EAGLE FINANCIAL SERVICES INC Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-Q)

The purpose of this discussion is to focus on the important factors affecting
the Company's financial condition, results of operations, liquidity and capital
resources. This discussion should be read in conjunction with the Company's
Consolidated Financial Statements and the Notes to the Consolidated Financial
Statements presented in Part I, Item 1, Financial Statements, of this Form 10-Q
and Item 8, Financial Statements and Supplementary Data, of the 2021 Form 10-K.

GENERAL


Eagle Financial Services, Inc. is a bank holding company which owns 100% of the
stock of Bank of Clarke County (the "Bank" and, collectively with Eagle
Financial Services, Inc., the "Company", "we", "us" or "our"). Accordingly, the
results of operations for the Company are dependent upon the operations of the
Bank. The Bank conducts a commercial banking business which consists of
attracting deposits from the general public and investing those funds in
commercial, consumer and real estate loans and municipal and U.S. government
agency securities. The Bank's deposits are insured by the Federal Deposit
Insurance Corporation to the maximum extent permitted by law. At September 30,
2022, the Company had total assets of $1.47 billion, net loans of $1.19 billion,
total deposits of $1.25 billion, and shareholders' equity of $98.5 million. The
Company's net income was $11.3 million for the nine months ended September 30,
2022.

MANAGEMENT'S STRATEGY

The Company strives to be an outstanding financial institution in its market by
building solid sustainable relationships with: (1) its customers, by providing
highly personalized customer service, a network of conveniently placed branches
and ATMs, a competitive variety of products/services and courteous, professional
employees, (2) its employees, by providing generous benefits, a positive work
environment, advancement opportunities and incentives to exceed expectations,
(3) its communities, by participating in local concerns, providing monetary
support, supporting employee volunteerism and providing employment
opportunities, and (4) its shareholders, by providing sound profits and returns,
sustainable growth, regular dividends and committing to its local, independent
status.

OPERATING STRATEGY

The Bank is a locally owned and managed financial institution. This allows the
Bank to be flexible and responsive in the products and services it offers. The
Bank grows primarily by lending funds to local residents and businesses at a
competitive price that reflects the inherent risk of lending. The Bank attempts
to fund these loans through deposits gathered from local residents and
businesses. The Bank prices its deposits by comparing alternative sources of
funds and selecting the lowest cost available. When deposits are not adequate to
fund asset growth, the Bank relies on borrowings, both short and long term. The
Bank's primary source of borrowed funds is the Federal Home Loan Bank of Atlanta
which offers numerous terms and rate structures to the Bank.

As interest rates change, the Bank attempts to maintain its net interest margin.
This is accomplished by changing the price, terms, and mix of its financial
assets and liabilities. The Bank also earns fees on services provided through
its trust department, sales of investments through Eagle Investment Services,
secondary market mortgage activities, and deposit operations. The Bank also
incurs noninterest expenses such as compensating employees, maintaining and
acquiring fixed assets, and purchasing goods and services necessary to support
its daily operations.

The Bank has a marketing department which seeks to develop new business. This is
accomplished through an ongoing calling program whereby account officers visit
with existing and potential customers to discuss the products and services
offered. The Bank also utilizes traditional advertising such as television
commercials, radio ads, newspaper ads, and billboards.


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LOAN POLICIES


Administration and supervision over the lending process is provided by the
Bank's Credit Administration Department. The principal risk associated with the
Bank's loan portfolio is the creditworthiness of its borrowers. In an effort to
manage this risk, the Bank's policy gives loan amount approval limits to
individual loan officers based on their position and level of experience. Credit
risk is increased or decreased, depending on the type of loan and prevailing
economic conditions. In consideration of the different types of loans in the
portfolio, the risk associated with real estate mortgage loans, commercial loans
and consumer loans varies based on employment levels, consumer confidence,
fluctuations in the value of real estate and other conditions that affect the
ability of borrowers to repay debt.

The Company has written policies and procedures to help manage credit risk. The
Company utilizes a loan review process that includes formulation of portfolio
management strategy, guidelines for underwriting standards and risk assessment,
procedures for ongoing identification and management of credit deterioration,
and regular portfolio reviews to establish loss exposure and to ascertain
compliance with the Company's policies.

The Bank uses a tiered approach to approve credit requests consisting of
individual lending authorities, joint approval of Category I officers, and a
director loan committee. Lending limits for individuals are set by the Board of
Directors and are determined by loan purpose, collateral type, and internal risk
rating of the borrower. The highest individual authority (Category I) is
assigned to the Bank's President / Chief Executive Officer, Chief Revenue
Officer and Chief Credit Officer (approval authority only). Two officers in
Category I may combine their authority to approve loan requests to borrowers
with credit exposure up to $10.0 million on a secured basis and $6.0 million
unsecured; and the three Category I Officers can combine to approve loan
requests to borrowers with credit exposure up to $15.0 million on a secured
basis and $9.0 million unsecured. Officers in Category II, III, IV, V, VI and
VII have lesser authorities and with approval of a Category I officer may extend
loans to borrowers with exposure of $5.0 million on a secured basis and $3.0
million unsecured. Officers in Categories I through VII can also utilize the
co-approval of the Regional and Small Business Credit Officers to extend loans
with exposures up to $2.5 million and $1.5 million respectively on a secured
basis, and up to $1 million and $750 thousand respectively on an unsecured
basis. Loans exceeding $15.0 million and up to the Bank's legal lending limit
can be approved by the Director Loan Committee consisting of four directors
(three directors constituting a quorum). The Director's Loan Committee also
reviews and approves changes to the Bank's Loan Policy as presented by
management.


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The following sections discuss the major categories of loans within the total loan portfolio:

Residential real estate loans for one to four families


Residential lending activity may be generated by the Bank's loan officer
solicitations, referrals by real estate professionals, and existing or new bank
customers. Loan applications are taken by a Bank loan officer. As part of the
application process, information is gathered concerning income, employment and
credit history of the applicant. The valuation of residential collateral is
provided by independent fee appraisers who have been approved by the Bank's
Directors Loan Committee. In connection with residential real estate loans, the
Bank requires title insurance, hazard insurance and, if applicable, flood
insurance. In addition to traditional residential mortgage loans secured by a
first or junior lien on the property, the Bank offers home equity lines of
credit.

Commercial real estate loans


Commercial real estate loans are secured by various types of commercial real
estate in the Bank's market area, including multi-family residential buildings,
commercial buildings and offices, small shopping centers and churches.
Commercial real estate loan originations are obtained through broker referrals,
direct solicitation of developers and continued business from customers. In its
underwriting of commercial real estate, the Bank's loan to original appraised
value ratio is generally 80% or less. Commercial real estate lending entails
significant additional risk as compared with residential mortgage lending.
Commercial real estate loans typically involve larger loan balances concentrated
with single borrowers or groups of related borrowers. Additionally, the
repayment of loans secured by income producing properties is typically dependent
on the successful operation of a business or a real estate project and thus may
be subject, to a greater extent, to adverse conditions in the real estate market
or the economy, in general. The Bank's commercial real estate loan underwriting
criteria require an examination of debt service coverage ratios, the borrower's
creditworthiness, prior credit history and reputation, and the Bank typically
requires personal guarantees or endorsements of the borrowers' principal owners.

Loans for construction and land development


The Bank makes local construction loans, primarily residential, and land
acquisition and development loans. The construction loans are secured by
residential houses under construction and the underlying land for which the loan
was obtained. The average life of most construction loans is less than one year
and the Bank offers both fixed and variable rate interest structures. The
interest rate structure offered to customers depends on the total amount of
these loans outstanding and the impact of the interest rate structure on the
Bank's overall interest rate risk. There are two characteristics of construction
lending which impact its overall risk as compared to residential mortgage
lending. First, there is more concentration risk due to the extension of a large
loan balance through several lines of credit to a single developer or
contractor. Second, there is more collateral risk due to the fact that loan
funds are provided to the borrower based upon the estimated value of the
collateral after completion. This could cause an inaccurate estimate of the
amount needed to complete construction or an excessive loan-to-value ratio. To
mitigate the risks associated with construction lending, the Bank generally
limits loan amounts to 80% of the estimated appraised value of the finished
construction project. The Bank also obtains a first lien on the property as
security for its construction loans and typically requires personal guarantees
from the borrower's principal owners. Finally, the Bank performs inspections of
the construction projects to ensure that the percentage of construction
completed correlates with the amount of draws on the construction line of
credit.


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Commercial and industrial loans


Commercial business loans generally have more risk than residential mortgage
loans, but have higher yields. To manage these risks, the Bank generally obtains
appropriate collateral and personal guarantees from the borrower's principal
owners and monitors the financial condition of its business borrowers.
Residential mortgage loans generally are made on the basis of the borrower's
ability to make repayment from employment and other income and are secured by
real estate whose value tends to be readily ascertainable. In contrast,
commercial business loans typically are made on the basis of the borrower's
ability to make repayment from cash flow from its business and are secured by
business assets, such as commercial real estate, accounts receivable, equipment
and inventory. As a result, the availability of funds for the repayment of
commercial business loans is substantially dependent on the success of the
business itself. Furthermore, the collateral for commercial business loans may
depreciate over time and generally cannot be appraised with as much precision as
residential real estate. Refer to the Marine Lending section below for
discussion of additional commercial and industrial lending.

consumer loan


The Bank offers various secured and unsecured consumer loans, which include
personal installment loans, personal lines of credit, automobile loans, and
credit card loans. The Bank originates its consumer loans within its geographic
market area and these loans are generally made to customers with whom the Bank
has an existing relationship. Consumer loans generally entail greater risk than
residential mortgage loans, particularly in the case of consumer loans which are
unsecured or secured by rapidly depreciable assets such as automobiles. In such
cases, any repossessed collateral on a defaulted consumer loan may not provide
an adequate source of repayment of the outstanding loan balance as a result of
the greater likelihood of damage, loss or depreciation. Consumer loan
collections are dependent on the borrower's continuing financial stability, and
thus are more likely to be adversely affected by job loss, divorce, illness or
personal bankruptcy. Furthermore, the application of various federal and state
laws, including federal and state bankruptcy and insolvency laws, may limit the
amount which can be recovered on such loans.

The underwriting standards employed by the Bank for consumer loans include a
determination of the applicant's payment history on other debts and an
assessment of ability to meet existing obligations and payments on the proposed
loan. The stability of the applicant's monthly income may be determined by
verification of gross monthly income from primary employment, and from any
verifiable secondary income. Although creditworthiness of the applicant is the
primary consideration, the underwriting process also includes an analysis of the
value of the security in relation to the proposed loan amount.

Refer to the Marine Loans section below for a discussion of additional consumer loans.


Marine Lending

The Bank's marine lending unit includes originated retail loans, which are
classified as commercial and industrial loans or consumer loans, depending on
the borrower, and dealer floorplan loans, which are classified as commercial and
industrial loans. The Company's relationships are limited to well established
dealers of global premium brand manufacturers. The Company's top three
manufacturer customers have been in business between 30 and 100 years. The
Company primarily has secured agreements with premium manufacturers to support
dealer floor plan loans which may reduce the Company's credit exposure to the
dealer, despite its underwriting of each respective dealer. The Company has
developed incentive retail pricing programs with the dealers to drive retail
dealer flow. Retail loans are generally limited to premium manufacturers with
established relationships with the Company which have a vested interest in the
secondary market pricing of their respective brand due to the limited inventory
available for resale. Consequently, while not contractually committed,
manufacturers will often support secondary resale values which can have the
effect of reducing losses from non-performing retail marine loans. Retail
borrowers generally have very high credit scores, substantial down payments,
substantial net worth, personal liquidity, and excess cash flow.


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CRITICAL ACCOUNTING POLICIES

The financial statements of the Company are prepared in accordance with
accounting principles generally accepted in the United States of America
("GAAP"). The financial information contained within these statements is, to a
significant extent, based on measurements of the financial effects of
transactions and events that have already occurred. A variety of factors could
affect the ultimate value that is obtained when earning income, recognizing an
expense, recovering an asset or relieving a liability. In addition, GAAP itself
may change from one previously acceptable method to another method. Although the
economics of the transactions would be the same, the timing of events that would
impact the transactions could change.

Allowance for loan losses


The allowance for loan losses is an estimate of the probable losses inherent in
the Company's loan portfolio. As required by GAAP, the allowance for loan losses
is accrued when the occurrence of losses is probable and they can be estimated.
Impairment losses are accrued based on the differences between the loan balance
and the value of its collateral, the present value of future cash flows, or the
price established in the secondary market. The Company's allowance for loan
losses has three basic components: the general allowance, the specific allowance
and the unallocated allowance. Each of these components is determined based upon
estimates that can and do change when actual events occur. The general allowance
uses historical experience and other qualitative factors to estimate future
losses and, as a result, the estimated amount of losses can differ significantly
from the actual amount of losses which would be incurred in the future. However,
the potential for significant differences is mitigated by continuously updating
the loss history of the Company. The specific allowance is based upon the
evaluation of specific impaired loans on which a loss may be realized. Factors
such as past due history, ability to pay, and collateral value are used to
identify those loans on which a loss may be realized. Each of these loans is
then evaluated to determine how much loss is estimated to be realized on its
disposition. The sum of the losses on the individual loans becomes the Company's
specific allowance. This process is inherently subjective and actual losses may
be greater than or less than the estimated specific allowance. The unallocated
allowance is due to imprecision in the model and for losses that are not
directly allocable to a specific loan type within the portfolio. As the loans,
which are affected by these events, are identified or losses are experienced on
the loans which are affected by these events, they will be reflected within the
specific or general allowances. Note 1 to the Consolidated Financial Statements
presented in Item 8, Financial Statements and Supplementary Data, of the 2021
Form 10-K, provides additional information related to the allowance for loan
losses.


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FORWARD-LOOKING STATEMENTS


The Company makes forward looking statements in this report that are subject to
risks and uncertainties. These forward looking statements include statements
regarding our expectations, intentions or objectives concerning our
profitability, liquidity, allowance for loan losses, interest rate sensitivity,
market risk, growth strategy, and financial and other goals. The words
"believes," "expects," "may," "will," "should," "could," "projects,"
"contemplates," "anticipates," "forecasts," "intends," or other similar words or
terms are intended to identify forward looking statements. These forward looking
statements are subject to significant uncertainties because they are based upon
or are affected by factors including:

the effects of the COVID-19 pandemic, including a potential resurgence (or
something to indicate that the pandemic itself is not as significant as it was)
on the Company's credit quality and business operations, as well as its impact
on general economic and financial market conditions;
•
the ability to successfully manage growth or implement growth strategies if the
Bank is unable to identify attractive markets, locations or opportunities to
expand in the future or if the Bank is unable to successfully integrate new
branches, business lines or other growth opportunities into its existing
operations;
•
competition with other banks and financial institutions, and companies outside
of the banking industry, including those companies that have substantially
greater access to capital and other resources;
•
the successful management of interest rate risk;
•
risks inherent in making loans such as repayment risks and fluctuating
collateral values;
•
changes in general economic and business conditions in the Bank's market area;
•
reliance on the Bank's management team, including the ability to attract and
retain key personnel;
•
changes in interest rates and interest rate policies;
•
maintaining capital levels adequate to support growth;
•
maintaining cost controls and asset qualities as new branches are opened or
acquired;
•
demand, development and acceptance of new products and services;
•
problems with technology utilized by the Bank;
•
changing trends in customer profiles and behavior;
•
response to acts or threats of terrorism and/or military conflicts, which could
impact business and economic conditions in the U.S. and abroad?
•
changes in banking, tax and other laws and regulations and interpretations or
guidance thereunder; and
•
other factors described in Item 1A., "Risk Factors," in the Company's 2021
Form10-K.

Due to these uncertainties, actual future results may differ materially from the results indicated by these forward-looking statements. In addition, past operating results are not necessarily indicative of future results.

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RESULTS OF OPERATIONS

Net Income

Net income for the nine months ended September 30, 2022 was $11.3 million, an
increase of 29.59% or $2.6 million when compared to the same period in 2021. Net
income for the three months ended September 30, 2022 was $4.1 million, an
increase of 42.08% or $1.2 million when compared to the same period in 2021.
Earnings per share, basic and diluted were $3.25 and $2.54 for the nine months
ended September 30, 2022 and 2021, respectively. Earnings per share, basic and
diluted were $1.17 and $0.83 for the three months ended September 30, 2022 and
2021, respectively.

Return on average assets ("ROA") measures how efficiently the Company uses its
assets to produce net income. Some issues reflected within this efficiency
include the Company's asset mix, funding sources, pricing, fee generation, and
cost control. The ROA of the Company, on an annualized basis, for the nine
months ended September 30, 2022 and 2021 was 1.09% and 0.98%, respectively.

Return on average equity ("ROE") measures the utilization of shareholders'
equity in generating net income. This measurement is affected by the same
factors as ROA with consideration to how much of the Company's assets are funded
by shareholders. The ROE of the Company, on an annualized basis, for the nine
months ended September 30, 2022 and 2021 was 14.63% and 11.05%, respectively.

Net interest income


Net interest income is our primary source of revenue, representing the
difference between interest and fees earned on interest-earning assets and the
interest paid on deposits and other interest-bearing liabilities. The level of
net interest income is impacted primarily by variations in the volume and mix of
these assets and liabilities, as well as changes in interest rates. Net interest
income was $36.0 million and $29.9 million for the nine months ended September
30, 2022 and 2021, respectively, which represents an increase of $6.1 million or
20.23%. Net interest income was $12.9 million and $10.4 million for the three
months ended September 30, 2022 and 2021, respectively, which represents an
increase of $2.5 million or 24.04%. Net interest income increased primarily due
to the increase in the average balance of the loan portfolio along with the
rising interest rate environment. Average interest earning assets increased
$187.4 million when comparing the nine months ended September 30, 2021 to the
nine months ended September 30, 2022 while the average yield on earning assets
increased by 20 basis points over that same period.

Total interest income was $38.5 million and $31.2 million for the nine months
ended September 30, 2022 and 2021, respectively, which represents an increase of
$7.3 million or 23.42%. Total interest income was $14.4 million and $10.8
million for the three months ended September 30, 2022 and 2021, respectively,
which represents an increase of $3.6 million or 33.24%. Total interest expense
was $2.6 million and $1.3 million for the nine months ended September 30, 2022
and 2021, respectively, which represents an increase of $1.3 million or 96.70%.
Total interest expense was $1.5 million and $383 thousand three months ended
September 30, 2022 and 2021. The increase in interest income was driven by an
increase in the average balance of the loan portfolio along with the rising
interest rate environment. The increase in interest expense was primarily due to
the subordinated debt issuance, currently paying a 4.50% fixed rate, on March
31, 2022 along with a Federal Home Loan Bank advance of $75.0 million entered
into in July 2022 at a fixed rate of 2.18%.

The net interest margin was 3.68% and 3.58% for the nine months ended September
30, 2022 and 2021, respectively. The net interest margin was 3.72% and 3.56% for
the three months ended September 30, 2022 and 2021, respectively. Tax-equivalent
net interest income is calculated by adding the tax benefit on certain
securities and loans, whose interest is tax-exempt, to total interest income
then subtracting total interest expense. The tax rate used to calculate the tax
benefit was 21% for 2022 and 2021.

Given the expected rise in interest rates, net interest income and net interest margin may continue to improve as interest-earning assets are generally expected to revalue at a faster rate than liabilities for the remainder of 2022.

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The following table shows interest income on earning assets and related average
yields as well as interest expense on interest-bearing liabilities and related
average rates paid for the three months ended September 30, 2022 and 2021
(dollars in thousands):

                                     September 30, 2022                            September 30, 2021
                                          Interest        Average                       Interest        Average
                            Average        Income/        Yield/          Average        Income/        Yield/
Assets:                     Balance        Expense       Rate (3)         Balance        Expense       Rate (3)
Securities:
Taxable                   $   172,848     $     873            2.00 %   $   164,203     $     611            1.47 %
Tax-Exempt (1)                  8,745            75            3.38 %        15,338           122            3.14 %
Total Securities          $   181,593     $     948            2.07 %   $   179,541     $     733            1.62 %
Loans:
Taxable                   $ 1,160,966     $  13,222            4.52 %   $   893,781     $  10,006            4.44 %
Non-accrual                     2,038             -               - %         3,834             -               - %
Tax-Exempt (1)                  7,649            76            3.94 %         5,191            54            4.13 %
Total Loans               $ 1,170,653     $  13,298            4.51 %   $   902,806     $  10,060            4.42 %
Federal funds sold              8,183             9            0.42 %           232             -            0.12 %
Interest-bearing
deposits in other banks        19,634           143            2.89 %        83,133            26            0.12 %
Total earning assets
(2)                       $ 1,378,025     $  14,398            4.14 %   $ 1,161,878     $  10,819            3.69 %
Allowance for loan
losses                        (10,218 )                                      (8,195 )
Total non-earning
assets                         92,539                                        86,862
Total assets              $ 1,460,346                                   $ 1,240,545

Liabilities and
Shareholders' Equity:
Interest-bearing
deposits:
NOW accounts              $   178,669     $     170            0.38 %   $   151,624     $      79            0.21 %
Money market accounts         276,851           283            0.41 %       229,864           137            0.24 %
Savings accounts              183,774            35            0.08 %       161,192            24            0.06 %
Time deposits:
$250,000 and more              57,901           144            0.98 %        67,325            79            0.47 %
Less than $250,000             59,979            82            0.54 %        58,261            64            0.43 %
Total interest-bearing
deposits                  $   757,174     $     714            0.37 %   $   668,266     $     383            0.23 %
Federal funds purchased         1,949            11            2.27 %             -             -               - %
Federal Home Loan Bank
advances                       66,848           404            2.40 %             -             -               - %
Subordinated debt              29,349           338            4.56 %             -             -               - %
Total interest-bearing
liabilities               $   855,320     $   1,467            0.68 %   $   668,266     $     383            0.23 %
Noninterest-bearing
liabilities:
Demand deposits               487,761                                       452,122
Other Liabilities              14,462                                        11,392
Total liabilities         $ 1,357,543                                   $ 1,131,780
Shareholders' equity          102,803                                       108,765
Total liabilities and
shareholders' equity      $ 1,460,346                                   $ 1,240,545
Net interest income                       $  12,931                                     $  10,436

Net interest spread                                            3.46 %                                        3.46 %
Interest expense as a
percent of
average earning assets                                         0.42 %                                        0.13 %
Net interest margin                                            3.72 %                                        3.56 %





(1)
Income and yields are reported on a tax-equivalent basis using a federal tax
rate of 21%.
(2)
Non-accrual loans are not included in this total since they are not considered
earning assets.
(3)
Annualized.

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The following table shows interest income on earning assets and related average
yields as well as interest expense on interest-bearing liabilities and related
average rates paid for the nine months ended September 30, 2022 and 2021(dollars
in thousands):

                                     September 30, 2022                            September 30, 2021
                                          Interest        Average                       Interest        Average
                            Average        Income/        Yield/          Average        Income/        Yield/
Assets:                     Balance        Expense       Rate (3)         Balance        Expense       Rate (3)
Securities:
Taxable                   $   178,821     $   2,526            1.89 %   $   155,949     $   1,631            1.40 %
Tax-Exempt (1)                 10,924           274            3.36 %        16,481           406            3.29 %
Total Securities          $   189,745     $   2,800            1.97 %   $   172,430     $   2,037            1.58 %
Loans:
Taxable                     1,079,773        35,465            4.39 %       865,568        28,999            4.48 %
Non-accrual                     2,363             -               - %         4,229             -               - %
Tax-Exempt (1)                  4,384           127            3.88 %         8,059           262            4.35 %
Total Loans               $ 1,086,520     $  35,592            4.38 %   $   877,856     $  29,261            4.45 %
Federal funds sold              5,885            15            0.34 %           225             -            0.09 %
Interest-bearing
deposits in other banks        29,591           199            0.90 %        75,741            53            0.09 %
Total earning assets
(2)                       $ 1,309,378     $  38,606            3.94 %   $ 1,122,023     $  31,351            3.74 %
Allowance for loan
losses                         (9,580 )                                      (7,775 )
Total non-earning
assets                         91,027                                        79,688
Total assets              $ 1,390,825                                   $ 1,193,936

Liabilities and
Shareholders' Equity:
Interest-bearing
deposits:
NOW accounts              $   172,716     $     345            0.27 %   $   142,539     $     233            0.22 %
Money market accounts         267,451           577            0.29 %       217,749           440            0.27 %
Savings accounts              180,432            90            0.07 %       153,633            67            0.06 %
Time deposits:
$250,000 and more              62,263           264            0.57 %        67,832           345            0.68 %
Less than $250,000             58,698           191            0.44 %        58,762           219            0.50 %
Total interest-bearing
deposits                  $   741,560     $   1,467            0.26 %   $   640,515     $   1,304            0.27 %
Federal funds purchased         1,616            19            1.58 %             -             -               - %
Federal Home Loan Bank
advances                       22,527           404            2.40 %             -             -               - %
Subordinated debt              19,776           675            4.56 %             -             -               - %
Total interest-bearing
liabilities               $   785,479     $   2,565            0.44 %   $   640,515     $   1,304            0.27 %
Noninterest-bearing
liabilities:
Demand deposits               479,464                                       434,683
Other Liabilities              21,031                                        11,993
Total liabilities         $ 1,285,974                                   $ 1,087,191
Shareholders' equity          105,016                                       106,745
Total liabilities and
shareholders' equity      $ 1,390,990                                   $ 1,193,936
Net interest income                       $  36,041                                     $  30,047

Net interest spread                                            3.50 %                                        3.47 %
Interest expense as a
percent of
average earning assets                                         0.26 %                                        0.16 %
Net interest margin                                            3.68 %                                        3.58 %



(1)
Income and yields are reported on a tax-equivalent basis using a federal tax
rate of 21%.
(2)
Non-accrual loans are not included in this total since they are not considered
earning assets.
(3)
Annualized.



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The following table reconciles net interest income equivalent to taxes, which is a non-GAAP measure, to net interest income.

                                        Three Months Ended               Nine Months Ended
                                          September 30,                    September 30,
                                       2022            2021             2022            2021
                                          (in thousands)                   (in thousands)
GAAP Financial Measurements:
Interest Income - Loans            $     13,282     $    10,049     $     35,565     $    29,206
Interest Income - Securities and
Other Interest-Earnings Assets            1,084             733            2,957           2,005
Interest Expense - Deposits                 714             383            1,467           1,304
Interest Expense - Other
Borrowings                                  753               -            1,098               -
Total Net Interest Income          $     12,899     $    10,399     $     35,957     $    29,907
Non-GAAP Financial Measurements:
Add: Tax Benefit on Tax-Exempt
Interest Income - Loans (1)        $         16     $        11     $         26     $        55
Add: Tax Benefit on Tax-Exempt
Interest Income - Securities (1)             16              26               58              85
Total Tax Benefit on Tax-Exempt
Interest Income                    $         32     $        37     $         84     $       140
Tax-Equivalent Net Interest
Income                             $     12,931     $    10,436     $     36,041     $    30,047



(1)

The tax benefit was calculated using the federal statutory tax rate of 21%.


The tax-equivalent yield on earning assets increased from 3.74% to 3.94% for the
nine months ended September 30, 2021 and 2022, respectively. For those same time
periods, the tax-equivalent yield on securities increased 39 basis points. The
tax equivalent yield on loans decreased seven basis points from 4.45% for the
nine months ended September 30, 2021 to 4.38% for the same time period in 2022.
The increase in the tax-equivalent yield on earning assets for the nine months
ended September 30, 2022 resulted mostly from the increase in the tax-equivalent
yield on securities. In the current rising interest rate environment, as
securities are maturing and being called or sold, they are being replaced with
securities at higher rates. The decrease in the yield on loans as compared to
the corresponding period in 2021 was primarily due to the composition of the
current loan portfolio and lower PPP fee accretion in 2022.

The average rate on interest bearing liabilities increased from 0.27% to 0.44%
for the nine months ended September 30, 2021 and 2022, respectively. The average
rate on interest bearing deposits decreased one basis point during the period.
The majority of deposit growth has been in non-maturity deposit accounts which
have traditionally paid a lower interest rate than maturity deposit accounts.
The growth in lower interest rate deposit accounts and the reduction in higher
interest rate accounts as well as the repricing of those accounts, has resulted
in a stable rate paid on interest bearing deposits, despite the current rise in
rates paid on deposit accounts. The cost of interest bearing liabilities was
higher in the third quarter of 2022 as well as the nine month period, due to the
subordinated notes that the Company issued on March 31, 2022, which are
currently paying a 4.5% fixed rate, and a Federal Home Loan Bank advance of $75
million entered into in July 2022 at a fixed rate of 2.18%.



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Allowance for loan losses


The provision for loan losses is based upon management's estimate of the amount
required to maintain an adequate allowance for loan losses as discussed within
the Critical Accounting Policies section above. The allowance represents an
amount that, in management's judgment, will be adequate to absorb probable
losses inherent in the loan portfolio. Management's judgment in determining the
level of the allowance is based on evaluations of the collectability of loans
while taking into consideration such factors as trends in delinquencies and
charge-offs, changes in the nature and volume of the loan portfolio, current
economic conditions that may affect a borrower's ability to repay and the value
of collateral, overall portfolio quality and review of specific potential
losses. This evaluation is inherently subjective because it requires estimates
that are susceptible to significant revision as more information becomes
available. The amount of provision for loan losses is affected by several
factors including the growth rate of loans, net charge-offs (recoveries), and
the estimated amount of inherent losses within the loan portfolio. The provision
for loan losses for the nine months ended September 30, 2022 and 2021 was $900
thousand and $1.2 million, respectively. The provision for loan losses for the
three months ended September 30, 2022 and 2021 was zero and $300 thousand,
respectively. The provision for the three months ended September 30, 2021 and
the nine months ended September 30, 2022 and 2021 resulted mostly from loan
growth during the quarters. There was no provision in the third quarter of 2022
due to the large amount of recoveries recognized during the period, mainly from
two loan relationships.

Noninterest Income

Total noninterest income for the nine months ended September 30, 2022 and 2021
was $10.3 million and $8.0 million, respectively and for the three months ended
September 30, 2022 and 2021 was $3.2 million and $2.9 million, respectively.
Management reviews the activities which generate noninterest income on an
ongoing basis. The following table provides the components of noninterest income
for the three and nine months ended September 30, 2022 and 2021, which are
included within the respective Consolidated Statements of Income headings.
Variances that the Company believes require explanation are discussed below the
table.

                                       Three Months Ended                                     Nine Months Ended
                                         September 30,                                          September 30,
(dollars in
thousands)               2022        2021        $ Change      % Change         2022        2021        $ Change      % Change
Wealth management
fees                    $ 1,094     $   876     $      218            25 %    $  3,077     $ 2,133     $      944            44 %
Service charges on
deposit accounts            432         338             94            28 %       1,195         869            326            38 %
Other service charges
and fees                  1,061         964             97            10 %       2,999       3,037            (38 )          (1 )%
(Loss) gain on sale
of securities              (737 )         -           (737 )          NM          (737 )        24           (761 )          NM
Gain (loss) on
disposal of bank
premises and
equipment                     8           -              8            NM            (3 )         -             (3 )          NM
Gain on sale of loans       568         486             82            17 %       1,544         845            699            83 %
Bank owned life
insurance income            138         145             (7 )          (5 )%        495         368            127            35 %
Other operating
income                      600          72            528           733 %       1,686         682          1,004           147 %
Total noninterest
income                  $ 3,164     $ 2,881     $      283            10 %    $ 10,256     $ 7,958     $    2,298            29 %



NM - Not Meaningful

Wealth management fee income increased from 2021 to 2022. Wealth management fee
income is comprised of income from fiduciary activities as well as commissions
from the sale of non-deposit investment products. The amount of income from
fiduciary activities is determined by the number of active accounts and total
assets under management. With the addition of several new employees during 2022,
total assets under management have seen an increase during the three and nine
months ended September 30, 2022.

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Services charges on deposit accounts increased during the three and nine months
ended September 30, 2022 when compared to the same periods in 2021. This
increase is mainly due to increases in overdraft charges. Overdraft charges can
fluctuate based on changes in customer activity.

The amount of other services charges and fees is comprised primarily of loan
servicing fee income, fees received from the Bank's credit card program and fees
generated from the Bank's ATM/debit card programs. Other service charges and
fees increased during the three months ended September 30, 2022 and remained
comparable for the nine months ended September 30, 2022 when compared to the
same period in 2021. This increase can be attributed to fees received from the
Bank's credit card program as the Bank's in-house credit card portfolio
continues to grow.

During the second quarter of 2021, the Bank began to sell mortgage and marine
loans. During the first three quarters of 2022, the Company sold $11.5 million
in mortgage loans on the secondary market and $97.8 million of marine loans from
the commercial and consumer loan portfolios. These loan sales resulted in gains
of $568 thousand and $1.5 million during the three and nine months ended
September 30, 2022. During the third quarter of 2022, the Company sold $3.0
million in Small Business Association (SBA) loans, resulting in a gain of $175
thousand. Beginning in the second quarter of 2021, the Company sold $11.3
million in mortgage loans on the secondary market and $41.1 million of loans
from the commercial and consumer loan portfolios. These loan sales resulted in
gains of $486 thousand and $845 during the three and nine months ended September
30, 2021.

Bank owned life insurance ("BOLI") income increased for the nine months ended
September 30, 2022. The Company made an investment of $10.0 million during the
second quarter of 2021, which has resulted in increased BOLI income for the nine
months ended September 30, 2022 in comparison to the same period in the prior
year.

Other operating income increased for the three and nine months ended September
30, 2022 when compared to the same periods in 2021. This increase can be mainly
attributed to cash distributions received from investments in Small Business
Investment Companies (SBICs).


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Non-interest expenses


Total noninterest expenses increased $5.3 million or 20.42% for the nine months
ended September 30, 2022 compared to the same period in 2021. Total noninterest
expenses increased $1.5 million or 16.12% for the three months ended September
30, 2022 compared to the same period in 2021. The following table presents the
components of noninterest expense for the three and nine months ended September
30, 2022 and 2021, which are included within the respective Consolidated
Statements of Income headings. Variances that the Company believes require
explanation are discussed below the table.

                                         Three Months Ended                                       Nine Months Ended
                                            September 30,                                           September 30,

(in thousands of dollars) 2022 2021 $ Change % Change

2022 2021 $ Change % Change Salaries and benefits

                  $  6,938     $ 5,947     $      991            17 %    $ 18,873     $ 15,973     $    2,900             18 %
Occupancy expenses             528         450             78            17 %       1,562        1,319            243             18 %
Equipment expenses             299         246             53            22 %         814          708            106             15 %
Advertising and
marketing expenses             181         102             79            77 %         438          286            152             53 %
Stationary and supplies         34          27              7            26 %         135          125             10              8 %
ATM network fees               381         285             96            34 %         977          847            130             15 %
Other real estate owned
expense                          -          32            (32 )          NM             -           37            (37 )           NM
Loss on other real
estate owned                     -          26            (26 )          NM             -          128           (128 )           NM
FDIC assessment                116         169            (53 )         (31 )%        430          409             21              5 %
Computer software
expense                        252         282            (30 )         (11 )%        690          752            (62 )           (8 )%
Bank franchise tax             234         199             35            18 %         653          583             70             12 %
Professional fees              270         289            (19 )          (7 )%      1,610        1,118            492             44 %
Data processing fees           427         418              9             2 %       1,386        1,193            193             16 %
Other operating
expenses                     1,398       1,051            347            33 %       3,941        2,688          1,253             47 %
Total noninterest
expenses                  $ 11,058     $ 9,523     $    1,535            16 %    $ 31,509     $ 26,166     $    5,343             20 %



NM - Not Meaningful

The Company's growth has had an impact on noninterest expenses. Total assets
have grown by $170.1 million or 13.05% from December 31, 2021 to September 30,
2022. This growth has required investments to be made in the Company's
infrastructure, causing increases in salaries and employee benefits, occupancy
expenses and equipment expenses and advertising and marketing expenses. In
addition, increases in asset size and capital levels have impacted bank
franchise tax amounts.

Salaries and employee benefits increased during the three and nine months ended
September 30, 2022 over 2021. Annual pay increases, newly hired employees,
increasing insurance costs and enhanced employee incentive plans have attributed
to these increases. The number of full-time equivalent employees (FTEs) has
increased from 215 at September 30, 2021 to 235 at September 30, 2022.

ATM network charges increased in the three and nine months ended September 30, 2022 in 2021. This is primarily due to fluctuations in customer usage.

Professional fees have increased in the nine months ended September 30, 2022 in 2021, primarily due to the increase in consulting services used as the company continues to grow and develop.


Data processing fees expenses increased in 2022 due to the fees associated to
the new general ledger system implemented
in late 2021, the implementation of a new budgeting system and a new loan
end-to-end platform system.

For the three and nine months ended September 30, 2022 other operating expenses
increased over 2021. This increase is due to increased loan related expenses due
to a higher volume, increased wealth management expenses due to growth in assets
under management, and employee travel expense for training, marketing and sales
meetings.

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The efficiency ratio of the Company was 66.99% and 68.56% for the nine months
ended September 30, 2022 and 2021, respectively. The efficiency ratio of the
Company was 65.73% and 71.31% for the three months ended September 30, 2022 and
2021. The efficiency ratio is not a measurement under accounting principles
generally accepted in the United States. It is calculated by dividing
noninterest expense by the sum of tax equivalent net interest income and
noninterest income excluding gains and losses on the investment portfolio and
other gains/losses from OREO, repossessed vehicles, disposals of bank premises
and equipment, etc. The tax rate utilized is 21%. The Company calculates and
reviews this ratio as a means of evaluating operational efficiency.

The calculation of the efficiency ratio for the three and nine months ended
September 30, 2022 and 2021 was as follows:

                                        Three Months Ended               Nine Months Ended
                                          September 30,                    September 30,
                                       2022            2021             2022            2021
                                          (in thousands)                   (in thousands)
Summary of Operating Results:
Noninterest expenses               $     11,058     $     9,523     $     31,509     $    26,166
Less: Loss on other real estate
owned                                         -              26                -             128
Adjusted noninterest expenses      $     11,058     $     9,497     $     31,509     $    26,038

Net interest income                      12,899          10,399           35,957          29,907

Noninterest income                        3,164           2,881           10,256           7,958
Less: (Loss) gain on sales of
securities                                 (737 )             -             (737 )            24
Less: Gain (loss) on the sale
and disposal of premises and
equipment                                     8               -               (3 )             -
Adjusted noninterest income        $      3,893     $     2,881     $     10,996     $     7,934
Tax equivalent adjustment (1)                32              37               84             140
Total net interest income and
noninterest income, adjusted       $     16,824     $    13,317     $     47,037     $    37,981

Efficiency ratio                          65.73 %         71.31 %          66.99 %         68.56 %



(1)

Includes tax equivalent adjustments on loans and securities using the federal statutory tax rate of 21%.


Income Taxes

Income tax expense was $2.5 million and $1.8 million during the nine months
ended September 30, 2022 and 2021, respectively. Income tax expense was $923
thousand and $584 thousand during the three months ended September 30, 2022 and
2021, respectively. The effective tax rate was 17.97% and 16.91% for the nine
months ended September 30, 2022 and 2021, respectively. The effective tax rate
was 18.44% and 16.89% for the three months ended September 30, 2022 and 2021,
respectively. The effective tax rate is below the statutory rate of 21% due to
tax-exempt income on investment securities and loans. The effective tax rate is
also impacted by BOLI as well as income tax credits on qualified affordable
housing project investments as discussed in Note 12 to the Consolidated
Financial Statements as well as qualified rehabilitation credits. The slight
increases in the 2022 periods as compared to the 2021 periods was primarily due
to a lower proportion of tax exempt income to pre-tax earnings year over year.


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FINANCIAL CONDITION

Securities

Total securities available for sale were $151.8 million at September 30, 2022,
compared to $192.3 million at December 31, 2021. This represents a decrease of
$40.5 million or 21.09%. The Company purchased $26.8 million of securities
during the nine months ended September 30, 2022. During the nine months ended
September 30, 2022, the Company sold $15.4 million of available for sale
securities recognizing $6 thousand in gross gains and $743 thousand in gross
losses. The Company had total maturities, calls, and principal repayments of
$24.1 million during the nine months ended September 30, 2022. Note 4 to the
Consolidated Financial Statements provides additional details about the
Company's securities portfolio at September 30, 2022 and December 31, 2021. The
Company had a net unrealized loss on available for sale securities of $26.7
million at September 30, 2022 as compared to a net unrealized loss of $218
thousand at December 31, 2021. Unrealized gains or losses on available for sale
securities are reported within shareholders' equity, net of the related deferred
tax effect, as accumulated other comprehensive income (loss). The primary cause
of the unrealized losses at September 30, 2022 and December 31, 2021 was changes
in market interest rates and other market conditions and not credit concerns of
the issuers. Since the losses can be primarily attributed to changes in market
interest rates and conditions and not expected cash flows or an issuer's
financial condition and management does not intend to sell and it is likely that
management will not be required to sell the securities prior to their
anticipated recovery, the unrealized losses were deemed to be temporary.

loan portfolio


The Company's primary use of funds is supporting lending activities from which
it derives the greatest amount of interest income. Gross loans were $1.20
billion and $985.7 million at September 30, 2022 and December 31, 2021,
respectively. This represents an increase of $216.1 million or 21.93% during the
nine months ended September 30, 2022. The ratio of gross loans to deposits
increased during the nine months ended September 30, 2022 from 83.73% at
December 31, 2021 to 95.83% at September 30, 2022. Loan growth excluding changes
in SBA PPP loans during the nine months ended September 30, 2022 was $231.9
million or 23.91%. SBA PPP loans were originated during 2020 and 2021 and as of
September 30, 2022 $112 thousand remained outstanding, down $15.8 million or
99.29% from December 31, 2021 due to forgiveness of the PPP loan balances.

The loan portfolio consists primarily of loans for owner-occupied single-family
dwellings and loans secured by commercial real estate. Note 5 to the
Consolidated Financial Statements provides the composition of the loan portfolio
at September 30, 2022 and December 31, 2021.

Residential real estate loans were $319.8 million or 26.61% and $292.8 million
or 29.71% of total loans at September 30, 2022 and December 31, 2021,
respectively. Commercial real estate loans were $491.4 million or 40.88% and
$377.1 million or 38.25% of total loans at September 30, 2022 and December 31,
2021, respectively, representing an increase of $114.3 million or 30.32% during
the nine months ended September 30, 2022. Construction, land development, and
farmland loans were $85.5 million or 7.11% and $84.9 million or 8.61% of total
loans at September 30, 2022 and December 31, 2021, respectively. Consumer
installment loans were $107.9 million or 8.98% and $67.3 million or 6.83% of
total loans at September 30, 2022 and December 31, 2021, respectively,
representing an increase of $40.6 million or 60.34% during the nine months ended
September 30, 2022. Commercial and industrial loans were $179.8 million or
14.96% and $143.4 million or 14.55% of total loans at September 30, 2022 and
December 31, 2021, respectively. Loan growth was mainly concentrated in
commercial real estate loans, which experienced an increase during the nine
months ended September 30, 2022 due largely to the expansion of the Bank's
current market area. In addition to the commercial real state lending growth,
growth of our marine lending portfolio was $71.4 million or 64.64%, which falls
into both the consumer installment loan and commercial and industrial loan
portfolios.


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Allowance for loan losses


The purpose of, and the methods for, measuring the allowance for loan losses are
discussed in the Critical Accounting Policies section above. Note 5 to the
Consolidated Financial Statements shows the activity within the allowance for
loan losses during the nine months ended September 30, 2022 and 2021 and the
year ended December 31, 2021. Charged-off loans were $169 thousand and $69
thousand for the nine months ended September 30, 2022 and 2021, respectively.
Recoveries were $1.2 million and $238 thousand for the nine months ended
September 30, 2022 and 2021, respectively. This resulted in net recoveries of
$1.1 million and $169 thousand for the nine months ended September 30, 2022 and
2021, respectively. The ratio of net charge-offs (recoveries) to average loans
was (0.10%) and (0.02%) for the nine months ended September 30, 2022 and 2021,
respectively. The allowance for loan losses as a percentage of loans was 0.89%
at September 30, 2022 and 0.89% at December 31, 2021. Excluding outstanding PPP
loans, the allowance for loan losses as a percentage of total loans was 0.89%
and 0.91% as of September 30, 2022 and December 31, 2021, respectively. The
percentage of the allowance for loan losses to total loans excluding PPP loans
declined slightly as compared to the prior year end. The slight decline during
the year-to-date period in 2022 was attributable in part to the concentration of
loan growth during the period in segments which carry lower reserves. Despite a
significant increase in classified loans, allowance for loan losses as a
percentage of loans excluding PPP loans declined slightly. The majority of the
increase in classified loans was due to the downgrade of loans where current
financial information has not been provided, per loan policy. These loans have
not been identified as impaired or nonperforming loans. Refer to the
Nonperforming Assets and Other Assets section for discussion on nonperforming
loans.

All nonaccrual and other impaired loans were evaluated for impairment and any
specific allocations were provided for as necessary. Based on management's
evaluation and update of the Company's historical loss experience adjusted for
qualitative factors assessed, the general reserve as a percentage of
non-impaired loans decreased from 0.90% at December 31, 2021 to 0.87% at
September 30, 2022. Management believes that the allowance for loan losses is
currently adequate to absorb probable and estimable losses inherent in the loan
portfolio. Management will continue to evaluate the adequacy of the allowance
for loan losses as more economic data becomes available and as changes within
the Company's portfolio are known.

Non-performing assets and other assets

Non-performing assets include non-accrual loans, repossessed assets, OREOs (foreclosed properties), and loans that are 90 days or more past due and still outstanding, as shown in the table below.

                                                      September 30,
                                                          2022           December 31, 2021
Nonaccrual loans                                      $       2,427     $             2,723
Loans past due 90 days or more and accruing
interest                                                          -                      43
Other real estate owned and repossessed assets                    -                       -
Total nonperforming assets                            $       2,427     $             2,766

Allowance for loan losses                             $      10,742     $             8,787

Gross loans                                           $   1,201,841     $           985,720

Allowance for loan losses to nonperforming assets               443 %                   318 %

Allowance for loan losses to total loans                       0.89 %                  0.89 %

Allowance for loan losses to nonaccrual loans                   443 %                   323 %

Nonaccrual loans to total loans                                0.20 %                  0.28 %

Non-performing assets to period end loans and other
real estate owned                                              0.20 %                  0.28 %





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Nonperforming assets decreased by $339 thousand during the nine months ended
September 30, 2022. Nonaccrual loans were $2.4 million and $2.7 million at
September 30, 2022 and December 31, 2021. There was no OREO at September 30,
2022 and December 31, 2021. The percentage of nonperforming assets to loans and
OREO was 0.20% at September 30, 2022 and 0.28% at December 31, 2021,
respectively. There were no loans past due 90 days or more and still accruing at
September 30, 2022 and $43 thousand in loans past due 90 days or more and still
accruing at December 31, 2021.

Total loans in arrears, as disclosed in Note 5 to the consolidated financial statements, increased to $1.7 million at September 30, 2022 compared to $1.6 million at December 31, 2021.


During the nine months ended September 30, 2022, the Bank placed four loans
totaling $665 thousand on nonaccrual status. Management evaluates the financial
condition of borrowers and the value of any collateral on nonaccrual loans. The
results of these evaluations are used to estimate the amount of losses which may
be realized on the disposition of these nonaccrual loans and are reflected in
the allowance for loan losses.

Loans are placed on nonaccrual status when collection of principal and interest
is doubtful, generally when a loan becomes 90 days past due. There are three
negative implications for earnings when a loan is placed on non-accrual status.
First, all interest accrued but unpaid at the date that the loan is placed on
non-accrual status is either deducted from interest income or written off as a
loss. Second, accruals of interest are discontinued until it becomes certain
that both principal and interest can be repaid. Finally, there may be actual
losses to principal that require additional provisions for loan losses to be
charged against earnings.

For real estate loans, upon foreclosure, the balance of the loan is transferred
to OREO and carried at the fair value of the property based on current
appraisals and other current market trends, less estimated selling costs. If a
write down of the OREO property is necessary at the time of foreclosure, the
amount is charged-off to the allowance for loan losses. A review of the recorded
property value is performed in conjunction with normal loan reviews, and if
market conditions indicate that the recorded value exceeds the fair value,
additional write downs of the property value are charged directly to operations.

In addition, the Company may, under certain circumstances, restructure loans in
troubled debt restructurings as a concession to a borrower when the borrower is
experiencing financial distress. Formal, standardized loan restructuring
programs are not utilized by the Company. Each loan considered for restructuring
is evaluated based on customer circumstances and may include modifications to
one or more loan provisions. Such restructured loans are included in impaired
loans. However, restructured loans are not necessarily considered nonperforming
assets. At September 30, 2022, the Company had $4.4 million in restructured
loans with specific allowances totaling $31 thousand. At December 31, 2021, the
Company had $2.7 million in restructured loans with specific allowances totaling
$39 thousand. At September 30, 2022 and December 31, 2021, total restructured
loans performing under the restructured terms and accruing interest were $4.2
million and $2.5 million, respectively. Two loans, totaling $136 thousand, were
in nonaccrual status at September 30, 2022. Two loans, totaling $149 thousand,
were in nonaccrual status at December 31, 2021.

Deposits


Total deposits were $1.25 billion and $1.18 billion at September 30, 2022 and
December 31, 2021, respectively. This represents an increase of $76.9 million or
6.53% during the nine months ended September 30, 2022. Note 7 to the
Consolidated Financial Statements provides the composition of total deposits at
September 30, 2022 and December 31, 2021. The growth in deposits was organic
growth as we expand and grow into newer market areas.

Noninterest-bearing demand deposits, which are comprised of checking accounts,
increased $20.7 million or 4.43% from $470.4 million at December 31, 2021 to
$491.2 million at September 30, 2022. Savings and interest-bearing demand
deposits, which include NOW accounts, money market accounts and regular savings
accounts increased $48.8 million or 8.36% from $583.3 million at December 31,
2021 to $632.1 million at September 30, 2022. Time deposits increased $7.2
million or 5.88% from $123.6 million at December 31, 2021 to $130.8 million at
September 30, 2022.


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CAPITAL RESOURCES


The Bank continues to be a well capitalized financial institution. Total
shareholders' equity at September 30, 2022 was $98.5 million, reflecting a
percentage of total assets of 6.69%, as compared to $110.3 million and 8.46% at
December 31, 2021. The reason for the decrease in shareholders' equity during
the first nine months of 2022 was due to unrealized losses on the securities
available for sale portfolio. During the nine months ended September 30, 2022
and 2021, the Company declared dividends of $0.85 and $0.82 per share,
respectively. The Company has a Dividend Investment Plan that allows
shareholders to reinvest dividends in Company stock.

At September 30, 2022, the Bank met all capital adequacy requirements and had
regulatory capital ratios in excess of the levels established for
well-capitalized institutions. The Bank monitors these ratios on a quarterly
basis and has several strategies, including without limitation the issuance of
common stock, to ensure that these ratios remain above regulatory minimums.

On September 17, 2019, the Federal Deposit Insurance Corporation finalized a
rule that introduces an optional simplified measure of capital adequacy for
qualifying community banking organizations (i.e., the community bank leverage
ratio or "CBLR" framework), as required by the Economic Growth, Regulatory
Relief and Consumer Protection Act. The CBLR framework is designed to reduce
burden by removing the requirements for calculating and reporting risk-based
capital ratios for qualifying community banking organizations that opt into the
framework. In order to qualify for the CBLR framework, a community banking
organization must have a tier 1 leverage ratio of greater than 9 percent, less
than $10 billion in total consolidated assets, and limited amounts of
off-balance-sheet exposures and trading assets and liabilities. A qualifying
community banking organization that opts into the CBLR framework and meets all
requirements under the framework will be considered to have met the
well-capitalized ratio requirements under the Prompt Corrective Action
regulations and will not be required to report or calculate risk-based capital.
Under the final rule, an eligible banking organization may opt out and revert to
the risk-weighting framework without restriction. As a qualifying community
banking organization, the Bank elected to measure its capital adequacy under the
CBLR framework as of September 30, 2022, and its leverage ratio was 9.44%. At
December 31, 2021, the Bank utilized the risk-based capital rules to assess its
capital adequacy and its leverage, tier 1, common equity tier 1, and total
capital ratios were 8.84%, 10.44%, 10.44%, and 11.30%, respectively. Management
believes, that as of September 30, 2022, that the Bank met all capital adequacy
requirements to which it is subject.. We are closely monitoring our capital
position and are taking appropriate steps to ensure our level of capital remains
strong. Our capital, while significant, may fluctuate in future periods and
limit our ability to pay dividends.

On March 31, 2022, the Company entered into Subordinated Note Purchase
Agreements with certain purchasers pursuant to which the Company issued and sold
$30.0 million in aggregate principal amount of its 4.50% Fixed-to-Floating Rate
Subordinated Notes due April 1, 2032. See Note 14 to the Consolidated Financial
Statements included in this Form 10-Q, for discussion of subordinated debt.

LIQUIDITY


Liquidity management involves meeting the present and future financial
obligations of the Company with the sale or maturity of assets or with the
occurrence of additional liabilities. Liquidity needs are met with cash on hand,
deposits in banks, federal funds sold, securities classified as available for
sale and loans maturing within one year. At September 30, 2022, liquid assets
totaled $291.2 million as compared to $365.1 million at December 31, 2021. These
amounts represented 21.18% and 30.61% of total liabilities at September 30, 2022
and December 31, 2021, respectively. The Company minimizes liquidity demand by
utilizing core deposits to fund asset growth. Securities provide a constant
source of liquidity through paydowns and maturities. Also, the Company maintains
short-term borrowing arrangements, namely federal funds lines of credit, with
larger financial institutions as an additional source of liquidity. The Bank's
membership with the Federal Home Loan Bank of Atlanta provides a source of
borrowings with numerous rate and term structures. The Company's senior
management monitors the liquidity position regularly and attempts to maintain a
position which utilizes available funds most efficiently.


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OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS

There have been no material changes in off-balance sheet arrangements and contractual obligations, as disclosed in the 2021 Form 10-K.

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