread

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tax-equivalent adjustment (1)

The tax-equivalent adjustment to net interest income adjusts the yield for assets earning tax-exempt income

to a comparable yield on a taxable basis.

interest income

(1) The tax-equivalent adjustment to net interest income adjusts

the yield for assets earning tax-exempt income to a comparable yield on a taxable basis.

(2) Includes loans held for sale and nonaccrual loans.

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on a tax-equivalent basis (TE), was 3.19%, 3.45% and 3.48% for the years ended December 31, 2022, 2021 and 2020, respectively.

interest margin (TE) decreased three basis points in 2021, compared to 2020, due to the growth in average interest-earning assets at reduced

yields being greater than the growth in interest-bearing liabilities which were also at reduced rates.

During 2020, our net interest margin

increased five basis points, compared to 2019, as the cost of our interest-bearing liabilities decreased quicker than the yield on our

interest-earning assets due to our deposits repricing more frequently to market prices than our loan yields.

interest margin (TE) decreased 26 basis points in 2022, compared to 2021, due to higher costs on our interest-bearing liabilities, partially

offset by an increase in yield on our interest- earning assets.

During 2021, our net interest margin decreased three basis points, compared

to 2020, due to the growth in average interest-earning assets at reduced yields being greater than the growth in interest-bearing liabilities

which were also at reduced rates.

Our average interest-earning assets increased by

$249.1 million during the year ended December 31, 2021, compared to 2020, while the related yield on our interest-earning assets decreased

$525.0 million during the year ended December 31, 2022, compared to 2021, while the related yield on our interest-earning assets increased

by 17 basis points.

The increase in average interest-earning assets was driven primarily by a $207.7 million increase in average loan

balances combined with a $18.0 million increase in federal funds sold and interest-bearing deposits with banks.

In addition, the reduction

in yield on our interest earning assets was driven by a 46 basis point decrease in loan yield as our loan portfolio continues to show

the impact of the Federal Reserve’s aggregate 225 basis point interest rate reduction since August 2019.

During the year ended December

31, 2020, our average interest-earning assets increased by $328.1 million, compared to 2019, while the yield on our interest-earning assets

decreased by 58 basis points.

The increase in average interest-earning assets was driven primarily by a $293.3 million increase in average

loan balances combined with a $33.5 million increase in federal funds sold and interest-bearing deposits with banks.

In addition, our

loan yield decreased 48 basis points during 2020.

The increase in average interest-earning assets was driven by a $556.5 million increase in average loan balances,

partially offset by a $35.3 million decrease in federal funds sold and interest-bearing deposits with banks.

In addition, the increase

in yield on our interest earning assets was driven by a 144 basis point increase in the yield on our federal funds sold and other interest-bearing

deposits which repriced as the Federal Reserve increased the federal funds rate by 425 basis points during 2022.

During the year ended December 31, 2021, our average

interest-earning assets increased by $249.1 million, compared to 2020, while the yield on our interest-earning assets decreased by 47

basis points.

The increase in average interest-earning assets was driven primarily by a $207.7 million increase in average loan balances

combined with an $18.0 million increase in federal funds sold and interest-bearing deposits with banks.

In addition, the reduction in

yield on our interest earning assets was driven by a 46 basis point decrease in loan yield as our loan portfolio was impacted by the Federal

Reserve’s aggregate 225 basis point interest rate reduction from July 2019 to March 2020.

Our average interest-bearing liabilities increased

by $69.7 million during 2021 while the cost of our interest-bearing liabilities decreased by 60 basis points.

by $401.0 million during 2022 while the cost of our interest-bearing liabilities increased by 64 basis points.

The increase in average

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is the difference between the yield we earn on our interest-earning assets and the rate we pay on our interest-bearing liabilities.

60 basis point decrease in the cost of our interest-bearing liabilities partially offset by a 47 basis point decrease in yield on our

interest-earning assets resulted in a 13 basis point increase in our net interest spread for the 2021 period.

64 basis point increase in the cost of our interest-bearing

liabilities, partially offset by a 17 basis point increase in yield on our

interest-earning assets resulted in a 47 basis point decrease in our net interest spread for the 2022 period.

We anticipate continued

pressure on our net interest spread and net interest margin in future periods as our loan yield continues to decline due to new and renewed

loans pricing at rates lower than our current portfolio rate.

pressure on our net interest spread and net interest margin in future periods as our deposits continue to reprice immediately with increases

in the fed funds rate, compared to our loan portfolio which reprices as loans are originated or renewed.

Rate/Volume Analysis

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the year ended December 31, 2021.

The increase in net interest income was driven by a $9.6 million decrease in interest expense, partially

offset by a $1.7 million decrease in interest income.

Reduced rates on our interest-bearing liabilities was the primary driver of the

decrease in interest expense which was partially offset by a $69.7 million increase in the average balance of those liabilities.

income decreased $1.7 million driven by a decrease in rates on interest earning assets.

Net interest income, the largest component of our

income, was $79.8 million for the year ended December 31, 2020, a $12.5 million increase from net interest income of $67.3 million for

the year ended December 31, 2019.

