FIRST COMMUNITY CORP /SC/ (FCCO) FY 2022 MD&A

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

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

Overview

We are headquartered
in Lexington, South Carolina and serve as the bank holding company for the Bank. We engage in a general commercial and retail banking
business characterized by personalized service and local decision making, emphasizing the banking needs of small to medium-sized businesses,
professionals and individuals. We operate from our main office in Lexington, South Carolina, and our 22 full-service offices located
in the South Carolina counties of Lexington County (6 offices), Richland County (4 offices), Newberry County (2 offices), Kershaw County
(1 office), Aiken County (1 office), Greenville County (2 offices), Anderson County (1 office), Pickens County (1 office), and York County
(1 office); and in the Georgia counties of Richmond County (2 offices) and Columbia County (1 office). On March 14, 2022, we opened a
loan production office in Rock Hill, South Carolina, which is located in York County. We converted this loan production office into a
full-service banking office on October 20, 2022. We refer to York County, South Carlina and the surrounding area as the Piedmont Region.

The following
discussion describes our results of operations for 2022, as compared to 2021 and 2020, and also analyzes our financial condition as of
December 31, 2022, as compared to December 31, 2021. Like most community banks, we derive most of our income from interest we receive
on our loans and investments. A primary source of funds for making these loans and investments is our deposits, on which we pay interest.
Consequently, one of the key measures of our success is our amount of net interest income, or the difference between the income on our
interest-earning assets, such as loans and investments, and the expense on our interest-bearing liabilities, such as deposits and borrowings.

We have included a number
of tables to assist in our description of these measures. For example, the “Average Balances” table shows the average balance
during 2022, 2021 and 2020 of each category of our assets and liabilities, as well as the yield we earned or the rate we paid with respect
to each category. A review of this table shows that our loans typically provide higher interest yields than do other types of interest
earning assets, which is why we intend to channel a substantial percentage of our earning assets into our loan portfolio. Similarly,
the “Rate/Volume Analysis” table helps demonstrate the impact of changing interest rates and changing volume of assets and
liabilities during the years shown. We also track the sensitivity of our various categories of assets and liabilities to changes in interest
rates, and we have included a “Sensitivity Analysis Table” to help explain this. Finally, we have included a number of tables
that provide detail about our investment securities, our loans, our deposits and our borrowings.

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

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

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Critical
Accounting Estimates

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

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

Allowance
for Loan Losses

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

For the financial information included in this Annual
Report of Form 10-K, we account for our allowance for loan losses under the incurred loss model. We perform an analysis quarterly to
assess the risk within the loan portfolio. The portfolio is segregated into similar risk components for which historical loss ratios
are calculated and adjusted for identified changes in current portfolio characteristics. Historical loss ratios are calculated by product
type and by regulatory credit risk classification (See Note 4 to the Consolidated Financial Statements). The annualized weighted average
loss ratios over the last 36 months for loans classified as substandard, special mention and pass have been approximately 0.00%, 0.07%
and 0.00%, respectively. The allowance consists of an allocated and unallocated allowance. The allocated portion is determined by types
and ratings of loans within the portfolio. The unallocated portion of the allowance is established for losses that exist in the remainder
of the portfolio and compensates for uncertainty in estimating the loan losses. The allocated portion of the allowance is based on historical
loss experience as well as certain qualitative factors as explained above. The qualitative factors have been established based on certain
assumptions made as a result of the current economic conditions and are adjusted as conditions change to be directionally consistent
with these changes. The unallocated portion of the allowance is composed of factors based on management’s evaluation of various
conditions that are not directly measured in the estimation of probable losses through the experience formula or specific allowances.

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

In
June 2016, the FASB issued ASU 2016-13, as amended, to replace the incurred loss model with an expected loss model, which is referred
to as the current expected credit loss (CECL) model. The CECL model is applicable to the measurement of credit losses on financial
assets measured at amortized cost, including loan receivables and held-to-maturity debt securities. It also applies to off-balance
sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and
similar instruments) and net investments in leases recognized by a lessor. For debt securities with other-than-temporary impairment
(OTTI), the guidance will be applied prospectively. Existing purchased credit impaired (PCI) assets will be grandfathered and
classified as purchased credit deteriorated (PCD) assets at the date of adoption. The assets will be grossed up for the allowance
of expected credit losses for all PCD assets at the date of adoption and will continue to recognize the noncredit discount in
interest income based on the yield of such assets as of the adoption date. Subsequent changes in expected credit losses will be
recorded through the allowance. Adoption is effective for interim and annual reporting periods beginning after December 15, 2022.
Early adoption was permitted. The Company adopted CECL on January 1, 2023, and currently estimates the allowance for credit losses
will increase by approximately zero to $50 thousand. In addition, the Company expects to recognize a liability for the unfunded
commitments of approximately $350 thousand to $450 thousand upon adoption. The impact to retained earnings is expected to be a
reduction of approximately $275 thousand to $395 thousand, net of tax. The adoption of CECL will not have a significant impact
to the Bank’s regulatory capital. The Company will finalize the adoption during the first quarter of 2023.

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Income
Taxes, Deferred Tax Assets, and Deferred Tax Liabilities

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

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

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

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Financial
Highlights

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

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

Results
of Operations

Year
Ended December 31, 2022 and 2021

Our net income for the
twelve months ended December 31, 2022 was $14.6 million, or $1.92 diluted earnings per common share, as compared to $15.5 million, or
$2.05 diluted earnings per common share, for the twelve months ended December 31, 2021. The $852 thousand decline in net income between
the two periods is primarily due to a $2.3 million decline in non-interest income and a $2.1 million increase in non-interest expense
partially offset by a $2.7 million increase in net interest income, a $487 thousand reduction in provision for loan losses, and a $384
thousand reduction in income tax expense.

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Year
Ended December 31, 2021 and 2020

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

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Net
Interest Income

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

Year
Ended December 31, 2022 and 2021

Net interest income
increased $2.7 million, or 5.9%, to $47.9 million for the twelve months ended December 31, 2022 from $45.3 million for the twelve months
ended December 31, 2021. Our net interest margin declined by eight basis points to 3.11% during the twelve months ended December 31,
2022 from 3.19% during the twelve months ended December 31, 2021. Our net interest margin, on a taxable equivalent basis, was 3.14% for
the twelve months ended December 31, 2022 compared to 3.23% for the twelve months ended December 31, 2021. Average earning assets increased
$122.2 million, or 8.6%, to $1.5 billion for the twelve months ended December 31, 2022 compared to $1.4 billion in the same period of
2021.

Average loans increased
$31.4 million, or 3.5%, to $920.4 million for the twelve months ended December 31, 2022 from $889.0 million for the same period in 2021.
Average PPP loans declined $36.5 million and average Non-PPP loans increased $67.9 million to $336 thousand and $920.0 million, respectively,
for the twelve months ended December 31, 2022. Average loans represented 59.7% of average earning assets during the twelve months ended
December 31, 2022 compared to 62.6% of average earning assets during the same period in 2021. Our loan (including loans held-for-sale)
to deposit ratio on average during 2022 was 64.9%, as compared to 68.8% during 2021. These declines were due to our growth in deposits
of $124.9 million exceeding our loan (including loans held-for-sale) growth of $31.4 million, net of a $36.5 million decline in PPP loans.
However, the loan to deposit ratio (including loans held-for-sale) increased to 70.9% at December 31, 2022 as compared to 64.0% at December
31, 2021. Our growth in loans of $111.8 million from December 31, 2021 to December 31, 2022 exceeded our growth in deposits of $24.1
million during the same period.

The growth in our
average deposits and securities sold under agreements to repurchase compared to the growth in our average loans, net of the $36.5
million decline in PPP loans resulted in the excess funds being deployed in our securities portfolio. The yield on loans declined 20
basis points to 4.26% during the twelve months ended December 31, 2022 from 4.46% during the same period in 2021 due to reduction in
higher yielding PPP loans. The yield on Non-PPP loans was 4.26% during both the twelve months ended December 31, 2022 and December
31, 2021. Average securities for the twelve months ended December 31, 2022 increased $113.7 million, or 24.9%, to $570.6 million from
$456.8 million during the same period in 2021. Other short-term investments declined $22.9 million to $50.5 million during the
twelve months ended December 31, 2022 from $73.4 million during the same period in 2021 due to the deployment of lower yielding
other short-term investments into higher yielding securities and loans. The yield on our securities portfolio increased to 1.97% for
the twelve months ended December 31, 2022 from 1.69% for the same period in 2021. The yield on our other short-term investments
increased to 1.25% for the twelve months ended December 31, 2022 from 0.18% for the same period in 2021 due to the Federal Open
Market Committee (FOMC) increasing the target range of federal funds during the twelve months of 2022 a total of 425 basis
points. The target range of federal funds was 4.25% - 4.50% at December 31, 2022 compared to compared to 0.00% - 0.25% at
December 31, 2021.

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The yield on earning
assets for the twelve months ended December 31, 2022 and 2021 were 3.32% and 3.35%, respectively.

The cost of interest-bearing
liabilities was 30 basis points during the twelve months ended December 31, 2022 compared to 24 basis points during the same period in
2021. The cost of deposits, including demand deposits, was 13 basis points during the twelve months ended December 31, 2022 compared
to 13 basis points during the same period in 2021. The cost of funds, including demand deposits, was 21 basis points during the twelve
months ended December 31, 2022 compared to 16 basis points during the same period in 2021. We continue to focus on growing our pure deposits
(demand deposits, interest-bearing transaction accounts, savings deposits, money market accounts, IRAs, and customer cash management
repurchase agreements) as these accounts tend to be low-cost deposits and assist us in controlling our overall cost of funds. During
the twelve months ended December 31, 2022, these pure deposits averaged 92.2% of total deposits as compared to 90.6% during the same
period of 2021.

Year
Ended December 31, 2021 and 2020

Net interest income
increased $5.3 million, or 13.1%, to $45.3 million for the twelve months ended December 31, 2021 from $40.0 million for the twelve months
ended December 31, 2020. The yield on earning assets was 3.35%, and 3.65% in 2021 and 2020, respectively. The rate paid on interest-bearing
liabilities was 0.24%, and 0.46% in 2021 and 2020, respectively. The fully taxable equivalent net interest margin was 3.23% in 2021 and
3.37% in 2020.

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

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

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

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

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

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

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Average
Balances, Income Expenses and Rates. The following table depicts, for the periods indicated,
certain information related to our average balance sheet and our average yields on assets and average costs of liabilities. Such yields
are derived by dividing income or expense by the average balance of the corresponding assets or liabilities. Average balances have been
derived from daily averages.

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

Market
Risk and Interest Rate Sensitivity

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

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

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The following
table illustrates our interest rate sensitivity at December 31, 2022.

Interest
Sensitivity Analysis

Based on the
many factors and assumptions used in simulating the effect of changes in interest rates, the following table estimates the hypothetical
percentage change in net interest income at December 31, 2022 and 2021 over the subsequent 12 months. At December 31, 2022, we are liability
sensitive and at December 31, 2021, we are asset sensitive. The primary driver for the change is decreased interest bearing cash balances
coupled with growth in the loan portfolio and short-term borrowings. As a result, our modeling at December 31, 2022, reflects a decrease
in net interest income in a rising interest rate environment during the first twelve months subsequent to interest rate changes. The
negative impact of rising rates reverses and net interest income is favorably impacted over a 24-month period. In a declining interest
rate environment, the model reflects increases in net interest income in the down 100 basis point and down 200 basis point scenarios.
At December 31, 2021, we are asset sensitive. As a result, our modeling reflects an increase in net interest income in a rising interest
rate environment and a reduction in net interest income in a declining interest rate environment. In a declining rate environment, the
decline in net interest income is primarily due to the level of interest rates being paid on our interest bearing transaction accounts
as well as money market accounts. The interest rates on these accounts are at a level where they cannot be repriced in proportion to
the change in interest rates. The increase and decrease of 100 and 200 basis points, respectively, reflected in the table below assume
a simultaneous and parallel change in interest rates along the entire yield curve.

Net
Interest Income Sensitivity

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During the second 12-month period after
100 basis point and 200 basis point simultaneous and parallel increases in interest rates along the entire yield curve, our net interest
income is projected to increase 3.44% and 6.13%, respectively, at December 31, 2022, and 7.82% and 15.00%, respectively, at December
31, 2021. During the second 12-month period after 100 basis point and 200 basis point simultaneous and parallel reduction in interest
rates along the entire yield curve, our net interest income is projected to decline 4.92% and 12.86%, respectively, at December 31, 2022,
and to decline 10.17% and 15.60%, respectively, at December 31, 2021.

We perform a valuation
analysis projecting future cash flows from assets and liabilities to determine the Present Value of Equity (“PVE”) over a
range of changes in market interest rates. The sensitivity of PVE to changes in interest rates is a measure of the sensitivity of earnings
over a longer time horizon. At December 31, 2022 and 2021, the PVE exposure in a plus 200 basis point increase in market interest rates
was estimated to increase 3.13% and 9.73%, respectively. The PVE exposure in a down 100 basis point decrease was estimated to decline
3.83% at December 31, 2022 compared to 9.86% at December 31, 2021. The PVE exposure in a down 200 basis point decrease was estimated
to decline 10.00% at December 31, 2022 compared to 21.79% at December 31, 2021.

Provision
and Allowance for Loan Losses

Year
Ended December 31, 2022 and 2021

We account for our allowance
for loan losses under the incurred loss model. At December 31, 2022, the allowance for loan losses was $11.3 million, or 1.16% of total
loans (excluding loans held-for-sale), compared to $11.2 million, or 1.29% of total loans (excluding loans held-for-sale) at December
31, 2021. Excluding PPP loans and loans held-for-sale, the allowance for loan losses was 1.16% of total loans at December 31, 2022 compared
to 1.30% of total loans at December 31, 2021. The decline in the allowance for loan losses as a percentage of total loans compared to
December 31, 2021 is primarily related to a reduction in the loss emergence period assumption in our COVID-19 qualitative factor, which
was added to our allowance for loan losses methodology during 2020 and is discussed below. The loss emergence assumption on our COVID-19
qualitative factor was reduced to zero months at December 31, 2022 from 21 months at December 31, 2021. This reduction was partially
offset by loan growth of $117.2 million; $309 thousand in net recoveries; an increase in our economic conditions qualitative factor by
six basis points due to higher inflation, supply chain bottlenecks, labor shortages in certain industries, and the war in Ukraine; an
increase in our change in staff qualitative factor by one basis point due to the addition of a new team and new market in York County,
South Carolina in March 2022; and an increase in our change in total of past due, rated, and non-accrual loans qualitative factor by
two basis points due to a $4.1 million loan being moved to non-accrual status in June 2022. This loan has a loan-to-value of 76.3% based
on an appraisal received in May 2022.

During 2020, we added
a qualitative factor for the COVID-19 pandemic to our allowance for loan losses methodology. This qualitative factor was based on the
dollar amount of our deferrals and a one-year loss emergence period based on the highest period of annual historical loss rate since
the Bank’s inception. As the pandemic worsened, we added our exposure to certain industry segments most impacted by the COVID-19
pandemic (hotels, restaurants, assisted living, and retail) to the COVID-19 qualitative factor and we extended the loss emergence period
to two years based on the highest two periods of annual historical loss rates since the Bank’s inception. The loss emergence period
assumption in the COVID-19 qualitative factor was reduced to zero months at December 31, 2022 from 21 months at December 31, 2021. At
December 31, 2022 and December 31, 2021, the COVID-19 qualitative factor represented zero dollars and $1.9 million, respectively, of
our allowance for loan losses.

Loans that we acquired
in our acquisition of Cornerstone Bancorp, otherwise referred to herein as Cornerstone, in 2017 as well as in our acquisition of Savannah
River Financial Corp., otherwise referred to herein as Savannah River, in 2014 are accounted for under FASB ASC 310-30. These acquired
loans were initially measured at fair value, which includes estimated future credit losses expected to be incurred over the life of the
loans. The credit component on loans related to cash flows not expected to be collected is not subsequently accreted (non-accretable
difference) into interest income. Any remaining portion representing the excess of a loan’s or pool’s cash flows expected
to be collected over the fair value is accreted (accretable difference) into interest income. At December 31, 2022 and December 31, 2021,
the remaining credit component on loans attributable to acquired loans in the Cornerstone and Savannah River transactions was $81 thousand
and $130 thousand, respectively.

Our provision for loan
losses was a credit of $152 thousand for the twelve months ended December 31, 2022 compared to an expense of $335 thousand during the
same period in 2021. The reduction in provision for loan losses is primarily related to a decrease in our COVID-19 qualitative factor
in our allowance for loan losses methodology and net recoveries during the twelve months of 2022, partially offset by increases in our
economic conditions, change in staff, and changes in past due, rated, and non-accrual loan qualitative factors and loan growth as discussed
above.

55

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

We perform an analysis
quarterly to assess the risk within the loan portfolio. The portfolio is segregated into similar risk components for which historical
loss ratios are calculated and adjusted for identified changes in current portfolio characteristics. Historical loss ratios are calculated
by product type and by regulatory credit risk classification (See Note 4 to the Consolidated Financial Statements). The annualized weighted
average loss ratios over the last 36 months for loans classified as substandard, special mention and pass have been approximately 0.00%,
0.07% and 0.00%, respectively. The allowance consists of an allocated and unallocated allowance. The allocated portion is determined
by types and ratings of loans within the portfolio. The unallocated portion of the allowance is established for losses that exist in
the remainder of the portfolio and compensates for uncertainty in estimating the loan losses. The allocated portion of the allowance
is based on historical loss experience as well as certain qualitative factors as explained above. The qualitative factors have been established
based on certain assumptions made as a result of the current economic conditions and are adjusted as conditions change to be directionally
consistent with these changes. The unallocated portion of the allowance is composed of factors based on management’s evaluation
of various conditions that are not directly measured in the estimation of probable losses through the experience formula or specific
allowances. The overall risk as measured in our three-year lookback, both quantitatively and qualitatively, does not encompass a full
economic cycle. Net charge-offs in the 2009 to 2011 period averaged 63 basis points annualized in our loan portfolio. Over the most recent
three-year period, our net charge-offs have experienced a modest net recovery. We currently believe the unallocated portion of our allowance
represents potential risk associated throughout a full economic cycle.

We have a significant
portion of our loan portfolio with real estate as the underlying collateral. At December 31, 2022 and December 31, 2021, approximately
90.8% and 90.9%, respectively, of the loan portfolio had real estate collateral. When loans, whether commercial or personal, are granted,
they are based on the borrower’s ability to generate repayment cash flows from income sources sufficient to service the debt. Real
estate is generally taken to reinforce the likelihood of the ultimate repayment and as a secondary source of repayment. We work closely
with all our borrowers that experience cash flow or other economic problems, and we believe that we have the appropriate processes in
place to monitor and identify problem credits. There can be no assurance that charge-offs of loans in future periods will not exceed
the allowance for loan losses as estimated at any point in time or that provisions for loan losses will not be significant to a particular
accounting period. The allowance is also subject to examination and testing for adequacy by regulatory agencies, which may consider such
factors as the methodology used to determine adequacy and the size of the allowance relative to that of peer institutions. Such regulatory
agencies could require us to adjust our allowance based on information available to them at the time of their examination.

The non-performing asset
ratio was 0.35% of total assets with the nominal level of $5.8 million in non-performing assets at December 31, 2022 compared to 0.09%
and $1.4 million at December 31, 2021. Non-accrual loans increased to $4.9 million at December 31, 2022 from $250 thousand at December
31, 2021. The increases in both non-performing assets and non-accrual loans from December 31, 2021 to December 31, 2022 were due to one
$4.1 million loan that was moved to non-accrual status in June 2022. This loan had a loan-to-value of 76.3% at the time it was moved
to non-accrual based on an appraisal received in May 2022. The balance of this loan is $4.0 million at December 31, 2022. Furthermore,
we had one customer relationship with two loans totaling $508 thousand, which was placed on non-accrual during September 2022. This relationship
had a loan-to-value of 42.5% at the time it was moved to non-accrual. The balance of this relationship increased to $550 thousand at
December 31, 2022 due to a loan advance to pay real estate taxes. We had $2 thousand in accruing loans past due 90 days or more at December
31, 2022 compared to zero at December 31, 2021. Loans past due 30 days or more represented 0.06% of the loan portfolio at December 31,
2022 compared to 0.03% at December 31, 2021. The ratio of classified loans plus OREO and repossessed assets declined to 4.47% of
total bank regulatory risk-based capital at December 31, 2022 from 6.27% at December 31, 2021. During the twelve months ended December
31, 2022, we experienced net loan recoveries of $361 thousand and net overdraft charge-offs of $52 thousand.

56

There were 12 loans
totaling $4.9 million (0.50% of total loans) included on non-performing status (non-accrual loans and loans past due 90 days and still
accruing) at December 31, 2022. Ten of these loans totaling $4.9 million were on non-accrual status. The largest loan included on non-accrual
status is in the amount of $4.0 million and is secured by a first mortgage lien and had a loan-to-value of 76.3% at the time it was moved
to non-accrual based on an appraisal received in May 2022. The average balance of the remaining nine loans on non-accrual status is approximately
$104 thousand with a range between $1 and $406 thousand. Five of these loans are secured by first mortgage liens, three loans are secured
by second mortgage liens, and one is secured by equipment. Furthermore, we had $88 thousand in accruing trouble debt restructurings,
or TDRs, at December 31, 2022 compared to $1.4 million at December 31, 2021. This reduction was due to the payoff of one loan. We had
two loans totaling $2 thousand that were accruing loans past due 90 days or more at December 31, 2022. We consider a loan impaired when,
based on current information and events, it is probable that we will be unable to collect all amounts due, including both principal and
interest, according to the contractual terms of the loan agreement. Nonaccrual loans and accruing TDRs are considered impaired. At December
31, 2022, we had 11 impaired loans totaling $5.0 million compared to ten impaired loans totaling $1.7 million at December 31, 2021. These
loans were measured for impairment under the fair value of collateral method or present value of expected cash flows method. For collateral
dependent loans, the fair value of collateral method is used and the fair value is determined by an independent appraisal less estimated
selling costs. There was no specific allowance for loan and lease losses on our impaired loans at December 31, 2022 and December 31,
2021. At December 31, 2022, we had ten loans totaling $565 thousand that were delinquent 30 days to 89 days representing 0.06% of total
loans compared to $235 thousand or 0.03% of total loans at December 31, 2021.

Year
Ended December 31, 2021 and 2020

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

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

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

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

57

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

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

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

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

58

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

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

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

Allowance
for Loan Losses

59

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

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

Allocation
of the Allowance for Loan Losses

60

Loans acquired
in the Cornerstone transaction are excluded from our evaluation of the adequacy of the allowance as they were measured at fair value
at acquisition. The assumptions used in this evaluation included a credit component and an interest rate component. These loans amounted
to approximately $5.5 million and $9.5 million at December 31, 2022 and 2021, respectively.

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

Non-interest
Income and Expense

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

Non-interest income
during the twelve months ended December 31, 2022 was $11.6 million compared to $13.9 million during the same period in 2021. Deposit
service charges declined $17 thousand to $960 thousand during the twelve months ended December 31, 2022 from $977 thousand during the
same period in 2021 primarily due to customer refunds related to the completion of a project to discontinue multiple presentments on
consumer returns and refund customers in a determined “lookback period” of two years. A total of $39 thousand was refunded
to 477 accounts ($24 thousand was refunded to 313 active accounts and $15 thousand was refunded to 164 closed accounts). Furthermore,
effective July 1, 2022, we increased the NSF de minimis amount to $50 from $5 and reduced our maximum fee per day to $140 from $210,
each of which will impact our future aggregate deposit service charges. Mortgage banking income declined by $2.4 million to $1.9 million
during the twelve months ended December 31, 2022 from $4.3 million during the same period in 2021. Mortgage production during the twelve
months ended December 31, 2022 was $88.6 million, $65.8 million of the production was originated to be sold in the secondary market and
$22.8 million of the production was originated as adjustable rate mortgage (ARM) loans for our loans held-for-investment portfolio, compared
to $142.1 million, which was all produced to be sold in the secondary market during the same period in 2021. The gain on sale margin
decreased to 2.85% during the twelve months ended December 31, 2022 from 3.04% during the same period in 2021. The reduction in mortgage
production was primarily due to a higher interest rate environment and low housing inventory. With the headwinds of rising interest rates,
we began to market an ARM product during the second quarter of 2022 to provide borrowers with an alternative to fixed-rate mortgages
and to help offset anticipated mortgage production challenges. Currently, we are offering 5/1, 7/1, and 10/1 ARM loans that are originated
for our loans held-for-investment portfolio. As these ARM loans are being held on our balance sheet as loans held-for-investment, the
result is additive to loan growth and interest income but results in less gain on sale fee income, which is reported in noninterest income
as mortgage banking income.

Investment advisory
fees increased $484 thousand to $4.5 million during the twelve months ended December 31, 2022 from $4.0 million during the same period
in 2021. Total assets under management declined to $558.8 million at December 31, 2022 compared to $650.9 million at December 31, 2021.
While revenue in our financial planning and investment management line of business increased during the twelve months of 2022 compared
to the same period in 2021, assets under management (AUM) declined due to the stock market performance in the twelve months of 2022.
Our investment advisory fees trail changes in AUM. Management continues to focus on both the mortgage banking income as well as the investment
advisory fees and commissions. Gain (loss) on sale of other real estate owned was a loss of $45 thousand during the twelve months ended
December 31, 2022 compared to a gain of $77 thousand during the same period in 2021. The $45 thousand loss was related to the sale of
one other real estate owned property during the twelve months ended December 31, 2022. Gain (loss) on sale of other assets was a loss
of $73 thousand during the twelve months ended December 31, 2022 compared to a gain of $117 thousand during the same period in 2021.
The $73 thousand loss in 2022 was related to the sale of one bank owned premise during the twelve months ended December 31, 2022. The
$117 thousand gain in 2021 was related to a $104 thousand gain on sale of bank premise held-for-sale and a $13 thousand gain on the sale
of bank owned land during the twelve months ended December 31, 2021. Other non-recurring income declined $164 thousand to $7 thousand
during the twelve months ended December 31, 2022 from $171 thousand during the same period in 2021. The reduction in other non-recurring
income was related to the collection of $147 thousand in summary judgments related to two loans charged off at a bank, which we subsequently
acquired and $24 thousand in gains on insurance proceeds during the twelve months ended December 31, 2021. We recorded $7 thousand in
other non-recurring income related to gains on insurance proceeds during the twelve months ended December 31, 2022.

61

Non-interest income,
other increased $93 thousand during the twelve months ended December 31, 2022 compared to the same period in 2021 primarily due to increases
in ATM/debit card income of $37 thousand, recurring income on bank owned life insurance of $28 thousand, rental income of $11 thousand,
wire transfer fees of $14 thousand, and bankcard fees of $14 thousand partially offset by lower customer check sales of $19 thousand.

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

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

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

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

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

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

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Non-interest expense
increased $2.1 million during the twelve months ended December 31, 2022 to $41.3 million compared to $39.2 million during the same period
in 2021. The $2.1 million increase in non-interest expense is primarily related to increased salaries and employee benefits expense of
$863 thousand, increased occupancy expense of $55 thousand, increased equipment expense of $47 thousand, increased marketing and public
relations expense of $86 thousand, increased legal and professional fees of $299 thousand, increased ATM/debit card and data processing
expense of $428 thousand, increased other real estate expense including other real estate write-downs of $203 thousand, increased fraud
expense of $106 thousand, increased travel, meals, and entertainment expense of $103 thousand, and increased postage / courier expense
of $118 thousand partially offset by lower FDIC assessments of $150 thousand, lower amortization of intangibles of $43 thousand, and
lower loan processing costs of $63 thousand.

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

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

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

Income
Tax Expense

Our income tax
expense for 2022 was $3.8 million as compared to income tax expense for the year ended December 31, 2021 of $4.2 million and $2.5
million for the year ended December 31, 2020 (see Note 14 “Income Taxes” to the Consolidated Financial Statements for
additional information). We recognize deferred tax assets for future deductible amounts resulting from differences in the financial
statement and tax bases of assets and liabilities and operating loss carry forwards. The deferred tax assets are established based
on the amounts expected to be paid/recovered at existing tax rates. A valuation allowance is established to reduce the deferred tax
asset to the level that it is more likely than not that the tax benefit will be realized. Our effective tax rate was 20.6% during
the twelve months ended December 31, 2022 compared to 21.3% during the twelve months ended December 31, 2021 and compared to 19.8%
during the twelve months ended December 31, 2020. The reduction in our effective tax rate in 2022 compared to 2021 was due to lower
net income before tax and a $153 thousand non-recurring reduction to income tax expense during the twelve months ended December 31,
2022. As a result of our current level of tax-exempt securities in our investment portfolio and our BOLI holdings, assuming the
current corporate rate remains unchanged, our effective tax rate is expected to be approximately 21.25% to 21.75%.

Financial
Position

Assets totaled $1.7
billion at December 31, 2022 and $1.6 billion at December 31, 2021. Loans (excluding loans held-for-sale) increased $117.2 million or
13.6% to $980.9 million at December 31, 2022 from $863.7 million at December 31, 2021. Non-PPP loans increased $118.4 million to $980.6
million at December 31, 2022 from $862.2 million at December 31, 2021. PPP loans declined $1.2 million to $219 thousand at December 31,
2022 from $1.5 million at December 31, 2021.

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Total loan production
excluding PPP loans was $257.9 million during the twelve months ended December 31, 2022 compared to $217.1 million during the same period
in 2021. In addition, we originated zero and $37.1 million in PPP loans during the twelve months ended December 31, 2022 and December
31, 2021, respectively. Loans held-for-sale declined to $1.8 million at December 31, 2022 from $7.1 million at December 31, 2021. Mortgage
production during the twelve months ended December 31, 2022 was $88.6 million, $65.8 million of the production was originated to be sold
in the secondary market and $22.8 million of the loan production was originated as adjustable rate mortgage (ARM) loans for our loans
held-for-investment portfolio and are included total loan production numbers referenced above compared to $142.1 million, which was all
produced to be sold in the secondary market during the same period in 2021. The reduction in mortgage production was primarily due to
a higher interest rate environment and low housing inventory. With the headwinds of rising interest rates, we began to market an ARM
product during the second quarter of 2022 to provide borrowers with an alternative to fixed-rate mortgages and to help offset anticipated
mortgage production challenges. Currently, we are offering 5/1, 7/1, and 10/1 ARM loans that are originated for our loans held-for-investment
portfolio. As these ARM loans are being held on our balance sheet as loans held-for-investment, the result is additive to loan growth
and interest income but results in less gain on sale fee income, which is reported in noninterest income as mortgage banking income.
The loan-to-deposit ratio (including loans held-for-sale) at December 31, 2022 and December 31, 2021 was 70.9% and 64.0%, respectively.
The loan-to-deposit ratio (excluding loans held-for-sale) at December 31, 2022 and December 31, 2021 was 70.8% and 63.4%, respectively. One
of our goals as a community bank has been, and continues to be, to grow our assets through quality loan growth by providing credit to
small and mid-size businesses and individuals within the markets we serve. We remain committed to meeting the credit needs of our local
markets.

Investment securities
declined $1.9 million to $564.8 million at December 31, 2022 from $566.6 million at December 31, 2021. On June 1, 2022, we reclassified
$224.5 million in investments to held-to-maturity (HTM) from available-for-sale (AFS). These securities were transferred at fair value
at the time of the transfer, which became the new cost basis for the securities held to maturity. The pretax unrealized net holding loss
on the available for sale securities on the date of transfer totaled approximately $16.7 million, and continued to be reported as a component
of accumulated other comprehensive loss. This net unrealized loss is being amortized to interest income over the remaining life of the
securities as a yield adjustment. There were no gains or losses recognized as a result of this transfer. The remaining pretax unrealized
net holding loss on these investments was $15.7 million ($12.4 million net of tax) at December 31, 2022. Our HTM investments totaled
$228.7 million and represented approximately 40% of our total investments at December 31, 2022. Our AFS investments totaled $331.9 million
or approximately 59% of our total investments at December 31, 2022. Our investments at cost totaled $4.2 million or approximately 1%
of our total investments at December 31, 2022. Other short-term investments declined $34.1 million to $12.9 million at December 31, 2022
from $47.0 million at December 31, 2021 due to loan growth exceeding deposit growth. Other assets increased $11.6 million to $19.2 million
at December 31, 2022 from $7.6 million at December 31 2021 primarily due to higher deferred tax assets related to unrealized losses on
our investment securities. The unrealized losses on our investment securities are related in an increase in market interest rates, which
has a temporary negative impact on the fair value of our investment securities portfolio and on accumulated other comprehensive income
(loss), which is included in shareholders’ equity.

Deposits increased $24.1
million to $1.4 billion at December 31, 2022 compared to $1.4 billion at December 31, 2021.  Our pure deposits, which are defined
as total deposits less certificates of deposits, increased $43.7 million to $1.3 billion at December 31, 2022 from $1.2 billion at December
31, 2021.  We continue to focus on growing our pure deposits as a percentage of total deposits in order to better manage our overall
cost of funds. We had no brokered deposits and no listing services deposits at December 31, 2022 and December 31, 2021.  Our securities
sold under agreements to repurchase, which are related to our customer cash management accounts, increased $14.5 million to $68.7 million
at December 31, 2022 from $54.2 million at December 31, 2021.

Other borrowings
increased $72.0 million to $87.0 million at December 31, 2022 from $15.0 million at December 31, 2021. Other borrowings include $22.0
million in federal funds purchased, $50.0 million in FHLB Advances, and $15.0 million in junior subordinated debt at December 31, 2022
compared to zero in federal funds purchased, zero in FHLB Advances, and $15.0 million in junior subordinated debt at December 31, 2021.
The $72.0 million increase in other borrowings was primarily due to loan growth exceeding deposit growth.

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Shareholders’
equity declined to 7.1% of total assets at December 31, 2022 from 8.9% at December 31, 2021 due to total asset growth of $88.4 million
compared to total shareholders’ equity decline of $22.6 million. The growth in total assets was primarily due to growth of $117.2
million in loans held-for-investment and $11.6 million in other assets partially offset by declines of $31.6 million in cash and interest
bearing bank balances, $5.3 million in loans held-for-sale, and $1.9 million in investment securities. The $22.6 million decline in shareholders’
equity was due to a $35.7 million reduction in accumulated other comprehensive income (loss) partially offset by a $10.7 million increase
in retention of earnings less dividends paid, the transfer of $1.2 million in deferred board compensation stock units from other liabilities
to shareholders’ equity, the transfer of $0.2 million in restricted stock units from other liabilities to shareholder’s equity,
a $0.5 million increase due to employee and director stock awards, and a $0.4 million increase due to dividend reinvestment plan (DRIP)
purchases. The decline in accumulated other comprehensive income was due to an increase in market interest rates, which has a temporary
negative impact on the fair value of our investment securities portfolio and on accumulated other comprehensive income (loss), which
is included in shareholders’ equity. On June 1, 2022, we reclassified $224.5 million in investments to held-to-maturity (HTM) from
available-for-sale (AFS). These securities were transferred at fair value at the time of the transfer, which became the new cost basis
for the securities held to maturity. The pretax unrealized net holding loss on the available for sale securities on the date of transfer
totaled approximately $16.7 million, and continued to be reported as a component of accumulated other comprehensive loss. This net unrealized
loss is being amortized to interest income over the remaining life of the securities as a yield adjustment. There were no gains or losses
recognized as a result of this transfer. The remaining pretax unrealized net holding loss on these investments was $15.7 million ($12.4
million net of tax) at December 31, 2022. Our HTM investments totaled $228.7 million and represented approximately 40% of our total investments
at December 31, 2022. Our AFS investments totaled $331.9 million or approximately 59% of our total investments with a modified duration
of 3.15 at December 31, 2022. Our investments at cost totaled $4.2 million or approximately 1% of our total investments at December 31,
2022.

On April 12, 2021, we
announced that our Board of Directors approved the repurchase of up to 375,000 shares of our common stock (the “2021 Repurchase
Plan”), which represents approximately 5% of our 7,548,638 shares outstanding as of December 31, 2021. No share repurchases were
made under the 2021 Repurchase Plan prior to its expiration at the market close on March 31, 2022. On April 20, 2022, we announced that
our Board of Directors approved the repurchase of up to 375,000 shares of our common stock (the “2022 Repurchase Plan”),
which represented approximately 5% of our 7,577,912 shares outstanding as of December 31, 2022. No repurchases have been made under the
2022 Repurchase Plan. The 2022 Repurchase Plan expires at the market close on December 31, 2023.

Earning
Assets

Loans
and loans held for sale

Loans typically provide
higher yields than the other types of earning assets. During 2022 and 2021, loans accounted for 59.7% and 62.6% of average earning assets,
respectively. The loan portfolio (including held-for-sale) averaged $920.4 million in 2022 as compared to $889.0 million in 2021. Quality
loan portfolio growth continued to be a strategic focus of ours in 2022. However, with the higher loan yields, there are inherent credit
and liquidity risks, which we attempt to control and counterbalance. One of our goals as a community bank continues to be to grow our
assets through quality loan growth by providing credit to small and mid-size businesses, as well as individuals within the markets we
serve. In 2022, we funded new loans (excluding loans originated for sale) of approximately $257.9 million, as compared to $217.1 million
in 2021. In addition, we originated $37.1 million in PPP loans in 2021. PPP loans net of deferred fees and costs were $219 thousand at
December 31, 2022 compared to $1.5 million at December 31, 2021.. We remain committed to meeting the credit needs of our local markets,
but adverse national and local economic conditions, as well as deterioration of our asset quality, could significantly impact our ability
to grow our loan portfolio. Significant increases in regulatory capital expectations beyond the traditional “well capitalized”
ratios and significantly increased regulatory burdens could impede our ability to leverage our balance sheet and expand the loan portfolio.

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

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In the context
of this discussion, a real estate mortgage loan is defined as any loan, other than loans for construction purposes, secured by real estate,
regardless of the purpose of the loan. We follow the common practice of financial institutions in our market area of obtaining a security
interest in real estate whenever possible, in addition to any other available collateral. This collateral is taken to reinforce the likelihood
of the ultimate repayment of the loan and tends to increase the magnitude of the real estate loan components. Generally, we limit the
loan-to-value ratio to 80%. The principal components of our loan portfolio at year-end 2022 and 2021 were commercial mortgage loans in
the amount of $704.5 million and $617.5 million, respectively, representing 71.8% and 71.5% of the portfolio, respectively, excluding
loans held for sale. Significant portions of these commercial mortgage loans are made to finance owner-occupied real estate. We continue
to maintain a conservative philosophy regarding our underwriting guidelines, and believe it will reduce the risk elements of the loan
portfolio through strategies that diversify the lending mix.

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

The repayment
of loans in the loan portfolio as they mature is a source of liquidity. The following table sets forth the loans maturing within specified
intervals at December 31, 2022.

Loan
Maturity Schedule and Sensitivity to Changes in Interest Rates

Loans
maturing after one year with:

The information presented
in the above table is based on the contractual maturities of the individual loans, including loans which may be subject to renewal at
their contractual maturity. Renewal of such loans is subject to review and credit approval, as well as modification of terms upon their
maturity.

Investment
Securities

Our investment securities
portfolio is a significant component of our total earning assets. Total investment securities averaged $570.6 million in 2022, as compared
to $456.8 million in 2021, which represents 37.0% and 32.2% of the average earning assets for the years ended December 31, 2022 and 2021,
respectively. At December 31, 2022 and 2021, our investment securities portfolio amounted to $564.8 million and $566.6 million, respectively.

On June 1, 2022, we
reclassified $224.5 million in investments to held-to-maturity (HTM) from available-for-sale (AFS). These securities were transferred
at fair value at the time of the transfer, which became the new cost basis for the securities held to maturity. The pretax unrealized
net holding loss on the available for sale securities on the date of transfer totaled approximately $16.7 million, and continued to be
reported as a component of accumulated other comprehensive loss. This net unrealized loss is being amortized to interest income over
the remaining life of the securities as a yield adjustment. There were no gains or losses recognized as a result of this transfer. The
remaining pretax unrealized net holding loss on these investments was $15.7 million ($12.4 million net of tax) at December 31, 2022.
Our HTM investments totaled $228.7 million and represented approximately 40% of our total investments at December 31, 2022. Our AFS investments
totaled $331.9 million or approximately 59% of our total investments at December 31, 2022. Our investments at cost totaled $4.2 million
or approximately 1% of our total investments at December 31, 2022.

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At December 31,
2022, the estimated weighted average life of our total investment portfolio was 6.41 years, the modified duration was 4.32, and the weighted
average tax equivalent book yield was 3.33%. At December 31, 2022, the estimated weighted average life of our investments held-to-maturity
was 7.12 years, the modified duration was 6.15, and the weighted average tax equivalent book yield was 3.41%. At December 31, 2022, the
estimated weighted average life of our investments available-for-sale was 5.95 years, the modified duration was 3.15, and the weighted
average tax equivalent book yield was 3.28%. At December 31, 2021, the estimated weighted average life of our investment portfolio was
6.82 years, the effective duration was 3.58, and the weighted average tax equivalent book yield was 1.73%.

We held no debt
securities rated below investment grade at December 31, 2022 and December 31, 2021.

The following
table shows the Available-for Sale investment portfolio composition.

The following
table shows the Held-to-Maturity investment portfolio composition.

We hold other
investments carried at cost totaling $4.2 million and $1.8 million at December 31, 2022 and 2021, respectively. Other investments, at
cost, include Federal Home Loan Bank (“FHLB”) stock in the amount of $2.9 million, corporate stock in the amount of $1.0
million, and a venture capital fund in the amount of $274.1 thousand at December 31, 2022. The Company held FHLB stock in the amount
of $698.4 thousand, corporate stock in the amount of $1.0 million, and a venture capital fund in the amount of $86.7 thousand at December
31, 2021. These are equity securities without readily determinable fair values.
Investment in the FHLB of Atlanta is a condition of borrowing from the FHLB Atlanta. FHLB stock is carried at cost, and periodically
evaluated for impairment based on an assessment of the ultimate recovery of par value. Both cash and stock dividends are reported as
interest income. Dividends received on other investments, at cost are reported as interest income.

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Investment
Securities Maturity Distribution and Yields

The following
table shows, at amortized cost, the expected maturities and weighted average yield, which is calculated using amortized cost as the weight
and tax-equivalent book yield, of securities held at December 31, 2022:

Short-Term
Investments

Short-term investments,
which consist of federal funds sold, securities purchased under agreements to resell and interest bearing deposits, averaged $50.5 million
in 2022, as compared to $73.4 million in 2021. The decline in short-term investments in 2022 is primarily due to loan growth exceeding
deposit growth, which resulted in short-term investments used to fund loan growth. We maintain the majority of our short-term overnight
investments in our account at the Federal Reserve rather than in federal funds at various correspondent banks due to the lower regulatory
capital risk weighting. At December 31, 2022, short-term investments including funds on deposit at the Federal Reserve totaled $12.9
million. These funds are an immediate source of liquidity and are generally invested in an earning capacity on an overnight basis.

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Deposits
and Other Interest-Bearing Liabilities

Deposits. Average
deposits were $1.4 billion during 2022, compared to $1.3 billion during 2021, and $1.1 billion during 2020. Total deposits were $1.4
billion at December 31, 2022 compared to $1.4 billion at December 31, 2021, and $1.2 billion at December 31, 2020. Average
interest-bearing deposits were $948.3 million during 2022, as compared to $869.7 million during 2021, and $743.4 million during
2020. Total interest-bearing deposits were $924.4 million at December 31, 2022 compared to $916.6 million at December 31, 2021, and
$803.9 million at December 31, 2020. These increases are primarily due to organic deposit growth and PPP loan proceeds and other
stimulus funds related to the COVID-19 pandemic being held in customers deposit accounts. Total uninsured deposits were $407.0
million and $392.2 million at December 31, 2022 and December 31, 2021, respectively. Included in uninsured deposits at December 31,
2022 and December 31, 2021 were $59.5 million and $55.2 million of collateralized public funds, respectively. We had no brokered
deposits and no listing services deposits at December 31, 2022, December 31, 2021, and December 31, 2020.

The following
table sets forth the deposits by category: