# SOUTHERN FIRST BANCSHARES INC (SFST) FY 2021 MD&A

Verbatim Item 7 Management's Discussion and Analysis from SOUTHERN FIRST BANCSHARES INC's 10-K for fiscal year 2021.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1090009/000120677422000604/sfs4023341-10k.htm
Accession: 0001206774-22-000604
Filing date: 2022-03-04
Report date: 2021-12-31
Extracted from a later financial-section MD&A body after the formal Item 7 span was a short reference.
Confidence: high

Company profile: /company/SFST/
All MD&A years: /company/SFST/mda/
Next year: /company/SFST/mda/fy2022/ (FY 2022)

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

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

OVERVIEW

Our business model continues
to be client-focused, utilizing relationship teams to provide our clients with a specific banker contact and support team responsible
for all of their banking needs. The purpose of this structure is to provide a consistent and superior level of professional service, and
we believe it provides us with a distinct competitive advantage. We consider exceptional client service to be a critical part of our culture,
which we refer to as “ClientFIRST.”

At December 31, 2021, we had total assets of $2.93
billion, a 17.8% increase from total assets of $2.48 billion at December 31, 2020. The largest components of our total assets are loans
which were $2.49 billion and $2.14 billion at December 31, 2021 and 2020, respectively. Our liabilities and shareholders’ equity
at December 31, 2021 totaled $2.65 billion and $277.9 million, respectively, compared to liabilities of $2.25 billion and shareholders’
equity of $228.3 million at December 31, 2020. The principal component of our liabilities is deposits which were $2.56 billion and $2.14
billion at December 31, 2021 and 2020, 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
liabilities, such as deposits and borrowings. Another key measure is the difference between the yield we earn on these interest-earning
assets and the rate we pay on our interest-bearing liabilities, which is called our net interest spread. In addition to earning interest
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, 2021 and 2020 was $46.7 million and $18.3 million, or diluted earnings per share (“EPS”)
of $5.85 and $2.34 for the years ended December 31, 2021 and 2020, 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. In addition, our net income available to shareholders was $27.9 million, or EPS of $3.58 for the
year ended December 31, 2019.

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. Noninterest
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. In addition,
as economic forecasts improved in 2021, we recaptured a portion of our provision for loan losses, compared with higher provision expense
in 2020. 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. Given
the ongoing and dynamic nature of the circumstances surrounding the pandemic, it is difficult to predict its future adverse financial
impact to the

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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:

[[GREPCENT_TABLE]]
[["","\u25cf","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;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","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 \u201cincurred loss\u201d standard that we currently use."]]
[[/GREPCENT_TABLE]]

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
location. 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.  In addition,
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
purposes.

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.

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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, 2021, 2020, and 2019 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.

[[GREPCENT_TABLE]]
[["","","Years Ended December 31,"],["(dollars in thousands, except per share data)","","2021","","","2020","","","2019"],["BALANCE SHEET DATA"],["Total assets","","$","2,925,548","","","$","2,482,587","","","","2,267,195"],["Investment securities","","","124,302","","","","98,364","","","","74,642"],["Loans (1)","","","2,489,877","","","","2,142,867","","","","1,943,525"],["Allowance for loan losses","","","30,408","","","","44,149","","","","16,642"],["Deposits","","","2,563,826","","","","2,142,758","","","","1,876,124"],["FHLB advances and other borrowings","","","-","","","","25,000","","","","110,000"],["Subordinated debentures","","","36,106","","","","35,998","","","","35,890"],["Common equity","","","277,901","","","","228,294","","","","205,860"],["Preferred stock","","","-","","","","-","","","","-"],["Shareholders\u2019 equity","","","277,901","","","","228,294","","","","205,860"],["SELECTED RESULTS OF OPERATIONS DATA"],["Interest income","","$","93,167","","","$","94,818","","","","92,652"],["Interest expense","","","5,435","","","","15,008","","","","25,383"],["Net interest income","","","87,732","","","","79,810","","","","67,269"],["Provision for loan losses","","","(12,400",")","","","29,600","","","","2,300"],["Net interest income after provision for loan losses","","","100,132","","","","50,210","","","","64,969"],["Noninterest income","","","17,101","","","","27,353","","","","14,983"],["Noninterest expenses","","","56,430","","","","53,744","","","","44,473"],["Income before income tax expense","","","60,803","","","","23,819","","","","35,479"],["Income tax expense","","","14,092","","","","5,491","","","","7,621"],["Net income","","","46,711","","","","18,328","","","","27,858"],["Preferred stock dividends","","","-","","","","-","","","","-"],["Net income available to common shareholders","","$","46,711","","","$","18,328","","","","27,858"],["PER COMMON SHARE DATA"],["Basic","","$","5.96","","","$","2.37","","","","3.70"],["Diluted","","","5.85","","","","2.34","","","","3.58"],["Book value","","","35.07","","","","29.37","","","","26.83"],["Weighted average number of common shares outstanding:"],["Basic, in thousands","","","7,844","","","","7,719","","","","7,528"],["Diluted, in thousands","","","7,989","","","","7,824","","","","7,773"],["SELECTED FINANCIAL RATIOS"],["Performance Ratios:"],["Return on average assets","","","1.75","%","","","0.76","%","","","1.35","%"],["Return on average equity","","","18.64","%","","","8.49","%","","","14.72","%"],["Return on average common equity","","","18.64","%","","","8.49","%","","","14.72","%"],["Net interest margin, tax equivalent(2)","","","3.45","%","","","3.55","%","","","3.43","%"],["Efficiency ratio (3)","","","53.83","%","","","50.15","%","","","54.07","%"],["Asset Quality Ratios:"],["Nonperforming assets to total loans (1)","","","0.20","%","","","0.43","%","","","0.35","%"],["Nonperforming assets to total assets","","","0.17","%","","","0.37","%","","","0.30","%"],["Net charge-offs to average total loans","","","0.06","%","","","0.10","%","","","0.08","%"],["Allowance for loan losses to nonperforming loans","","","625.16","%","","","547.14","%","","","244.95","%"],["Allowance for loan losses to total loans","","","1.22","%","","","2.06","%","","","0.86","%"],["Holding Company Capital Ratios:"],["Total risk-based capital ratio","","","14.90","%","","","14.38","%","","","13.73","%"],["Tier 1 risk-based capital ratio","","","12.65","%","","","11.97","%","","","11.63","%"],["Leverage ratio","","","10.19","%","","","9.70","%","","","10.10","%"],["Common equity tier 1 ratio(4)","","","12.09","%","","","11.32","%","","","10.94","%"],["Tangible common equity(5)","","","9.50","%","","","9.20","%","","","9.08","%"],["Growth Ratios:"],["Change in assets","","","17.84","%","","","9.50","%","","","19.29","%"],["Change in loans","","","16.19","%","","","10.26","%","","","15.87","%"],["Change in deposits","","","19.65","%","","","14.21","%","","","13.83","%"],["Change in net income to common shareholders","","","154.86","%","","","-34.21","%","","","24.99","%"],["Change in earnings per common share - diluted","","","150.00","%","","","-34.64","%","","","24.31","%"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["Footnotes to table:"],["(1)","Excludes loans held for sale."],["(2)","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."],["(3)","Noninterest expense divided by the sum of net interest income and noninterest income."],["(4)","The common equity tier 1 ratio is calculated as the sum of common equity divided by risk-weighted assets."],["(5)","The common equity ratio is calculated as total equity less preferred stock divided by total assets."]]
[[/GREPCENT_TABLE]]

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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, 2021.

Certain accounting policies inherently involve
a greater reliance on the use of estimates, assumptions and judgments and, as such, have a greater possibility of producing results that
could be materially different than originally reported, which could have a material impact on the carrying values of our assets and liabilities
and our results of operations. We consider these accounting policies and estimates to be critical accounting policies. We have identified
the determination of the allowance for loan losses, 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
becomes available or circumstances change, including overall changes in the economic climate and/or market interest rates. Therefore,
management has reviewed and approved these critical accounting policies and estimates and has discussed these policies with the Company’s
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. In contrast,
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.

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. A significant change in assumptions
may result in a significant change in fair value, which in turn, may result in a higher degree of financial statement volatility and could
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
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 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.

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Income Taxes

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
are recognized for the expected future tax consequences of events that have been recognized in the consolidated financial statements or
tax returns. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years
in which those temporary differences are expected to be realized or settled.

RESULTS OF OPERATIONS

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, 2021, 2020, and 2019, our
net interest income was $87.7 million, $79.8 million, and $67.3 million, respectively. The $7.9 million, or 9.9%, 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. During
2020, our net interest income increased $12.5 million, or 18.6%, compared to 2019, while average interest-earning assets increased $328.1
million and average interest-bearing liabilities increased $152.2 million.

Interest income for the years ended December 31,
2021, 2020, and 2019 was $93.2 million, $94.8 million, and $92.7 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
sold. As such, 98.3% of our interest income related to interest on loans during 2021, compared to 98.2% during 2020 and 96.0% during 2019.
Also, included in interest income on loans was $1.4 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.

Interest expense was $5.4 million, $15.0 million,
and $25.4 million for the years ended December 31, 2021, 2020, and 2019, respectively. Interest expense on deposits for 2021 represented
71.9% of total interest expense, compared to 87.0% for 2020, and 93.5% for 2019, while interest expense on borrowings represented 28.1%
of total interest expense for 2021, compared to 13.0% for 2020, and 6.5% for 2019. The decrease in interest expense on deposits during
2021 resulted from a decrease in deposit rates.

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 2021, 2020, and 2019. Similarly, the “Rate/Volume Analysis” table demonstrates
the effect of changing interest rates and changing volume of assets and liabilities on our financial condition during the periods shown.
We also track the sensitivity of our various categories of assets and liabilities to changes in interest rates, and we have included tables
to illustrate our interest rate sensitivity with respect to interest-earning and interest-bearing accounts.

The following table sets forth information related
to our average balance sheet, average yields on assets, and average costs of liabilities at December 31, 2021, 2020 and 2019. We derived
these yields or costs by dividing income or expense by the average balance of the corresponding assets or liabilities. We derived average
balances from the daily balances throughout the periods indicated. During the same periods, we had no securities purchased with agreements
to resell. All investments were owned at an original maturity of over one year. Nonaccrual loans are included in earning assets in the
following tables. Loan yields have been reduced to reflect the negative impact on our earnings of loans on nonaccrual status. The net
of capitalized loan costs and fees are amortized into interest income on loans.

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Average Balances, Income and Expenses, Yields and
Rates

[[GREPCENT_TABLE]]
[["","","For the Year Ended December 31,"],["","","2021","","","2020","","","2019"],["(dollars in thousands)","","Average Balance","","","Income/ Expense","","","Yield/ Rate","","","Average Balance","","","Income/ Expense","","","Yield/ Rate","","","Average Balance","","","Income/ Expense","","","Yield/ Rate"],["Interest-earning assets"],["Federal funds sold and interest-bearing deposits with banks","","$","123,379","","","$","233","","","","0.19","%","","$","105,344","","","$","270","","","","0.26","%","","$","71,797","","","$","1,622","","","","2.26","%"],["Investment securities, taxable","","","92,812","","","","1,110","","","","1.20","%","","","74,517","","","","1,253","","","","1.68","%","","","72,137","","","","1,961","","","","2.72","%"],["Investment securities, nontaxable (1)","","","11,331","","","","292","","","","2.58","%","","","6,262","","","","210","","","","3.36","%","","","7,376","","","","182","","","","2.46","%"],["Loans (2)","","","2,314,257","","","","91,599","","","","3.96","%","","","2,106,569","","","","93,133","","","","4.42","%","","","1,813,259","","","","88,929","","","","4.90","%"],["Total earning assets","","","2,541,779","","","","93,234","","","","3.67","%","","","2,292,692","","","","94,866","","","","4.14","%","","","1,964,569","","","","92,694","","","","4.72","%"],["Nonearning assets","","","126,654","","","","","","","","","","","","103,212","","","","","","","","","","","","101,647"],["Total assets","","$","2,668,433","","","","","","","","","","","$","2,395,904","","","","","","","","","","","$","2,066,216"],["Interest-bearing liabilities"],["NOW accounts","","$","306,669","","","","204","","","","0.07","%","","$","255,514","","","","352","","","","0.14","%","","$","205,513","","","","555","","","","0.27","%"],["Savings & money market","","","1,176,820","","","","2,454","","","","0.21","%","","","1,003,339","","","","7,513","","","","0.75","%","","","864,708","","","","15,086","","","","1.74","%"],["Time deposits","","","176,301","","","","1,251","","","","0.71","%","","","301,078","","","","5,190","","","","1.72","%","","","363,431","","","","8,089","","","","2.23","%"],["Total interest-bearing deposits","","","1,659,790","","","","3,909","","","","0.24","%","","","1,559,931","","","","13,055","","","","0.84","%","","","1,433,652","","","","23,730","","","","1.66","%"],["FHLB advances and other borrowings","","","704","","","","11","","","","1.56","%","","","30,990","","","","338","","","","1.09","%","","","21,914","","","","736","","","","3.36","%"],["Subordinated debt","","","36,049","","","","1,515","","","","4.20","%","","","35,940","","","","1,615","","","","4.49","%","","","19,133","","","","917","","","","4.79","%"],["Total interest-bearing liabilities","","","1,696,543","","","","5,435","","","","0.32","%","","","1,626,861","","","","15,008","","","","0.92","%","","","1,474,699","","","","25,383","","","","1.72","%"],["Noninterest-bearing liabilities","","","721,267","","","","","","","","","","","","553,098","","","","","","","","","","","","402,216"],["Shareholders\u2019 equity","","","250,623","","","","","","","","","","","","215,945","","","","","","","","","","","","189,301"],["Total liabilities and shareholders\u2019 equity","","$","2,668,433","","","","","","","","","","","$","2,395,904","","","","","","","","","","","$","2,066,216"],["Net interest spread","","","","","","","","","","","3.35","%","","","","","","","","","","","3.22","%","","","","","","","","","","","3.00","%"],["Net interest income(tax equivalent)/margin","","","","","","$","87,799","","","","3.45","%","","","","","","$","79,858","","","","3.48","%","","","","","","$","67,311","","","","3.43","%"],["Less: tax-equivalent adjustment (1)","","","","","","","(67",")","","","","","","","","","","","(48",")","","","","","","","","","","","(42",")"],["Net interest income","","","","","","$","87,732","","","","","","","","","","","$","79,810","","","","","","","","","","","$","67,269"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","(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."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","(2)","Includes loans held for sale and nonaccrual loans."]]
[[/GREPCENT_TABLE]]

Our net interest margin,
on a tax-equivalent basis (TE), was 3.45%, 3.48% and 3.43% for the years ended December 31, 2021, 2020 and 2019, respectively. Our net
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.

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
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 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.

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. The increase in average
interest-bearing liabilities was driven primarily by a $99.9 million increase in average interest-bearing deposits at an average rate
of 0.24%. During 2020, our average interest-bearing liabilities increased by $152.2 million, compared to 2019, while the cost of our interest-bearing
liabilities decreased by 80 basis points.

51 

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Our net interest spread
was 3.35% for the year ended December 31, 2021, compared to 3.22% for the same period in 2020 and 3.00% for 2019. 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. The
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. 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.

Rate/Volume Analysis

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
assets and interest-bearing liabilities and the applicable rates have had on changes in net interest income for the periods presented.

[[GREPCENT_TABLE]]
[["","","Years Ended"],["","","December 31, 2021 vs. 2020","","","December 31, 2020 vs. 2019"],["","","Increase (Decrease) Due to Change in","","","Increase (Decrease) Due to Change in"],["(dollars in thousands)","","Volume","","","Rate","","","Rate/ Volume","","","Total","","","Volume","","","Rate","","","Rate/ Volume","","","Total"],["Interest income"],["Loans","","$","9,182","","","","(9,754",")","","","(962",")","","","(1,534",")","","","14,385","","","","(8,763",")","","","(1,418",")","","","4,204"],["Investment securities","","","409","","","","(380",")","","","(109",")","","","(80",")","","","33","","","","(708",")","","","(11",")","","","(686",")"],["Federal funds sold","","","46","","","","(71",")","","","(12",")","","","(37",")","","","758","","","","(1,438",")","","","(672",")","","","(1,352",")"],["Total interest income","","","9,637","","","","(10,205",")","","","(1,083",")","","","(1,651",")","","","15,176","","","","(10,909",")","","","(2,101",")","","","2,166"],["Interest expense"],["Deposits","","","6,455","","","","(10,439",")","","","(5,162",")","","","(9,146",")","","","2,088","","","","(11,731",")","","","(1,032",")","","","(10,675",")"],["FHLB advances and other borrowings","","","(330",")","","","146","","","","(143",")","","","(327",")","","","305","","","","(497",")","","","(206",")","","","(398",")"],["Subordinated debt","","","5","","","","(105",")","","","-","","","","(100",")","","","805","","","","(57",")","","","(50",")","","","698"],["Total interest expense","","","6,130","","","","(10,398",")","","","(5,305",")","","","(9,573",")","","","3,198","","","","(12,285",")","","","(1,288",")","","","(10,375",")"],["Net interest income","","$","3,507","","","","193","","","","4,222","","","","7,922","","","","11,978","","","","1,376","","","","(813",")","","","12,541"]]
[[/GREPCENT_TABLE]]

Net interest income, the largest component of our
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. 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. Interest
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. Please see
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.

Following is a summary of the activity in the allowance
for loan losses.

[[GREPCENT_TABLE]]
[["","","December 31,"],["(dollars in thousands)","","2021","","","2020","","","2019"],["Balance, beginning of period","","$","44,149","","","","16,642","","","","15,762"],["Provision for (reversal of) loan losses","","","(12,400",")","","","29,600","","","","2,300"],["Loan charge-offs","","","(2,166",")","","","(3,414",")","","","(1,515",")"],["Loan recoveries","","","825","","","","1,321","","","","95"],["Net loan charge-offs","","","(1,341",")","","","(2,093",")","","","(1,420",")"],["Balance, end of period","","$","30,408","","","","44,149","","","","16,642"]]
[[/GREPCENT_TABLE]]

52 

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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
loans. 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
increase.

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.

We reported net charge-offs of $2.1 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
2019, respectively. The net charge-offs of $2.1 million and $1.4 million during 2020 and 2019, respectively, represented 0.10% and 0.08%
of the average outstanding loan portfolios for 2020 and 2019, respectively.

Noninterest Income

The following table sets forth information related
to our noninterest income.

[[GREPCENT_TABLE]]
[["","","Year ended December 31,"],["(dollars in thousands)","","2021","","","2020","","","2019"],["Mortgage banking income","","$","11,376","","","","19,785","","","","9,923"],["Service fees on deposit accounts","","","757","","","","860","","","","1,061"],["ATM and debit card income","","","2,092","","","","1,741","","","","1,728"],["Income from bank owned life insurance","","","1,231","","","","1,091","","","","1,001"],["Gain on sale of investment securities","","","-","","","","3","","","","727"],["Loss on extinguishment of debt","","","-","","","","(37",")","","","(1,496",")"],["Net lender fees on PPP loan sale","","","-","","","","2,247","","","","-"],["Other income","","","1,645","","","","1,663","","","","2,039"],["Total noninterest income","","$","17,101","","","","27,353","","","","14,983"]]
[[/GREPCENT_TABLE]]

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
31, 2020. The decrease in noninterest income during 2021, compared to 2020, resulted primarily from the following:

[[GREPCENT_TABLE]]
[["","\u00b7","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."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u00b7","Service fees on deposit accounts declined $103,000, or 12.0%, related primarily to a reduction in Non-sufficient Funds (\u201cNSF\u201d) income and lockbox services income."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u00b7","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 2020."]]
[[/GREPCENT_TABLE]]

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.

53 

Table of Contents

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
31, 2019. The increase in noninterest income during 2020, compared to 2019 resulted primarily from the following:

[[GREPCENT_TABLE]]
[["","\u00b7","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."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u00b7","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 below."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u00b7","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."]]
[[/GREPCENT_TABLE]]

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

The following table sets forth information related
to our noninterest expenses.

[[GREPCENT_TABLE]]
[["","","Years ended December 31,"],["(dollars in thousands)","","2021","","","2020","","","2019"],["Compensation and benefits","","$","28,854","","","","26,287","","","","23,826"],["Mortgage production costs","","","8,753","","","","9,898","","","","6,436"],["Occupancy","","","6,950","","","","6,226","","","","5,513"],["Other real estate owned (income) expenses, net","","","385","","","","1,223","","","","(26",")"],["Outside service and data processing costs","","","4,865","","","","4,223","","","","3,782"],["Insurance","","","1,149","","","","1,380","","","","813"],["Professional fees","","","2,057","","","","1,771","","","","1,327"],["Marketing","","","873","","","","628","","","","791"],["Other","","","2,544","","","","2,108","","","","2,011"],["Total noninterest expenses","","$","56,430","","","","53,744","","","","44,473"]]
[[/GREPCENT_TABLE]]

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.

The increase in total noninterest expenses during
2021, compared to 2020, resulted primarily from the following:

[[GREPCENT_TABLE]]
[["","\u00b7","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 employees. 13 of which were hired to support growth in our North Carolina offices."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u00b7","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."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u00b7","Outside service and data processing costs increased $642,000, or 15.2%, primarily due to increased electronic banking, software licensing costs and ATM card related expenses."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u00b7","Professional fees increased $286,000, or 16.1%, driven by increased audit, legal and various consulting fees."]]
[[/GREPCENT_TABLE]]

Partially offsetting the above increases were the
following decreases in noninterest expense:

[[GREPCENT_TABLE]]
[["","\u00b7","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."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u00b7","Other real estate owned expenses decreased $838,000 due to one large valuation adjustment on a commercial property in 2020."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u00b7","Insurance expenses decreased $231,000, or 16.7%, resulting primarily from reduced FDIC assessments during 2021."]]
[[/GREPCENT_TABLE]]

Noninterest expenses were $53.7 million for the
year ended December 31, 2020, a $9.3 million, or 20.8%, increase from noninterest expense of $44.5 million for 2019.

54 

Table of Contents

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

[[GREPCENT_TABLE]]
[["","\u00b7","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."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u00b7","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."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u00b7","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."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u00b7","Other real estate owned expenses increased $1.2 million due to a valuation adjustment on one commercial property."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u00b7","Outside service and data processing costs increased $441,000, or 11.7%, primarily due to increased electronic banking, software licensing costs and ATM card related expenses."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u00b7","Insurance expenses increased $567,000, or 69.7%, resulting primarily from higher FDIC assessments during the year."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u00b7","Professional fees increased $444,000, or 33.5%, driven by increased audit, legal and various consulting fees."]]
[[/GREPCENT_TABLE]]

Our efficiency ratio was 53.8% for 2021 compared
to 50.2% for 2020. The efficiency ratio represents the percentage of one dollar of expense required to be incurred to earn a full dollar
of revenue and is computed by dividing noninterest expense by the sum of net interest income and noninterest income. The increase during
the 2021 period relates primarily to the decrease in noninterest income, combined with the increase in noninterest expense compared to
2020.

Income Taxes

Income tax expense was $14.1 million, $5.5 million
and $7.6 million for the years ended December 31, 2021, 2020 and 2019, respectively. Our effective tax rate was 23.2% for the year ended
December 31, 2021, compared to 23.1% for 2020, and 21.5% for 2019. The increase in the effective rate for the 2021 and 2020 periods is
related to the greater impact of various employee stock option transactions that occurred during the 2019 period.

Investment Securities

At December 31, 2021 and 2020, our investment securities
portfolio was $124.3 million and $98.4 million, respectively, and represented approximately 4.2% and 4.0% 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.

The amortized costs and the fair value of our investments
are as follows.

[[GREPCENT_TABLE]]
[["","","December 31,"],["","","2021","","","2020","","","2019"],["","","Amortized","","","Fair","","","Amortized","","","Fair","","","Amortized","","","Fair"],["(dollars in thousands)","","Cost","","","Value","","","Cost","","","Value","","","Cost","","","Value"],["Available for Sale"],["Corporate bonds","","$","2,198","","","","2,188","","","","-","","","","-","","","","-","","","","-"],["US treasuries","","","999","","","","992","","","","-","","","","-","","","","-","","","","-"],["US government agencies","","","14,504","","","","14,169","","","","6,500","","","","6,493","","","","500","","","","499"],["SBA securities","","","429","","","","438","","","","504","","","","485","","","","550","","","","531"],["State and political subdivisions","","","24,887","","","","25,176","","","","18,614","","","","19,388","","","","4,205","","","","4,184"],["Asset-backed securities","","","10,136","","","","10,164","","","","11,587","","","","11,529","","","","13,351","","","","13,167"],["Mortgage-backed securities","","","68,065","","","","67,154","","","","56,229","","","","56,834","","","","49,465","","","","49,313"],["Total","","$","121,218","","","","120,281","","","","93,434","","","","94,729","","","","68,071","","","","67,694"]]
[[/GREPCENT_TABLE]]

Contractual maturities and yields on our investments
are shown in the following table. Expected maturities may differ from contractual maturities because issuers may have the right to call
or prepay obligations with or without call or prepayment penalties.

55 

Table of Contents

[[GREPCENT_TABLE]]
[["","","December 31, 2021"],["","","Less Than One Year","","","One to Five Years","","","Five to Ten Years","","","Over Ten Years","","","Total"],["(dollars in thousands)","","Amount","","","Yield","","","Amount","","","Yield","","","Amount","","","Yield","","","Amount","","","Yield","","","Amount","","","Yield"],["Available for Sale"],["Corporate bonds","","$","-","","","","-","","","$","-","","","","-","","","$","2,188","","","","1.98","%","","$","-","","","","-","","","$","2,188","","","","1.98","%"],["US treasuries","","","-","","","","-","","","","-","","","","-","","","","992","","","","1.27","%","","","-","","","","-","","","","992","","","","1.27","%"],["US government agencies","","","-","","","","-","","","","2,482","","","","0.36","%","","","8,756","","","","1.31","%","","","2,932","","","","1.79","%","","","14,169","","","","1.24","%"],["SBA securities","","","-","","","","-","","","","-","","","","-","","","","-","","","","-","","","","438","","","","1.01","%","","","438","","","","1.01","%"],["State and political subdivisions","","","-","","","","-","","","","470","","","","2.13","%","","","4,282","","","","1.61","%","","","20,423","","","","2.21","%","","","25,176","","","","2.11","%"],["Asset-backed securities","","","-","","","","-","","","","-","","","","-","","","","1,614","","","","1.79","%","","","8,550","","","","0.97","%","","","10,164","","","","1.10","%"],["Mortgage-backed securities","","","387","","","","2.10","%","","","4,411","","","","1.29","%","","","9,121","","","","1.59","%","","","53,235","","","","1.38","%","","","67,154","","","","1.40","%"],["Total","","$","387","","","","2.10","%","","$","7,363","","","","1.03","%","","$","26,953","","","","1.53","%","","$","85,578","","","","1.55","%","","$","120,281","","","","1.52","%"]]
[[/GREPCENT_TABLE]]

Other investments are comprised of the following
and are recorded at cost which approximates fair value.

[[GREPCENT_TABLE]]
[["","","December 31,"],["(dollars in thousands)","","2021","","","2020"],["Federal Home Loan Bank stock","","$","1,241","","","","3,103"],["Other investments","","","2,377","","","","129"],["Investment in Trust Preferred subsidiaries","","","403","","","","403"],["Total","","$","4,021","","","","3,635"]]
[[/GREPCENT_TABLE]]

Loans

Since loans typically provide higher interest yields
than other types of interest-earning assets, a substantial percentage of our earning assets are invested in our loan portfolio. Average
loans for the years ended December 31, 2021 and 2020 were $2.31 billion and $2.11 billion, respectively. Before allowance for loan losses,
total loans outstanding at December 31, 2021 and 2020 were $2.49 billion and $2.14 billion, respectively.

The principal component of our loan portfolio is
loans secured by real estate mortgages. As of December 31, 2021, our loan portfolio included $2.13 billion, or 85.5%, of real estate loans,
compared to $1.81 billion, or 84.6%, as of December 31, 2020. Most of our real estate loans are secured by residential or commercial property.
We obtain a security interest in real estate, in addition to any other available collateral, in order to increase the likelihood of the
ultimate repayment of the loan. Generally, we limit the loan-to-value ratio on loans to coincide with the appropriate regulatory guidelines.
We attempt to maintain a relatively diversified loan portfolio to help reduce the risk inherent in concentration in certain types of collateral
and business types. In addition to traditional residential mortgage loans, we issue second mortgage residential real estate loans and
home equity lines of credit. Home equity lines of credit totaled $154.8 million as of December 31, 2021, of which approximately 49% were
in a first lien position, while the remaining balance was second liens, compared to $157.0 million as of December 31, 2020, of which approximately
45% were in first lien positions and the remaining balance was in second liens. The average home equity loan had a balance of approximately
$81,000 and a loan to value of approximately 62% as of December 31, 2021, compared to an average loan balance of $83,000 and a loan to
value of approximately 62% as of December 31, 2020. Further, 1.0% and 0.2% of our total home equity lines of credit were over 30 days
past due as of December 31, 2021 and 2020, respectively.

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. 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%.

56 

Table of Contents

[[GREPCENT_TABLE]]
[["","","December 31,"],["","","2021","","","2020","","","2019"],["","","","","","% of","","","","","","% of","","","","","","% of"],["(dollars in thousands)","","Amount","","","Total","","","Amount","","","Total","","","Amount","","","Total"],["Commercial"],["Owner occupied RE","","$","488,965","","","","19.6","%","","$","433,320","","","","20.2","%","","$","407,851","","","","21.0","%"],["Non-owner occupied RE","","","666,833","","","","26.8","%","","","585,269","","","","27.3","%","","","501,878","","","","25.8","%"],["Construction","","","64,425","","","","2.6","%","","","61,467","","","","2.9","%","","","80,486","","","","4.1","%"],["Business","","","333,049","","","","13.4","%","","","307,599","","","","14.4","%","","","308,123","","","","15.9","%"],["Total commercial loans","","","1,553,272","","","","62.4","%","","","1,387,655","","","","64.8","%","","","1,298,338","","","","66.8","%"],["Consumer"],["Real estate","","","694,401","","","","27.9","%","","","536,311","","","","25.0","%","","","398,245","","","","20.5","%"],["Home equity","","","154,839","","","","6.2","%","","","156,957","","","","7.3","%","","","179,738","","","","9.3","%"],["Construction","","","59,846","","","","2.4","%","","","40,525","","","","1.9","%","","","41,471","","","","2.1","%"],["Other","","","27,519","","","","1.1","%","","","21,419","","","","1.0","%","","","25,733","","","","1.3","%"],["Total consumer loans","","","936,605","","","","37.6","%","","","755,212","","","","35.2","%","","","645,187","","","","33.2","%"],["Total gross loans, net of deferred fees","","","2,489,877","","","","100.0","%","","","2,142,867","","","","100.0","%","","","1,943,525","","","","100.0","%"],["Less \u2013 allowance for loan losses","","","(30,408",")","","","","","","","(44,149",")","","","","","","","(16,642",")"],["Total loans, net","","$","2,459,469","","","","","","","$","2,098,718","","","","","","","$","1,926,883"]]
[[/GREPCENT_TABLE]]

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

[[GREPCENT_TABLE]]
[["","","December 31, 2021"],["(dollars in thousands)","","One year or less","","","After one but within five years","","","After five but within fifteen years","","","After fifteen years","","","Total"],["Commercial"],["Owner occupied RE","","$","16,858","","","","120,480","","","","316,261","","","","35,366","","","","488,965"],["Non-owner occupied RE","","","47,453","","","","329,085","","","","263,317","","","","26,978","","","","666,833"],["Construction","","","4,882","","","","16,393","","","","29,310","","","","13,840","","","","64,425"],["Business","","","66,833","","","","152,732","","","","109,008","","","","4,476","","","","333,049"],["Total commercial loans","","","136,026","","","","618,690","","","","717,896","","","","80,660","","","","1,553,272"],["Consumer"],["Real estate","","","14,632","","","","45,219","","","","162,655","","","","471,895","","","","694,401"],["Home equity","","","2,178","","","","21,280","","","","125,427","","","","5,954","","","","154,839"],["Construction","","","962","","","","594","","","","8,956","","","","49,334","","","","59,846"],["Other","","","8,071","","","","15,711","","","","3,341","","","","396","","","","27,519"],["Total consumer loans","","","25,843","","","","82,804","","","","300,379","","","","527,579","","","","936,605"],["Total gross loan, net of deferred fees","","$","161,869","","","","701,494","","","","1,018,275","","","","608,239","","","","2,489,877"]]
[[/GREPCENT_TABLE]]

57 

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The following
table summarizes the loans due after one year by category.

[[GREPCENT_TABLE]]
[["","","Interest Rate"],["(dollars in thousands)","","Fixed","","","Floating or Adjustable"],["Commercial"],["Owner occupied RE","","","463,589","","","","8,518"],["Non-owner occupied RE","","","533,565","","","","85,815"],["Construction","","","57,139","","","","2,404"],["Business","","","191,522","","","","74,694"],["Total commercial loans","","","1,245,815","","","","171,431"],["Consumer"],["Real estate","","","679,756","","","","13"],["Home equity","","","12,850","","","","139,811"],["Construction","","","58,884","","","","-"],["Other","","","13,220","","","","6,228"],["Total consumer loans","","","764,710","","","","146,052"],["Total gross loan, net of deferred fees","","","2,010,525","","","","317,483"]]
[[/GREPCENT_TABLE]]

Nonperforming Assets

Nonperforming assets include real estate acquired
through foreclosure or deed taken in lieu of foreclosure and loans on nonaccrual status. The following table shows the nonperforming assets
and the related percentage of nonperforming assets to total assets and gross loans for the five years ended December 31, 2021. Generally,
a loan is placed on nonaccrual status when it becomes 90 days past due as to principal or interest, or when we believe, after considering
economic and business conditions and collection efforts, that the borrower’s financial condition is such that collection of the
loan is doubtful. A payment of interest on a loan that is classified as nonaccrual is recognized as a reduction in principal when received.
Our policy with respect to nonperforming loans requires the borrower to make a minimum of six consecutive payments in accordance with
the loan terms before that loan can be placed back on accrual status. Further, the borrower must show capacity to continue performing
into the future prior to restoration of accrual status.

[[GREPCENT_TABLE]]
[["","","December 31,"],["(dollars in thousands)","","2021","","","2020","","","2019"],["Commercial"],["Owner occupied RE","","$","-","","","","-","","","","-"],["Non-owner occupied RE","","","270","","","","1,143","","","","188"],["Construction","","","-","","","","139","","","","-"],["Business","","","-","","","","195","","","","235"],["Consumer"],["Real estate","","","989","","","","2,536","","","","1,829"],["Home equity","","","653","","","","547","","","","431"],["Construction","","","-","","","","-","","","","-"],["Other","","","-","","","","-","","","","-"],["Nonaccruing troubled debt restructurings (TDRs)","","","2,952","","","","3,509","","","","4,111"],["Total nonaccrual loans, including nonaccruing TDRs","","","4,864","","","","8,069","","","","6,794"],["Other real estate owned","","","-","","","","1,169","","","","-"],["Total nonperforming assets","","$","4,864","","","","9,238","","","","6,794"],["Asset Quality Ratios:"],["Nonperforming assets/total assets","","","0.17","%","","","0.37","%","","","0.30","%"],["Nonaccrual loans/gross loans","","","0.20","%","","","0.38","%","","","0.35","%"],["Total loans over 90 days past due (1)","","$","554","","","","2,296","","","","2,038"],["Loans over 90 days past due and still accruing","","","-","","","","-","","","","-"],["Accruing troubled debt restructurings","","","3,299","","","","4,893","","","","5,219"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(1)","Loans over 90 days are included in nonaccrual loans"]]
[[/GREPCENT_TABLE]]

At December 31, 2021, nonperforming assets were
$4.9 million, or 0.17% of total assets and 0.20% of gross loans, compared to $9.2 million, or 0.37% of total assets and 0.43% of gross
loans at December 31, 2020. Nonaccrual loans decreased $3.2 million to $4.9 million at December 31, 2021 from $8.1 million at December
31, 2020. 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
owned. 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.

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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.

As a general practice, most of our commercial loans
and a portion of our consumer loans are originated with relatively short maturities of less than ten years. As a result, when a loan reaches
its maturity we frequently renew the loan and thus extend its maturity using similar credit standards as those used when the loan was
first originated. Due to these loan practices, we may, at times, renew loans which are classified as nonaccrual after evaluating the loan’s
collateral value and financial strength of its guarantors. Nonaccrual loans are renewed at terms generally consistent with the ultimate
source of repayment and rarely at reduced rates. In these cases, we will generally seek additional credit enhancements, such as additional
collateral or additional guarantees to further protect the loan. When a loan is no longer performing in accordance with its stated terms,
we will typically seek performance under the guarantee.

In addition, approximately 86% 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
agreement.

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. During 2020,
the average recorded investment in impaired loans was approximately $14.6 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, 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

At December 31, 2021 and December 31, 2020, the
allowance for loan losses was $30.4 million and $44.1 million, respectively, or 1.22% and 2.06% of outstanding loans, respectively. The
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
of 2021. See Note 4 to the Consolidated Financial Statements for more information on our allowance for loan losses.

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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 following table summarizes the net charge-off
detail as a percentage of average loans by loan composition for the three years ended December 31, 2021.

[[GREPCENT_TABLE]]
[["","","Year ended December 31,"],["(dollars in thousands)","","2021","","","2020","","","2019"],["","","Amount","","","%","","","Amount","","","%","","","Amount","","","%"],["Net charge-offs:"],["Commercial"],["Owner occupied RE","","$","94","","","","0.00","%","","$","(29",")","","","0.00","%","","$","(110",")","","","0.01","%"],["Non-owner occupied RE","","","(573",")","","","0.03","%","","","(838",")","","","0.04","%","","","(237",")","","","0.01","%"],["Construction","","","-","","","","-","","","","-","","","","-","","","","-","","","","-"],["Business","","","(943",")","","","0.04","%","","","(839",")","","","0.04","%","","","(867",")","","","0.05","%"],["Total commercial","","","(1,422",")","","","0.06","%","","","(1,706",")","","","0.08","%","","","(1,214",")","","","0.07","%"],["Consumer"],["Real estate","","","18","","","","0.00","%","","","(116",")","","","0.01","%","","","37","","","","0.00","%"],["Home equity","","","62","","","","0.00","%","","","(230",")","","","0.01","%","","","(172",")","","","0.01","%"],["Construction","","","-","","","","-","","","","-","","","","-","","","","-","","","","-"],["Other","","","1","","","","0.00","%","","","(41",")","","","0.00","%","","","(71",")","","","0.00","%"],["Total consumer","","","81","","","","0.00","%","","","(387",")","","","0.02","%","","","(206",")","","","0.01","%"],["Net loan charge-offs","","$","(1,341",")","","","","","","$","(2,093",")","","","","","","$","(1,420",")"],["Net loan charge-offs as a % of average loans","","","","","","","0.06","%","","","","","","","0.10","%","","","","","","","0.08","%"]]
[[/GREPCENT_TABLE]]

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

[[GREPCENT_TABLE]]
[["","","Year ended December 31,"],["(dollars in thousands)","","2021","","","2020"],["","","Amount","","","%(1)","","","Amount","","","%(1)"],["Commercial"],["Owner occupied RE","","$","4,754","","","","19.6","%","","$","8,145","","","","20.2","%"],["Non-owner occupied RE","","","10,518","","","","26.8","%","","","12,049","","","","27.3","%"],["Construction","","","625","","","","2.6","%","","","1,154","","","","2.9","%"],["Business","","","4,861","","","","13.4","%","","","7,845","","","","14.4","%"],["Total commercial","","","20,758","","","","62.4","%","","","29,193","","","","64.8","%"],["Consumer"],["Real estate","","","7,054","","","","27.9","%","","","10,453","","","","25.0","%"],["Home equity","","","1,698","","","","6.2","%","","","3,249","","","","7.3","%"],["Construction","","","578","","","","2.4","%","","","747","","","","1.9","%"],["Other","","","320","","","","1.1","%","","","507","","","","1.0","%"],["Total consumer","","","9,650","","","","37.6","%","","","14,956","","","","35.2","%"],["Total allowance for loan losses","","$","30,408","","","","100.0","%","","$","44,149","","","","100.0","%"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(1)","Percentage of loans in each category to total loans"]]
[[/GREPCENT_TABLE]]

Deposits and Other Interest-Bearing Liabilities

Our primary source of funds for loans and investments
is our deposits and advances from the FHLB. In the past, we have chosen to obtain a portion of our certificates of deposits from areas
outside of our market in order to obtain longer term deposits than are readily available in our local market. Our internal guidelines
regarding the use of brokered CDs limit our brokered CDs to 20% 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.

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Our retail deposits represented $2.56 billion,
or 100.0% of total deposits at December 31, 2021. At December 31, 2020, retail deposits represented $2.12 billion, or 99.0% 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.

[[GREPCENT_TABLE]]
[["","","December 31,"],["","","2021","","","2020","","","2019"],["(dollars in thousands)","","Amount","","","Rate","","","Amount","","","Rate","","","Amount","","","Rate"],["Noninterest bearing demand deposits","","$","671,223","","","","-","%","","$","513,576","","","","-","%","","$","367,674","","","","-","%"],["Interest bearing demand deposits","","","306,669","","","","0.07","%","","","255,514","","","","0.14","%","","","205,513","","","","0.27","%"],["Money market accounts","","","1,143,904","","","","0.21","%","","","981,226","","","","0.76","%","","","849,225","","","","1.78","%"],["Savings accounts","","","32,916","","","","0.05","%","","","22,113","","","","0.05","%","","","15,483","","","","0.06","%"],["Time deposits less than $100,000","","","30,217","","","","0.54","%","","","41,406","","","","1.40","%","","","58,043","","","","1.88","%"],["Time deposits greater than $100,000","","","146,084","","","","0.75","%","","","259,672","","","","1.27","%","","","305,388","","","","1.72","%"],["Total deposits","","$","2,331,013","","","","0.17","%","","$","2,073,507","","","","0.57","%","","$","1,801,326","","","","1.22","%"]]
[[/GREPCENT_TABLE]]

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
million, or 41.4%. Core deposits exclude out-of-market deposits and time deposits of $250,000 or more and provide a relatively stable
funding source for our loan portfolio and other earning assets. Our core deposits were $2.48 billion, $2.01 billion, and $1.66 billion
at December 31, 2021, 2020 and 2019, respectively.

All of our time deposits are certificates of deposits.
The maturity distribution of our time deposits of $250,000 or more is as follows:

[[GREPCENT_TABLE]]
[["","","December 31,"],["(dollars in thousands)","","2021","","","2020"],["Three months or less","","$","35,151","","","","118,714"],["Over three through six months","","","13,746","","","","608"],["Over six through twelve months","","","20,521","","","","1,416"],["Over twelve months","","","14,995","","","","10,117"],["Total","","$","84,413","","","","130,855"]]
[[/GREPCENT_TABLE]]

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.

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 management involves monitoring our sources and uses of funds in order to meet our day-to-day cash flow requirements while maximizing
profits. Liquidity management is made more complicated because different balance sheet components are subject to varying degrees of management
control. For example, the timing of maturities of our investment portfolio is fairly predictable and subject to a high degree of control
at the time investment decisions are made. However, net deposit inflows and outflows are far less predictable and are not subject to the
same degree of control.

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At December 31, 2021 and 2020, our cash and cash
equivalents amounted to $167.2 million and $100.7 million, or 5.7% and 4.1% of total assets, respectively. Our investment securities at
December 31, 2021 and 2020 amounted to $124.3 million and $98.4 million, or 4.2% and 4.0% 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
and sale of loans and the maturity of investment securities. We maintain five federal funds purchased lines of credit with correspondent
banks totaling $118.5 million to meet short-term liquidity needs. There were no borrowings against the lines at December 31, 2021.

We are also a member of the FHLB of Atlanta, from
which applications for borrowings can be made. The FHLB requires that securities, qualifying mortgage loans, and stock of the FHLB owned
by the Bank be pledged to secure any advances from the FHLB. The unused borrowing capacity currently available from the FHLB at December
31, 2021 was $580.7 million, based on the Bank’s $1.2 million investment in FHLB stock, as well as qualifying mortgages available
to secure any future borrowings. However, we are able to pledge additional securities to the FHLB in order to increase our available borrowing
capacity. In addition, at December 31, 2021 we had $254.5 million of letters of credit outstanding with the FHLB to secure client deposits.

We also have a line of credit with another financial
institution for $15.0 million, which was unused at December 31, 2021. 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 to meet those needs.

Total shareholders’ equity was $277.9 million
at December 31, 2021 and $228.3 million at December 31, 2020. The $49.6 million increase during 2021 is due primarily to net income to
common shareholders of $46.7 million, stock option exercises and expenses of $4.7 million and $1.8 million loss in other comprehensive
income.

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, 2021. Since our inception, we have not paid cash dividends.

[[GREPCENT_TABLE]]
[["","","December 31,"],["(dollars in thousands)","","2021","","","2020","","","2019"],["Return on average assets","","","1.75","%","","","0.76","%","","","1.35","%"],["Return on average equity","","","18.64","%","","","8.49","%","","","14.72","%"],["Return on average common equity","","","18.64","%","","","8.49","%","","","14.72","%"],["Average equity to average assets ratio","","","9.39","%","","","9.01","%","","","9.16","%"],["Tangible common equity to assets ratio","","","9.50","%","","","9.20","%","","","9.08","%"]]
[[/GREPCENT_TABLE]]

Under the capital adequacy guidelines, regulatory
capital is classified into two tiers. These guidelines require an institution to maintain a certain level of Tier 1 and Tier 2 capital
to risk-weighted assets. Tier 1 capital consists of common shareholders’ equity, excluding the unrealized gain or loss on securities
available for sale, minus certain intangible assets. 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
of asset. Tier 2 capital consists of Tier 1 capital plus the general reserve for loan 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 Basel
III, impose minimum capital requirements for bank holding companies and banks. The Basel III rules apply to all national and state banks
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). 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.

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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
of at least 5%. As of December 31, 2021, 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
Company.

[[GREPCENT_TABLE]]
[["","","Actual","","","For capital adequacy purposes minimum (1)","","","To be well capitalized under prompt corrective action provisions minimum"],["(dollars in thousands)","","Amount","","","Ratio","","","Amount","","","Ratio","","","Amount","","","Ratio"],["As of December 31, 2021"],["Total Capital (to risk weighted assets)","","$","331,052","","","","14.36","%","","$","184,418","","","","8.00","%","","$","230,522","","","","10.00","%"],["Tier 1 Capital (to risk weighted assets)","","","302,217","","","","13.11","%","","","138,313","","","","6.00","%","","","184,418","","","","8.00","%"],["Common Equity Tier 1 (to risk weighted assets)","","","302,217","","","","13.11","%","","","103,735","","","","4.50","%","","","149,839","","","","6.50","%"],["Tier 1 Capital (to average assets)","","","302,217","","","","10.55","%","","","114,537","","","","4.00","%","","","143,172","","","","5.00","%"],["As of December 31, 2020"],["Total Capital (to risk weighted assets)","","$","279,414","","","","13.92","%","","$","160,554","","","","8.00","%","","$","200,693","","","","10.00","%"],["Tier 1 Capital (to risk weighted assets)","","","254,092","","","","12.66","%","","","120,416","","","","6.00","%","","","160,554","","","","8.00","%"],["Common Equity Tier 1 (to risk weighted assets)","","","254,092","","","","12.66","%","","","90,312","","","","4.50","%","","","130,451","","","","6.50","%"],["Tier 1 Capital (to average assets)","","","254,092","","","","10.26","%","","","99,094","","","","4.00","%","","","123,867","","","","5.00","%"],["As of December 31, 2019"],["Total Capital (to risk weighted assets)","","$","250,847","","","","13.31","%","","$","150,807","","","","8.00","%","","$","188,510","","","","10.00","%"],["Tier 1 Capital (to risk weighted assets)","","","234,205","","","","12.42","%","","","113,106","","","","6.00","%","","","150,807","","","","8.00","%"],["Common Equity Tier 1 (to risk weighted assets)","","","234,205","","","","12.42","%","","","84,829","","","","4.50","%","","","122,531","","","","6.50","%"],["Tier 1 Capital (to average assets)","","","234,205","","","","10.80","%","","","86,772","","","","4.00","%","","","108,465","","","","5.00","%"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(1)","Ratios do not include the capital conservation buffer of 2.5%."]]
[[/GREPCENT_TABLE]]

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 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.

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
due to inflation has not been taken into account in our consolidated financial statements. Rather, our financial statements have been
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.

63 

Table of Contents

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, 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
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.

At December 31, 2021 and 2020, there were $10.2
million and $8.7 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
or transactions that could result in liquidity needs or other commitments that significantly impact earnings.

Market Risk and Interest Rate Sensitivity

Market risk is the risk of loss from adverse changes
in market prices and rates, which principally arises from interest rate risk inherent in our lending, investing, deposit gathering, and
borrowing activities. Other types of market risks, such as foreign currency exchange rate risk and commodity price risk, do not generally
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.
The essential purposes of asset/liability management are to seek to ensure adequate liquidity and to maintain an appropriate balance between
interest sensitive assets and liabilities in order to minimize potentially adverse impacts on earnings from changes in market interest
rates. Our asset/liability management committee (“ALCO”) monitors and considers methods of managing exposure to interest rate
risk. 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.

As of December 31, 2021, the following table summarizes
the forecasted impact on net interest income using a base case scenario given upward and downward movements in interest rates of 100,
200, and 300 basis points based on forecasted assumptions of prepayment speeds, nominal interest rates and loan and deposit repricing
rates. Estimates are based on current economic conditions, historical interest rate cycles and other factors deemed to be relevant. However,
underlying assumptions may be impacted in future periods which were not known to management at the time of the issuance of the Consolidated
Financial Statements. Therefore, management’s assumptions may or may not prove valid. No assurance can be given that changing economic
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.

[[GREPCENT_TABLE]]
[["Interest rate scenario","","Change in net interest income from base"],["Up 300 basis points","","","(13.99",")%"],["Up 200 basis points","","","(9.01",")%"],["Up 100 basis points","","","(4.30",")%"],["Base","","","-"],["Down 100 basis points","","","(1.87",")%"],["Down 200 basis points","","","(2.91",")%"],["Down 300 basis points","","","(3.45",")%"]]
[[/GREPCENT_TABLE]]

64 

Table of Contents

Contractual Obligations

We have commitments with various investment partners
under the Small Business Investment Company (“SBIC”) and the Rural Business Investment Company (“RBIC”) Programs
for which we have committed to make capital contributions from time to time.

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. Certificates of deposit, structured repurchase agreements, FHLB advances, and subordinated
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. 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
for obligations under long-term borrowings and operating lease obligations as of December 31, 2021.

[[GREPCENT_TABLE]]
[["","","December 31, 2021"],["","","Payments Due by Period"],["(dollars in thousands)","","Within One Year","","","Over One to Two Years","","","Over Two to Three Years","","","Over Three to Four Years","","","After Five Years","","","Total"],["Certificates of deposit","","$","119,674","","","","20,195","","","","6,810","","","","5,803","","","","110","","","","152,592"],["Subordinated debentures","","","-","","","","-","","","","-","","","","-","","","","36,106","","","","36,106"],["Operating lease obligations","","","1,974","","","","1,939","","","","1,990","","","","2,046","","","","26,188","","","","34,137"],["Total","","$","121,648","","","","22,134","","","","8,800","","","","7,849","","","","62,404","","","","222,835"]]
[[/GREPCENT_TABLE]]

Accounting, Reporting, and Regulatory Matters

See Note 1 – Summary of Significant Accounting
Policies and Activities in our “Notes to Consolidated Financial Statements” for a discussion on the effects of recently issued
accounting pronouncements.