GRANDSOUTH BANCORPORATION MANAGEMENT REPORT OF FINANCIAL POSITION AND RESULTS OF OPERATIONS (Form 10-Q)

CAUTION REGARDING FORWARD-LOOKING STATEMENTS



This Quarterly Report on Form 10-Q (this "Form 10-Q") contains forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, and
Section 21E of the Securities Exchange Act of 1932 (the "Exchange Act"), which
can be identified by the use of words such as "estimate," "project," "believe,"
"intend," "anticipate," "plan," "continue," "seek," "could," "expect," "will,"
"may" and words of similar meaning. These forward-looking statements include,
but are not limited to:



  · statements of our goals, intentions and expectations;

statements regarding our business plans, prospects, growth and operations

strategies;

· statements regarding the quality of the assets of our loan and investment portfolios;

    and


  · estimates of our risks and future costs and benefits.


These forward-looking statements are based on our current beliefs and
expectations and are inherently subject to significant business, economic and
competitive uncertainties and contingencies, many of which are beyond our
control. In addition, these forward-looking statements are subject to
assumptions with respect to future business strategies and decisions that are
subject to change. The Company is under no duty to and does not undertake any
obligation to update any forward-looking statements after the date of this Form
10-Q except as required by law.



The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:

Changes in the interest rate environment that could reduce

real margins;

· Restrictions or conditions imposed by our regulators on our operations;

Increased competitive pressure in banking and financial services

Industries;

Changes in access to finance or increased regulatory requirements for

financing;

· Changes in deposit flows;

Credit losses from declining real estate values, increased interest

interest rates, rising unemployment, changes in payment behavior or other factors;

· Credit losses due to loan concentration;

Changes in the amount of our loan portfolio secured by real estate and

weaknesses in the real estate market;

· Our ability to attract and retain key personnel;

· The success and costs of our expansion into potential new markets;

Changes in political conditions or the legislative or regulatory environment,

including government initiatives affecting the financial services sector,

including as a result of presidential administration and democratic control

of Congress;

Changes in economic conditions in United States and the strength of

local economies in which we operate, including but not limited to

due to the persistent negative impacts and disruptions resulting from the

COVID-19 outbreak on the economies and communities we serve, which may have

adversely impact our business, operations and performance, and could have a

negative impact on our credit portfolio, share price, borrowers and on the

the economy as a whole, both nationally and internationally;

· Changes in trading conditions and inflation;

Increased cybersecurity risk, including potential business interruptions or

financial losses;

· Changes in technology;

The adequacy of the level of our provision for loan losses and the amount of

loan loss provisions required in future periods;

Reviews by our regulatory authorities, including the possibility that the

regulatory authorities may, among other things, require us to increase our

provision for loan losses or impairment of assets;

· Changes in monetary and fiscal policies;

26




Risks associated with actual or potential litigation or investigations by

customers, regulators or others;

· The rate of unpaid debts and the amounts of credits written off;

The growth rate of loans in recent years and the lack of seasoning of part

our loan portfolio;

Our ability to maintain appropriate capital levels and comply with our

capital ratio requirements;

Adverse changes in asset quality and resulting losses and credit risk losses

expenses;

· Changes in accounting policies, practices or guidelines;

The adverse effects of our suppliers’ failures to provide the agreed services within

in the manner and at the agreed cost; and

The potential effects of events beyond our control that may have a

destabilizing effect on financial markets and the economy, such as epidemics

and pandemics, (including the potential continuing negative effects of COVID-19

trade) supply chain disruptions in transportation, war or terrorism

activities, critical utility outages or commercial disputes and tariffs.

For additional information about factors that could cause actual results to differ materially from the expectations set forth in the forward-looking statements, see “Risk Factors” in Part I, Item 1A of our Form 10- K deposited with the Security and Exchange Commission (the “SEC”) on March 31, 2022(“2021 Form 10-K”).

Non-GAAP Measures



This Form 10-Q includes financial information determined by a method other than
in accordance with generally accepted accounting principles ("GAAP"). This
financial information includes the operating performance measure "Tangible book
value per common share, outstanding".

Management has included this non-GAAP measure because it believes this measure
may provide useful supplemental information for evaluating the Company's
underlying performance trends. Further, management uses this measure in managing
and evaluating the Company's business and intends to refer to them in
discussions about our operations and performance. Operating performance measures
should be viewed in addition to, and not as an alternative to or substitute for,
measures determined in accordance with GAAP, and are not necessarily comparable
to non-GAAP measures that may be presented by other companies.

Critical accounting estimates

Our critical accounting estimates involving significant judgments and
assumptions used in the preparation of the Consolidated Financial Statements as
of March 31, 2022 have remained unchanged from the disclosures presented in our
2021 Form 10-K. Refer to Note 1 in the notes to the consolidated financial
statements included under Item 1 -"Financial Statements" of this Form 10-Q for
more information about recent accounting updates.

Insight

GrandSouth Bancorporation ("we," "us," "our," or the "Company") was incorporated
in 2000 under the laws of South Carolina and is a bank holding company
registered under the Bank Holding Company Act of 1956. The Company's primary
purpose is to serve as the holding company for GrandSouth Bank (the "Bank"). On
October 2, 2000, pursuant to a Plan of Exchange approved by the shareholders of
the Bank, all of the outstanding shares of capital stock of the Bank were
exchanged for shares of the Company, and the Company became the owner of all of
the outstanding capital stock of the Bank. The Company presently engages in no
business other than that of owning the Bank and has no employees.

The Company has one non-bank subsidiary, GrandSouth Capital Trust I (the
"Trust"), a Delaware statutory trust, formed to facilitate the issuance of trust
preferred securities. The GrandSouth Trust is not consolidated in the Company's
financial statements.

We provide a full range of financial services through offices located in
Caroline from the south. We provide full-service retail and commercial banking products.

27





Our results of operations are significantly affected by general economic and
competitive conditions in our market areas and nationally, as well as changes in
interest rates, sources of funding, government policies and actions of
regulatory authorities. Future changes in applicable laws, regulations or
government policies may materially affect our financial condition and results of
operations.


The following discussion and analysis is presented on a consolidated basis and
focuses on the major components of the Company's operations and significant
changes in its results of operations for the periods presented. We encourage you
to read this discussion and analysis in conjunction with the financial
statements and the related notes and the other statistical information included
in this Form 10-Q and in our 2021 Form 10-K.

Discussion on the financial situation

General

Total assets increased $49.5 million for $1.3 billion to March 31, 2022i.e. 4.11%, of December 31, 2021. This increase in assets is mainly due to the increase in cash and cash equivalents of $35.1 millionavailable-for-sale (“AFS”) investments of $11.2 millionand loans from $2.7 million.

Total liabilities increased $50.5 million to $1.2 billion at March 31, 2022, or
4.57%, from December 31, 2021, due primarily to increases in total deposits of
$49.9 million, which includes increases in interest-bearing deposits of $46.8
million.

Total shareholders' equity decreased $1.0 million to $96.4 million, or 1.00%,
from December 31, 2021, due to normal retention of earnings, exercise of stock
options, and stock-based compensation partially offset by changes in the fair
value of AFS investments and payment of dividends. Book Value per common share
decreased $0.29 to $18.32 at March 31, 2022 from $18.61 at December 31, 2021.
Tangible book value per common share, a non-GAAP measure, also decreased $0.29
to $18.18 at March 31, 2022 from $18.47 at December 31, 2021.

The following is a reconciliation of book value to book value per common share and book value to tangible book value per common share for the periods indicated:

                                                                                 As Of
(in thousands, except share data)                               March 31, 2022        December 31, 2021
Book Value (GAAP)                                              $         96,431      $            97,405
Book Value Attributable to Preferred Shares                              (1,204 )                 (1,204 )
Book Value Attributable to Common Shares                                 95,227                   96,201
Outstanding common shares                                             5,198,542                5,168,681
Book Value Per Common Share                                    $          18.32      $             18.61

Book Value (GAAP)                                              $         96,431      $            97,405
Book Value Attributable to Preferred Shares                              (1,204 )                 (1,204 )
Book Value Attributable to Common Shares                                 95,227                   96,201
Goodwill and intangibles                                                   (737 )                   (737 )
Book Value Attributable to Common Shares (Tangible)            $         94,490      $            95,464
Outstanding common shares                                             5,198,542                5,168,681
Tangible Book Value Per Common Share                           $          18.18      $             18.47


Cash and cash equivalents

Total cash and cash equivalents increased $35.1 million to $159.2 million at
March 31, 2022 from $124.1 million at December 31, 2021, primarily due to the
increase in customer deposits. We continue to look for opportunities to
re-invest excess cash in higher yielding assets, but will continue to hold
adequate levels of liquid and short-term assets.

Investment security

Our investment securities portfolio is classified as AFS, which is carried at
fair value. The following table shows the amortized cost and fair value for our
AFS investment portfolio at the dates indicated (in thousands).

28





                                               March 31, 2022                December 31, 2021
                                          Amortized         Fair         Amortized         Fair
                                             Cost           Value           Cost           Value
U.S. government agencies                  $   27,449      $  26,477      $    9,479      $   9,439
State and municipal obligations               25,971         24,267          26,011         26,677
Mortgage-backed securities - agency           31,594         30,166          33,191         33,418
Collateralized mortgage obligations -
agency                                        25,530         25,010          26,968         27,435
Asset-backed securities                        2,451          2,418           2,599          2,590
Corporate bonds                               14,950         14,829          12,200         12,403
                                          $  127,945      $ 123,167      $  110,448      $ 111,962


AFS investment securities increased $11.2 million, or 10.01%, to $123.2 million
at March 31, 2022 from $112.0 million at December 31, 2021. We continue to look
for opportunities to re-deploy funds from investment securities to higher
yielding loans.

The composition and maturities of the available-for-sale investment securities
portfolio at March 31, 2022 are summarized in the following table (in
thousands). Maturities are based on the final contractual payment dates, and do
not reflect the impact of prepayments or early redemptions that may occur. The
composition and maturity distribution of the securities portfolio is subject to
change depending on rate sensitivity, capital, and liquidity needs. The weighted
average yield was calculated using net income (interest accrual plus or minus
accretion/amortization) divided by ending book value.

                                                                       More than one year                 More than five years
                                   Less than one year                  through five years                  through ten years                  More than ten years                  Total securities
                                                  Weighted                           Weighted                            Weighted                            Weighted                          Weighted
                              Amortized            Average         Amortized          Average         Amortized           Average         Amortized           Average         Amortized         Average
                                 Cost               Yield            Cost              Yield             Cost              Yield             Cost              Yield            Cost             Yield
U.S. government agencies    $            -                 -      $    17,970                 0      $      9,479              1.37 %    $          -              0.00 %    $    27,449             1.47 %
State and municipal
obligations                              -                 -      $         -                 -      $      7,387              1.99 %    $     18,584              2.26 %         25,971             2.19 %
Mortgage-backed
securities - agency                      -                 -              165              3.80 %           8,498              0.86 %          22,931              1.29 %         31,594             1.19 %
Collateralized mortgage
obligations - agency                     -                 -                -                 -            12,241              1.96 %          13,289              0.20 %         25,530             1.05 %
Asset-backed securities                  -                 -               
-                 -               590              0.43 %           1,861              0.79 %          2,451             0.71 %
Corporate bonds                          -                 -                -                 -            14,200              3.98 %             750              4.92 %         14,950             4.03 %
Total securities
available-for-sale          $            -              0.00 %    $   
18,135              1.55 %    $     52,395              2.21 %    $     57,415              1.38 %    $   127,945             1.75 %


Loans

The following table presents our loan portfolio composition and the
corresponding percentage of total loans as of the dates indicated (in
thousands). Other construction and land loans include residential acquisition
and development loans and loans on commercial undeveloped land and one-to-four
family improved and unimproved lots. Commercial real estate loans include loans
on non-residential owner-occupied and non-owner-occupied real estate,
multi-family, and owner-occupied investment property. Commercial and industrial
loans include unsecured commercial loans and commercial loans secured by
business assets.

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                                             March 31, 2022            December 31, 2021
                                          Balance      Percent       Balance        Percent
Real estate mortgage loans:
One-to four-family residential           $ 132,895        14.19     $  132,836         14.22
Commercial real estate                     415,571        44.37        423,552         45.36
Home equity loans and lines of credit       20,155         2.15         21,568          2.31
Residential construction                    37,260         3.98         38,881          4.16
Other construction and land                 80,540         8.60         75,682          8.10
Commercial                                 243,860        26.04        234,355         25.09
Consumer                                     6,351         0.67          7,129          0.76
Loans receivable, gross                    936,632       100.00        934,003        100.00
Net deferred loan costs (fees)                (442 )                      

(528 )

Loans receivable, net of deferred fees   $ 936,190                  $  

933 475

Commercial real estate loan balances contracted during the first quarter primarily due to large repayments of existing loans.

Commercial loans include PPP loans totaling $0.1 million and $1.3 million from March 31, 2022 and December 31, 2021respectively.

Delinquent loans

When a loan becomes 15 days past due, we contact the borrower to inquire as to
the status of the loan payment. When a loan becomes 30 days or more past due, we
increase collection efforts to include all available forms of communication.
Once a loan becomes 45 days past due, we generally issue a demand letter and
further explore the reasons for non-repayment, discuss repayment options, and
inspect the collateral. In the event the loan officer or collections staff has
reason to believe restructuring will be mutually beneficial to the borrower and
the Bank, the borrower is referred to the Bank's Credit Administration staff to
explore restructuring alternatives to foreclosure. Once the demand period has
expired and it has been determined that restructuring is not a viable option,
the Bank's counsel is instructed to pursue foreclosure.

The accrual of interest on loans is discontinued at the time a loan becomes 90
days delinquent or when it becomes impaired, whichever occurs first, unless the
loan is well secured and in the process of collection. All interest accrued but
not collected for loans that are placed on nonaccrual is reversed. Interest
payments received on nonaccrual loans are generally applied as a direct
reduction to the principal outstanding until the loan is returned to accrual
status. Interest payments received on nonaccrual loans may be recognized as
income on a cash basis if recovery of the remaining principal is reasonably
assured. Loans are returned to accrual status when all the principal and
interest amounts contractually due are brought current and future payments are
reasonably assured. Interest payments applied to principal while the loan was on
nonaccrual may be recognized in income over the remaining life of the loan after
the loan is returned to accrual status.

If a loan is modified as part of a distressed debt restructuring (“TDR”), the loan is generally placed on non-recognition until there is a period of satisfactory payment performance by the lender. borrower (either immediately before or after the restructuring), generally six consecutive years. months, and the ultimate collection of all amounts contractually due is beyond doubt. For a discussion of TDRs, see the section entitled “Distressed Debt Restructurings” below.

The following table sets forth certain information with respect to our loan
portfolio carrying balances of delinquencies at the dates indicated (in
thousands). We had one loan with a balance of $50 thousand that was more than 90
days past due and still accruing interest as of March 31, 2022 that was not 98%
guaranteed by the issuing agency. We had no loans 90 days or more past due that
are still accruing interest as of December 31, 2021 that are not 98% guaranteed
by the issuing agency.

30





                                                                           Delinquent loans
                                                   30-59 Days       60-89 Days        90 Days and over       Total
March 31, 2022
One-to-four family residential                     $         -      $      
  -      $               50      $   50
Commercial real estate                                      34                -                       -          34
Commercial                                                   -                -                     106         106
Consumer                                                    54                -                     267         321
Total delinquent loans                             $        88      $         -      $              423      $  511
% of total loans, net                                     0.01 %           0.00 %                  0.05 %      0.05 %

December 31, 2021
One-to-four family residential                     $         -      $      
  -      $               50      $   50
Commercial                                                  54                -                       -          54
Consumer                                                     -                -                     590         590
Total delinquent loans                             $        54      $         -      $              640      $  694

% of total loans, net of fees and deferred charges 0.01% 0.00%

                  0.07 %      0.07 %


Total delinquencies as a percentage of loans decreased from 0.07% at December
31, 2021 to 0.05% at March 31, 2022. Delinquent loans decreased $0.2 million, or
26.37%, to $0.5 million at March 31, 2022 from $0.7 million at December 31,
2021. We continue to focus on collection efforts and favorable resolutions.

Non-performing assets



Nonperforming loans include all loans past due 90 days and over that are not 98%
guaranteed by the issuing agency, certain impaired loans, and TDR loans that
have not yet established a satisfactory period of payment performance (some of
which may be contractually current). Nonperforming assets include nonperforming
loans and other real estate owned ("REO"). The table below sets forth the
amounts and categories of our nonperforming assets at the dates indicated (in
thousands).



                                        March 31,      December 31,
                                          2022             2021
Nonaccrual loans:
Real estate loans:
One-to-four family residential         $         -     $         107
Commercial                                     132               767
Commercial                                     429               473
Consumer                                        15                 2
Loans 90 days past due:
Real estate loans:
One-to-four family residential                  50                 -
Consumer                                         2                 -
Total nonperforming loans                      628             1,349

REO:

Other construction and land                    842               842
Total foreclosed real estate                   842               842
Total nonperforming assets             $     1,470     $       2,191

TDRs still accruing                    $     1,735     $       1,780

Ratios:
Nonperforming loans to total loans            0.07 %            0.14 %
Nonperforming assets to total assets          0.12 %            0.18 %


31




The decrease in nonperforming loans and nonperforming assets is the result of
the successful resolution and disposal of nonperforming loans and nonperforming
assets by means of restructure, foreclosure, deed in lieu of foreclosure and
sales.

Troubled Debt Restructurings
In situations where, for economic or legal reasons related to a borrower's
financial difficulties, we grant a concession that we would not otherwise
consider, for other than an insignificant period of time, the related loan is
classified as a TDR. We strive to identify borrowers in financial difficulty
early so that we may work with them to modify their loans before they reach
nonaccrual status. Modified terms generally include extensions of maturity dates
at a stated interest rate lower than the current market rate for a new loan with
similar risk characteristics, reductions in contractual interest rates, periods
of interest-only payments, and principal deferments. A restructuring that
results in only a delay in payments that is insignificant is not considered an
economic concession. While unusual, there may be instances of forgiveness of
loan principal. We individually evaluate all substandard loans that experience a
modification of terms to determine if a TDR has occurred.



All TDRs over $200,000 are considered to be impaired loans and are reported as
such for the remaining life of the loan, unless the restructuring agreement
specifies an interest rate equal to or greater than the rate that would be
accepted at the time of the restructuring for a new loan with comparable risk
and the ultimate collectability of all amounts contractually due is not in
doubt. We may also remove a loan from TDR and impaired status if the loan is
subsequently restructured and at the time of the subsequent restructuring the
borrower is not experiencing financial difficulties and, under the terms of the
subsequent restructuring agreement, no concession has been granted to the
borrower.



Classification of Loans



The following table sets forth amounts of classified and criticized loans at the
dates indicated. As indicated in the table, loans classified as "doubtful" or
"loss" are charged off immediately (in thousands).

                                                     March 31,       December 31,
                                                       2022              2021
Classified loans:
Substandard                                         $     3,879     $        4,304
Doubtful                                                      -                  -
Loss                                                          -                  -
Total classified loans:                                   3,879              4,304
Special mention                                           7,219              9,647
Total criticized loans                              $    11,098     $       13,951

Total loans classified as % of total loans, net 0.41%

   0.46 %
Total criticized loans as a % of total loans, net          1.19 %          

1.49%

Management continues to dedicate resources to tracking and resolving classified and disputed loans.

Allowance for loan losses

The allowance for loan losses reflects our estimates of probable losses inherent
in our loan portfolio at the balance sheet date. The allowance for loan losses
is evaluated on a regular basis by management and is based upon management's
periodic review of the collectability of our loans in light of historical
experience, the nature and volume of our loan portfolio, adverse situations that
may affect our borrowers' abilities to repay, the estimated value of any
underlying collateral and prevailing economic conditions. This evaluation is
inherently subjective as it requires estimates that are susceptible to
significant revision as more information becomes available. The methodology for
determining the allowance for loan losses has two main components: the
evaluation of individual loans for impairment and the evaluation of certain
groups of homogeneous loans with similar risk characteristics.

32




A loan is considered impaired when it is probable that we will be unable to
collect all principal and interest payments due according to the original
contractual terms of the loan. We individually evaluate loans, or relationships,
greater than $200,000 for impairment that are classified as nonaccrual, TDRs, or
performing substandard loans. If the impaired loan is considered collateral
dependent, a charge-off is taken based upon the appraised value of the property
less an estimate of selling costs if foreclosure or sale of the property is
anticipated. If the impaired loan is not collateral dependent, a specific
reserve is established based upon an estimate of the future discounted cash
flows after consideration of modifications and the likelihood of future default
and prepayment.

The allowance for homogenous loans consists of a base loss reserve and a
qualitative reserve. The loss rates for the base loss reserve, segmented into
seven loan categories, contain average net loss rates ranging from approximately
0.00% to 0.58%.

The qualitative reserve adjusts the weighted average loss rates used in the base loss reserve based on trends in the following internal and external factors:

· Changes to loan policies and loan reviews;

Economic conditions – including unemployment rates, federal macroeconomic data,

housing prices and sales and regional economic outlook;

Changes in the nature and volume of the portfolio and in the conditions of

loans;

· Experience, capacity and depth of loan management;

· Volume and severity of delinquent, unexpired and classified loans;

· Changes in the quality of the institution’s loan review system;

· Collateral values;

· Loan concentrations and loan growth; and

The effect of other external factors such as competition, laws and regulations

   requirements on the level of estimated credit losses.




Qualitative reserve adjustment factors are decreased for favorable trends and
increased for unfavorable trends. There is no certainty that our ALL will be
appropriate over time to cover losses in our portfolio as economic and market
conditions may ultimately differ from our reasonable and supportable forecast.



The following table summarizes the detail of net write-offs as a percentage of average loans by loan mix for the periods indicated (in thousands).


                                                        Three Months Ended March 31,
                                                    2022                           2021
                                           Amount         Percent         Amount         Percent
Real Estate:
One-to-four family residential            $      (2 )          0.00 %    $      14            0.01 %
Commercial real estate                          (52 )         -0.01 %            -            0.00 %
Home equity loans and lines of credit             -            0.00 %      
     -            0.00 %
Residential construction                          -            0.00 %            -            0.00 %
Other construction and land                     (19 )         -0.02 %            -            0.00 %
Commercial                                      155            0.05 %         (159 )         -0.06 %
Consumer                                          -            0.00 %            -            0.00 %
Total                                     $      82                      $    (145 )

Ratios:
Net charge-offs to average loans
outstanding                                                    0.01 %                        (0.02 )%
Allowance to nonperforming loans at
period end (1)                                             2,221.18 %                     3,531.06 %
Allowance to total loans at period end                         1.49 %      
                  1.46 %



(1) To March 31, 2022total non-performing loans included

loans and loans 90 days past due and still outstanding.

33





Our allowance as a percentage of total loans increased to 1.49% at March 31,
2022 from 1.47% at December 31, 2021, and 1.46% at March 31, 2021, primarily as
the result of loan growth in our more heavily reserved CarBucks segment.



We have continued to experience limited charge-off amounts and stable
collections of amounts previously charged-off. The overall historical loss rate
used in our allowance for loan losses calculation continues to decline as
previous quarters with larger loss rates are eliminated from the calculation as
time passes. Our coverage ratio of nonperforming loans increased to 2,221.18% at
March 31, 2022 from 1,017.27% at December 31, 2021 primarily as the result of
the decreased balance of nonperforming loans during the period.

Deposits

The following table presents deposits by category and percentage of total deposits for the periods indicated (in thousands).

                                  March 31, 2022             December 31, 2021
                               Balance       Percent        Balance       Percent
Noninterest-bearing demand   $   283,685         25.6     $   280,665         26.5
Interest-bearing demand           63,004          5.7          52,479          5.0
Money Market                     547,207         49.3         500,862         47.3
Savings                           17,003          1.5          16,106          1.5
Time Deposits                    198,005         17.9         208,929         19.7
                             $ 1,108,904        100.0     $ 1,059,041        100.0


At March 31, 2022 and December 31, 2021, we estimate that we have approximately
$440.1 million and $393.8 million, respectively, in uninsured deposits including
related interest accrued and unpaid. Since it is not reasonably practicable to
provide a precise measure of uninsured deposits, these amounts are estimates and
are based on the same methodologies and assumptions used for the Bank's
regulatory reporting requirements by the FDIC for the Call Report.

As indicated in the above table, deposit balances increased approximately $49.9
million, or 4.71%, for the three months ended March 31, 2022 compared to
December 31, 2021. The increase in total deposits was mainly attributable to the
$46.3 million, or 9.25%, increase in money market accounts and $10.5 million, or
20.06%, increase in interest-bearing demand accounts, partially offset by a
$10.9 million, or 5.23%, decline in time deposits.

Discussion of operating results

Comparison of the three months ended March 31, 2022 and March 31, 2021.


General



Net income for the three months ended March 31, 2022 was $4.1 million, compared
to $3.6 million for the same period in 2021. The increase in net income for the
period was primarily the result of increases in net interest income and of $1.0
million, partially offset by an increase in noninterest expenses totaling $0.3
million.

34





Net Interest Income


Net interest income increased $1.0 million, or 8.10%, to $13.0 million for the
three months ended March 31, 2022, compared to $12.1 million for the same period
in 2021. The increase in net interest income was primarily due to a higher
volume in loans (both Core Bank and CarBucks) and taxable investments, and
decreases in costs on time deposits. This was partially offset by the decline in
yields on our Core Bank loans and taxable investments during the period.



The following table sets forth the average balances of assets and liabilities,
the total dollar amounts of interest income and dividends from average
interest-earning assets on a tax-equivalent basis, the total dollar amounts of
interest expense on average interest-bearing liabilities, and the resulting
average tax-equivalent yields and cost for the periods indicated. All average
balances are daily average balances. Nonaccrual loans were included in the
computation of average balances, but have been reflected in the table as loans
carrying a zero yield. The yields set forth below include the effect of deferred
fees and costs that are amortized or accreted to interest income or expense.

35





                                                                               For the Three Months Ended March 31,
                                                                     2022                                                2021
                                                  Average                                             Average
                                                Outstanding                                         Outstanding
                                                  Balance         Interest        Yield/ Rate         Balance         Interest        Yield/ Rate
                                                                                      (Dollars in thousands)
Interest-earning assets:
Loans, Core Bank(1)                             $    834,518      $   8,275               4.02 %    $    807,600      $   8,525               4.28 %
Loans, Carbucks(2)                                   108,282          5,306              19.87 %          87,319          4,613              21.43 %
Investments - taxable                                107,903            466               1.75 %         101,326            268               1.07 %
Investments - tax exempt(3)                           12,244             87               2.88 %          12,738             88               2.80 %
Federal funds sold and other interest
earning deposits                                     115,281             40               0.14 %          57,178             19               0.13 %
Other investments, at cost                             2,893             15               2.10 %           5,979             34               2.31 %
Total interest-earning assets                      1,181,121         14,189               4.87 %       1,072,140         13,547               5.12 %

Noninterest-earning assets                            34,294               
                              36,795

Total assets                                    $  1,215,415                                        $  1,108,935

Interest-bearing liabilities:
Savings accounts                                $     16,252      $       4               0.10 %    $     10,877      $       3               0.10 %
Time deposits                                        203,116            156               0.31 %         274,526            495               0.73 %
Money market accounts                                519,485            503               0.39 %         400,168            452               0.46 %
Interest bearing transaction accounts                 52,573             24               0.19 %          63,962             43               0.27 %
Total interest bearing deposits                      791,426            687               0.35 %         749,533            993               0.54 %

FHLB advances                                          5,000              5               0.41 %          16,000             35               0.88 %
Junior subordinated debentures                        35,876            433               4.89 %          35,757            433               4.91 %
Other borrowings                                           -              -               0.00 %             151              -               0.96 %

Total interest-bearing liabilities                   832,302          1,125               0.55 %         801,441          1,461               0.74 %

Noninterest-bearing deposits                         278,227                                             215,073

Other non interest bearing liabilities                 6,210               
                               5,759

Total liabilities                                  1,116,739                                           1,022,273
Total equity                                          98,676                                              86,662
Total liabilities and equity                    $  1,215,415                                        $  1,108,935


Tax-equivalent net interest income                                $  13,064                                           $  12,086


Net interest-earning assets(4)                  $    348,819                                        $    270,699

Average interest-earning assets to
interest-bearing liabilities                          141.91 %                                            133.78 %

Tax-equivalent net interest rate spread(5)                                                4.32 %                                              4.39 %
Tax-equivalent net interest margin(6)                                                     4.49 %                                              4.57 %


(1) Basic bank is the bank’s core business of providing traditional depository services and

lending of goods and services to commercial and retail bank customers.

(2) Carbucks is the division of the bank that offers specialized floor plan loans to

small car dealerships in over 20 states.

(3) Tax-exempt investments are calculated taking into account a federal tax of 21%

rate, or $18,000 and $19,000 for the three months ended March 31, 2022 and

2021, respectively.

(4) Net interest-earning assets represent total interest-earning assets less

total interest-bearing liabilities.

(5) The tax-equivalent net interest rate difference represents the difference between the

     tax equivalent yield on average interest-earning assets and the cost of
     average interest-bearing liabilities.

(6) The net interest margin in tax equivalent represents the net interest in tax equivalent

income divided by average total interest-earning assets.

36





The following table presents the effects of changing rates and volumes on our
net interest income for the periods indicated. The rate column shows the effects
attributable to changes in rate (changes in rate multiplied by prior volume).
The volume column shows the effects attributable to changes in volume (changes
in volume multiplied by prior rate). The total column represents the sum of the
prior columns. For purposes of this table, changes attributable to both rate and
volume, which cannot be segregated, have been allocated proportionately, based
on the absolute values of changes due to rate and the changes due to volume.

                                                              For the Three Months Ended March 31, 2022
                                                          Compared to the

Three months completed March 31, 2021

                                                                     Increase (decrease) due to:
(In thousands)                                            Volume                        Rate               Total
Interest-earning assets:
Loans - Core Bank (1)                               $               278           $           (528 )      $   (250 )
Loans - CarBucks (1)                                              1,046                       (353 )           693
Investment - taxable                                                 18                        180             198
Investments - tax exempt (2)                                         (3 )  
                     2              (1 )
Interest-earning deposits                                            20                          1              21
Other investments, at cost                                          (16 )                       (3 )           (19 )
Total interest-earning assets                                     1,343                       (701 )           642

Interest-bearing liabilities:
Savings accounts                                                      1                          -               1
Time deposits                                                      (106 )                     (233 )          (339 )
Money market accounts                                               122                        (71 )            51
Interest bearing transaction accounts                                (7 )                      (12 )           (19 )
FHLB advances                                                       (17 )                      (13 )           (30 )
Junior subordinated debentures                                        -                          -               -
Other borrowings                                                      -                          -               -
Total interest-bearing liabilities                                   (7 )                     (329 )          (336 )
Change in tax-equivalent net interest income        $             1,350           $           (372 )      $    978


(1) Unaccrued loans are included in the above analysis.

(2) Interest income on tax-exempt loans and investments is adjusted according to

     a 21% federal tax rate.




Net interest income before provision for loan losses increased to $13.0 million
for the three months ended March 31, 2022, compared to $12.1 million for the
same period in 2021, due to improvements in volume, partially offset by
unfavorable movements in interest rates.



The increase in tax-equivalent net interest income of $1.3 million related to
volume was primarily the result of higher average loan (both Core Bank and
CarBucks) which increased $47.9 million, and a $71.4 million decrease in average
time deposits for the three months ended March 31, 2022 compared to the same
period in 2021. The increase in average loan and taxable investment balances was
partially offset by increases of $119.3 million in money market balances.

The decrease in tax-equivalent net interest income of $0.4 million related to
rate was primarily the result of decreased costs on time deposits and decreased
yields on Core Bank and CarBucks loans.

Our tax-equivalent net interest margin was 4.49% for the three months ended
March 31, 2022, compared to 4.57% for the same period in 2021, a decrease of
eight basis points. The decrease in net interest margin was primarily
attributable to higher average loan balances combined with interest rate
reductions on our cost of funds partially offset by reduced yields on our Core
Bank and CarBucks loans.

Provision for Loan Losses



We recorded a provision for loan losses for the three months ended March 31,
2022 of $0.3 million due to organic loan growth and certain qualitative
adjustments in response to shifts in used car demand which could impact our
CarBucks portfolio. This compares to a $0.2 million provision for loan losses in
for the same period in 2021. We are experiencing continued stabilization in
asset quality, low charge-off amounts and a decline in the historical loss rates
used in our allowance for loan losses model. In light of ongoing supply chain
disruptions, labor shortages and the associated impact on monetary policy, there
is a risk that loss rates could increase.

37





Noninterest Income



The following table summarizes the components of noninterest income and the
corresponding changes between the three months ended March 31, 2022 and 2021 (in
thousands):



                                                       Three Months Ended March 31,
                                                        2022                  2021            Change
Service charges on deposit accounts                 $         334         $         268      $      66
Bank owned life insurance                                      78                    92            (14 )
Net gain on sale of premises and equipment                     24          
          6             18
Other noninterest income                                      189                   209            (20 )
Total noninterest income                            $         625         $         575      $      50



Our non-interest income grew less than $0.1 million for $0.6 million within three months March 31, 2022compared to the same period in 2021 mainly due to service fee increases on deposit accounts.

Non-interest expenses



The following table summarizes the components of noninterest expense and the
corresponding change between the three months ended March 31, 2022 and 2021
(in
thousands):



                                                      Three Months Ended March 31,
                                                        2022                2021            Change
Compensation and employee benefits                  $       5,537       $  
    5,074      $     463
Net occupancy                                                 586                 564             22
Federal deposit insurance                                     116                 153            (37 )
Professional and advisory                                     230                 309            (79 )
Data processing                                               493                 533            (40 )
Marketing and advertising                                      70                  44             26
Net cost of operation of real estate owned                     23          
      110            (87 )
Other noninterest expense                                     929                 880             49
Total noninterest expenses                          $       7,984       $       7,667      $     317



Our noninterest expense increased $0.3 million to $8.0 million in the three
months ended March 31, 2022, compared to the same period in 2021, primarily as
the result of increases in compensation and employee benefits of $0.5 million.
This increase was partially offset by a $0.1 million decrease in the net cost of
operation of real estate owned. The increase in compensation and employee
benefits is primarily related to increased full-time equivalent employees
combined with annual raises and increases in employee benefits, incentives and
commissions. The decrease in the net cost of operation of real estate owned is
primarily related to a decrease in writedowns of real estate owned.



Income Taxes



Income tax expense totaled $1.3 million for the three months ended March 31,
2022, compared to $1.1 million for the same period in 2021. Income tax expense
benefited from tax-exempt income related to municipal bond investments and BOLI
income resulting in effective tax rates of 23.6% and 24.1% for the three months
ended March 31, 2022 and 2021, respectively.



We continue to have unused net operating losses for state income tax purposes and no material current tax receivables or payables.

38





Discussion of Segment Results

See Note 9, “Reportable Segments” in the Notes to the Consolidated Financial Statements included in Section 1 – “Financial Statements” for additional information relating to our reportable segments. Fluctuations in non-interest income and non-interest expense incurred directly by the segments are discussed in more detail in the “Non-interest income” and “Non-interest expense” sections above. .

Comparison of the three months ended March 31, 2022 and 2021.


                                  As of and for the Three Months Ended March 31, 2022
                              Core Bank            CarBucks          Other          Total
Interest income             $        8,329       $      5,306      $     536     $    14,171
Interest expense                       203                489            433           1,125
Net interest income                  8,126              4,817            103          13,046
Provision for loan losses             (324 )              632              -             308
Noninterest income                     482                 64             79             625
Noninterest expense                  5,289              2,679             16           7,984
Net income before taxes              3,643              1,570            166           5,379
Income tax expense                     904                371             (4 )         1,271
Net income                  $        2,739       $      1,199      $     170     $     4,108

Total assets                $    1,006,678       $    108,229      $ 138,345     $ 1,253,252

                                  As of and for the Three Months Ended March 31, 2021
                              Core Bank            CarBucks          Other          Total
Interest income             $        8,577       $      4,613      $     339     $    13,529
Interest expense                       663                365            433           1,461
Net interest income                  7,914              4,248            (94 )        12,068
Provision for loan losses              523               (281 )            -             242
Noninterest income                     447                 37             91             575
Noninterest expense                  5,217              2,435             15           7,667
Net income before taxes              2,621              2,131            (18 )         4,734
Income tax expense                     631                513             (4 )         1,140
Net income                  $        1,990       $      1,618      $     (14 )   $     3,594

Total assets                $      924,723       $     78,756      $ 132,869     $ 1,136,348




Core Bank



Core Bank consists of commercial and consumer lending and full-service branches
in its geographic region with its own management team. The branches provide a
full range of traditional banking products as well as treasury services and
merchant services.



Core Bank net income increased $0.8 million to $2.7 million for the three months
ended March 31, 2022 compared to $2.0 million for the same period in 2021. Net
interest income increased $0.2 million to $8.1 million for the three months
ended March 31, 2022 from $7.9 million for the same period a year ago primarily
due to increased loan volume and reduced funding costs, partially offset by a
reduction in loan yield. Provision for loan losses decreased $0.8 million for
the three months ended March 31, 2022 compared to 2021 due to lower net charge
off activity and loan balance contraction during the first quarter of 2022 as
opposed to loan balance growth during the first quarter of 2021. Noninterest
expense increased $0.1 million to $5.3 million for the 2022 period compared to
$5.2 million for the same period in 2021 due primarily to an increase in
compensation and employee benefits expense in 2022.



CarBucks



CarBucks provides specialty floor plan inventory financing for more than 1,600
small automobile dealers in over 20 states. Credit lines are established for
each approved dealer using the Company's Board approved underwriting guidelines.
Advances and repayments on credit lines averaging $0.1 million are vehicle
specific. The inventory typically consists of over 12,000 floored used vehicles
with an average price of $8,000 per unit, generally has an average 67-day
turnover, and generates approximately $300 in financing fees per vehicle which
is included in loan interest income.

39





CarBucks net income decreased $0.4 million to $1.2 million for the three months
ended March 31, 2022 compared to $1.6 million for the same three-month period in
2021. Net interest income increased $0.6 million to $4.8 million for the 2022
period from $4.2 million for the same period a year ago primarily due to
increased fees related to increases in inventory. Provision for loan losses
increased $0.9 million for the three months ended March 31, 2022 compared to
2021 due to increased net charge offs and higher loan balance, partially offset
by lower qualitative adjustments. Noninterest expense increased $0.2 million to
$2.7 million for the 2022 period compared to $2.4 million for the same period in
2021 due primarily to an increase in compensation and employee benefits expense
in 2022.



Other



Other includes parent company transactions, investment securities portfolio,
BOLI, excess death benefits, net intercompany eliminations, and certain other
activities not currently allocated to the aforementioned segments.



Other net income increased $0.2 million for $0.2 million for the three months ended March 31, 2022 compared to the same period in 2021, mainly due to the increase in interest income related to the Company’s taxable investments, partially offset by a decrease in BOLI income.

Cash and capital resources

Liquidity and Market Risk. Our primary sources of funds consist of deposit
inflows, loan repayments, advances from the Federal Home Loan Bank of Atlanta
("FHLB"), and the sale of available-for-sale securities. While maturities and
scheduled amortization of loans and securities are predictable sources of funds,
deposit flows and mortgage prepayments are greatly influenced by general
interest rates, economic conditions and competition. Our ALCO, under the
direction of our Chief Financial Officer, is responsible for establishing and
monitoring our liquidity targets and strategies in order to ensure that
sufficient liquidity exists for meeting the borrowing needs and deposit
withdrawals of our customers as well as unanticipated contingencies. We have not
experienced any unusual pressure on our deposit balances or our liquidity
position as a result of the COVID-19 pandemic. We believe that, as of March 31,
2022, we have enough sources of liquidity to satisfy our liquidity needs for the
next twelve months and thereafter.

We regularly monitor and adjust our investments in liquid assets based upon our
assessment of expected loan demand, expected deposit flows and borrowing
maturities, yields available on interest-earning deposits and securities, and
the objectives of our asset/liability management program. Excess liquid assets
are invested generally in FHLB and Federal Reserve Bank of Richmond ("FRB")
interest-earning deposits and investment securities and are also used to pay off
short-term borrowings. At March 31, 2022, cash and cash equivalents totaled
$159.2 million. Included in this total was $131.6 million held at the FRB, $1.2
million held at the FHLB, and $21.8 million held at correspondent banks in
interest-earning accounts.

Our cash flows are derived from operating activities, investing activities and
financing activities as reported in our consolidated statements of cash flows
included in our unaudited consolidated financial statements of this From 10-Q.
The following summarizes the most significant sources and uses of liquidity
during the three months ended March 31, 2022 and 2021 (in thousands):

                                                                  Three Months Ended March 31,
                                                                    2022                 2021
Investing activities:
Purchases of investments                                       $      (20,730 )     $      (12,644 )
Maturities and principal repayments of investments                      3,025                5,495
Net increase in loans                                                  (2,901 )            (11,289 )
Redemption of other investments, at cost                                  500                    -

Financing activities:
Net increase in deposits                                       $       49,863       $       44,077
Repurchase of common stock                                                  -               (2,392 )
Dividends paid on common stock                                           (672 )                  -


In addition, because the Company is a separate entity from the Bank, it must
provide for its own liquidity. The Company is responsible for payment of
dividends declared on its common and preferred stock and interest and principal
on any outstanding debt or trust preferred securities. The Company currently has
internal capital resources to meet these obligations. While the Company has
access to capital, the ultimate sources of its liquidity are dividends from the
Bank and tax allocation agreements, which are limited by applicable law and
regulations. The Bank paid no dividends to the Company in the three months
ended
March 31, 2022 or 2021.

40




To March 31, 2022we have had $322.5 million outstanding commitments to extend credit through unused lines of credit and stand-by letters of credit.



Depending on market conditions, we may be required to pay higher rates on our
deposits or other borrowings than we currently pay on certificates of deposit.
Based on historical experience and current market interest rates, we anticipate
that following their maturity we will retain a large portion of our retail
certificates of deposit with maturities of one year or less as March 31, 2022.



In addition to loans, we invest in securities that provide a source of
liquidity, both through repayments and as collateral for borrowings. Our
securities portfolio includes both callable securities (which allow the issuer
to exercise call options) and mortgage-backed securities (which allow borrowers
to prepay loans). Accordingly, a decline in interest rates would likely prompt
issuers to exercise call options and borrowers to prepay higher-rate loans,
producing higher than otherwise scheduled cash flows.



Liquidity management is both a daily and long-term function of management. If we
require more funds than we are able to generate locally, we have a borrowing
agreement with the FHLB. The following summarizes our borrowing capacity as of
March 31, 2022 (in thousands):

                                     Total          Used         Unused
                                   Capacity       Capacity      Capacity

FHLB

Loan collateral capacity           $ 356,037
Pledgeable marketable securities     122,667
FHLB totals                          478,704     $    5,000     $ 473,704
Fed funds lines                       49,000              -        49,000
                                   $ 527,704     $    5,000     $ 522,704




Capital Resources. Shareholders' equity decreased $1.0 million to $96.4 million
at March 31, 2022 compared to $97.4 million at December 31, 2021. This decrease
was primarily attributable to net income of $4.1 million, stock-based
compensation of $0.1 million, and stock options exercised of $0.4 million offset
by after-tax decreases in market value of AFS investment securities of $4.9
million and dividends declared of $0.7 million.

41





The tables below summarize the capital amounts and ratios of the Bank and the
minimum regulatory requirements in accordance with Basel III and the prompt
corrective action provisions at March 31, 2022 and December 31, 2021 (dollars in
thousands).

                                                                                      To Be Well-Capitalized
                                                                                           Under Prompt
                                                          For Capital Adequacy              Corrective
                                       Actual                 Purposes (1)              Action Provisions
                                 Amount       Ratio        Amount         Ratio         Amount         Ratio
As of March 31, 2022:
Tier 1 Leverage Capital         $ 127,808      10.52 %  $      48,575       >4.0 %  $       60,718        >5.0 %
Common Equity Tier 1 Capital    $ 127,808      12.59 %  $      71,073      
>7.0 %  $       65,996        >6.5 %
Tier 1 Risk-based Capital       $ 127,808      12.59 %  $      86,303       >8.5 %  $       81,226        >8.0 %
Total Risk-based Capital        $ 140,515      13.84 %  $     106,609      >10.5 %  $      101,533       >10.0 %

As of December 31, 2021:
Tier 1 Leverage Capital         $ 123,344      10.21 %  $      48,317       >4.0 %  $       60,396        >5.0 %
Common Equity Tier 1 Capital    $ 123,344      12.24 %  $      70,517      
>7.0 %  $       65,480        >6.5 %
Tier 1 Risk-based Capital       $ 123,344      12.24 %  $      85,628       >8.5 %  $       80,591        >8.0 %
Total Risk-based Capital        $ 135,951      13.50 %  $     105,776      >10.5 %  $      100,739       >10.0 %

1) Includes a capital conservation buffer of 2.50%.




The tables below summarize the capital amounts and ratios of the Company and the
minimum(1) regulatory requirements in accordance with Basel III at March 31,
2022, and December 31, 2021 (in thousands).

                                                       For Capital Adequacy
                                     Actual                Purposes (2)
                                Amount      Ratio       Amount         Ratio
As of March 31, 2022:
Tier I Leverage Capital        $ 107,676      8.86 % $      48,587       >4.0 %
Common Equity Tier 1 Capital   $  99,428      9.78 % $      71,134       >7.0 %
Tier I Risk-based Capital      $ 107,676     10.60 % $      86,378       >8.5 %
Total Risk Based Capital       $ 148,040     14.57 % $     106,702      >10.5 %

As of December 31, 2021:
Tier I Leverage Capital        $ 103,730      8.59 % $      48,327       >4.0 %
Common Equity Tier 1 Capital   $  95,482      9.47 % $      70,574       >7.0 %
Tier I Risk-based Capital      $ 103,730     10.29 % $      85,696       >8.5 %
Total Risk Based Capital       $ 143,963     14.28 % $     105,860      >10.5 %

(1) Under the of the Federal Reserve Policy statement of the small holding bank, the

The company is not subject to minimum capital adequacy and capital

conservation reserve capital requirements at the holding company level, unless

otherwise advised by the FRB (these capital requirements are only applicable

at the Bank level). Although the minimum regulatory capital requirements are

not applicable to the Company, we calculate these ratios for our own planning

and for monitoring purposes.

(2) Includes a capital conservation buffer of 2.50%.

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