The increase in net interest income was driven by a $10.4 million decrease in interest expense and a

$2.2 million increase in interest income.

Reduced rates on our interest-bearing liabilities was the primary driver of the decrease in

interest expense which was partially offset by a $152.2 million increase in the average balance of those liabilities.

Interest income

increased $2.2 million driven by an increase in average loan balances that was partially offset by a decrease in yield across all interest

earning assets.

Provision for Loan Losses

We have established an allowance for loan losses

through a provision for loan losses charged as an expense on our statements of income.

We review our loan portfolio periodically to evaluate

our outstanding loans and to measure both the performance of the portfolio and the adequacy of the allowance for loan losses.

the discussion below under “Results of Operations – Allowance for Loan Losses” for a description of the factors we consider

in determining the amount of the provision we expense each period to maintain this allowance.

The increase in net interest income was driven by a $24.5 million increase in interest income, partially

offset by a $14.6 million increase in interest expense.

The $556.5 million increase in average loan balances was the primary driver of

the increase in interest income, while the 65 basis point increase in deposit costs drove the increase in interest expense.

Net interest income was $87.7 million for the year

ended December 31, 2021, a $7.9 million increase from net interest income of $79.8 million for the year ended December 31, 2020.

in net interest income was driven by a $9.6 million decrease in interest expense, partially offset by a $1.7 million decrease in interest

Reduced rates on our interest-bearing liabilities was the primary driver of the decrease in interest expense which was partially

offset by a $69.7 million increase in the average balance of those liabilities.

Interest income decreased $1.7 million driven by a decrease

in rates on interest earning assets.

Provision for Credit Losses

The provision for credit losses, which includes

a provision for losses on unfunded commitments, is a charge to earnings to maintain the allowance for credit losses and reserve for unfunded

commitments at levels consistent with management’s assessment of expected losses in the loan portfolio at the balance sheet date.

On January 1, 2022, we adopted the Current Expected Credit Loss (CECL) methodology for estimating credit losses, which resulted in an

increase of $1.5 million in our allowance for credit losses and an increase of $2.0 million in our reserve for unfunded commitments.

tax-effected impact of these two items amounted to $2.8 million and was recorded as an adjustment to our retained earnings as of January

We review the adequacy of the allowance for credit losses on a quarterly basis.

Please see the discussion below under “Results

of Operations – Allowance for Credit Losses” for a description of the factors we consider in determining the amount of the

provision we expense each period to maintain this allowance.

There was a $6.2 million provision for credit losses

for the year ended December 31, 2022, compared to reversal of $12.4 million and an expense of $29.6 million for the years ended December

31, 2021 and 2020, respectively.

The $6.2 million provision during 2022, which included a $780,000 provision for unfunded commitments,

was driven primarily by $783.5 million in loan growth during the year, combined with a $259.6 million increase in unfunded commitments.

In addition, to loan growth, the provision for credit losses was impacted by slightly lower expected loss rates due to historically low

charge-offs during the 12 months ended December 31, 2022 while minor adjustments to two internal qualitative factors increased the qualitative

component of the allowance and related provision expense.

The $12.4 million reversal of

provision during 2021 related to a reduction in

qualitative adjustment factors driven by the overall improvement in economic conditions as well as improvement in the credit quality of

our portfolio following the pandemic.

The $29.6 million provision recorded during 2020 was driven by an increase to our qualitative environmental

factors related to the uncertain economic and business conditions arising from the pandemic at both the national and regional levels.

Following is a summary of the activity in the allowance

for loan losses.

for credit losses.

(dollars in thousands)

Balance, beginning of period

Provision for (reversal of) loan losses

Adjustment for CECL

Provision for (reversal of) credit losses

Loan charge-offs

Loan recoveries

Net loan charge-offs

Net loan (charge-offs) recoveries

Balance, end of period

For the year ended December 31, 2021, there was

a reversal of the provision for loan losses of $12.4 million, bringing the allowance for loan losses to $30.4 million, or 1.22% of gross

In comparison, we added $29.6 million and $2.3 million to the provision for loan losses during the years ended December 31, 2020

and 2019, respectively, resulting in an allowance for loan losses of $44.1 million, or 2.06% of gross loans, as of December 31, 2020,

and an allowance for loan losses of $16.6 million, or 0.86% of gross loans, as of December 31, 2019.

The negative provision during 2021

was driven by a reduction in qualitative adjustment factors related to the overall improvement in economic conditions at both the national

and regional levels as well as improvement in the credit quality of our loan portfolio, and a reduction in the historical loss percentages

of our various loan categories due to the low charge-off percentage during the historical loss period.

The increased provision during

2020 was driven by an increase to our qualitative environmental factors related to the uncertain economic and business conditions arising

from the pandemic at both the national and regional levels.

Factors such as the continued impact on the tourism and hospitality industries

due to the pandemic, an increase in permanent job losses and unemployment rates as well as uncertainty in the political realm drove this

During the year ended December 31, 2021, our net

charge-offs were $1.3 million, representing 0.06% of average loans, and consisted of $2.2 million in loans charged-off, partially offset

by $825 thousand of recoveries on loans previously charged-off.

In addition, nonperforming assets decreased to 0.17% of total assets while

our level of classified assets increased to 12.61% at December 31, 2021.

As of December 31, 2022, the allowance for credit

losses totaled $38.6 million, or 1.18% of gross loans.

In comparison, the allowance for credit losses totaled $30.4 million as of December

31, 2021, or 1.22% of gross loans, and $44.1 million as of December 31, 2020, or 2.06% of gross loans.

During the year ended December 31, 2022, we had

net recoveries of $1.4 million, consisting of $1.8 million of recoveries on loans previously charged-off, partially offset by $485 thousand

of loans charged-off in the current year.

In addition, nonperforming assets decreased to 0.07% of total assets while our level of classified

assets decreased to 4.72% at December 31, 2022.

We reported net charge-offs of $1.3 million and

$1.4 million for the years ended December 31, 2020 and 2019, respectively, including recoveries of $1.3 million and $95,000 in 2020 and

$2.1 million for the years ended December 31, 2021 and 2020, respectively, including recoveries of $825,000 and $1.3 million in 2021 and

2020, respectively.

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Income from bank owned life insurance

Gain on sale of investment securities

Loss on extinguishment of debt

Net lender fees on PPP loan sale

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The decrease in noninterest income during 2022, compared to 2021, resulted primarily from the following:

Mortgage banking income decreased $8.4 million, or

42.5%, driven by low inventory in the housing market, lower refinance volumes, and a decrease in margin on loan sales.

We do not expect

mortgage origination volume to continue at levels seen in 2020 which will reduce the amount of mortgage banking income recorded in future

periods in comparison to prior periods.

● Mortgage banking income decreased $7.2 million,

or 63.1%, driven by low inventory in the housing market, lower refinance volumes, and a decrease in margin on loan sales.

purchase transactions accounted for approximately 84% of our mortgage volume compared to 40% in 2021 as refinance transactions diminished

due to the higher mortgage rates in the current year.

● Other income decreased due to a loss on disposal

of fixed assets of $439,000 resulting from the disposal of assets from our prior headquarters building.

Offsetting these decreases in noninterest income

were increases in service fees on deposit accounts and ATM and debit card income due to growth in our client base and transaction volume.

Noninterest income was $17.1 million for the year

ended December 31, 2021, a $10.3 million, or 37.5%, decrease compared to noninterest income of $27.4 million for the year ended December

The decrease in noninterest income during 2021, compared to 2020, resulted primarily from the following:

● Mortgage banking income decreased $8.4 million,

or 42.5%, driven by low inventory in the housing market, lower refinance volumes, and a decrease in margin on loan sales.

● Service fees on deposit accounts declined $103,000,

or 12.0%, related primarily to a reduction in Non-sufficient Funds (“NSF”) income and lockbox services income.

Net lender fees on PPP loan sale totaled $2.2 million

during the 2020 period due to net fee income on the PPP loans we originated and then sold to a third party during the second quarter of

● Net lender fees on PPP loan sale totaled $2.2

million during the 2020 period due to net fee income on the PPP loans we originated and then sold to a third party during the second quarter

Offsetting these decreases in noninterest income

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as we purchased $7.5 million in additional life insurance.

Noninterest income was $27.4 million for the year

ended December 31, 2020, a $12.4 million, or 82.6%, increase compared to noninterest income of $15.0 million for the year ended December

The increase in noninterest income during 2020, compared to 2019 resulted primarily from the following:

Mortgage banking income increased $9.9 million, or

99.4%, driven by higher mortgage origination volume during 2020 due to the favorable interest rate environment for mortgage loans.

Loss on extinguishment of debt decreased as a result

of fewer prepayment penalties related to the paydown of FHLB Advances.

More detail on these transactions is included in the 2019 discussion

Net lender fees on PPP loan sale totaled $2.2 million

and related to the net fee income on the PPP loans we originated and then sold to a third party during the second quarter of 2020.

Offsetting these increases during 2020 were decreases

in service fees on deposit accounts and other income.

The decrease in service fees on deposit accounts is directly related to the impact

of COVID-19 as we have waived certain fees in an effort to assist our clients during this time.

During the fourth quarter of 2019, the Company

sold its Health Savings Account (“HSA”) deposit accounts, which totaled $6.2 million, to a nationwide HSA servicer and recognized

a gain of approximately $745,000 from the sale.

Also during the fourth quarter of 2019, the Company sold $29.5 million of investment

securities from its existing investment portfolio, recognizing a gain of approximately $720,000 and paid off $25.0 million of FHLB advances

that resulted in a prepayment penalty of $1.5 million.

Noninterest Expenses

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Compensation and benefits

Mortgage production costs

Other real estate owned (income) expenses, net

Other real estate owned expenses, net

Outside service and data processing costs

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2022, compared to 2021, resulted primarily from the following:

Compensation and benefits expense increased $2.6 million,

or 9.8%, during 2021 relating primarily to a $2.5 million increase in salaries and incentive compensation.

During 2021, we grew by 24

13 of which were hired to support growth in our North Carolina offices.

Occupancy expenses increased $724,000, or 11.6%, driven

by increased rent expense and depreciation on our new office in Charlotte, North Carolina as well as additional depreciation, insurance,

property taxes and maintenance expenses related to all of our properties.

● Compensation and benefits expense increased $2.7

million, or 7.4%, during 2022 relating primarily to a $5.2 million increase in salaries and incentive compensation, partially offset by

a $2.4 million decrease in mortgage commissions paid on sales activity.

During 2022, we grew by 15 employees who were hired primarily

to grow our footprint in each of our South Carolina, North Carolina, and Georgia markets.

● Occupancy expenses increased $2.1 million, or

30.9%, driven by increased depreciation, insurance, property taxes and maintenance expenses primarily related to our new headquarters

● Outside service and data processing costs increased

$644,000, or 11.8%, primarily due to increased electronic banking, software licensing costs and ATM card related expenses.

Professional fees increased $286,000, or 16.1%, driven

by increased audit, legal and various consulting fees.

● Insurance expenses increased $537,000, or 46.7%,

related to higher FDIC insurance premiums.

● Marketing expenses increased $311,000, or 34.4%,

driven by an increase in community sponsorships and business development.

● Other noninterest expenses increased $514,000,

or 17.9%, due primarily to an increase in travel expenses between our eight markets, deposit account losses, and staff related expenses.

Partially offsetting the above increases were the

following decreases in noninterest expense:

Mortgage production costs decreased $1.1 million,

or 11.6%, driven by a decrease in salaries and benefits expense, primarily related to commissions paid on sales activity.

● Other real estate owned expenses decreased $385,000

due to one large valuation adjustment on a commercial property in 2020.

Insurance expenses decreased $231,000, or 16.7%, resulting

primarily from reduced FDIC assessments during 2021.

due to the sale of one commercial property in 2021.

Noninterest expenses were $56.4 million for the

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2021, compared to 2020, resulted primarily from the following:

Compensation and benefits expense increased $2.5 million,

or 10.3%, during 2020 relating primarily to a $1.3 million increase in benefits expense, which includes insurance, 401k expenses and executive

retirement plans.

Base and incentive compensation also increased by $1.1 million as we continue to grow our existing markets.

Mortgage production costs, which primarily includes

compensation and benefits, professional fees, software licensing costs and credit bureau fees, increased $3.5 million, or 53.8%, driven

by higher mortgage commissions as a result of the increased origination volume during 2020.

Occupancy expenses increased $713,000, or 12.9%, driven

by increased rent expense primarily due to office expansion in Atlanta, Georgia as well as additional depreciation, insurance, property

taxes and maintenance expenses related to all of our owned properties.

Other real estate owned expenses increased $1.2 million

due to a valuation adjustment on one commercial property.

● Compensation and benefits expense increased $1.4

million, or 4.1%, during 2021 relating primarily to a $2.5 million increase in salaries and incentive compensation, partially offset by

a $1.3 million decrease in mortgage commissions paid on sales activity.

During 2021, we grew by 24 employees, 13 of which were hired to

support growth in our North Carolina offices.

● Occupancy expenses increased $724,000, or 11.6%,

driven by increased rent expense and depreciation on our new office in Charlotte, North Carolina as well as additional depreciation, insurance,

property taxes and maintenance expenses related to all of our properties.

● Outside service and data processing costs increased

$608,000, or 12.5%, primarily due to increased electronic banking, software licensing costs and ATM card related expenses.

Insurance expenses increased $567,000, or 69.7%, resulting

primarily from higher FDIC assessments during the year.

Professional fees increased $444,000, or 33.5%, driven

by increased audit, legal and various consulting fees.

● Professional fees increased $314,000, or 13.8%,

driven by increased audit, legal and various consulting fees.

Partially offsetting the above increases were the

following decreases in noninterest expense:

● Other real estate owned expenses decreased $838,000

due to one large valuation adjustment on a commercial property in 2020.

● Insurance expenses decreased $231,000, or 16.7%,

resulting primarily from reduced FDIC assessments during 2021.

Our efficiency ratio was 58.7% for 2022 compared

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The increase in the effective rate for the 2022 and 2021 periods is

related to the greater impact of various employee stock option transactions that occurred during the 2019 period.

related to the lesser impact of tax-exempt income and equity compensation transactions that occurred during the respective periods.

Investment Securities

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portfolio was $104.2 million and $124.3 million, respectively, and represented approximately 2.8% and 4.2% of our total assets, respectively.

Our available for sale investment portfolio included Corporate bonds, US treasuries, U.S.

agency securities, SBA securities, state and

political subdivisions, mortgage-backed securities, and asset-backed securities with a fair value of $120.3 million and amortized cost

of $121.2 million for an unrealized loss of $937,000 at December 31, 2021 compared to a fair value of $94.7 million and amortized cost

of $93.4 million for an unrealized gain of $1.3 million at December 31, 2020.

Our available for sale investment portfolio included Corporate bonds, US treasuries, US agency securities, SBA securities, state and political

subdivisions, asset-backed securities, and mortgage-backed securities with a fair value of $93.3 million and amortized cost of $110.3

million for an unrealized loss of $17.0 million at December 31, 2022 compared to a fair value of $120.3 million and amortized cost of

$121.2 million for an unrealized loss of $937,000 at December 31, 2021.

The amortized costs and the fair value of our investments

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US government agencies

SBA securities

State and political subdivisions

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loans for the years ended December 31, 2022 and 2021 were $2.87 billion and $2.31 billion, respectively.

Before allowance for loan losses,

Before allowance for credit losses,

total loans outstanding at December 31, 2022 and 2021 were $3.27 billion and $2.49 billion, respectively.

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Following is a summary of our loan composition

for each of the five years ended December 31, 2021.

Of the $347.0 million in loan growth in 2021, $165.6 million of growth was in commercial

related loans, while $181.4 million of growth was in consumer related loans, specifically consumer real estate mortgages which grew by

$158.1 million during 2021.

for each of the last three years ended December 31, 2022.

Of the $783.5 million in loan growth in 2022, $500.0 million of growth was in

commercial related loans, while $283.4 million of growth was in consumer related loans, specifically consumer real estate mortgages which

grew by $236.9 million during 2022.

The increase in consumer real estate loans is related to our focus to continue to originate high quality

1-4 family consumer real estate loans.

Our average consumer real estate loan currently has a principal balance of $454,000, a term of 21 years,

and an average rate of 3.47%.

Our average consumer real estate loan currently has a principal balance of $468,000, a term of

22 years, and an average rate of 3.71%.

(dollars in thousands)

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Total gross loans, net of deferred fees

Less – allowance for loan losses

Less – allowance for credit losses

Total loans, net

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(dollars in thousands)

fifteen years

Owner occupied RE

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Total gross loan, net of deferred fees

The following

table summarizes the loans due after one year by category.

The following table summarizes the loans due after

one year by category.

Interest Rate

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(dollars in thousands)

Owner occupied RE

Non-owner occupied RE

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Nonaccrual loans decreased $2.2 million to $2.6 million at December 31, 2022 from $4.9 million at December

During 2021, we added three new loans totaling $1.1 million to nonaccrual, while nine loans totaling $1.4 million paid off,

three loans totaling $1.5 million were returned to accruing status and one loan totaling $367,000 was transferred to other real estate

The amount of foregone interest income on the nonaccrual loans for the years ended December 31, 2021 and 2020 was approximately

$55,000 and $61,000, respectively.

At December 31, 2021, our allowance for loan losses

represented 625.16% of nonaccrual loans, compared to 547.14% at year-end 2020 and 244.95% at year-end 2019.

A significant portion, or

95.1%, of nonaccrual loans at December 31, 2021 were secured by real estate.

We have evaluated the underlying collateral on these loans

and believe that the collateral on these loans is sufficient to minimize future losses.

As a result of this level of coverage on nonaccrual

loans, we believe the allowance for loan losses of $30.4 million for the year ended December 31, 2021 is adequate.

During 2022, we added seven new loans totaling $1.3 million to nonaccrual, while two loans totaling $1.4 million paid off, eight

loans totaling $1.7 million were returned to accruing status and one loan totaling $171,000 was charged off.

The amount of foregone

income on the nonaccrual loans as of December 31, 2022 and 2021 was approximately $28,000 and $55,000, respectively, for the twelve-month

A significant portion, or 93.1%, of nonaccrual

loans at December 31, 2022 were secured by real estate.

We have evaluated the underlying collateral on these loans and believe that the

collateral on these loans is sufficient to minimize future losses.

As a result of this level of coverage on nonaccrual loans, we believe

the allowance for credit losses of $38.6 million for the year ended December 31, 2022 is adequate.

As a general practice, most of our commercial loans

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In addition, approximately 85% of our loans are

collateralized by real estate and approximately 97% of our impaired loans are secured by real estate.

We use third party appraisers to

determine the fair value of collateral dependent loans.

Our current loan and appraisal policies require us to review impaired loans at

least annually and determine whether it is necessary to obtain an updated appraisal, either through a new external appraisal or an internal

appraisal evaluation.

We individually review our impaired loans on a quarterly basis to determine the level of impairment.

As of December

31, 2021, we do not have any impaired loans carried at a value in excess of the appraised value.

We typically charge-off a portion or

create a specific reserve for impaired loans when we do not expect repayment to occur as agreed upon under the original terms of the loan

At December 31, 2021, impaired loans totaled approximately

$8.2 million for which $2.9 million of these loans have a reserve of approximately $836,000 allocated in the allowance.

During 2021, the

average recorded investment in impaired loans was approximately $12.5 million.

At December 31, 2020, impaired loans totaled approximately

$13.0 million for which $5.1 million of these loans had a reserve of approximately $1.7 million allocated in the allowance.

the average recorded investment in impaired loans was approximately $14.6 million.

collateralized by real estate and approximately 82% of our individually evaluated loans are secured by real estate.

We use third party

appraisers to determine the fair value of collateral dependent loans.

Our current loan and appraisal policies require us to review individually

evaluated loans at least annually and determine whether it is necessary to obtain an updated appraisal, either through a new external

appraisal or an internal appraisal evaluation.

We individually review our individually evaluated loans on a quarterly basis to determine

the level of impairment.

As of December 31, 2022, we do not have any individually evaluated loans carried at a value in excess of the

appraised value.

We typically charge-off a portion or create a specific reserve for individually evaluated loans when we do not expect

repayment to occur as agreed upon under the original terms of the loan agreement.

At December 31, 2022, individually evaluated loans

totaled approximately $7.1 million for which $6.8 million of these loans have a reserve of approximately $1.3 million allocated in the

During 2022, the average recorded investment in individually evaluated loans was approximately $7.6 million.

At December 31,

2021, impaired loans totaled approximately $8.2 million for which $2.9 million of these loans had a reserve of approximately $836,000

allocated in the allowance.

During 2021, the average recorded investment in impaired loans was approximately $12.5 million.

We consider a loan to

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assist borrowers facing challenges in the current economic environment.

As of December 31, 2021 and 2020, we had $6.3 million and $8.4

million, respectively, in loans that we considered TDRs.

As permitted by the CARES Act, we do not consider loan modifications to borrowers

affected by COVID-19 to be TDRs unless the borrower was 30 days or more past due before December 31, 2019.

See Notes 1 and 5 to the Consolidated

Financial Statements for additional information on TDRs.

In addition, potential

problem loans, which are loans rated substandard and not included in nonperforming loans or TDRs, amounted to approximately $35.9 million,

or 1.44% of gross loans at December 31, 2021, compared to $19.6 million, or 0.92% of gross loans at December 31, 2020.

Potential problem

loans represent those loans with a well-defined weakness and where information about possible credit problems of borrowers has caused

management to have serious doubts about the borrower’s ability to comply with present repayment terms.

The increase in potential

problem loans since December 31, 2020 is primarily the result of five hotel loans that were downgraded during the first quarter of 2021,

increasing total potential problem loans by approximately $13.7 million.

As of December 31, 2021 these five loans were each accruing and

performing as agreed.

Allowance for Loan Losses

As of December 31, 2022 and 2021, we had $6.3 million in loans

that we considered TDRs.

As permitted by the CARES Act, we do not consider loan modifications to borrowers affected by COVID-19 to be

TDRs unless the borrower was 30 days or more past due as of December 31, 2019, (ii) the modifications were related to COVID-19, and (iii)

the modification occurred between March 1, 2020 and January 1, 2022.

See Notes 1 and 5 to the Consolidated Financial Statements for additional

information on TDRs.

Allowance for Credit Losses

At December 31, 2022 and December 31, 2021, the

allowance for loan losses was $30.4 million and $44.1 million, respectively, or 1.22% and 2.06% of outstanding loans, respectively.

allowance for loan losses as a percentage of our outstanding loan portfolio decreased from the prior year primarily due a reduction in

qualitative adjustment factors related to the overall improvement in economic conditions at both the national and regional levels as well

as a reduction in the historical loss percentages of our various loan categories.

In addition, despite the increase in potential problem

loans, the credit quality of our loan portfolio improved with our nonperforming assets decreasing to 0.17% compared to 0.37%, as a percentage

of total assets, at December 31, 2021 and 2020, respectively.

However, our classified assets increased to 12.6% of capital as of December

31, 2021, compared to 8.2% of capital as of December 31, 2020 due to the five hotel loans that were downgraded during the first quarter

See Note 4 to the Consolidated Financial Statements for more information on our allowance for loan losses.

allowance for credit losses was $38.6 million and $30.4 million, respectively, or 1.18% and 1.22% of outstanding loans, respectively.

The allowance for credit losses as a percentage of our outstanding loan portfolio decreased from the prior year primarily to historically

low loan charge-offs which factors into the expected loss rate on our current loan portfolio.

In addition, the credit quality of our loan

portfolio improved with our nonperforming assets decreasing to 0.07% compared to 0.17%, as a percentage of total assets, at December 31,

2022 and 2021, respectively.

However, our classified assets decreased to 4.72% of capital as of December 31, 2022, compared to 12.6% of

capital as of December 31, 2021 due to the five hotel loans that were downgraded during the first quarter of 2021.

See Note 4 to the Consolidated

Financial Statements for more information on our allowance for credit losses.

The negative provision during 2021 was driven by

a reduction in qualitative adjustment factors related to the overall improvement in economic conditions at both the national and regional

levels as well as improvement in the credit quality of our loan portfolio, and a reduction in the historical loss percentages of our various

loan categories due to the low charge-off percentage during the historical loss period.

levels as well as improvement in the credit quality of our loan portfolio.

The following table summarizes the net charge-off

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Total consumer

Net loan charge-offs

Net loan charge-offs as a % of average loans

Net loan (charge-offs) recoveries

Net loan (charge-offs) recoveries as a % of average loans

The following

table summarizes the allocation of the allowance for loan losses among the various loan categories.

table summarizes the allocation of the allowance for credit losses among the various loan categories.

Year ended December 31,

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Total consumer

Total allowance for loan losses

Percentage of loans in each category to total loans

Total allowance for credit losses

(1) Percentage of

loans in each category to total loans

Deposits and Other Interest-Bearing Liabilities

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At December 31, 2021, retail deposits represented $2.56 billion, or 100.0% of our total

deposits, and brokered deposits were $22.0 million, representing 1.0% of our total deposits, at December 31, 2020.

Our loan-to-deposit

ratio was 97%, 100%, and 104% at December 31, 2021, 2020, and 2019, respectively.

The following table shows the average balance amounts

and the average rates paid on deposits held by us.

(dollars in thousands)

Noninterest bearing demand deposits

Interest bearing demand deposits

Money market accounts

Savings accounts

Time deposits less than $100,000

Time deposits greater than $100,000

Total deposits

During the 12 months ended December 31, 2021, our

average transaction account balances increased by $382.3 million, or 21.6%, while our average time deposit balances decreased by $124.8

deposits at December 31, 2021.

Brokered deposits were $236.2 million, representing 7.5% of our total deposits at December 31, 2022.

loan-to-deposit ratio was 104%, 97%, and 100% at December 31, 2022, 2021, and 2020, respectively.

The following table shows the average balance

amounts and the average rates paid on deposits held by us.

in thousands)

bearing demand deposits

market accounts

deposits less than $250,000

deposits greater than $250,000

During the 12 months ended December 31, 2022,

our average transaction account balances increased by $374.2 million, or 17.4%, while our average time deposit balances increased by $125.6

million, or 71.2%.

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Time deposits that meet or exceed the FDIC insurance

limit of $250,000 at December 31, 2021 and December 31, 2020 were $84.4 million and $130.9 million, respectively.

At December 31, 2021 and

2020, the Company estimates that it has approximately $1.2 billion and $879.1 million, respectively, in uninsured deposits including related

interest accrued and unpaid.

Since it is not reasonably practicable to provide a precise measure of uninsured deposits, the amounts above

are estimates and are based on the same methodologies and assumptions used for the bank’s regulatory reporting requirements by the

FDIC for the Call Report.

limit of $250,000 at December 31, 2022 and December 31, 2021 were $374.8 million and $84.4 million, respectively, including wholesale

At December 31, 2022

and 2021, the Company estimates that it has approximately $1.4 billion and $1.2 billion, respectively, in uninsured deposits including

related interest accrued and unpaid.

Since it is not reasonably practicable to provide a precise measure of uninsured deposits, the amounts

above are estimates and are based on the same methodologies and assumptions used for the bank’s regulatory reporting requirements

by the FDIC for the Call Report.

Liquidity and Capital Resources

Liquidity represents the ability of a company to

convert assets into cash or cash equivalents without significant loss, and the ability to raise additional funds by increasing liabilities.

Liquidity represents the ability of a company

to convert assets into cash or cash equivalents without significant loss, and the ability to raise additional funds by increasing liabilities.

Liquidity management involves monitoring our sources and uses of funds in order to meet our day-to-day cash flow requirements while maximizing

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However, as short-term liquidity needs arise, we have the ability to sell a portion of our investment

securities portfolio to meet those needs.

securities portfolio should we be required to meet those needs.

Total shareholders’ equity was $294.5 million

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common shareholders of $29.1 million, stock option exercises and expenses of $2.9 million and $12.7 million loss in other comprehensive

We also recorded a $2.8 million adjustment for the adoption of ASU 2016-13.

The following table shows the return on average

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Since our inception, we have not paid cash dividends.

(dollars in thousands)

Return on average assets

in thousands)

Return on average

Return on average equity

Return on average common equity

Average equity to average assets ratio

Tangible common equity to assets ratio

Average equity to average assets

Tangible common equity to assets

Under the capital adequacy guidelines, regulatory

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off-balance sheet assets, are multiplied by a risk-weight factor of 0% to 100% based on the risks believed to be inherent in the type

Tier 2 capital consists of Tier 1 capital plus the general reserve for loan losses, subject to certain limitations.

required to maintain capital at a minimum level based on total average assets, which is known as the Tier 1 leverage ratio.

Tier 2 capital consists of Tier 1 capital plus the general reserve for credit losses, subject to certain limitations.

also required to maintain capital at a minimum level based on total average assets, which is known as the Tier 1 leverage ratio.

Regulatory capital rules, which we refer to Basel

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and savings associations regardless of size and bank holding companies and savings and loan holding companies other than “small

bank holding companies,” generally holding companies with consolidated assets of less than $3 billion (such as the Company).

order to avoid restrictions on capital distributions or discretionary bonus payments to executives, a covered banking organization must

maintain a “capital conservation buffer” on top of our minimum risk-based capital requirements.

This buffer must consist solely

of common equity Tier 1, but the buffer applies to all three measurements (common equity Tier 1, Tier 1 capital and total capital).

capital conservation buffer consists of an additional amount of CET1 equal to 2.5% of risk-weighted assets.

bank holding companies,” generally holding companies with consolidated assets of less than $3 billion.

In order to avoid restrictions

on capital distributions or discretionary bonus payments to executives, a covered banking organization must maintain a “capital

conservation buffer” on top of our minimum risk-based capital requirements.

This buffer must consist solely of common equity Tier

1, but the buffer applies to all three measurements (common equity Tier 1, Tier 1 capital and total capital).

The capital conservation

buffer consists of an additional amount of CET1 equal to 2.5% of risk-weighted assets.

To be considered “well-capitalized”

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Tier 1 Capital (to average assets)

Ratios do not include the capital conservation buffer of 2.5%.

do not include the capital conservation buffer of 2.5%.

30, 2019, the Company sold and issued $23.0 million in aggregate principal amount of its 4.75% Fixed-to-Floating Rate Subordinated Notes

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for regulatory capital purposes for the Company.

The ability of

the Company to pay cash dividends is dependent upon receiving cash in the form of dividends from the Bank.

The dividends that may be paid

by the Bank to the Company are subject to legal limitations and regulatory capital requirements.

Effect of Inflation and Changing Prices

of the Company to pay cash dividends is dependent upon receiving cash in the form of dividends from the Bank.

The dividends that may be

paid by the Bank to the Company are subject to legal limitations and regulatory capital requirements.

Inflation and Changing Prices

The effect of relative purchasing power over time

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between interest sensitive assets and liabilities in order to protect against wide rate fluctuations, including those resulting from inflation.

Off-Balance Sheet Risk

Commitments to extend credit are agreements to

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fixed expiration dates or other termination clauses and may require the payment of a fee.

At December 31, 2021, unfunded commitments to

extend credit were approximately $618.7 million, of which $205.4 million were at fixed rates and $413.3 million were at variable rates.

At December 31, 2020, unfunded commitments to extend credit were $480.1 million, of which approximately $114.6 million were at fixed rates

and $365.5 million were at variable rates.

A majority of the unfunded commitments related to commercial business lines of credit and home

equity lines of credit.

Based on historical experience, we anticipate that a significant portion of these lines of credit will not be

At December 31, 2022, unfunded commitments

to extend credit were approximately $878.3 million, of which $318.9 million were at fixed rates and $559.4 million were at variable rates.

At December 31, 2021, unfunded commitments to extend credit were $618.7 million, of which approximately $205.4 million were at fixed

rates and $413.3 million were at variable rates.

A majority of the unfunded commitments related to commercial business lines of credit

and home equity lines of credit.

Based on historical experience, we anticipate that a significant portion of these lines of credit will

not be funded.

We evaluate each client’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.

The type of collateral varies but may include accounts

receivable, inventory, property, plant and equipment, and commercial and residential real estate.

The amount of collateral obtained, if deemed

necessary by us upon extension of credit, is based on our credit evaluation of the

The type of collateral varies but may include

accounts receivable, inventory, property, plant and equipment, and commercial and residential real estate.

At December 31, 2022 and 2021, there were $14.3

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to expire without being drawn upon, they do not necessarily represent future cash requirements.

Except as disclosed in this Annual Report, we are

not involved in off-balance sheet contractual relationships, unconsolidated related entities that have off-balance sheet arrangements

Except as disclosed in this Annual Report, we

are not involved in off-balance sheet contractual relationships, unconsolidated related entities that have off-balance sheet arrangements

or transactions that could result in liquidity needs or other commitments that significantly impact earnings.

Market Risk and Interest Rate Sensitivity

and Interest Rate Sensitivity

Market risk is the risk of loss from adverse changes

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conditions and other relevant factors impacting our net interest income will not cause actual occurrences to differ from underlying assumptions.

In addition, this analysis does not consider any strategic changes to our balance sheet which management may consider as a result of changes

in market conditions.

In addition, this analysis does not consider any strategic changes to our balance sheet which management may consider as a result of

changes in market conditions.

Interest rate scenario

Change in net interest

income from base

Up 300 basis points

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for which we have committed to make capital contributions from time to time.

As of December 31, 2022, $1.7 million remained outstanding

under these commitments.

We utilize a variety of short-term and long-term

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We do not feel that any existing noncancelable

operating lease agreements are likely to materially impact our financial condition or results of operations in an adverse way.

operating lease agreements are likely to materially impact

our financial condition or results of operations in an adverse way.

obligations relative to these agreements are noted in the table below.

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for obligations under long-term borrowings and operating lease obligations as of December 31, 2022.

December 31, 2021

Payments Due by Period

(dollars in thousands)

Certificates of deposit

Subordinated debentures

Operating lease obligations

Due by Period

in thousands)

lease obligations

Accounting, Reporting, and Regulatory Matters

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accounting pronouncements.

Quantitative and Qualitative Disclosures about Market Risk

Management’s Discussion and Analysis

of Financial Condition and Results of Operations – Market Risk and Interest Rate Sensitivity and – Liquidity and Capital Resources.

Quantitative and Qualitative

Disclosures about Market Risk

Management’s Discussion and

Analysis of Financial Condition and Results of Operations – Market Risk and Interest Rate Sensitivity and – Liquidity and

Capital Resources.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis