FIRST COMMUNITY CORP /SC/ (FCCO) FY 2024 MD&A

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

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

Overview

We are headquartered
in Lexington, South Carolina and serve as the bank holding company for the Bank. We engage in a general commercial and retail
banking business characterized by personalized service and local decision making, emphasizing the banking needs of small to medium-sized
businesses, professionals and individuals. We operate from our main office in Lexington, South Carolina, and our 21 full-service
offices located in the South Carolina counties of Lexington County (6 offices), Richland County (4 offices), Newberry County (2
offices), Kershaw County (1 office), Aiken County (1 office), Greenville County (2 offices), Anderson County (1 office), Pickens
County (1 office), and York County (1 office); and in the Georgia counties of Richmond County (1 office) and Columbia County (1
office).

The following
discussion describes our results of operations for 2024, as compared to 2023 and 2022, and also analyzes our financial condition
as of December 31, 2024, as compared to December 31, 2023. 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 2024, 2023 and 2022 of each category of our assets and liabilities, as well as the yield we earned
or the rate we paid with respect to each category. A review of this table shows that our loans typically provide higher interest
yields than do other types of interest earning assets, which is why we intend to channel a substantial percentage of our earning
assets into our loan portfolio. Similarly, the “Rate/Volume Analysis” table helps demonstrate the impact of changing
interest rates and changing volume of assets and liabilities during the years shown. We also track the sensitivity of our various
categories of assets and liabilities to changes in interest rates, and we have included a “Sensitivity Analysis Table”
to help explain this. Finally, we have included a number of tables that provide detail about our investment securities, our loans,
our deposits and our borrowings.

There
are risks inherent in all loans, so we maintain an allowance for credit losses to absorb expected losses in 2024 and probable
losses in 2023 and 2022 on existing loans that may become uncollectible. We establish and maintain this allowance by charging
a provision for credit losses against our operating earnings. In the following section, we have included a detailed discussion
of this process, as well as several tables describing our allowance for credit losses and the allocation of this allowance among
our various categories of loans.

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

Critical Accounting Estimates

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

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

Allowance for Credit Losses

As of
January 1, 2023, we adopted Financial Accounting Standards Board (“FASB”) Accounting Standard Update (“ASU”)
2016-13 Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASC
326”), which changed the methodology, accounting policies and inputs used in determining the allowance for credit losses
(“ACL”). We believe the allowance for credit losses is the critical accounting policy that requires the most significant
judgment and estimates used in preparation of our consolidated financial statements.

The allowance
for credit losses represents our best estimate of credit losses on financial assets. The allowance for credit losses is assessed
at least quarterly and adjustments are recorded in the provision for credit losses. These losses are estimated using historical
loss rates and a projection of reasonable and supportable macroeconomic forecast, combined with additional qualitative factors.
At December 31, 2024 and 2023, we held an allowance for credit losses for our held-to-maturity investment securities, our loans
held-for-investment and our unfunded commitments that are not unconditionally cancelable.

The allowance
for credit losses represents an amount which we believe will be adequate to absorb expected losses (2024 and 2023) and probable
losses (2022) on existing financial assets that may become uncollectible. Our judgment as to the adequacy of the allowance for
credit losses is based on assumptions about future events, which we believe to be reasonable, but which may or may not prove to
be accurate. There can be no assurance that charge-offs of financial assets in future periods will not exceed the allowance for
credit losses as estimated at any point in time or that provisions for credit losses will not be significant to a particular accounting
period.

The allowance
for credit losses represents management’s best estimate for our expected losses at December 31, 2024 and 2023 and probable
losses at December 31, 2022, but significant downturns in circumstances relating to asset quality and economic conditions could
result in a requirement for additional allowance for credit losses. Likewise, an upturn in asset quality and improved economic
conditions may allow a reduction in the required allowance for credit losses. In either instance, unanticipated changes could
have a significant impact on results of operations. In addition, regulatory agencies, as an integral part of their examination
process, periodically review our allowance for credit losses. Such agencies may require us to recognize additions to the allowance
for credit losses based on their judgments about information available to them at the time of their examination.

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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 credit losses, write-downs of OREO properties, write-downs on premises held-for-sale,
accumulated depreciation, net operating loss carry forwards, accretion income, deferred compensation, intangible assets, and pension
plan and post-retirement benefits. The deferred tax assets and liabilities represent the future tax return consequences of those
differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. Deferred tax
assets and liabilities are reflected at income tax rates applicable to the period in which the deferred tax assets or liabilities
are expected to be realized or settled. A valuation allowance is recorded when it is “more likely than not” that a
deferred tax asset will not be realized. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are
adjusted through the provision for income taxes.

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

Goodwill and Other Intangible
Assets

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

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

Derivative Instruments

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

Accounting
for derivatives differs significantly depending on whether a derivative is designated as an accounting hedge, which is a transaction
intended to reduce a risk associated with a specific asset or liability or future expected cash flow at the time it is purchased.
In order to qualify as an accounting hedge, a derivative must be designated as such at inception by management and meet certain
criteria. Management must also continue to evaluate whether the instrument effectively reduces the risk associated with that item.
To determine if a derivative instrument continues to be an effective hedge, we must make assumptions and judgments about the continued
effectiveness of the hedging strategies and the nature and timing of forecasted transactions. If our hedging strategy was to become
ineffective, hedge accounting would no longer apply and the reported results of operations or financial condition could be materially
affected.

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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 by net interest income on a tax equivalent basis and non-interest income, excluding loss on
sale of securities, gain on sale of other assets, loss on early extinguishment of debt, and other non-recurring noninterest income.
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.
“Return on average tangible common equity” is defined as net income on an annualized basis divided by average total
equity reduced by average recorded intangible assets. “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, 2024 and
2023

Our net income
for the twelve months ended December 31, 2024 was $14.0 million, or $1.81 diluted earnings per common share, as compared to $11.8
million, or $1.55 diluted earnings per common share, for the twelve months ended December 31, 2023. The $2.1 million increase
in net income between the two periods is primarily due to an increase in net interest income of $3.1 million, a decrease in provision
for credit losses of $320 thousand, and an increase in non-interest income of $3.6 million, partially offset by an increase in
non-interest expense of $4.3 million and an increase in income tax expense of $618 thousand.

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Year Ended December 31, 2023 and
2022

Our net income
for the twelve months ended December 31, 2023 was $11.8 million, or $1.55 diluted earnings per common share, as compared to $14.6
million, or $1.92 diluted earnings per common share, for the twelve months ended December 31, 2022. The $2.8 million decline in
net income between the two periods is primarily due to a $1.1 million decline in non-interest income, a $1.9 million increase
in total non-interest expense and a $1.3 million increase in provision for credit losses, partially offset by a $949 thousand
increase in net interest income and a $601 thousand reduction 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, 2024 and
2023

Net interest
income increased $3.1 million, or 6.4%, to $52.0 million for the twelve months ended December 31, 2024 from $48.9 million for
the twelve months ended December 31, 2023. Our net interest margin declined by nine basis points to 2.91% during the twelve months
ended December 31, 2024 from 3.00% during the twelve months ended December 31, 2023. Our net interest margin, on a taxable equivalent
basis, was 2.92% for the twelve months ended December 31, 2024 compared to 3.01% for the twelve months ended December 31, 2023.
Average earning assets increased $154.9 million, or 9.5%, to $1.8 billion for the twelve months ended December 31, 2024 compared
to $1.6 billion in the same period of 2023.

Average loans
increased $136.9 million, or 13.1%, to $1.2 billion for the twelve months ended December 31, 2024 from $1.0 billion for the same
period in 2023. Average loans represented 66.3% of average earning assets during the twelve months ended December 31, 2024 compared
to 64.2% of average earning assets during the same period in 2023. Our loan (including loans held-for-sale) to deposit ratio on
average during 2024 was 74.4%, as compared to 73.2% during 2023. This increase was due to the growth rate on our average loans
(including loans held-for-sale) of 13.1% in 2024 exceeding the growth rate on our deposits of 11.4% during the same time period.
The loan to deposit ratio (including loans held-for-sale) declined to 73.4% at December 31, 2024 as compared to 75.3% at December
31, 2023. Our growth in loans of $91.8 million or 8.1% from December 31, 2023 to December 31, 2024 was exceeded by our growth
in deposits of $164.9 million or 10.4% during the same period.

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The growth in
our average deposits of $162.9 million and securities sold under agreements to repurchase of $2.6 million compared to the growth
in our average loans of $136.9 million resulted in a reduction in borrowings. The yield on loans increased 0.62% to 5.61% during
the twelve months ended December 31, 2024 from 4.99% during the same period in 2023 due to market interest rates and the Pay-Fixed
Swap Agreement. Average securities for the twelve months ended December 31, 2024 declined $50.0 million, or 9.2%, to $491.0 million
from $541.1 million during the same period in 2023. Other short-term investments increased $68.0 million to $110.9 million during
the twelve months ended December 31, 2024 from $42.9 million during the same period in 2023 due to the additional cash on hand
as deposit growth outpaced loan growth. The yield on our securities portfolio increased to 3.90% for the twelve months ended December
31, 2024 from 3.36% for the same period in 2023. The yield on our other short-term investments declined to 4.95% for the twelve
months ended December 31, 2024 from 5.11% for the same period in 2023 due to the Federal Open Market Committee (FOMC) decreasing
the target range of federal funds during the twelve months of 2024 a total of 1.00% to a target federal funds rate range of 4.25%
– 4.50% at December 31, 2023 from a target federal funds rate range of 5.25% – 5.50% at December 31, 2024.

The yield on
earning assets for the twelve months ended December 31, 2024 and 2023 were 5.00% and 4.45%, respectively.

The cost of interest-bearing
liabilities was 2.88% during the twelve months ended December 31, 2024 compared to 2.06% during the same period in 2023. The cost
of deposits, including demand deposits, was 1.96% during the twelve months ended December 31, 2024 compared to 1.16% during the
same period in 2023. The cost of funds, including demand deposits, was 2.15% during the twelve months ended December 31, 2024
compared to 1.48% during the same period in 2023. We continue to focus on growing our pure deposits plus customer cash management
repurchase agreements (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, 2024, these pure deposits plus customer cash management
repurchase agreements averaged 83.1% of total deposits plus customer cash management repurchase agreements as compared to 89.9%
during the same period of 2023.

Year Ended December 31, 2023 and
2022

Net interest
income increased $949,000, or 2.0%, to $48.9 million for the twelve months ended December 31, 2023 from $47.9 million for the
twelve months ended December 31, 2022. Our net interest margin declined by 11 basis points to 3.00% during the twelve months ended
December 31, 2023 from 3.11% during the twelve months ended December 31, 2022. Our net interest margin, on a taxable equivalent
basis, was 3.01% for the twelve months ended December 31, 2023 compared to 3.14% for the twelve months ended December 31, 2022.
Average earning assets increased $90.7 million, or 5.9%, to $1.6 billion for the twelve months ended December 31, 2023 compared
to $1.5 billion in the same period of 2022.

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Average loans
increased $127.7 million, or 13.9%, to $1.0 billion for the twelve months ended December 31, 2023 from $920.4 million for the
same period in 2022. Average loans represented 64.2% of average earning assets during the twelve months ended December 31, 2023
compared to 59.7% of average earning assets during the same period in 2022. Our loan (including loans held-for-sale) to deposit
ratio on average during 2023 was 73.2%, as compared to 64.9% during 2022. These increases were due to our growth in loans (including
loans held for sale) of $127.7 million exceeding our deposit growth of $13.3 million. The loan to deposit ratio (including loans
held-for-sale) increased to 75.3% at December 31, 2023 as compared to 70.9% at December 31, 2022. Our growth in loans of $155.8
million from December 31, 2022 to December 31, 2023 exceeded our growth in deposits of $125.6 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 resulted in
an increase in borrowings. The yield on loans increased 73 basis points to 4.99% during the twelve months ended December 31, 2023
from 4.26% during the same period in 2022 due to market interest rates and the Pay-Fixed Swap Agreement. Average securities for
the twelve months ended December 31, 2023 declined $29.5 million, or 5.2%, to $541.1 million from $570.6 million during the same
period in 2022. Other short-term investments declined $7.5 million to $42.9 million during the twelve months ended December 31,
2023 from $50.5 million during the same period in 2022 due to the deployment of lower yielding other short-term investments into
higher yielding loans. The yield on our securities portfolio increased to 3.36% for the twelve months ended December 31, 2023
from 1.97% for the same period in 2022. The yield on our other short-term investments increased to 5.11% for the twelve months
ended December 31, 2023 from 1.25% for the same period in 2022 due to the Federal Open Market Committee (FOMC) increasing the
target range of federal funds during the twelve months of 2023 a total of 100 basis points and a total of 425 basis points during
the twelve months of 2022 . The target range of federal funds was 5.25% - 5.50% at December 31, 2023 compared to compared
to 4.25% - 4.50% at December 31, 2022.

The yield on
earning assets for the twelve months ended December 31, 2023 and 2022 were 4.45% and 3.32%, respectively.

The cost of interest-bearing
liabilities was 2.06% during the twelve months ended December 31, 2023 compared to 30 basis points during the same period in 2022.
The cost of deposits, including demand deposits, was 1.16% during the twelve months ended December 31, 2023 compared to 13 basis
points during the same period in 2022. The cost of funds, including demand deposits, was 1.48% during the twelve months ended
December 31, 2023 compared to 21 basis points during the same period in 2022. We continue to focus on growing our pure deposits
plus customer cash management repurchase agreements (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, 2023, these pure deposits
plus customer cash management repurchase agreements averaged 89.9% of total deposits plus customer cash management repurchase
agreements as compared to 92.2% during the same period of 2022.

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.

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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 Committee of the board of directors (the “ALCO”), which has members from
our board of directors and management to monitor and manage interest rate risk. Our ALCO

Further, our ALCO and board of directors
explicitly review our ALCO policies at least annually and review our ALCO assumptions and policy limits quarterly.

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 in the yield curve. We model the impact on net interest income in an increasing
and decreasing rate environment of 100, 200, 300, and 400 basis points. We also periodically stress certain assumptions such as
loan prepayment rates, average lives, interest rate betas, and deposit migration 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%, 15%, 20%, and 20%, respectively, in a 100, 200, 300, and 400 basis point change
in interest rates over the first 12-month period subsequent to interest rate changes. Interest rate sensitivity can be managed
by repricing assets or liabilities, selling securities available-for-sale, replacing an asset or liability at maturity, by adjusting
the interest rate during the life of an asset or liability, or by the use of derivatives such as interest rate swaps and other
hedging instruments. 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, 2024.

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, 2024 and at December 31, 2023 over the subsequent 12 months. We were
liability sensitive at December 31, 2024 and primarily liability sensitive at December 31, 2023. In 2023, we increased our non-maturity
deposit interest rate betas in increasing rate environments, which increased our liability sensitivity at December 31, 2023. This
was partially offset by the previously mentioned $150.0 million Pay-Fixed Swap Agreement that we entered into effective May 5,
2023. Furthermore, we reduced the average live on our non-maturity deposits at June 30, 2024. As a result, our modeling, at December
31, 2024, reflects a decrease in net interest income in a rising interest rate environment during the first 12-month period subsequent
to interest rate changes. The negative impact of rising rates on net interest income is slightly less liability sensitive during
the second 12-month period subsequent to interest rate changes. In a declining interest rate environment, the model reflects increases
in net interest income in all of the scenarios during the first 12-month period subsequent to interest rate changes. The positive
impact in the down 100, down 200, and down 300 basis point scenarios of declining rates changes to a slightly less positive impact
on net interest income during the second 12-month period subsequent to interest rate changes. In the down 400 basis point scenario,
the model reflects a slight decrease. The increase and decrease of 100, 200, 300, and 400 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, 200 basis point, 300 basis point, and 400 basis point simultaneous and parallel increases
in interest rates along the entire yield curve, our net interest income is projected to decline 2.04%, 4.96%, 8.75%, and 12.70%,
respectively, at December 31, 2024, and decline 1.94%, 4.67%, 7.63%, and 10.68%, respectively, at December 31, 2023. During the
second 12-month period after 100 basis point, 200 basis point, 300 basis point, and 400 basis point simultaneous and parallel
reduction in interest rates along the entire yield curve, our net interest income is projected to increase 1.80%, 2.91%, and 1.46%
and decline 1.75%, respectively, at December 31, 2024, and to increase 0.51% and decline 0.03%, 3.19%, and 4.41%, respectively,
at December 31, 2023.

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. Policies have been established in an effort to maintain the maximum anticipated negative
impact of these modeled changes in PVE at no more than 15%, 20%, 25%, and 25%, respectively, in a 100, 200, 300, and 400 basis
point change in market interest rates. Based on PVE, we were primarily asset sensitive at December 31, 2024 and asset sensitive
at December 31, 2023. However, in the up 300 and 400 basis point scenarios, present value of equity declines 1.47% and 3.72%,
respectively, at December 31, 2024.

Present Value
of Equity Sensitivity

Provision and Allowance for Credit
Losses

Year Ended December 31, 2024 and
2023

On January
1, 2023, we adopted CECL, which resulted in a day one reduction of $14 thousand to the allowance for credit losses on loans
offset by increases of $398 thousand to the allowance for credit losses on unfunded commitments and $43.5 thousand to the
allowance for credit losses on held-to-maturity investments. Furthermore, deferred tax assets increased $90 thousand and retained
earnings declined $337 thousand. During the twelve months ended December 31, 2024, the allowance for credit losses on loans increased
$868 thousand to $13.1 million, the allowance for credit losses on unfunded commitments declined $117 thousand to $480 thousand,
and the allowance for credit loss on held-to-maturity investments declined $7 thousand to $23 thousand. Compared to the day one
CECL results, the allowance for credit losses on loans increased $945 thousand to $12.3 million at December 31, 2023 from $11.3
million at January 1, 2023; the allowance for credit losses on unfunded commitments increased $199 thousand to $597 thousand as
of December 31, 2023 from $398 thousand as of January 1, 2023; and the allowance for credit losses on held-to-maturity investments
declined $14 thousand to $30 thousand at December 31, 2023 from $43.5 thousand at January 1, 2023. At December 31, 2024, the combined
allowance for credit losses for loans, unfunded commitments, and investments was $13.6 million compared to $12.9 million at December
31, 2023 and $11.8 million at January 1, 2023.

The allowance
for credit losses on loans as a percentage of total loans held-for-investment was 1.08% at December 31, 2024, 1.08% at December
31, 2023 and 1.15% at January 1, 2023.

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The total ACL
is composed of three parts: the ACL for loans, the ACL for unfunded commitments, and the ACL for HTM investments. The ACL for
loans is further composed of the allowance for individually assessed loans, the allowance for collectively assessed expected losses,
the allowance for collectively assessed qualitative adjustments, and the allowance for collectively assessed additional allowance.
The allowance for collectively assessed qualitative adjustments is calculated using a set of qualitative factors, which at December
31, 2024 and 2023 included the following factors:

We have a significant
portion of our loan portfolio with real estate as the underlying collateral. As of December 31, 2024 and December 31, 2023,
approximately 91.4% and 91.7%, 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 credit losses as estimated at any point in time
or that provisions for credit losses will not be significant to a particular accounting period. The allowance 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 0.04% of total assets with the nominal level of $810 thousand in non-performing assets at December 31, 2024 compared to 0.05%
and $864 thousand at December 31, 2023. Non-accrual loans increase to $219 thousand at December 31, 2024 from $27 thousand at December
31, 2023. We had $48 thousand in accruing loans past due 90 days or more at December 31, 2024 compared to $215 thousand at December 31,
2023. Loans past due 30 days or more represented 0.05% of the loan portfolio at December 31, 2024 compared to 0.06% at December 31, 2023. The
ratio of classified loans plus OREO and repossessed assets declined to 1.06% of total bank regulatory risk-based capital at December
31, 2024 from 1.25% at December 31, 2023. During the twelve months ended December 31, 2024, we experienced net loan recoveries of $6
thousand (charge-offs of $97 thousand less recoveries of $103 thousand) and net overdraft charge-offs of $71 thousand (charge-offs of
$87 thousand less recoveries of $16 thousand). In comparison, we experienced net loan recoveries of $55 thousand and net overdraft
charge-offs of $49 thousand during the twelve months ended December 31, 2023.

There were five
loans totaling $267 thousand (0.02% of total loans) included on non-performing status (non-accrual loans and loans past due 90
days and still accruing) at December 31, 2024. Two of these loans were on non-accrual status. The largest loan of the two is $217
thousand and is secured by a first lien mortgage. The balance of the remaining loan on non-accrual status is $2 thousand and it
is secured by a second lien mortgage. We had two loans totaling $215 thousand that were accruing loans past due 90 days or more
at December 31, 2023. At December 31, 2024 and December 31, 2023, we considered loan relationships exceeding $500 thousand and
on non-accrual status as individually assessed loans for the allowance for credit losses. At December 31, 2024 and December 31,
2023, we had no individually assessed loans. The specific allowance for individually assessed loans is based on 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 were no specific
allowances for credit losses on our individually assessed loans at December 31, 2024 and December 31, 2023. At December 31, 2024,
we had $554 thousand in loans that were delinquent 30 days to 89 days representing 0.05% of total loans compared to $498 thousand
or 0.04% of total loans at December 31, 2023.

56

Year Ended December 31, 2023 and
2022

On January
1, 2023, we adopted CECL, which resulted in a day one reduction of $14 thousand to the allowance for credit losses on loans
offset by increases of $398 thousand to the allowance for credit losses on unfunded commitments and $43.5 thousand to the
allowance for credit losses on held-to-maturity investments. Furthermore, deferred tax assets increased $90 thousand and retained
earnings declined $337 thousand. Refer to the “Application of New Accounting Guidance Adopted in 2023” section in
Note 2 for more information about our CECL adoption and methodology. Compared to the day one CECL results, the allowance for credit
losses on loans increased $945 thousand to $12.3 million at December 31, 2023 from $11.3 million at January 1, 2023; the allowance
for credit losses on unfunded commitments increased $199 thousand to $597 thousand as of December 31, 2023 from $398 thousand
as of January 1, 2023; and the allowance for credit losses on held-to-maturity investments declined $14 thousand to $30 thousand
at December 31, 2023 from $43.5 thousand at January 1, 2023. As of December 31, 2023, the combined allowance for credit losses
for loans, unfunded commitments, and investments was $12.9 million compared to $11.8 million at January 1,
2023 and $11.3 million at December 31, 2022.

The allowance
for credit losses on loans as a percentage of total loans held-for-investment was 1.08% at December 31, 2023, 1.15% at January
1, 2023, and 1.16% at December 31, 2022.

The total ACL
is composed of three parts: the ACL for loans, the ACL for unfunded commitments, and the ACL for HTM investments. The ACL for
loans is further composed of the allowance for individually assessed loans, the allowance for collectively assessed expected losses,
the allowance for collectively assessed qualitative adjustments, and the allowance for collectively assessed additional allowance.
The allowance for collectively assessed qualitative adjustments is calculated using a set of qualitative factors, which at December
31, 2023 included the following factors:

Refer to the
“Application of New Accounting Guidance Adopted in 2023” section in Note 2 for more information about our CECL adoption
and methodology.

We have a significant
portion of our loan portfolio with real estate as the underlying collateral. As of December 31, 2023 and December 31, 2022,
approximately 91.7% and 91.2%, 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 credit losses as estimated at any point in time
or that provisions for credit losses will not be significant to a particular accounting period. The allowance 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 0.05% of total assets with the nominal level of $864 thousand in non-performing assets at December 31, 2023 compared
to 0.35% and $5.8 million at December 31, 2022. Non-accrual loans declined to $27 thousand at December 31, 2023 from $4.9 million
at December 31, 2022. The declines in both non-performing assets and non-accrual loans from December 31, 2022 to December 31,
2023 were due to non-accrual loan payoffs and paydowns primarily due to the successful resolution of two customer relationships
with three non-accrual loans totaling $716 thousand, which were paid-off during the first quarter of 2023; and due to one large
loan relationship totaling $3.9 million, which was resolved during the second quarter of 2023. The resolution of the $3.9 million
loan relationship during the second quarter of 2023 occurred through the foreclosure process followed by the timely sale of the
real estate at a gain of $105 thousand. We had $215 thousand in accruing loans past due 90 days or more at December 31, 2023 compared
to $2 thousand at December 31, 2022. Loans past due 30 days or more represented 0.06% of the loan portfolio at December 31, 2023
compared to 0.06% at December 31, 2022. The ratio of classified loans plus OREO and repossessed assets declined to 1.25%
of total bank regulatory risk-based capital at December 31, 2023 from 4.47% at December 31, 2022. During the twelve months ended
December 31, 2023, we experienced net loan recoveries of $55 thousand (charge-offs of $24 thousand less recoveries of $79 thousand)
and net overdraft charge-offs of $49 thousand (charge-offs of $63 thousand and recoveries of $14 thousand). In comparison, we
experienced net loan recoveries of $361 thousand and net overdraft charge-offs of $52 thousand during the twelve months ended
December 31, 2022.

57

There were four
loans totaling $242 thousand (0.02% of total loans) included on non-performing status (non-accrual loans and loans past due 90
days and still accruing) at December 31, 2023. Two of these loans were on non-accrual status. The largest loan of the two is $24
thousand and is secured by a truck. The balance of the remaining loan on non-accrual status is $3 thousand and it is secured by
a second mortgage lien. Furthermore, we had $88 thousand in accruing trouble debt restructurings, or TDRs, at December 31, 2022.
We had two loans totaling $215 thousand that were accruing loans past due 90 days or more at December 31, 2023. At December 31,
2023, we considered loan relationships exceeding $500 thousand and on non-accrual status as individually assessed loans for the
allowance for credit losses. At December 31, 2023, we had no individually assessed loans. At December 31, 2022, we considered
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. Non-accrual loans and accruing
TDRs were considered impaired. At December 31, 2022, we had 11 impaired loans totaling $5.0 million. The specific allowance for
individually assessed loans is based on 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 credit losses on our individually assessed loans at December
31, 2023 and December 31, 2022. At December 31, 2023, we had $498 thousand in loans that were delinquent 30 days to 89 days representing
0.04% of total loans compared to $564 thousand or 0.06% of total loans at December 31, 2022.

Year Ended December 31, 2022

We accounted
for our allowance for loan losses under the incurred loss model during 2022 and 2021. At December 31, 2022, the allowance for
credit 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 credit 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 credit 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 credit 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 credit 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 credit 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, the remaining credit component on loans attributable to acquired loans in the Cornerstone and Savannah River
transactions was $81 thousand.

Our provision
for credit 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 credit losses is primarily related to a decrease in our COVID-19
qualitative factor in our allowance for credit 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.

58

The allowance
for credit 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 credit losses is based on assumptions about future events,
which we believe to be reasonable, but which may or may not prove to be accurate. Our determination of the allowance for credit
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 credit 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 credit losses. There can
be no assurance that charge-offs of loans in future periods will not exceed the allowance for credit losses as estimated at any
point in time or that provisions for credit losses will not be significant to a particular accounting period.

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 credit 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 credit losses as estimated at any point in time
or that provisions for credit losses will not be significant to a particular accounting period. The allowance 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.

59

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.

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

Allowance for Credit Losses

60

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

At December
31, 2022, 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 at 2022.

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.

61

The following
table shows the allocation of the allowance for credit losses on loans:

Allocation of the Allowance for
Credit Losses on Loans

Non-interest Income and
Expense

Non-interest
Income. A 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, official check fees, rental income, and bank owned life insurance income.

Non-interest
income during the twelve months ended December 31, 2024 increased to $14.0 million from $10.4 million during the same period in
2023. The $3.6 million increase in non-interest income is primarily related to a reduction in loss on sale of securities of $1.2
million, increases in mortgage banking income of $962 thousand, investment advisory fees and non-deposit commissions of $1.7 million,
and an increase in gains on insurance proceeds of $73 thousand partially offset by a decease in gain on sale of other assets of
$146 thousand and a loss on early extinguishment of debt of $229 thousand.

During
the third quarter of 2023, we sold $39.9 million of book value U.S. Treasuries in our available-for-sale investment securities
portfolio. While this sale created a one-time pre-tax loss of $1.2 million, it provided additional liquidity which was used to
pay down borrowings and fund loan growth. The weighted average book yield of the securities sold was 1.75% and the projected earn
back period is 1.6 years. There was no such similar sale during 2024.

Mortgage banking
income increased $962 thousand to $2.4 million during the twelve months ended December 31, 2024 from $1.4 million during the same
period in 2023. Secondary mortgage production during the twelve months ended December 31, 2024 was $79.3 million compared to $49.7
million during the same period in 2023 while the gain on sale margin increased to 2.96% during the twelve months ended December
31, 2024 from 2.83% during the same period in 2023.

During 2022,
we began to market an adjustable rate mortgage (ARM) product to provide borrowers with an alternative to fixed-rate mortgages
and to help offset anticipated mortgage production challenges. Currently, we are offering 5/6, 7/6, and 10/6 ARM loans that are
originated for our loans held-for-investment portfolio. Furthermore, in 2022, we added a new construction residential real estate
team and product. Total mortgage production during the twelve months ended December 31, 2024 was $165.6 million, $79.3 million
of the production was originated to be sold in the secondary market, $40.9 million of the loan production was originated as ARM
loans for our loans held-for-investment portfolio, and $45.4 million of the loan production was commitments for new construction
residential real estate loans. As these ARM and new construction residential real estate 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.

62

Investment advisory
fees increased $1.7 million to $6.2 million during the twelve months ended December 31, 2024 from $4.5 million during the same
period in 2023. Total assets under management were $926.0 million at December 31, 2024 compared to $755.4 million at December
31, 2023. Our net new assets were $37.5 million during the twelve months ended December 31, 2024. Furthermore, our investment
performance for the twelve months ended December 31, 2024 was 17.6% compared to 23.3% for the S&P 500.

Gain (loss) on
sale of other assets declined $146 thousand to a gain of $5 thousand during the twelve months ended December 31, 2024 from $151
thousand during the same period in 2023 due to an income tax recovery in 2024 on a previously sold other real estate owned property
and due to a sale of other real estate owned during the twelve months ended December 31, 2023.

The $229 thousand
loss on early extinguishment of debt during the twelve months ended December 31, 2024 resulted from our decision to use available
cash to reduce FHLB advances to zero, including the pre-payment of $35.0 million in FHLB advances during the fourth quarter of
2024. We believe this reduction in these borrowings positioned us for improvements in net interest income and margin in the future.

Non-interest
income during the twelve months ended December 31, 2023 declined to $10.4 million from $11.6 million during the same period in
2022. The $1.1 million decline in non-interest income is primarily related to decreases in non-recurring non-interest income of
$866 thousand, and mortgage banking income of $494 thousand partially offset by increases in investment advisory fees and non-deposit
commissions of $32 thousand and other non-interest income of $177 thousand.

During
the third quarter of 2023, we sold $39.9 million of book value U.S. Treasuries in our available-for-sale investment securities
portfolio, which created a one-time pre-tax loss of $1.2 million. The weighted average book yield of the securities sold was 1.75%
and the projected earn back period is 1.6 years.

Mortgage banking
income declined $494 thousand to $1.4 million during the twelve months ended December 31, 2023 from $1.9 million during the same
period in 2022. Secondary mortgage production during the twelve months ended December 31, 2023 was $49.7 million compared to $65.8
million during the same period in 2022 while the gain on sale margin declined to 2.83% during the twelve months ended December
31, 2023 from 2.85% during the same period in 2022. The reduction in mortgage production was primarily due to a higher interest
rate environment and low levels of home inventories.

Total mortgage
production during the twelve months ended December 31, 2023 was $135.7 million, $49.7 million of the production was originated
to be sold in the secondary market, $32.5 million of the loan production was originated as ARM loans for our loans held-for-investment
portfolio, and $53.5 million of the loan production was commitments for new construction residential real estate loans. As these
ARM and new construction residential real estate 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 $32 thousand to $4.5 million during the twelve months ended December 31, 2023 from $4.5 million during the same
period in 2022. Total assets under management were $755.4 million at December 31, 2023 compared to $558.8 million at December
31, 2022. Our net new assets were $39.2 million during the twelve months ended December 31, 2023. Furthermore, our investment
performance for the twelve months ended December 31, 2023 was 28.2% compared to 24.2% for the S&P 500.

The $977 thousand
in non-recurring contra non-interest income during the twelve months ended December 31, 2023 includes the previously mentioned
loss on sale of securities of $1.2 million, gains on sale of other real estate owned of $151 thousand, a bank owned life insurance
claim of $93 thousand, and gains on insurance proceeds of $28 thousand.  We recorded $111 thousand in other non-recurring
contra income related to a loss on sale of other real estate owned of $45 thousand, due to the sale of one other real estate owned
property, and a loss on sale of other assets of $73 thousand, due to the sale of one bank owned premise, partially offset by gains
on insurance proceeds of $7 thousand during the twelve months ended December 31, 2022.

Non-interest
income, other increased $177 thousand during the twelve months ended December 31, 2023 compared to the same period in 2022 primarily
due to increases in ATM debit card income of $65 thousand and rental income of $48 thousand.

63

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.

Non-interest
expense during the twelve months ended December 31, 2024 increased $4.3 million to $47.5 million from $43.1 million during the
same period in 2023. The increase is primarily due to increases in salaries and employee benefits of $3.4 million, increases in
marketing and public relations expense of $15 thousand, increases in FDIC Insurance assessments of $273 thousand, increases in
other real estate expense, net, of $215 thousand, and increases in other non-interest expense of $597 thousand, partially offset
by a decline in occupancy expense of $63 thousand and equipment expense of $115 thousand.

64

Non-interest
expense during the twelve months ended December 31, 2023 increased to $43.1 million from $41.3 million during the same period
in 2022. The $1.9 million increase in non-interest expense is primarily due to increases in salaries and benefits of $507 thousand,
occupancy expense of $155 thousand, equipment expense of $223 thousand, marketing and public relations of $237 thousand, FDIC
assessment of $223 thousand, and other expense of $753 thousand partially offset by lower other real estate expense of $420 thousand.

65

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

Income Tax Expense

Our income tax
expense for the years ended December 31, 2024, 2023, and 2022 were $3.8 million, $3.2 million, and $3.8 million, respectively.
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 rates were 21.5%, 21.3%, and 20.6%, for the twelve month periods
ended December 31, 2024, 2023, and 2022, respectively. The effective tax rates were affected by a $149 thousand non-recurring
reduction to income tax during the twelve months ended December 31, 2024, by a $122 thousand non-recurring reduction to income
tax expense during the twelve months ended December 31, 2023, and by a $153 thousand non-recurring reduction to income taxes during
the twelve months ended December 31, 2022. Furthermore, we purchased $500 thousand of South Carolina State Tax Credits for $432.5
thousand in November 2024, which created a $67.5 thousand non-recurring benefit to income taxes in November 2024. 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 22.25% to 22.75%.

Financial Position

Assets increased
$130.3 million, or 7.1%, to $2.0 billion at December 31, 2024 from $1.8 billion at December 31, 2023. The $130.3 million increase
in assets was primarily due to loans (excluding loans held-for-sale), which increased $86.5 million, or 7.6%, to $1.2 billion
at December 31, 2024 from $1.1 billion at December 31, 2023.

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Earning Assets

Loans and loans held-for-sale

Loans held-for-sale
increased to $9.7 million at December 31, 2024 from $4.4 million at December 31, 2023. Loans (excluding loans held-for-sale) increased
$86.5 million, or 7.6%, to $1.2 billion at December 31, 2024 from $1.1 billion at December 31, 2023. Total loan production, excluding
mortgage secondary market and new construction residential real estate, was $179.3 million during the twelve months ended December
31, 2024 compared to $198.8 million during the same period in 2023. Advances from unfunded commercial construction loans available
for draws were $94.5 million during the twelve months ended December 31, 2024. Total mortgage production during the twelve months
ended December 31, 2024 was $165.6 million, $79.3 million of the production was originated to be sold in the secondary market,
$40.9 million of the loan production was originated as ARM loans for our loans held-for-investment portfolio, and $45.4 million
of the loan production was commitments for new construction residential real estate loans. Total mortgage production during the
twelve months ended December 31, 2023 was $135.7 million, $49.7 million of the production was originated to be sold in the secondary
market, $32.5 million of the loan production was originated as ARM loans for our loans held-for-investment portfolio, and $53.5
million of the loan production was commitments for new construction residential real estate loans. As these ARM and new construction
residential real estate 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 increase in mortgage production was primarily due to higher secondary market and ARM production partially offset by
lower construction residential real estate loan production. Payoffs and paydowns increased to $113.2 million during the twelve
months ended December 31, 2024 compared to $87.0 million during the same period in 2023. However, they were still the second lowest
level of payoffs and paydowns in the past six years. The loan-to-deposit ratio (including loans held-for-sale) at December 31,
2024 and December 31, 2023 was 73.4% and 75.3%, respectively. The loan-to-deposit ratio (excluding loans held-for-sale) at December
31, 2024 and December 31, 2023 was 72.8% and 75.1%, 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. Based on the Bank’s loan portfolio as of December 31, 2024, its non-owner occupied commercial real estate loans
and its construction and land development loans were approximately 305% and 82% of total risk-based capital, respectively. Furthermore,
our three-year growth in non-owner occupied commercial real estate loans was 46% from December 31, 2021 to December 31, 2024.
We have expertise and a long history in originating and managing commercial real estate loans. We have a strong credit underwriting
process, which includes management and board oversight. We perform rigorous monitoring, stress testing, and reporting of these
portfolios at the management and board levels, and we continue to monitor the level of the concentration in commercial real estate
loans within the Bank’s loan portfolio monthly.

Loans typically
provide higher yields than the other types of earning assets. During 2024 and 2023, loans accounted for 66.3% and 64.2% of average
earning assets, respectively. The loan portfolio (including held-for-sale) averaged $1.2 billion in 2024 as compared to $1.0 billion
in 2023. Quality loan portfolio growth continued to be a strategic focus of ours in 2024. 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. 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:

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 December
31, 2024 and 2023 were commercial mortgage loans in the amount of $796.4 million and $791.9 million, respectively, representing
65.3% and 69.8% 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 we will reduce the risk elements of the loan portfolio through strategies that diversify the lending mix.

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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, 2024.

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. Investment securities declined $14.5 million to $491.7
million, net of allowance for credit losses on investments of $23 thousand, at December 31, 2024 from $506.2 million, net of allowance
for credit losses on investments of $30 thousand, at December 31, 2023. The $14.5 million decline was primarily related to normal
principal cash flows primarily offset by the purchase of $17.7 million in investment securities. Our investment securities portfolio
averaged $491.0 million in 2024, as compared to $541.1 million in 2023, which represents 27.5% and 33.2% of the average earning
assets for the years ended December 31, 2024 and 2023, 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 $12.3 million ($9.7 million net of tax)
at December 31, 2024. The remaining pretax unrealized net holding loss on these investments was $14.0 million ($11.1 million net
of tax) at December 31, 2023. Our HTM investments totaled $209.4 million and represented approximately 42% of our total investments
at December 31, 2024. Our AFS investments totaled $279.6 million or approximately 57% of our total investments at December 31,
2024. Our investments at cost totaled $2.7 million or approximately 1% of our total investments at December 31, 2024. The
unrealized losses on our investment securities are related 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.

At December
31, 2024, the estimated weighted average life of our total investment portfolio was 5.67 years, the modified duration was 4.4,
the effective duration was 3.5, and the weighted average tax equivalent book yield was 3.68%. At December 31, 2023, the estimated
weighted average life of our total investment portfolio was 6.19 years, the modified duration was 4.7, the effective duration
was 3.8, and the weighted average tax equivalent book yield was 3.84%.

We held
no debt securities rated below investment grade at December 31, 2024 and December 31, 2023.

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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 $2.7 million and $6.8 million at December 31, 2024 and 2023, respectively. Other investments,
at cost, include Federal Home Loan Bank (“FHLB”) stock in the amount of $1.3 million, corporate stock in the amount
of $1.0 million, and a venture capital fund in the amount of $399.2 thousand at December 31, 2024. We held FHLB stock in the amount
of $5.4 million, corporate stock in the amount of $1.0 million, and a venture capital fund in the amount of $354.2 thousand at
December 31, 2023. 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.

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, 2024: