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Item 7. Management’s Discussion and Analysis

2024-03-05 compared with 2023-02-13 · 541 added, 529 removed, 445 unchanged (71% of the section changed)

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

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.

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.

Our business model continues

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billion at December 31, 2023 and 2022, respectively.

Like most community banks, we derive the majority

of our income from interest received on our loans and investments.

Our primary source of funds for making these loans and investments

is our deposits, on which we pay interest.

Consequently, one of the key measures of our success is our amount of net interest income,

or the difference between the income on our interest-earning assets, such as loans and investments, and the expense on our interest-bearing

Like most community banks, we derive the majority of

our income from interest received on our loans and investments.

Our primary source of funds for making these loans and investments is

our deposits, on which we pay interest.

Consequently, one of the key measures of our success is our amount of net interest income, or

the difference between the income on our interest-earning assets, such as loans and investments, and the expense on our interest-bearing

liabilities, such as deposits and borrowings.

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on our loans and investments, we earn income through fees and other charges to our clients.

Our net income available to common shareholders

for the years ended December 31, 2022 and 2021 was $29.1 million and $46.7 million, or diluted earnings per share (“EPS”)

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

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 net income available to common shareholders for

the years ended December 31, 2023 and 2022 was $13.4 million and $29.1 million, or diluted earnings per share (“EPS”) of $1.66

and $3.61 for the years ended December 31, 2023 and 2022, respectively.

The decrease in net income resulted primarily from a decrease

in net interest income and an increase in noninterest expenses, partially offset by a decrease in the provision for credit losses.

addition, our net income available to shareholders was $46.7 million, or EPS of $5.85 for the year ended December 31, 2021.

SELECTED FINANCIAL DATA

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.

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, 2023, 2022, and 2021 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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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.

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

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

We have adopted various accounting policies that

govern the application of accounting principles generally accepted in the U.S.

and with general practices within the banking industry

in the preparation of our financial statements.

Our significant accounting policies are described in Note 1 to our Consolidated Financial

Statements as of December 31, 2022.

Certain accounting policies inherently involve

a greater reliance on the use of estimates, assumptions and judgments and, as such, have a greater possibility of producing results that

could be materially different than originally reported, which could have a material impact on the carrying values of our assets and liabilities

We have adopted various accounting policies that govern

the application of accounting principles generally accepted in the U.S.

and with general practices within the banking industry in the

preparation of our financial statements.

Our significant accounting policies are described in Note 1 to our Consolidated Financial Statements

as of December 31, 2023.

Certain accounting policies inherently involve a greater

reliance on the use of estimates, assumptions and judgments and, as such, have a greater possibility of producing results that could be

materially different than originally reported, which could have a material impact on the carrying values of our assets and liabilities

and our results of operations.

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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 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

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

There are many factors

affecting the ACL;

There are many factors affecting

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

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.

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Fair Valuation of Financial Instruments

Certain assets and liabilities are measured at

fair value on a recurring basis, including securities and derivative instruments.

Assets and liabilities carried at fair value inherently

include subjectivity and may require the use of significant assumptions, adjustments and judgment including, among others, discount rates,

rates of return on assets, cash flows, default rates, loss rates, terminal values and liquidation values.

Certain assets and liabilities are measured at fair

value on a recurring basis, including securities and derivative instruments.

Assets and liabilities carried at fair value inherently include

subjectivity and may require the use of significant assumptions, adjustments and judgment including, among others, discount rates, rates

of return on assets, cash flows, default rates, loss rates, terminal values and liquidation values.

A significant change in assumptions

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result in significant impact on our results of operations, financial condition or disclosures of fair value information.

The fair value hierarchy

requires use of observable inputs first and subsequently unobservable inputs when observable inputs are not available.

Our fair value

measurements involve various valuation techniques and models, which involve inputs that are observable (Level 1 or Level 2 in fair value

hierarchy), when available.

The level of judgment required to determine fair value is dependent on the methods or techniques used in the

Assets and liabilities that are measured at fair value using quoted prices in active markets (Level 1) do not require significant

judgment while the valuation of assets and liabilities when quoted market prices are not available (Levels 2 and 3) may require significant

judgment to assess whether observable or unobservable inputs for those assets and liabilities provide reasonable determination of fair

See Note 14 to the Consolidated Financial Statements for additional information regarding the fair values measured at each level

of the fair value hierarchy, additional discussion regarding fair value measurements, and a brief description of how fair value is determined

for categories that have unobservable inputs.

The financial statements have been prepared on

the accrual basis.

When income and expenses are recognized in different periods for financial reporting purposes versus for the purposes

of computing income taxes currently payable, deferred taxes are provided on such temporary differences.

The fair value hierarchy requires

use of observable inputs first and subsequently unobservable inputs when observable inputs are not available.

Our fair value measurements

involve various valuation techniques and models, which involve inputs that are observable (Level 1 or Level 2 in fair value hierarchy),

when available.

The level of judgment required to determine fair value is dependent on the methods or techniques used in the process.

Assets and liabilities that are measured at fair value using quoted prices in active markets (Level 1) do not require significant judgment

while the valuation of assets and liabilities

when quoted market prices are not available (Levels 2 and 3) may require significant

judgment to assess whether observable or unobservable

inputs for those assets and liabilities provide reasonable determination of fair value.

See Note 12 to the Consolidated Financial Statements

for additional information regarding the fair values measured at each level of the fair value hierarchy, additional discussion regarding

fair value measurements, and a brief description of how fair value is determined for categories that have unobservable inputs.

The financial statements have been prepared on the

accrual basis.

When income and expenses are recognized in different periods for financial reporting purposes versus for the purposes of

computing income taxes currently payable, deferred taxes are provided on such temporary differences.

Deferred tax assets and liabilities

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Net Interest Income and Margin

Our level of net interest income is determined

by the level of earning assets and the management of our net interest margin.

For the years ended December 31, 2022, 2021, and 2020, our

net interest income was $97.6 million, $87.7 million, and $79.8 million, respectively.

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

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.

Our level of net interest income is determined by the

level of earning assets and the management of our net interest margin.

For the years ended December 31, 2023, 2022, and 2021, our net

interest income was $77.7 million, $97.6 million, and $87.7 million, respectively.

The $20.0 million, or 20.5%, decrease in net interest

income during 2023, compared to 2022, was driven by a $79.9 million increase in interest expense, primarily related to our interest-bearing

deposits, partially offset by a $59.9 million increase in interest income.

During 2022, our net interest income increased $9.9 million,

or 11.3%, compared to 2021, while average interest-earning assets increased $525.0 million and average interest-bearing liabilities increased

$401.0 million.

Interest income for the years ended December 31, 2023,

2022, and 2021 was $177.6 million, $117.7 million, and $93.2 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

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

As such, 93.5% of our interest income related to interest on loans during 2023, compared to 97.1% during 2022 and 98.3% during 2021.

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

costs for the year ended December 31, 2023, compared to $1.7 million and $1.4 million for the years ended December 31, 2022 and 2021,

respectively.

The increase in interest income during 2023 was driven by an increase in average interest-earning assets, combined with

higher yields on those assets.

Interest expense was $99.9 million, $20.0 million,

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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

our description of various measures of our financial performance.

For example, the “Average Balances, Income and Expenses, Yields

and Rates” table shows the average balance 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 during 2022, 2021, and 2022.

2023 resulted primarily from an increase in the rate paid on deposit balances which relates to the Federal Reserve’s 525 basis point

increase in the federal funds rate over the past two years.

We have included a number of tables to assist in our

description of various measures of our financial performance.

For example, the “Average Balances, Income and Expenses, Yields and

Rates” table shows the average balance 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 during 2023, 2022, and 2021.

Similarly, the “Rate/Volume Analysis” table demonstrates

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Average Balances, Income and Expenses, Yields and

the Year Ended December 31,

in thousands)

Interest-earning

Federal funds

sold and interest-bearing deposits with banks

For the Year Ended December 31,

(dollars in thousands)

Interest-earning assets

Federal funds sold and interest-bearing deposits with banks

Investment securities, taxable

securities, nontaxable (1)

Total earning assets

Interest-bearing

Investment securities, nontaxable (1)

Total interest-earning assets

Noninterest-earning assets

Interest-bearing liabilities

Savings & money market

Time deposits

Total interest-bearing deposits

FHLB advances and other borrowings

Subordinated debt

Total interest-bearing liabilities

Noninterest-bearing liabilities

Shareholders’

liabilities and shareholders’ equity

Shareholders’ equity

Total liabilities and shareholders’ equity

Net interest spread

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tax-equivalent adjustment (1)

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.

Net interest income

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.

Includes loans held for sale and nonaccrual loans.

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on a tax-equivalent basis (TE), was 2.07%, 3.19% and 3.45% for the years ended December 31, 2023, 2022 and 2021, respectively.

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.

interest margin (TE) decreased 112 basis points in 2023, compared to 2022, driven by higher costs on our interest-bearing liabilities,

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

During 2022, our net interest margin decreased 26 basis points,

compared to 2021, due to higher costs on our interest-bearing liabilities, partially offset by an increase in yield on our interest-earning

Our average interest-earning assets increased by $695.1

$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 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

million during the year ended December 31, 2023, compared to 2022, while the related yield on our interest-earning assets increased by

88 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.

The increase in average interest-earning assets was driven by a $626.9 million increase in average loan balances and

a $46.4 million increase 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 357 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 100 basis points during 2023.

Our average interest-bearing liabilities increased

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During 2022, our average interest-bearing liabilities increased by $401.0 million, compared to 2021, while the cost of our interest-bearing

liabilities decreased by 60 basis points.

Our net interest spread

was 2.88% for the year ended December 31, 2022, compared to 3.35% for the same period in 2021 and 3.22% for 2020.

liabilities increased by 64 basis points.

During the year ended December 31, 2022, our average

interest-earning assets increased by $525.0 million, compared to 2021, while the yield on our interest-earning assets increased by 17

basis points.

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

combined with an $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.

Our net interest spread was

1.21% for the year ended December 31, 2023, compared to 2.88% for the same period in 2022 and 3.35% for 2021.

The net interest spread

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

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 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.

255 basis point increase in the cost of our interest-

bearing liabilities, partially

offset by an 88 basis point increase in yield on our interest-earning assets resulted in a 167 basis point decrease in our net interest

spread for the 2023 period.

We anticipate continued 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

Net interest income can be analyzed in terms of

the impact of changing interest rates and changing volume.

Net interest income can be analyzed in terms of the

impact of changing interest rates and changing volume.

The following tables set forth the effect which the varying levels of interest-earning

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interest income

Investment securities

Federal funds sold

Total interest income

advances and other borrowings

interest expense

FHLB advances and other borrowings

Subordinated debt

Total interest expense

Net interest income

interest income

Net interest income, the largest component of our

income, was $97.6 million for the year ended December 31, 2022, a $9.9 million increase from net interest income of $87.7 million for

income, was $77.7 million for the year ended December 31, 2023, a $20.0 million decrease from net interest income of $97.6 million for

the year ended December 31, 2022.

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.

The decrease in net interest income was driven by a $79.9 million increase in interest expense, partially

offset by a $59.9 million increase in interest income.

The 257 basis point increase in deposit costs drove the increase in interest expense

while the $626.9 million increase in average loan balances combined with the 77 basis point increase in loan yield drove the increase

in interest income.

Net interest income was $97.6 million for the year

ended December 31, 2022, a $9.9 million increase from net interest income of $87.7 million for the year ended December 31, 2021.

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.

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

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.

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

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.

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There was a $1.3 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

for the year ended December 31, 2023, compared to a provision of $6.2 million and a reversal of $12.4 million for the years ended December

31, 2022 and 2021, 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.

The $1.3 million provision during 2023 included a $2.2 million provision for credit losses and a reversal

of $949,000 for unfunded commitments.

The $2.2 million provision was driven primarily by $329.3 million in loan growth during the year,

while the $949,000 reversal was driven by a $153.7 million decrease in unfunded commitments.

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.

Following is a summary of the activity in the allowance

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(dollars in thousands)

Balance, beginning of period

Adjustment for CECL

Provision for (reversal of) credit losses

beginning of period

for (reversal of) credit losses

Loan charge-offs

Loan recoveries

Net loan (charge-offs) recoveries

Balance, end of period

loan (charge-offs) recoveries

end of period

As of December 31, 2023, the allowance for credit

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31, 2022, or 1.18% of gross loans, and $30.4 million as of December 31, 2021, or 1.22% 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

$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.

The net charge-offs of $1.3 million and $2.1 million during 2021 and 2020, respectively, represented 0.06% and 0.10%

of the average outstanding loan portfolios for 2021 and 2020, respectively.

During the year ended December 31, 2023, we had net

charge-offs of $166,000, consisting of $761,000 of loans charged-off in the current year, partially offset by $595,000 of recoveries on

loans previously charged-off.

Net charge-offs were 0.00% of the average outstanding loan portfolio for 2023.

In addition, nonperforming

assets increased to 0.10% of total assets while our level of classified assets decreased to 4.25% at December 31, 2023.

We reported net recoveries of $1.4 million and net

charge-offs of $1.3 million for the years ended December 31, 2022 and 2021, respectively, including charge-offs of $485,000 and recoveries

of $825,000 in 2022 and 2021, respectively.

The net recoveries of $1.4 million and charge-offs of $1.3 million during 2022 and 2021, respectively,

represented 0.05% and 0.06% of the average outstanding loan portfolios for 2022 and 2021, respectively.

In addition, nonperforming assets

were 0.07% and 0.17% of total assets for 2022 and 2021, respectively, and classified assets were 4.72% and 12.61% at December 31, 2022

and 2021, respectively.

Noninterest Income

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to our noninterest income.

Year ended December 31,

ended December 31,

(dollars in thousands)

Mortgage banking income

Service fees on deposit accounts

ATM and debit card income

Income from bank owned life insurance

Net lender fees on PPP loan sale

Total noninterest income

Noninterest income was $9.6 million for the year

ended December 31, 2022, a $7.5 million, or 44.0%, decrease compared to noninterest income of $17.1 million for the year ended December

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

● 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

banking income

fees on deposit accounts

debit card income

bank owned life insurance

fees on PPP loan sale

on disposal of fixed assets

sale of securities

noninterest income

Noninterest income was $9.9 million for the year ended

December 31, 2023, a $280,000, or 2.9%, increase compared to noninterest income of $9.6 million for the year ended December 31, 2022.

The increase in noninterest income during 2023, compared to 2022, resulted primarily from a loss on disposal of assets during the prior

Offsetting the increases in noninterest income were decreases in mortgage banking income and other income.

Other income decreased

due to a decrease in loan fee income during 2023 as compared to 2022 due to fewer loan originations.

Noninterest income was $9.6 million for the year ended

December 31, 2022, a $7.5 million, or 44.0%, decrease compared to noninterest income of $17.1 million for the year ended December 31,

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.

● 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

Offsetting these decreases in noninterest income

was an increase in ATM and debit card income which was driven by additional transaction volume and an increase in bank owned life insurance

as we purchased $7.5 million in additional life insurance.

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.

During 2022, 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 2022.

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 Expenses

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(dollars in thousands)

Compensation and benefits

Other real estate owned expenses, net

Outside service and data processing costs

Professional fees

Total noninterest expenses

Noninterest expenses were $62.9 million for the

year ended December 31, 2022, a $6.5 million, or 11.5%, increase from noninterest expense of $56.4 million for 2021.

estate owned expenses, net

service and data processing costs

noninterest expenses

Noninterest expenses were $68.8 million for the year

ended December 31, 2023, a $5.9 million, or 9.4%, increase from noninterest expense of $62.9 million for 2022.

The increase in total noninterest expenses during

2023, compared to 2022, resulted primarily from the following:

● 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.

● 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:

● Other real estate owned expenses decreased $385,000

due to the sale of one commercial property in 2021.

Noninterest expenses were $56.4 million for the

year ended December 31, 2021, a $2.7 million, or 5.0%, increase from noninterest expense of $53.7 million for 2020.

Compensation and benefits expense increased $1.5 million, or 3.8%, during 2023 relating

primarily to an increase in salaries and incentive compensation.

Occupancy expenses increased $1.2 million, or 12.6%, driven by increased depreciation, insurance,

property taxes and maintenance expenses primarily related to our new headquarters building.

Outside service and data processing costs increased $966,000, or 15.8%, primarily due to increased

electronic banking, software licensing costs and debit card related expenses.

Insurance expenses increased $2.1 million, or 123.4%, related to higher FDIC insurance premiums.

Marketing expenses increased $141,000, or 11.6%, driven by an increase in community sponsorships

and business development.

Other noninterest expenses increased $211,000, or 6.2%, due primarily to an increase in telephone

expense and deposit account and fraud losses.

Partially offsetting the above increases was a decrease

in professional of $139,000, or 5.3% due to less legal fees and consulting expenses.

Noninterest expenses were $62.9 million for the year

ended December 31, 2022, a $6.5 million, or 11.5%, increase from noninterest expense of $56.4 million for 2021.

The increase in total noninterest expenses during

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

● 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.

● 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

to 53.8% for 2021.

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 building.

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.

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 was a decrease

in other real estate owned expenses of $385,000 due to the sale of one commercial property in 2021.

Our efficiency ratio was 78.7% for 2023 compared to

58.7% for 2022.

The efficiency ratio represents the percentage of one dollar of expense required to be incurred to earn a full dollar

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The increase during

the 2022 period relates primarily to the decrease in noninterest income, combined with the increase in noninterest expense compared to

the 2023 period relates primarily to the decrease in net interest income compared to the prior year.

Income tax expense was $4.0 million, $9.0 million

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December 31, 2023, compared to 23.6% for 2022, and 23.2% for 2021.

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

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

The fluctuation in the effective rate for each of the periods is driven

by to the impact of tax-exempt income and equity compensation transactions that occurred during the respective periods in relation to

pre-tax income.

Investment Securities

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million for an unrealized loss of $14.4 million at December 31, 2023 compared to a fair value of $93.3 million and amortized cost of $110.3

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

million for an unrealized loss of $17.0 million at December 31, 2022.

The amortized costs and the fair value of our investments

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(dollars in thousands)

Available for Sale

Corporate bonds

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Asset-backed securities

Mortgage-backed securities

Mortgage-backed

Contractual maturities and yields on our investments

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(dollars in thousands)

Available for Sale

Corporate bonds

US treasuries

US government agencies

State and political subdivisions

Asset-backed securities

Mortgage-backed securities

Other investments are comprised of the following

and are recorded at cost which approximates fair value.

US government

political subdivisions

Mortgage-backed

Other investments are comprised of the following and

are recorded at cost which approximates fair value.

(dollars in thousands)

Federal Home Loan Bank stock

Home Loan Bank stock

Other investments

Investment in Trust Preferred subsidiaries

in Trust Preferred subsidiaries

Since loans typically provide higher interest yields

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total loans outstanding at December 31, 2023 and 2022 were $3.60 billion and $3.27 billion, respectively.

The principal component of our loan portfolio is

loans secured by real estate mortgages.

The principal component of our loan portfolio is loans

secured by real estate mortgages.

As of December 31, 2023, our loan portfolio included $3.05 billion, or 84.8%, of real estate loans,

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past due as of December 31, 2023 and 2022, respectively.

Following is a summary of our loan composition

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.

Following is a summary of our loan composition for

each of the last three years ended December 31, 2023.

Of the $329.3 million in loan growth in 2023, $171.7 million of growth was in commercial

related loans, while $157.6 million of growth was in consumer related loans, specifically consumer real estate mortgages which grew by

$151.2 million during 2023.

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 $468,000, a term of

22 years, and an average rate of 3.71%.

Our average consumer real estate loan currently has a principal balance of $469,000, a term of 23 years,

and an average rate of 4.10%.

(dollars in thousands)

Owner occupied RE

Non-owner occupied RE

Total commercial loans

Total consumer loans

Total gross loans, net of deferred fees

Less – allowance for credit losses

Total loans, net

Maturities and Sensitivity of Loans to Changes

in Interest Rates

The information in the following table is based

on the contractual maturities of individual loans, including loans which may be subject to renewal at their contractual maturity.

commercial loans

consumer loans

gross loans, net of deferred fees

– allowance for credit losses

Maturities and Sensitivity of Loans to Changes in

Interest Rates

The information in the following table is based on

the contractual maturities of individual loans, including loans which may be subject to renewal at their contractual maturity.

of such loans is subject to review and credit approval, as well as modification of terms upon maturity.

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differ from the maturities reflected below because borrowers have the right to prepay obligations with or without prepayment penalties.

The following table summarizes the composition

and maturities of the loan portfolio.

The following table summarizes the composition and

maturities of the loan portfolio.

December 31, 2023

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fifteen years

Owner occupied RE

Non-owner occupied RE

Total commercial loans

Total consumer loans

Total gross loan, net of deferred fees

The following table summarizes the loans due after

one year by category.

commercial loans

consumer loans

gross loan, net of deferred fees

The following table summarizes the loans due after one

year by category.

Interest Rate

(dollars in thousands)

Owner occupied RE

Non-owner occupied RE

Total commercial loans

Total consumer loans

Total gross loan, net of deferred fees

commercial loans

consumer loans

gross loan, net of deferred fees

Nonperforming Assets

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into the future prior to restoration of accrual status.

(dollars in thousands)

Non-owner occupied RE

Nonaccruing troubled debt restructurings (TDRs)

Total nonaccrual loans, including nonaccruing TDRs

Other real estate owned

Total nonperforming assets

Asset Quality Ratios:

Nonperforming assets/total assets

Nonaccrual loans/gross loans

Total loans over 90 days past due (1)

Loans over 90 days past due and still accruing

Accruing troubled debt restructurings

in thousands)

troubled debt restructurings (TDRs)

nonaccrual loans, including nonaccruing TDRs

nonperforming assets

Quality Ratios:

Nonperforming

assets/total assets

loans/gross loans

loans over 90 days past due (1)

over 90 days past due and still accruing

troubled debt restructurings

Loans over 90 days are included in nonaccrual loans

At December 31, 2023, nonperforming assets were $4.0

$2.6 million, or 0.07% of total assets and 0.08% of gross loans, compared to $4.9 million, or 0.17% of total assets and 0.20% of gross

loans at December 31, 2021.

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

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.

million, or 0.10% of total assets and 0.11% of gross loans, compared to $2.6 million, or 0.07% of total assets and 0.08% of gross loans

at December 31, 2022.

Nonaccrual loans increased $1.3 million to $4.0 million at December 31, 2023 from $2.6 million at December 31, 2022.

During 2023, we added eight new loans totaling $2.0 million to nonaccrual, two loans totaling $283,000 were returned to accruing status,

one loan totaling $30,000 was charged off, while paydowns on nonaccrual loans totaled $388,000.

The amount of foregone interest income

on the nonaccrual loans as of December 31, 2023 and 2022 was approximately $73,000 and $28,000, respectively, for the twelve-month periods.

A significant portion, or 95.1%, of nonaccrual loans

at December 31, 2023 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 $40.7 million for the year ended December 31, 2023 is adequate.

As a general practice, most of our commercial loans

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we will typically seek performance under the guarantee.

In addition, approximately 85% of our loans are

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.

In addition, approximately 85% of our loans are collateralized

by real estate and approximately 96% of our individually evaluated loans are secured by real estate.

Individual loan evaluations are generally

performed for individually evaluated loans, which includes nonaccrual loans and certain loans not meeting the risk characteristics of

the pool, whether on accrual or nonaccrual status.

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 review each

of our individually evaluated loans on a quarterly basis to determine the level of impairment.

As of December 31, 2023, 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

At December 31, 2023, 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

be a TDR when the debtor experiences financial difficulties and we provide concessions such that we will not collect all principal and

interest in accordance with the original terms of the loan agreement.

Concessions can relate to the contractual interest rate, maturity

date, or payment structure of the note.

As part of our workout plan for individual loan relationships, we may restructure loan terms to

assist borrowers facing challenges in the current economic environment.

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.

totaled approximately $4.8 million for which $3.7 million of these loans have a reserve of approximately $688,000 allocated in the allowance.

At December 31, 2022, individually evaluated loans totaled approximately $7.1 million for which $6.8 million of these loans had a reserve

of approximately $1.3 million allocated in the allowance.

We adopted Accounting Standards Update (“ASU”)

2022-02, Financial Instruments - Credit Losses (Topic 326) Troubled Debt Restructurings and Vintage Disclosures (“ASU 2022-02”)

effective January 1, 2023.

The amendments in ASU 2022-02 eliminated the recognition and measurement of troubled debt restructurings and

enhanced disclosures for loan modifications to borrowers experiencing financial difficulty.

During the 12 months ended December 31, 2023,

we had two commercial business loans that were modified due to the borrowers experiencing financial difficulty.

The amortized cost basis

of the two loans was $319,000 at December 31, 2023.

Prior to adopting ASU 2022-02,

we considered a loan to be a TDR when the debtor experienced financial difficulty and we provided concessions such that we would not collect

all principal and interest in accordance with the original terms of the loan agreement.

Concessions related to the contractual interest

rate, maturity date, or payment structure of the note.

As part of our workout plan for individual loan relationships, we restructured

loan terms to assist borrowers facing challenges in the economic environment.

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

we considered TDRs.

As permitted by the CARES Act, we did 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 4 to the Consolidated Financial Statements for additional

information on TDRs.

information on loan modifications and TDRs.

Allowance for Credit Losses

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

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.

At December 31, 2023 and December 31, 2022, the allowance

for credit losses was $40.7 million and $38.6 million, respectively, or 1.13% and 1.18% of outstanding loans, respectively.

The allowance

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

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

In addition, our nonperforming assets increased to

0.10% compared to 0.07%, as a percentage of total assets, at December 31, 2023 and 2022, respectively.

Our classified assets decreased

to 4.25% of capital as of December 31, 2023, compared to 4.72% of capital as of December 31, 2022.

See Note 4 to the Consolidated Financial

Statements for more information on our allowance for credit losses.

The following table summarizes the net charge-off

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(dollars in thousands)

Net charge-offs:

Owner occupied RE

Non-owner occupied RE

Total commercial

Total consumer

Net loan (charge-offs) recoveries

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

loan (charge-offs) recoveries

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

The following

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(dollars in thousands)

Owner occupied RE

Non-owner occupied RE

Total commercial

Total consumer

Total allowance for credit losses

(1) Percentage of

loans in each category to total loans

allowance for credit losses

of loans in each category to total loans

Deposits and Other Interest-Bearing Liabilities

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regarding the use of brokered CDs limit our brokered CDs to 30% of total deposits.

In addition, we do not obtain time deposits of $100,000

or more through the Internet.

These guidelines allow us to take advantage of the attractive terms that wholesale funding can offer while

mitigating the related inherent risk.

Our retail deposits represented $2.90 billion,

or 92.5% of total deposits at December 31, 2022.

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

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)

These guidelines allow us to take advantage of the

attractive terms that wholesale funding can offer while mitigating the related inherent risk.

Our retail deposits represented $3.00 billion, or

88.8% of total deposits at December 31, 2023.

At December 31, 2022, retail deposits represented $2.90 billion, or 92.5% of our total deposits.

Brokered deposits were $379.4 million, representing 11.2% of our total deposits at December 31, 2023 and are included in time deposits

greater than $250,000 in the following table.

Our loan-to-deposit ratio was 107%, 104%, and 97% at December 31, 2023, 2022, and 2021,

respectively.

The following table shows the average balance amounts

and the average rates paid on deposits held by us.

(dollars in thousands)

bearing demand deposits

market accounts

deposits less than $250,000

Time 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

During the 12 months ended December 31, 2023, our

average transaction account balances increased by $197.0 million, or 7.8%, while our average time deposit balances increased by $330.1

million, or 109.4%.

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(dollars in thousands)

Three months or less

Over three through six months

Over six through twelve months

Over twelve months

months or less

through six months

through twelve months

twelve months

Time deposits that meet or exceed the FDIC insurance

limit of $250,000 at December 31, 2023 and December 31, 2022 were $568.1 million and $374.8 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.

At December 31, 2023 and

2022, the Company estimates that it has approximately $1.3 billion and $1.4 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 is our ability to fund operations, to meet

depositor withdrawals, to provide for customers’ credit needs, and to meet maturing obligations and existing commitments.

Our liquidity

principally depends on our cash flows from operating activities, investment in and maturity of assets, changes in balances of deposits

and borrowings, and our ability to borrow funds.

The bank failures in the first five months of 2023 exemplify the potential serious results

of the unexpected inability of insured depository institutions to obtain needed liquidity to satisfy deposit withdrawal requests, including

how quickly such requests can accelerate once uninsured depositors lose confidence in an institutions ability to satisfy its obligations

to depositors.

We seek to ensure our funding needs are met by maintaining a level of liquidity through asset and liability management.

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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same degree of control.

At December 31, 2022 and 2021, our cash and cash

equivalents amounted to $170.9 million and $167.2 million, or 4.6% and 5.7% of total assets, respectively.

Our investment securities at

December 31, 2022 and 2021 amounted to $104.2 million and $124.3 million, or 2.8% and 4.2% of total assets, respectively.

Investment securities

traditionally provide a secondary source of liquidity since they can be converted into cash in a timely manner.

Our ability to maintain and expand our deposit

base and borrowing capabilities serves as our primary source of liquidity.

We plan to meet our future cash needs through the liquidation

of temporary investments, the generation of deposits, and from additional borrowings.

At December 31, 2023 and 2022, our cash and cash equivalents

amounted to $156.2 million and $170.9 million, or 3.9% and 4.6% of total assets, respectively.

Our investment securities at December 31,

2023 and 2022 amounted to $154.6 million and $104.2 million, or 3.8% and 2.8% of total assets, respectively.

Investment securities traditionally

provide a secondary source of liquidity since they can be converted into cash in a timely manner.

Our ability to maintain and expand our deposit base

and borrowing capabilities serves as our primary source of liquidity.

We plan to meet our future cash needs through the liquidation of

temporary investments, the generation of deposits, and from additional borrowings.

In addition, we will receive cash upon the maturity

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banks totaling $108.5 million to meet short-term liquidity needs.

There were no borrowings against the lines at December 31, 2022.

There were no borrowings against the lines at December 31, 2023.Further,

in July 2023, we enrolled in the Federal Reserve’s Bank Term Funding Program which offers loans of up to one year in length if we

pledge collateral eligible for purchase by the Federal Reserve Banks in open market operations, such as U.S.

Treasuries, U.S.

agency securities,

agency mortgage-backed securities.

At December 31, 2023, we had $13.0 million of marketable investment securities pledged in

the Federal Reserve’s Bank Term Funding Program.

At December 31, 2023, we had $227.1 million pledged and available with the Federal

Reserve Discount Window.

We are also a member of the FHLB of Atlanta, from

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In addition, at December 31, 2023 we had $388.3 million of letters of credit outstanding with the FHLB to secure client deposits.

We have a relationship with IntraFi Promontory Network,

allowing us to provide deposit customers with access to aggregate FDIC insurance in amounts exceeding $250,000.

This gives us the ability,

as and when needed, to attract and retain large deposits from insurance conscious customers.

With IntraFi, we have the option to keep

deposits on balance sheet or sell them to other members of the network.

Additionally, subject to certain limits, the Bank can use IntraFi

to purchase cost-effective funding without collateralization and in lieu of generating funds through traditional brokered CDs or the FHLB.

In this manner, IntraFi can provide us with another funding option.

Thus, it serves as a deposit-gathering tool and an additional liquidity

management tool.

Under the Economic Growth, Regulatory Relief, and Consumer Protection Act, a well capitalized bank with a CAMELS rating

of 1 or 2 may hold reciprocal deposits up to the lesser of 20% of its total liabilities or $5 billion without those deposits being treated

as brokered deposits.

We also have a line of credit with another financial

institution for $15.0 million, which was unused at December 31, 2023.

The line of credit was renewed on December 21, 2021 at an interest

rate of One Month CME Term SOFR plus 3.5% and a maturity date of December 20, 2023.

We believe that our existing stable base of core

deposits, federal funds purchased lines of credit with correspondent banks, and borrowings from the FHLB will enable us to successfully

meet our long-term liquidity needs.

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

securities portfolio should we be required to meet those needs.

The line of credit was issued on December 28, 2023 at an interest

rate of the U.S.

Prime Rate plus 0.25% and a maturity date of February 28, 2025.

We believe that our existing stable base of core deposits,

federal funds purchased lines of credit with correspondent banks, availability with the Federal Reserve’s Bank Term Funding Program

and Discount Window, and borrowings from the FHLB will enable us to successfully meet our long-term liquidity needs.

However, as short-term

liquidity needs arise, we have the ability to sell a portion of our investment securities portfolio should we be required to meet those

Total shareholders’ equity was $312.5 million

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The $18.0 million increase during 2023 is due primarily to net income to

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

assets (net income divided by average total assets), return on average equity (net income divided by average equity), equity to assets

ratio (average equity divided by average assets), and tangible common equity ratio (total equity less preferred stock divided by total

assets) for the three years ended December 31, 2022.

common shareholders of $13.4 million, stock option exercises and expenses of $2.5 million and $2.1 million gain in other comprehensive

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), equity to assets ratio

(average equity divided by average assets), and tangible common equity ratio (total equity less preferred stock divided by total assets)

for the three years ended December 31, 2023.

Since our inception, we have not paid cash dividends.

in thousands)

Return on average

Return on average equity

Return on average common equity

Average equity to average assets

Tangible common equity to assets

(dollars in thousands)

on average assets

average equity

average common equity

equity to average assets ratio

common equity to assets ratio

Under the capital adequacy guidelines, regulatory

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In determining the amount of risk-weighted assets, all assets, including certain

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 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

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 of asset.

Tier 2 capital consists of Tier 1 capital plus the general reserve for credit losses,

subject to certain limitations.

We are 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 as Basel

III, impose minimum capital requirements for bank holding companies and banks.

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

To be considered “well-capitalized”

for purposes of certain rules and prompt corrective action requirements, the Bank must maintain a minimum total risked-based capital ratio

To be considered “well-capitalized” for

purposes of certain rules and prompt corrective action requirements, the Bank must maintain a minimum total risked-based capital ratio

of at least 10%, a total Tier 1 capital ratio of at least 8%, a common equity Tier 1 capital ratio of at least 6.5%, and a leverage ratio

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As of December 31, 2023, our capital ratios exceed these ratios and we remain “well capitalized.”

The following table summarizes the capital amounts

and ratios of the Bank and the regulatory minimum requirements.

See Note 23 to the Consolidated Financial Statements for ratios of the

The following table summarizes the capital amounts and

ratios of the Bank and the regulatory minimum requirements.

See Note 21 to the Consolidated Financial Statements for ratios of the Company.

adequacy purposes

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Tier 1 Capital (to average assets)

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

due 2029 to eligible purchasers in a private offering.

The Company intends to use the proceeds from the offering, which were approximately

$22.5 million, for general corporate purposes, including providing capital to the Bank and supporting organic growth.

The Notes rank junior

in right to payment to the Company’s current and future senior indebtedness.

The Notes are intended to qualify as Tier 2 capital

for regulatory capital purposes for the Company.

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

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

On September 30, 2019, the Company sold and issued $23.0

million in aggregate principal amount of its 4.75% Fixed-to-Floating Rate Subordinated Notes due 2029 to eligible purchasers in a

private offering.

The Company used the proceeds from the offering, which were approximately $22.5 million, for general corporate

purposes, including providing capital to the Bank and supporting organic growth.

The Notes rank junior in right to payment to the

Company’s current and future senior indebtedness.

The Notes are intended to qualify as Tier 2 capital for regulatory capital

purposes for the Company and are subject to certain limitations.

See Note 9 to the Consolidated Financial Statements for more information on

our subordinated debentures.

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

The effect of relative purchasing power over time

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prepared on an historical cost basis in accordance with generally accepted accounting principles.

Unlike most industrial companies, our assets and

liabilities are primarily monetary in nature.

Therefore, the effect of changes in interest rates will have a more significant impact on

our performance than will the effect of changing prices and inflation in general.

In addition, interest rates may generally increase as

the rate of inflation increases, although not necessarily in the same magnitude.

As discussed previously, we seek to manage the relationships

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

Commitments to extend credit are agreements to

lend to a client as long as the client has not violated any material condition established in the contract.

Commitments generally have

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

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.

Unlike most industrial companies, our assets and liabilities

are primarily monetary in nature.

Therefore, the effect of changes in interest rates will have a more significant impact on our performance

than will the effect of changing prices and inflation in general.

In addition, interest rates may generally increase as the rate of inflation

increases, although not necessarily in the same magnitude.

As discussed previously, we seek to manage the relationships 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 lend

to a client as long as the client has not violated any material condition established in the contract.

Commitments generally have fixed

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

At December 31, 2023, unfunded commitments to extend

credit were approximately $724.6 million, of which $145.6 million were at fixed rates and $579.0 million were at variable rates.

31, 2022, unfunded commitments to extend credit were $878.3 million, of which approximately $318.9 million were at fixed rates and $559.4

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

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

million and $10.2 million of commitments under letters of credit, respectively.

The credit risk and collateral involved in issuing letters

of credit is essentially the same as that involved in extending loan facilities to clients.

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.

At December 31, 2023 and 2022, there were $16.1 million

and $14.3 million of commitments under letters of credit, respectively.

The credit risk and collateral involved in issuing letters of

credit is essentially the same as that involved in extending loan facilities to clients.

Since most of the letters of credit are expected

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.

and Interest Rate Sensitivity

Market Risk and Interest Rate Sensitivity

Market risk is the risk of loss from adverse changes

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arise in the normal course of our business.

We actively monitor and manage our interest rate

risk exposure to seek to control the mix and maturities of our assets and liabilities utilizing a process we call asset/liability management.

We actively monitor and manage our interest rate risk

exposure to seek to control the mix and maturities of our assets and liabilities utilizing a process we call asset/liability management.

The essential purposes of asset/liability management are to seek to ensure adequate liquidity and to maintain an appropriate balance between

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Our asset/liability management committee (“ALCO”) monitors and considers methods of managing exposure to interest rate

We have both an internal ALCO consisting of senior management that meets at various times during each month and a board ALCO that

meets monthly.

The ALCOs are responsible for maintaining the level of interest rate sensitivity of our interest sensitive assets and liabilities

within board-approved limits.

We have both an internal ALCO consisting of senior management that meets no less than quarterly and a board risk committee that

meets quarterly.

These committees are responsible for maintaining the level of interest rate sensitivity of our interest sensitive assets

and liabilities within board-approved limits.

As of December 31, 2023, the following table summarizes

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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.

Interest rate scenario

Change in net interest

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.

rate scenario

in net interest

income from base

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under these commitments.

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

borrowings to supplement our supply of lendable funds, to assist in meeting deposit withdrawal requirements, and to fund growth of interest-earning

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

to supplement our supply of lendable funds, to assist in meeting deposit withdrawal requirements, and to fund growth of interest-earning

assets in excess of traditional deposit growth.

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debentures serve as our primary sources of such funds.

Obligations under noncancelable operating lease

agreements are payable over several years with the longest obligation expiring in 2032.

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.

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

Option periods that we have not yet exercised are not included

in this analysis as they do not represent contractual obligations until exercised.

Obligations under noncancelable operating lease agreements

are payable over several years with the longest obligation expiring in 2032.

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.

Contractual obligations

relative to these agreements are noted in the table below.

Option periods that we have not yet exercised are not included in this analysis

as they do not represent contractual obligations until exercised.

The following table provides payments due by period

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in thousands)

lease obligations

Certificates of deposit

Subordinated debentures

Operating 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