UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

☒

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

~~For the Quarterly Period Ended September 30, 2017~~
OR


	For the Quarterly Period Ended June 30, 2019
	OR
☐		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the Transition Period from to
	Commission file number 000-27719


	Southern First Bancshares, Inc.
	~~(Exact name of registrant as specified in its charter)~~

(Exact name of registrant as specified in its charter)

South Carolina		58-2459561
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

100 Verdae Boulevard, Suite 100
Greenville, S.C.		29606
(Address of principal executive offices)		(Zip Code)

864-679-9000
~~864-679-9000~~
~~(Registrant’s telephone number, including area code)~~
~~Not Applicable~~
~~(Former name, former address, and former fiscal year, if changed since last report)~~
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address, and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” ~~and~~ “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☐		Accelerated filer	☒
Non-accelerated filer	☐	~~(Do not check if a smaller reporting company)~~	Smaller Reporting Company	☐☒
			Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: ~~7,319,098~~7,557,923 shares of common stock, par value $0.01 per share, were issued and outstanding as of ~~October~~July 25, ~~2017.~~2019.

SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARY
~~September~~June 30, ~~2017~~2019 Form 10-Q

INDEX

PART I – CONSOLIDATED FINANCIAL INFORMATION		Page

Item 1.	Consolidated Financial Statements

	Consolidated Balance Sheets	3

	Consolidated Statements of Income	4

	Consolidated Statements of Comprehensive Income	5

	Consolidated Statements of Shareholders’ Equity	6

	Consolidated Statements of Cash Flows	7

	Notes to Unaudited Consolidated Financial Statements	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	4642

Item 4.	Controls and Procedures	4642

PART II – OTHER INFORMATION

Item 1.	Legal Proceedings	4643

Item 1A.	Risk Factors	4643

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	4643

Item 3.	Defaults upon Senior Securities	4643

Item 4.	Mine Safety Disclosures	4643

Item 5.	Other Information	4643

Item 6.	Exhibits	4643

PART I. CONSOLIDATED FINANCIAL INFORMATION
Item 1. CONSOLIDATED FINANCIAL STATEMENTS

SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS


	September 30,			December 31,		June 30,			December 31,
(dollars in thousands, except share data)	2017			2016		2019			2018
		(Unaudited)		(Audited)		(Unaudited)			(Audited)
ASSETS
Cash and cash equivalents:
Cash and due from banks	$	18,942		11,574		$	12,220		17,434
Federal funds sold		34,016		24,039			40,044		35,882
Interest-bearing deposits with banks		21,654		10,939			64,520		19,557
Total cash and cash equivalents		74,612		46,552			116,784		72,873
Investment securities:
Investment securities available for sale		78,440		64,480			75,252		74,905
Other investments		3,064		5,742			3,311		4,121
Total investment securities		81,504		70,222			78,563		79,026
Mortgage loans held for sale		9,124		7,801			24,509		9,241
Loans		1,327,739		1,163,644			1,809,355		1,677,332
Less allowance for loan losses		(15,579	)	(14,855	)		(16,144	)	(15,762	)
Loans, net		1,312,160		1,148,789			1,793,211		1,661,570
Bank owned life insurance		32,911		25,471			39,448		34,010
Property and equipment, net		31,549		28,362			48,262		32,430
Deferred income taxes		9,085		6,825			7,049		4,020
Other assets		6,739		6,886			8,218		7,444
Total assets	$	1,557,684		1,340,908		$	2,116,044		1,900,614
LIABILITIES
Deposits	$	1,342,577		1,091,151		$	1,854,008		1,648,136
Federal Home Loan Bank advances and other borrowings		39,200		115,200			25,000		50,000
Junior subordinated debentures		13,403		13,403			13,403		13,403
Other liabilities		15,055		11,282			33,779		15,159
Total liabilities		1,410,235		1,231,036			1,926,190		1,726,698
SHAREHOLDERS’ EQUITY
Preferred stock, par value $.01 per share, 10,000,000 shares authorized, no shares issued and outstanding		-		-
Common stock, par value $.01 per share, 10,000,000 shares authorized, 7,319,098 and 6,463,789 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively		73		65
Preferred stock, par value $.01 per share, 10,000,000 shares authorized							-		-
Common stock, par value $.01 per share, 10,000,000 shares authorized, 7,557,923 and 7,466,481 shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively							76		75
Nonvested restricted stock		(500	)	(600	)		(887	)	(741	)
Additional paid-in capital		99,464		73,371			104,354		102,625
Accumulated other comprehensive income (loss)		(93	)	(504	)		188		(917	)
Retained earnings		48,505		37,540			86,123		72,874
Total shareholders’ equity		147,449		109,872			189,854		173,916
Total liabilities and shareholders’ equity	$	1,557,684		1,340,908		$	2,116,044		1,900,614

See notes to consolidated financial statements that are an integral part of these consolidated statements.

SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)


		For the three months		For the nine months			For the three months			For the six months
		ended September 30,		ended September 30,			ended June 30,			ended June 30,
(dollars in thousands, except share data)	2017		2016	2017		2016	2019		2018	2019	2018
Interest income
Loans	$	15,282	12,486	43,089		36,280	$	22,098	17,591	42,988	34,154
Investment securities		443	395	1,208		1,342		539	430	1,087	798
Federal funds sold		230	31	548		122		451	514	625	761
Total interest income		15,955	12,912	44,845		37,744		23,088	18,535	44,700	35,713
Interest expense
Deposits		2,084	957	5,073		2,891		6,175	3,524	11,550	6,263
Borrowings		562	1,075	2,504		3,153		374	399	793	797
Total interest expense		2,646	2,032	7,577		6,044		6,549	3,923	12,343	7,060
Net interest income		13,309	10,880	37,268		31,700		16,539	14,612	32,357	28,653
Provision for loan losses		500	825	1,500		2,025		300	400	600	900
Net interest income after provision for loan losses		12,809	10,055	35,768		29,675		16,239	14,212	31,757	27,753
Noninterest income
Mortgage banking income		1,403	2,003	4,063		5,685		2,830	1,629	4,687	2,957
Service fees on deposit accounts		324	269	886		732		265	256	530	512
ATM and debit card income								443	371	823	705
Income from bank owned life insurance		224	187	590		553		222	220	438	441
Gain on sale of investment securities		-	106	2		431
Loss on disposal of fixed assets		-	-	(50	)	-
Other income		591	452	1,665		1,320		330	295	606	577
Total noninterest income		2,542	3,017	7,156		8,721		4,090	2,771	7,084	5,192
Noninterest expenses
Compensation and benefits		5,698	4,948	16,496		14,353		7,399	6,365	14,182	12,208
Occupancy		1,043	908	3,042		2,670		1,343	1,276	2,682	2,413
Real estate owned expenses		28	81	38		725
Outside service and data processing costs		794	690	2,362		1,916		1,045	824	2,005	1,560
Insurance		258	227	845		678		280	297	598	610
Professional fees		334	326	1,029		864		414	457	853	933
Marketing		199	195	605		625		236	229	496	438
Other		452	425	1,512		1,339		651	531	1,200	1,022
Total noninterest expenses		8,806	7,800	25,929		23,170		11,368	9,979	22,016	19,184
Income before income tax expense		6,545	5,272	16,995		15,226		8,961	7,004	16,825	13,761
Income tax expense		2,295	1,839	6,030		5,481		1,721	1,494	3,576	3,037
Net income available to common shareholders	$	4,250	3,433	10,965		9,745	$	7,240	5,510	13,249	10,724
Earnings per common share
Basic	$	0.58	0.54	1.59		1.55	$	0.97	0.75	1.77	1.46
Diluted	$	0.55	0.51	1.50		1.45	$	0.93	0.71	1.71	1.39
Weighted average common shares outstanding
Basic		7,281,594	6,322,073	6,905,017		6,299,009		7,495,508	7,370,709	7,477,525	7,353,867
Diluted		7,668,476	6,740,751	7,291,164		6,702,475		7,755,821	7,751,146	7,748,879	7,739,082

See notes to consolidated financial statements that are an integral part of these consolidated statements.

SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)


	For the three months					For the nine months				For the three months					For the six months
	ended September 30,					ended September 30,				ended June 30,					ended June 30,
(dollars in thousands)		2017		2016		2017		2016		2019			2018		2019		2018
Net income	$	4,250		3,433		10,965		9,745		$	7,240		5,510		13,249		10,724
Other comprehensive income (loss):
Unrealized gain (loss) on securities available for sale:
Unrealized holding gain (loss) arising during the period, pretax		130		(222	)	626		1,552			720		(234	)	1,404		(1,150	)
Tax (expense) benefit		(43	)	75		(213	)	(528	)		(151	)	51		(294	)	240
Reclassification of realized gain		-		(106	)	(2	)	(431	)
Reclassification of realized (gain) loss											(2	)	-		(6	)	1
Tax expense		-		37		-		147			-		-		1		-
Other comprehensive income (loss)		87		(216	)	411		740			567		(183	)	1,105		(909	)
Comprehensive income	$	4,337		3,217		11,376		10,485		$	7,807		5,327		14,354		9,815

See notes to consolidated financial statements that are an integral part of these consolidated statements.

SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
~~FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2017 AND 2016~~
(Unaudited)


												Accumulated							For the three months ended June 30,
							Nonvested			Additional		other								Common stock			Preferred stock			Nonvested restricted stock			Additional paid-in capital		Accumulated other comprehensive loss			Retained earnings		Total
(dollars in thousands, except share data)	Common stock			Preferred stock			restricted			paid-in		comprehensive			Retained					Shares	Amount		Shares	Amount		Nonvested restricted stock			Additional paid-in capital		Accumulated other comprehensive loss			Retained earnings		Total
(dollars in thousands, except share data)	Shares	Amount		Shares	Amount		stock			capital		income (loss)			earnings		Total
December 31, 2015	6,289,038	$	63	-		-	$	(360	)	$	70,037	$	(4	)	$	24,504	$	94,240
March 31, 2018																				7,381,716		74	-		-		(842	)		100,890		(1,182	)		55,799		154,739
Net income	-		-	-		-		-			-		-			9,745		9,745		-		-	-		-		-			-		-			5,510		5,510
Proceeds from exercise of stock options	71,628		1	-		-		-			533		-			-		534		41,956		-	-		-		-			409		-			-		409
Issuance of restricted stock	22,000		-	-		-		(526	)		526		-			-		-		2,000		-	-		-		(92	)		92		-			-		-
Amortization of deferred compensation on restricted stock	-		-	-		-		211			-		-			-		211
Compensation expense related to restricted stock, net of tax																				-		-	-		-		81			-		-			-		81
Compensation expense related to stock options, net of tax																				-		-	-		-		-			300		-			-		300
Other comprehensive loss																				-		-	-		-		-			-		(183	)		-		(183	)

June 30, 2018																				7,425,672	$	74	-	$	-	$	(853	)	$	101,691	$	(1,365	)	$	61,309	$	160,856
March 31, 2019																				7,505,636		75	-		-		(993	)		103,600		(379	)		78,883		181,186
Net income																				-		-	-		-		-			-		-			7,240		7,240
Proceeds from exercise of stock options																				52,287		1	-		-		-			436		-			-		437
Issuance of restricted stock																				-		-	-		-		-			-		-			-		-
Compensation expense related to restricted stock, net of tax																				-		-	-		-		106			-		-			-		106
Compensation expense related to stock options, net of tax	-		-	-		-		-			553		-			-		553		-		-	-		-		-			318		-			-		318
Other comprehensive income	-		-	-		-		-			-		740			-		740		-		-	-		-		-			-		567			-		567
September 30, 2016	6,382,666	$	64	-	$	-	$	(675	)	$	71,649	$	736		$	34,249	$	106,023
December 31, 2016	6,463,789		65	-		-		(600	)		73,371		(504	)		37,540		109,872
Net income	-		-	-		-		-			-		-			10,965		10,965
Net issuance of common stock	805,000		8	-		-		-			24,750		-			-		24,758
Proceeds from exercise of stock options	47,184		-	-		-		-			454		-			-		454
Issuance of restricted stock	3,125		-	-		-		(146	)		146		-			-		-
Amortization of deferred compensation on restricted stock	-		-	-		-		246			-		-			-		246
Compensation expense related to stock options, net of tax	-		-	-		-		-			743		-			-		743
Other comprehensive income	-		-	-		-		-			-		411			-		411
September 30, 2017	7,319,098	$	73	-	$	-	$	(500	)	$	99,464	$	(93	)	$	48,505	$	147,449
June 30, 2019																				7,557,923	$	76	-	$	-	$	(887)		$	104,354	$	188		$	86,123	$	189,854

For the six months ended June 30,
	Common stock			Preferred stock			Nonvested restricted stock			Additional paid-in capital		Accumulated other comprehensive loss			Retained earnings
(dollars in thousands, except share data)	Shares	Amount		Shares	Amount		Nonvested restricted stock			Additional paid-in capital		Accumulated other comprehensive loss			Retained earnings		Total
December 31, 2017	7,347,851		73	-		-		(502	)		99,986		(456	)		50,585		149,686
Net income	-		-	-		-		-			-		-			10,724		10,724
Proceeds from exercise of stock options	66,321		1	-		-		-			637		-			-		638
Issuance of restricted stock	11,500		-	-		-		(501	)		501		-			-		-
Compensation expense related to restricted stock, net of tax	-		-	-		-		150			-		-			-		150
Compensation expense related to stock options, net of tax	-		-	-		-		-			567		-			-		567
Other comprehensive loss	-		-	-		-		-			-		(909	)		-		(909	)

June 30, 2018	7,425,672	$	74	-	$	-	$	(853	)	$	101,691	$	(1,365	)	$	61,309	$	160,856
December 31, 2018	7,466,481		75	-		-		(741	)		102,625		(917	)		72,874		173,916
Net income	-		-	-		-		-			-		-			13,249		13,249
Proceeds from exercise of stock options	80,742		1	-		-		-			758		-			-		759
Issuance of restricted stock	10,700		-	-		-		(347	)		347		-			-		-
Compensation expense related to restricted stock, net of tax	-		-	-		-		201			-		-			-		201
Compensation expense related to stock options, net of tax	-		-	-		-		-			624		-			-		624
Other comprehensive income	-		-	-		-		-			-		1,105			-		1,105
June 30, 2019	7,557,923	$	76	-	$	-	$	(887)		$	104,354	$	188		$	86,123	$	189,854

See notes to consolidated financial statements that are an integral part of these consolidated statements.

SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)


							For the six months ended
	For the nine months ended September 30,						June 30,
(dollars in thousands)	2017			2016			2019			2018
Operating activities
Net income	$	10,965		$	9,745		$	13,249		10,724
Adjustments to reconcile net income to cash provided by operating activities:
Adjustments to reconcile net income to cash provided by (used for) operating activities:
Provision for loan losses		1,500			2,025			600		900
Depreciation and other amortization		1,053			939			913		850
Accretion and amortization of securities discounts and premium, net		422			433			182		220
Gain on sale of investment securities available for sale		(2	)		(431	)
Loss on sale of real estate owned		3			51
Loss on disposal of fixed assets		50			-
Write-down of real estate owned		7			389
Compensation expense related to stock options and grants		989			764
(Gain) loss on sale of investment securities available for sale								(6	)	1
Gain on sale of fixed assets								-		(8	)
Net change in operating leases								492		-
Compensation expense related to stock options and restricted stock grants								825		717
Gain on sale of loans held for sale		(4,520	)		(5,704	)		(4,411	)	(2,620	)
Loans originated and held for sale		(144,622	)		(198,601	)		(154,785	)	(109,193	)
Proceeds from sale of loans held for sale		147,819			200,122			143,928		115,528
Increase in cash surrender value of bank owned life insurance		(590	)		(553	)		(438	)	(441	)
(Increase) decrease in deferred tax asset		(2,472	)		552
Increase in other assets, net		(72	)		(606	)
Increase in deferred tax asset								(3,323	)	(2,045	)
(Increase) decrease in other assets, net								(774	)	257
Increase in other liabilities		3,773			1,328			3,487		3,730
Net cash provided by operating activities		14,303			10,453
Net cash provided by (used for) operating activities								(61	)	18,620
Investing activities
Increase (decrease) in cash realized from:
Origination of loans, net		(165,160	)		(110,576	)
Increase in loans, net								(132,241	)	(146,700	)
Purchase of property and equipment		(4,290	)		(4,079	)		(2,104	)	(1,328	)
Purchase of investment securities:
Available for sale		(20,675	)		(16,852	)		(5,115	)	(13,904	)
Other		(1,811	)		(806	)
Other investments								-		(2,596	)
Payments and maturities, calls and repayments of investment securities:
Available for sale		6,918			18,448			5,991		4,227
Other		4,489			-
Other investments								810		3,999
Proceeds from sale of investment securities available for sale		-			22,185			-		5,841
Proceeds from sale of real estate owned								-		132
Purchase of life insurance policies		(6,850	)		-			(5,000	)	-
Proceeds from sale of real estate owned		498			395
Net cash used for investing activities		(186,881	)		(91,285	)		(137,659	)	(150,329	)
Financing activities
Increase (decrease) in cash realized from:
Increase in deposits, net		251,426			59,342			205,872		186,859
Decrease in Federal Home Loan Bank advances and other borrowings, net		(76,000	)		-			(25,000	)	(38,600	)
Proceeds from issuance of common stock		24,758			-
Proceeds from the exercise of stock options and warrants		454			534			759		638
Net cash provided by financing activities		200,638			59,876			181,631		148,897
Net increase (decrease) in cash and cash equivalents		28,060			(20,956	)
Net increase in cash and cash equivalents								43,911		17,188
Cash and cash equivalents at beginning of the period		46,552			62,866			72,873		92,165
Cash and cash equivalents at end of the period	$	74,612		$	41,910		$	116,784		109,353
Supplemental information
Cash paid for
Interest	$	7,404		$	5,951		$	12,063		6,764
Income taxes		5,490			4,930			3,323		1,960
Schedule of non-cash transactions
Real estate acquired in settlement of loans		289			245
Unrealized gain on securities, net of income taxes		413			1,024
Unrealized gain (loss) on securities, net of income taxes								1,110		(910	)
Right-of-use assets obtained in exchange for lease obligations:
Operating leases								15,395		-

See notes to consolidated financial statements that are an integral part of these consolidated statements.

SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – Nature of Business and Basis of Presentation

Business Activity
Southern First Bancshares, Inc. ~~(the "Company"~~(the “Company”) is a South Carolina corporation that owns all of the capital stock of Southern First Bank (the ~~"Bank"~~“Bank”) and all of the stock of Greenville First Statutory Trust I and II (collectively, the ~~"Trusts"~~“Trusts”). The Trusts are special purpose non-consolidated entities organized for the sole purpose of issuing trust preferred securities. The Bank's primary federal regulator is the Federal Deposit Insurance Corporation (the ~~"FDIC"~~“FDIC”). The Bank is also regulated and examined by the South Carolina Board of Financial Institutions. The Bank is primarily engaged in the business of accepting demand deposits and savings deposits insured by the FDIC, and providing commercial, consumer and mortgage loans to the general public.

Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the ~~three-~~three and ~~nine-month~~six month periods ended ~~September~~June 30, ~~2017~~2019 are not necessarily indicative of the results that may be expected for the year ending December 31, ~~2017.~~2019. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2016~~2018 as filed with the Securities and Exchange Commission (“SEC”) on ~~March 3, 2017.~~February 28, 2019. The consolidated financial statements include the accounts of the Company and the Bank. In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810, “Consolidation,” the financial statements related to the Trusts have not been consolidated.

Business Segments
In determining proper segment definition, the Company considers the materiality of a potential segment and components of the business about which financial information is available and regularly evaluated, relative to a resource allocation and performance assessment. The Company accounts for intersegment revenues and expenses as if the revenue/expense transactions were generated to third parties, that is, at current market prices. Please refer to “Note 10 – Reportable Segments” for further information on the reporting for the Company’s three business segments.

Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, or GAAP, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amount of income and expenses during the reporting periods. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, real estate acquired in the settlement of loans, fair value of financial instruments, evaluating other-than-temporary-impairment of investment securities and valuation of deferred tax assets.

~~Business Segments~~
The Company began reporting its activities as three business segments – Commercial and Retail Banking, Mortgage Banking and Corporate – in 2016. In determining proper segment definition, the Company considers the materiality of a potential segment and components of the business about which financial information is available and regularly evaluated, relative to a resource allocation and performance assessment. The Company accounts for intersegment revenues and expenses as if the revenue/expense transactions were generated to third parties, that is, at current market prices. Please refer to “Note 9 – Reportable Segments” for further information on the reporting for the Company’s three business segments.

Reclassifications
Certain amounts, previously reported, have been reclassified to state all periods on a comparable basis and had no effect on shareholders’ equity or net income.

Subsequent Events
Subsequent events are events or transactions that occur after the balance sheet date but before financial statements are issued. Recognized subsequent events are events or transactions that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements. Non-recognized subsequent events are events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after that date. Management performed an evaluation to determine whether there have been any subsequent events since the balance sheet date and determined that no subsequent events occurred requiring accrual or disclosure.

Adoption of New Accounting Standards
In February 2016, the FASB issued ASU No. 2016-02,“Leases (Topic 842)”. The guidance in the update supersedes the requirements in ASC Topic 840, Leases. The guidance is intended to increase transparency and comparability among organizations by recognizing right-of-use assets and lease liabilities on the balance sheet. For public companies, this update was effective for interim and annual periods beginning after December 15, 2018. The Company adopted this guidance in the first quarter of 2019. Upon adoption, the Company elected a practical expedient which allows existing leases to retain their classification as operating leases. The Company has also elected to not recognize right-of-use assets and lease liabilities arising from short-term leases. Implementation of the guidance resulted in the recording of a right-of-use asset and lease liability on the balance sheet; however it does not have a material impact on the Company's other consolidated financial statements. See additional disclosures in Note 8.

Newly Issued, But Not Yet Effective Accounting Standards
In June 2016, the FASB issued ASU 2016-13,“Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”. Among other things, ASU 2016-13 requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to form their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, ASU 2016-13 amends the accounting for credit losses on debt securities and purchased financial assets with credit deterioration. ASU 2016-13 is effective for all annual and interim periods beginning after December 31, 2019, with early adoption permitted for fiscal years beginning after December 15, 2018. Adoption will be applied through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. The Company has established a team of individuals from credit, finance and risk management to evaluate the requirements of the new standard and the impact it will have on our processes. Our implementation plan has progressed through the initial design, build, and testing phase and, in the first quarter of 2019, we began running parallel models. While we continue to evaluate the impact the new guidance will have on our financial position and results of operations, we currently expect the new guidance may result in an increase to our allowance for credit losses given the change to estimated losses over the contractual life of the loan portfolio. The amount of any change to our allowance is still under review and will depend, in part, upon the composition of our loan portfolio at the adoption date as well as economic conditions and loss forecasts at that date.

On July 17, 2019, the FASB voted to issue a proposal for public comment that would potentially result in a postponement of the required implementation date for ASU 2016-13. As a smaller reporting company, the Company would be eligible for the proposed delay. The Company is currently evaluating the impact of the proposed delay on its implementation project plan. Management will continue to monitor any new developments regarding this possible delay.

Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption.

NOTE 2 – Investment Securities

The amortized costs and fair value of investment securities are as follows:

September 30, 2017
Amortized Gross Unrealized Fair
(dollars in thousands) Cost Gains Losses Value
Available for sale
US government agencies $ 8,754 14 58 8,710
SBA securities 4,357 - 18 4,339
State and political subdivisions 20,088 329 60 20,357
Mortgage-backed securities 45,381 15 362 45,034
Total investment securities available for sale $ 78,580 358 498 78,440

December 31, 2016
Amortized Gross Unrealized Fair
Cost Gains Losses Value
Available for sale
US government agencies $ 6,271 1 113 6,159
SBA securities 1,453 - 16 1,437
State and political subdivisions 20,625 141 292 20,474
Mortgage-backed securities 36,895 21 506 36,410
Total investment securities available for sale $ 65,244 163 927 64,480

During the first nine months of 2017, there were $915,000 of investment securities either sold or called, resulting in a gain on sale of $2,000. During the first nine months of 2016, approximately $33.5 million of investment securities were either sold or called, subsequently resulting in a gain on sale of $431,000.


	June 30, 2019
		Amortized		Gross Unrealized		Fair
(dollars in thousands)		Cost		Gains	Losses	Value
Available for sale
US government agencies		$	7,716	33	4	7,745
SBA securities			4,066	60	21	4,105
State and political subdivisions			8,019	191	1	8,209
Asset-backed securities			10,909	1	91	10,819
Mortgage-backed securities
FHLMC			11,370	225	59	11,536
FNMA			28,946	123	179	28,890
GNMA			3,988	6	46	3,948
Total mortgage-backed securities			44,304	354	284	44,374
Total investment securities available for sale		$	75,014	639	401	75,252

	December 31, 2018
		Amortized		Gross Unrealized		Fair
		Cost		Gains	Losses	Value
Available for sale
US government agencies		$	8,975	1	194	8,782
SBA securities			3,628	-	103	3,525
State and political subdivisions			8,371	48	63	8,356
Asset-backed securities			9,595	12	49	9,558
Mortgage-backed securities
FHLMC			12,258	87	242	12,103
FNMA			29,068	25	551	28,542
GNMA			4,170	1	132	4,039
Total mortgage-backed securities			45,496	113	925	44,684
Total		$	76,065	174	1,334	74,905

Contractual maturities and yields on the Company’s investment securities at ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016~~2018 are shown in the following table. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.


	September 30, 2017																												June 30, 2019
	Less than one year				One to five years			Five to ten years			Over ten years			Total			Less than one year			One to five years			Five to ten years			Over ten years				Total
(dollars in thousands)	Amount		Yield		Amount	Yield		Amount	Yield		Amount	Yield		Amount	Yield		Amount		Yield	Amount	Yield		Amount	Yield		Amount	Yield		Amount	Yield
Available for sale
US government agencies	$	997	1.15	%	1,517	2.04	%	6,196	2.39	%	-	-		8,710	2.19	%	$	-	-	3,969	2.14	%	3,776	2.68	%	-	-		7,745	2.40	%
SBA securities		-	-		-	-		-	-		4,339	2.48	%	4,339	2.48	%		-	-	-	-		752	2.88	%	3,353	2.77	%	4,105	2.79	%
State and political subdivisions		-	-		3,668	1.64	%	11,730	2.44	%	4,959	2.88	%	20,357	2.40	%		-	-	1,127	2.97	%	4,175	2.95	%	2,907	2.88	%	8,209	2.93	%
Asset-backed securities																		-	-	-	-		1,682	3.19	%	9,137	3.19	%	10,819	3.19	%
Mortgage-backed securities		790	1.30	%	-	-		12,005	1.80	%	32,239	2.04	%	45,034	1.97	%		-	-	4,658	1.94	%	8,922	2.15	%	30,794	2.63	%	44,374	2.46	%
Total	$	1,787	1.21	%	5,185	1.59	%	29,931	2.18	%	41,537	2.23	%	78,440	2.13	%	$	-	-	9,754	2.14	%	19,307	2.55	%	46,191	2.76	%	75,252	2.63	%

	December 31, 2016
	Less than one year				One to five years			Five to ten years			Over ten years			Total
	Amount		Yield		Amount	Yield		Amount	Yield		Amount	Yield		Amount	Yield
Available for sale
US government agencies	$	-	-		997	1.15	%	5,162	2.23	%	-	-		6,159	2.06	%
SBA securities		-	-		-	-		-	-		1,437	1.32	%	1,437	1.32	%
State and political subdivisions		-	-		2,271	1.73	%	12,287	2.35	%	5,916	2.77	%	20,474	2.40	%
Mortgage-backed securities		-	-		-	-		8,527	1.64	%	27,883	1.68	%	36,410	1.67	%
Total	$	-	-		3,268	1.55	%	25,976	2.10	%	35,236	1.85	%	64,480	1.93	%

													December 31, 2018
	Less than one year			One to five years			Five to ten years			Over ten years				Total
(dollars in thousands)	Amount		Yield	Amount	Yield		Amount	Yield		Amount	Yield		Amount	Yield
Available for sale
US government agencies	$	-	-	2,665	2.12	%	6,117	2.77	%	-	-		8,782	2.57	%
SBA securities		-	-	-	-		-	-		3,525	2.72	%	3,525	2.72	%
State and political subdivisions		-	-	819	2.60	%	4,637	3.04	%	2,900	2.88	%	8,356	2.94	%
Asset-backed securities		-	-	-	-		1,862	3.22	%	7,696	3.29	%	9,558	3.27	%
Mortgage-backed securities		-	-	5,094	1.89	%	9,763	2.22	%	29,827	2.70	%	44,684	2.50	%
Total	$	-	-	8,578	2.03	%	22,379	2.62	%	43,948	2.81	%	74,905	2.67	%

The tables below summarize gross unrealized losses on investment securities and the fair market value of the related securities at ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016,~~2018, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position.


	September 30, 2017															June 30, 2019
	Less than 12 months					12 months or longer					Total						Less than 12 months						12 months or longer						Total
		Fair		Unrealized			Fair		Unrealized			Fair		Unrealized			Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
(dollars in thousands)	#	value		losses		#	value		losses		#	value		losses		#	value		losses		#	value		losses		#	value		losses
Available for sale
US government agencies	6	$	5,250	$	40	1	$	740	$	18	7	$	5,990	$	58	1	$	500	$	1	2	$	1,997	$	3	3	$	2,497	$	4
SBA securities	1		2,937		12	1		1,402		6	2		4,339		18	-		-		-	1		649		21	1		649		21
State and political subdivisions	8		3,652		12	6		2,910		48	14		6,562		60	-		-		-	2		979		1	2		979		1
Asset-backed securities																5		7,614		89	1		1,682		2	6		9,296		91
Mortgage-backed securities	25		29,392		230	8		9,839		132	33		39,231		362
FHLMC																-		-		-	9		6,049		59	9		6,049		59
FNMA																1		1,550		1	22		19,632		178	23		21,182		179
GNMA																-		-		-	3		2,975		46	3		2,975		46
Total	40	$	41,231	$	294	16	$	14,891	$	204	56	$	56,122	$	498	7	$	9,664	$	91	40	$	33,963	$	310	47	$	43,627	$	401

	December 31, 2016															December 31, 2018
	Less than 12 months					12 months or longer					Total						Less than 12 months						12 months or longer						Total
		Fair		Unrealized			Fair		Unrealized			Fair		Unrealized			Fair		Unrealized				Fair	Unrealized			Fair		Unrealized
	#	value		losses		#	value		losses		#	value		losses
(dollars in thousands)																#	value		losses		#		value	losses		#	value		losses
Available for sale
US government agencies	5	$	5,144	$	113	-	$	-	$	-	5	$	5,144	$	113	1	$	1,246	$	3	8	$	7,035	$	191	9	$	8,281	$	194
SBA securities	1		1,437		16	-		-		-	1		1,437		16	-		-		-	2		3,525		103	2		3,525		103
State and political subdivisions	32		13,936		292	-		-		-	32		13,936		292	-		-		-	7		2,829		63	7		2,829		63
Asset-backed securities																4		6,707		49	-		-		-	4		6,707		49
Mortgage-backed securities	25		27,292		476	2		3,991		30	27		31,283		506
FHLMC																-		-		-	10		7,402		242	10		7,402		242
FNMA																2		2,689		6	23		22,814		545	25		25,503		551
GNMA																1		1,104		6	3		2,919		126	4		4,023		132
Total	63	$	47,809	$	897	2	$	3,991	$	30	65	$	51,800	$	927	8	$	11,746	$	64	53	$	46,524	$	1,270	61	$	58,270	$	1,334

At ~~September~~June 30, ~~2017,~~2019, the Company had 40seven individual investments with a fair market value of ~~$41.2~~$9.7 million that were in an unrealized loss position for less than 12 months and 1640 individual investments with a fair market value of ~~$14.9~~$34.0 million that were in an unrealized loss position for 12 months or longer. The unrealized losses were primarily attributable to changes in interest rates, rather than deterioration in credit quality. The individual securities are each investment grade securities. The Company considers the length of time and extent to which the fair value of available-for-sale debt securities have been less than cost to conclude that such securities are not other-than-temporarily impaired. The Company also considers other factors such as the financial condition of the issuer including credit ratings and specific events affecting the operations of the issuer, volatility of the security, underlying assets that collateralize the debt security, and other industry and macroeconomic conditions.

As the Company has no intent to sell securities with unrealized losses and it is not more-likely-than-not that the Company will be required to sell these securities before recovery of amortized cost, the Company has concluded that these securities are not impaired on an other-than-temporary basis.

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


(dollars in thousands)	September 30, 2017		December 31, 2016	June 30, 2019		December 31, 2018
Federal Home Loan Bank stock	$	2,479	5,173	$	2,774	3,587
Other investments					134	131
Investment in Trust Preferred securities		403	403		403	403
Other investments		182	166
Total other investments	$	3,064	5,742	$	3,311	4,121

The Company has evaluated the Federal Home Loan Bank (“FHLB”) stock for impairment and determined that the investment in the FHLB stock is not other than temporarily impaired as of ~~September~~June 30, ~~2017~~2019 and that ultimate recoverability of the par value of this investment is probable. All of the FHLB stock is used to collateralize advances with the FHLB.

At September 30, 2017, $9.8 million of securities were pledged as collateral for repurchase agreements from brokers and no securities were pledged to secure client deposits. At December 31, 2016, $21.0 million of securities were pledged as collateral for repurchase agreements from brokers, and approximately $21.1 million of securities were pledged to secure client deposits.

NOTE 3 – Mortgage Loans Held for Sale

Mortgage loans originated and intended for sale in the secondary market are reported as loans held for sale and carried at fair value under the fair value option ~~which was adopted by the Company on April 1, 2016,~~ with changes in fair value recognized in current period earnings. At the date of funding of the mortgage loan held for sale, the funded amount of the loan, the related derivative asset or liability of the associated interest rate lock commitment, less direct loan costs becomes the initial recorded investment in the loan held for sale. Such amount approximates the fair value of the loan. At ~~September~~June 30, ~~2017,~~2019, mortgage loans held for sale totaled ~~$9.1~~$24.5 million compared to ~~$7.8~~$9.2 million at December 31, ~~2016.~~2018. The $15.3 million increase in mortgage loans held for sale during the first six months of 2019 was driven by an increase in volume of mortgage loans originated and sold in the favorable mortgage rate environment.

Mortgage loans held for sale are considered de-recognized, or sold, when the Company surrenders control over the financial assets. Control is considered to have been surrendered when the transferred assets have been isolated from the Company, beyond the reach of the Company and its creditors; the purchaser obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets; and the Company does not maintain effective control over the transferred assets through an agreement that both entitles and obligates the Company to repurchase or redeem the transferred assets before their maturity or the ability to unilaterally cause the holder to return specific assets.

Gains and losses from the sale of mortgage loans are recognized based upon the difference between the sales proceeds and carrying value of the related loans upon sale and are recorded in mortgage banking income in the statement of income. Mortgage banking income also includes the unrealized gains and losses associated with the loans held for sale and the realized and unrealized gains and losses from derivatives.

Mortgage loans sold by the Company to investors and which were believed to have met investor and agency underwriting guidelines at the time of sale may be subject to repurchase or indemnification in the event of specific default by the borrower or subsequent discovery that underwriting standards were not met. The Company may, upon mutual agreement, agree to repurchase the loans or indemnify the investor against future losses on such loans. In such cases, the Company bears any subsequent credit loss on the loans.

The Company establishes mortgage repurchase reserves related to various representations and warranties that reflect management’s estimate of losses based on a combination of factors. The Company establishes a reserve at the time loans are sold and updates the reserve estimate on a quarterly basis during the estimated life of the loan.

NOTE 4 – Loans and Allowance for Loan Losses

The following table summarizes the composition of our loan portfolio. Total gross loans are recorded net of deferred loan fees and costs, which totaled ~~$2.2~~$2.9 million as of ~~September~~June 30, ~~2017~~2019 and ~~$2.0~~$2.8 million as of December 31, ~~2016.~~2018.


	September 30, 2017					December 31, 2016					June 30, 2019					December 31, 2018
(dollars in thousands)	Amount			% of Total		Amount			% of Total		Amount			% of Total		Amount			% of Total
Commercial
Owner occupied RE	$	317,262		23.9	%	$	285,938		24.6	%	$	390,727		21.6	%	$	367,018		21.9	%
Non-owner occupied RE		301,360		22.7	%		239,574		20.6	%		455,346		25.2	%		404,296		24.1	%
Construction		32,332		2.4	%		33,393		2.9	%		85,065		4.7	%		84,411		5.0	%
Business		214,898		16.2	%		202,552		17.4	%		292,564		16.2	%		272,980		16.3	%
Total commercial loans		865,852		65.2	%		761,457		65.5	%		1,223,702		67.7	%		1,128,705		67.3	%
Consumer
Real estate		250,483		18.9	%		215,588		18.5	%		342,100		18.9	%		320,943		19.1	%
Home equity		150,371		11.3	%		137,105		11.8	%		170,861		9.4	%		165,937		9.9	%
Construction		38,766		2.9	%		31,922		2.7	%		46,247		2.6	%		37,925		2.3	%
Other		22,267		1.7	%		17,572		1.5	%		26,445		1.4	%		23,822		1.4	%
Total consumer loans		461,887		34.8	%		402,187		34.5	%		585,653		32.3	%		548,627		32.7	%
Total gross loans, net of deferred fees		1,327,739		100.0	%		1,163,644		100.0	%		1,809,355		100.0	%		1,677,332		100.0	%
Less—allowance for loan losses		(15,579	)				(14,855	)				(16,144	)				(15,762	)
Total loans, net	$	1,312,160				$	1,148,789				$	1,793,211				$	1,661,570

Maturities and Sensitivity of Loans to Changes in Interest Rates

The information in the following tables summarizes the loan maturity distribution by type and related interest rate characteristics based on the contractual maturities of individual loans, including loans which may be subject to renewal at their contractual maturity. Renewal of such loans is subject to review and credit approval, as well as modification of terms upon maturity. Actual repayments of loans may differ from the maturities reflected below, because borrowers have the right to prepay obligations with or without prepayment penalties.


				September 30, 2017			June 30, 2019
			After one						After one
	One year		but within	After five			One year		but within	After five
(dollars in thousands)	or less		five years	years	Total		or less		five years	years	Total
Commercial
Owner occupied RE	$	24,771	165,019	127,472		317,262	$	21,628	161,881	207,218		390,727
Non-owner occupied RE		47,778	155,987	97,595		301,360		50,516	268,178	136,652		455,346
Construction		6,908	6,492	18,932		32,332		23,222	28,283	33,560		85,065
Business		63,391	109,003	42,504		214,898		84,902	144,493	63,169		292,564
Total commercial loans		142,848	436,501	286,503		865,852		180,268	602,835	440,599		1,223,702
Consumer
Real estate		23,864	62,991	163,628		250,483		24,866	77,323	239,911		342,100
Home equity		10,441	25,930	114,000		150,371		10,700	24,353	135,808		170,861
Construction		19,312	635	18,819		38,766		16,216	872	29,159		46,247
Other		5,875	12,082	4,310		22,267		7,617	14,294	4,534		26,445
Total consumer loans		59,492	101,638	300,757		461,887		59,399	116,842	409,412		585,653
Total gross loans, net of deferred fees	$	202,340	538,139	587,260		1,327,739	$	239,667	719,677	850,011		1,809,355
Loans maturing after one year with:
Fixed interest rates					$	851,998					$	1,198,490
Floating interest rates						273,401						371,198

				December 31, 2016						December 31, 2018
			After one						After one
	One year		but within	After five				One year	but within	After five
	or less		five years	years	Total
(dollars in thousands)								or less	five years	years		Total
Commercial
Owner occupied RE	$	26,062	145,419	114,457		285,938	$	20,839	165,436	180,743		367,018
Non-owner occupied RE		34,685	142,261	62,628		239,574		43,000	227,454	133,842		404,296
Construction		5,881	9,558	17,954		33,393		22,941	33,045	28,425		84,411
Business		66,361	99,255	36,936		202,552		80,672	128,911	63,397		272,980
Total commercial loans		132,989	396,493	231,975		761,457		167,452	554,846	406,407		1,128,705
Consumer
Real estate		26,342	49,832	139,414		215,588		29,301	70,467	221,175		320,943
Home equity		7,142	29,041	100,922		137,105		8,867	24,618	132,452		165,937
Construction		14,103	627	17,192		31,922		16,006	1,646	20,273		37,925
Other		5,049	9,305	3,218		17,572		7,681	11,253	4,888		23,822
Total consumer		52,636	88,805	260,746		402,187		61,855	107,984	378,788		548,627
Total gross loan, net of deferred fees	$	185,625	485,298	492,721		1,163,644	$	229,307	662,830	785,195		1,677,332
Loans maturing after one year with:
Fixed interest rates					$	733,892					$	1,100,854
Floating interest rates						244,127						347,171

Portfolio Segment Methodology

Commercial

Commercial loans are assessed for estimated losses by grading each loan using various risk factors identified through periodic reviews. The Company applies historic grade-specific loss factors to each loan class. In the development of statistically derived loan grade loss factors, the Company observes historical losses over 20 quarters for each loan grade. These loss estimates are adjusted as appropriate based on additional analysis of external loss data or other risks identified from current economic conditions and credit quality trends. The allowance also includes an amount for the estimated impairment on nonaccrual commercial loans and commercial loans modified in a troubled debt restructuring (“TDR”), whether on accrual or nonaccrual status.

Consumer

For consumer loans, the Company determines the allowance on a collective basis utilizing historical losses over 20 quarters to represent its best estimate of inherent loss. The Company pools loans, generally by loan class with similar risk characteristics. The allowance also includes an amount for the estimated impairment on nonaccrual consumer loans and consumer loans modified in a TDR, whether on accrual or nonaccrual status.

Credit Quality Indicators

Commercial

We manage a consistent process for assessing commercial loan credit quality by monitoring its loan grading trends and past due statistics. All loans are subject to individual risk assessment. Our risk categories include Pass, Special Mention, Substandard, and Doubtful, each of which is defined by our banking regulatory agencies. Delinquency statistics are also an important indicator of credit quality in the establishment of our allowance for ~~credit~~loan losses.

We categorize our loans into risk categories based on relevant information about the ability of the borrower to service their debt such as current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. A description of the general characteristics of the risk grades is as follows:

●	Pass—These loans range from minimal credit risk to average credit risk; however, still have acceptable credit risk.

●	Special mention—A special mention loan has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or the institution’s credit position at some future date.

●	Substandard—A substandard loan is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified must have a well-defined weakness, or weaknesses, that may jeopardize the liquidation of the debt. A substandard loan is characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.

●	Doubtful—A doubtful loan has all of the weaknesses inherent in one classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of the currently existing facts, conditions and values, highly questionable and improbable.

The tables below provide a breakdown of outstanding commercial loans by risk category.


					September 30, 2017		June 30, 2019
	Owner		Non-owner				Owner		Non-owner
(dollars in thousands)	occupied RE		occupied RE	Construction	Business	Total	occupied RE		occupied RE	Construction	Business	Total
Pass	$	312,878	294,934	32,332	204,694	844,838	$	386,489	447,808	84,998	286,387	1,205,682
Special mention		2,020	2,039	-	4,587	8,646		1,850	4,194	67	1,969	8,080
Substandard		2,364	4,387	-	5,617	12,368		2,388	3,344	-	4,208	9,940
Doubtful		-	-	-	-	-		-	-	-	-	-
	$	317,262	301,360	32,332	214,898	865,852	$	390,727	455,346	85,065	292,564	1,223,702

							December 31, 2018
							Owner		Non-owner
(dollars in thousands)							occupied RE		occupied RE	Construction	Business	Total
Pass							$	363,621	400,266	84,411	266,898	1,115,196
Special mention								296	118	-	2,971	3,385
Substandard								3,101	3,912	-	3,111	10,124
Doubtful								-	-	-	-	-
							$	367,018	404,296	84,411	272,980	1,128,705

December 31, 2016
Owner Non-owner
occupied RE occupied RE Construction Business Total
Pass $ 282,055 234,957 33,393 193,517 743,922
Special mention 1,097 975 - 2,489 4,561
Substandard 2,786 3,642 - 6,546 12,974
Doubtful - - - - -
$ 285,938 239,574 33,393 202,552 761,457

The following tables provide past due information for outstanding commercial loans and include loans on nonaccrual status as well as accruing TDRs.

September 30, 2017
Owner Non-owner
(dollars in thousands) occupied RE occupied RE Construction Business Total
Current $ 317,019 300,720 32,332 213,394 863,465
30-59 days past due - - - 1,381 1,381
60-89 days past due - - - - -
Greater than 90 Days 243 640 - 123 1,006
$ 317,262 301,360 32,332 214,898 865,852

December 31, 2016
Owner Non-owner
occupied RE occupied RE Construction Business Total
Current $ 284,700 238,346 33,393 200,624 757,063
30-59 days past due 981 - - 1,423 2,404
60-89 days past due 257 56 - - 313
Greater than 90 Days - 1,172 - 505 1,677
$ 285,938 239,574 33,393 202,552 761,457

As of September 30, 2017 and December 31, 2016, loans 30 days or more past due represented 0.36% and 0.55% of the Company’s total loan portfolio, respectively. Commercial loans 30 days or more past due were 0.18% and 0.38% of the Company’s total loan portfolio as of September 30, 2017 and December 31, 2016, respectively.


	June 30, 2019
	Owner		Non-owner
(dollars in thousands)	occupied RE		occupied RE	Construction	Business	Total
Current	$	390,538	454,930	85,065	292,284	1,222,817
30-59 days past due		189	206	-	38	433
60-89 days past due		-	210	-	177	387
Greater than 90 Days		-	-	-	65	65
	$	390,727	455,346	85,065	292,564	1,223,702

	December 31, 2018
	Owner		Non-owner
	occupied RE		occupied RE	Construction	Business	Total
Current	$	367,018	404,179	84,411	272,864	1,128,472
30-59 days past due		-	117	-	36	153
60-89 days past due		-	-	-	-	-
Greater than 90 Days		-	-	-	80	80
	$	367,018	404,296	84,411	272,980	1,128,705

Consumer

The Company manages a consistent process for assessing consumer loan credit quality by monitoring its loan grading trends and past due statistics. All loans are subject to individual risk assessment. The Company’s categories include Pass, Special Mention, Substandard, and Doubtful, which are defined above. Delinquency statistics are also an important indicator of credit quality in the establishment of the allowance for loan losses.

The tables below provide a breakdown of outstanding consumer loans by risk category.


					September 30, 2017		June 30, 2019
(dollars in thousands)	Real estate		Home equity	Construction	Other	Total	Real estate		Home equity	Construction	Other	Total
Pass	$	246,962	147,570	38,766	22,172	455,470	$	335,618	167,670	46,247	26,322	575,857
Special mention		719	126	-	7	852		2,818	256	-	99	3,173
Substandard		2,802	2,675	-	88	5,565		3,664	2,935	-	24	6,623
Doubtful		-	-	-	-	-		-	-	-	-	-
Loss		-	-	-	-	-
	$	250,483	150,371	38,766	22,267	461,887	$	342,100	170,861	46,247	26,445	585,653

							December 31, 2018
(dollars in thousands)								Real estate	Home equity	Construction	Other	Total
Pass							$	314,586	162,626	37,925	23,586	538,723
Special mention								1,792	864	-	139	2,795
Substandard								4,565	2,447	-	97	7,109
Doubtful								-	-	-	-	-
							$	320,943	165,937	37,925	23,822	548,627

December 31, 2016
Real estate Home equity Construction Other Total
Pass $ 211,563 134,124 31,922 17,485 395,094
Special mention 1,064 2,109 - 16 3,189
Substandard 2,961 872 - 71 3,904
Doubtful - - - - -
Loss - - - - -
$ 215,588 137,105 31,922 17,572 402,187

The following tables provide past due information for outstanding consumer loans and include loans on nonaccrual status as well as accruing TDRs.


					September 30, 2017		June 30, 2019
(dollars in thousands)	Real estate		Home equity	Construction	Other	Total	Real estate		Home equity	Construction	Other	Total
Current	$	248,907	149,978	38,493	22,175	459,553	$	339,686	169,686	46,247	26,417	582,036
30-59 days past due		132	90	-	92	314		674	604	-	28	1,306
60-89 days past due		1,172	180	273	-	1,625		247	371	-	-	618
Greater than 90 Days		272	123	-	-	395		1,493	200	-	-	1,693
	$	250,483	150,371	38,766	22,267	461,887	$	342,100	170,861	46,247	26,445	585,653

					December 31, 2016		December 31, 2018
	Real estate		Home equity	Construction	Other	Total
(dollars in thousands)							Real estate		Home equity	Construction	Other	Total
Current	$	214,228	136,638	31,922	17,427	400,215	$	317,267	165,727	37,925	23,603	544,522
30-59 days past due		1,041	210	-	126	1,377		2,555	30	-	106	2,691
60-89 days past due		282	-	-	6	288		923	-	-	113	1,036
Greater than 90 Days		37	257	-	13	307		198	180	-	-	378
	$	215,588	137,105	31,922	17,572	402,187	$	320,943	165,937	37,925	23,822	548,627

As of ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016,~~2018, loans 30 days or more past due represented 0.25% and 0.26% of the Company’s total loan portfolio, respectively. Commercial loans 30 days or more past due were 0.05% and 0.01% of the Company’s total loan portfolio as of June 30, 2019 and December 31, 2018, respectively, while consumer loans 30 days or more past due were ~~0.18%~~0.20% and ~~0.17%~~0.25% of total loans as of June 30, 2019 and December 31, 2018, respectively.

Nonperforming assets

The following table shows the nonperforming assets and the related percentage of nonperforming assets to total assets and gross loans. Generally, a loan is placed on nonaccrual status when it becomes 90 days past due as to principal or interest, or when the Company believes, after considering economic and business conditions and collection efforts, that the borrower’s financial condition is such that collection of the contractual principal or interest on the loan is doubtful. A payment of interest on a loan that is classified as nonaccrual is recognized as a reduction in principal when received.

Following is a summary of our nonperforming assets, including nonaccruing TDRs.


(dollars in thousands)	September 30, 2017		December 31, 2016	June 30, 2019			December 31, 2018
Commercial
Owner occupied RE	$	244	276	$	-		-
Non-owner occupied RE		2,049	2,711		372		210
Construction		-	-		-		-
Business		1,116	686		65		81
Consumer
Real estate		1,267	550		1,710		1,980
Home equity		195	256		442		1,006
Construction		-	-		-		-
Other		2	13		-		12
Nonaccruing troubled debt restructurings		730	990		3,220		2,541
Total nonaccrual loans, including nonaccruing TDRs		5,603	5,482		5,809		5,830
Other real estate owned		420	639		-		-
Total nonperforming assets	$	6,023	6,121	$	5,809		5,830
Nonperforming assets as a percentage of:
Total assets		0.39%	0.46%		0.27	%	0.31	%
Gross loans		0.45%	0.53%		0.32	%	0.35	%
Total loans over 90 days past due		1,401	1,984		1,758		458
Loans over 90 days past due and still accruing		-	-		-		-
Accruing troubled debt restructurings	$	6,954	5,675	$	6,935		6,742

Impaired Loans

The table below summarizes key information for impaired loans. The Company’s impaired loans include loans on nonaccrual status and loans modified in a TDR, whether on accrual or nonaccrual status. These impaired loans may have estimated impairment which is included in the allowance for loan losses. The Company’s commercial and consumer impaired loans are evaluated individually to determine the related allowance for loan losses.


				September 30, 2017				June 30, 2019
			Recorded investment					Recorded investment
				Impaired loans					Impaired loans
	Unpaid			with related	Related	Unpaid			with related	Related
	Principal		Impaired	allowance for	allowance for	Principal		Impaired	allowance for	allowance for
(dollars in thousands)	Balance		loans	loan losses	loan losses	Balance		loans	loan losses	loan losses
Commercial
Owner occupied RE	$	2,232	2,177	830	192	$	3,171	3,107	447	75
Non-owner occupied RE		7,854	4,299	3,704	948		2,870	2,507	1,706	532
Construction		-	-	-	-		-	-	-	-
Business		4,488	3,355	2,090	1,140		3,359	2,713	2,118	884
Total commercial		14,574	9,831	6,624	2,280		9,400	8,327	4,271	1,491
Consumer
Real estate		2,382	2,357	2,357	1,304		2,619	2,612	1,776	466
Home equity		203	195	195	133		2,197	1,651	270	71
Construction		-	-	-	-		-	-	-	-
Other		175	174	174	25		154	154	154	17
Total consumer		2,760	2,726	2,726	1,462		4,970	4,417	2,201	554
Total	$	17,334	12,557	9,350	3,742	$	14,370	12,744	6,472	2,045

								December 31, 2018
								Recorded investment
									Impaired loans
						Unpaid			with related	Related
						Principal		Impaired	allowance for	allowance for
(dollars in thousands)						Balance		loans	loan losses	loan losses
Commercial
Owner occupied RE						$	2,827	2,762	451	75
Non-owner occupied RE							3,321	2,807	2,204	558
Construction							-	-	-	-
Business							3,745	2,520	2,005	895
Total commercial							9,893	8,089	4,660	1,528
Consumer
Real estate							2,993	2,892	1,398	456
Home equity							1,935	1,421	-	-
Construction							-	-	-	-
Other							170	170	170	30
Total consumer							5,098	4,483	1,568	486
Total						$	14,991	12,572	6,228	2,014

December 31, 2016
Recorded investment
Impaired loans
Unpaid with related Related
Principal Impaired allowance for allowance for
Balance loans loan losses loan losses
Commercial
Owner occupied RE $ 2,284 2,243 2,224 263
Non-owner occupied RE 7,238 4,031 1,638 457
Construction - - - -
Business 3,699 2,593 1,610 1,154
Total commercial 13,221 8,867 5,472 1,874
Consumer
Real estate 1,853 1,843 1,843 682
Home equity 207 257 - -
Construction - - - -
Other 261 190 177 88
Total consumer 2,321 2,290 2,020 770
Total $ 15,542 11,157 7,492 2,644

The following table provides the average recorded investment in impaired loans and the amount of interest income recognized on impaired loans after impairment by portfolio segment and class.

Three months ended Three months ended
September 30, 2017 September 30, 2016
Average Recognized Average Recognized
recorded interest recorded interest
(dollars in thousands) investment income investment income
Commercial
Owner occupied RE $ 2,182 25 2,000 30
Non-owner occupied RE 4,322 57 5,515 39
Construction - - - -
Business 3,498 58 5,072 71
Total commercial 10,002 140 12,587 140
Consumer
Real estate 2,361 40 1,573 16
Home equity 196 2 207 -
Construction - - - -
Other 176 1 257 2
Total consumer 2,733 43 2,037 18
Total $ 12,735 183 14,624 158


	Nine months ended			Nine months ended			Year ended				Three months ended			Three months ended
	September 30, 2017			September 30, 2016		December 31, 2016					June 30, 2019			June 30, 2018
	Average		Recognized	Average	Recognized	Average	Recognized				Average		Recognized	Average	Recognized
	recorded		interest	recorded	interest	recorded	interest				recorded		interest	recorded	interest
(dollars in thousands)	investment		income	investment	income	investment	income				investment		income	investment	income
Commercial
Owner occupied RE	$	2,198	78	2,009	72	2,263	112				$	3,116	44	2,800	45
Non-owner occupied RE		4,503	154	5,594	124	4,106	200					2,544	41	3,878	77
Construction		-	-	-	-	-	-					-	-	-	-
Business		3,585	165	5,134	199	2,873	135					2,728	37	3,361	57
Total commercial		10,286	397	12,737	395	9,242	447					8,388	122	10,039	179
Consumer
Real estate		2,370	73	1,578	49	1,854	81					2,622	20	2,892	40
Home equity		196	4	257	1	257	2					1,659	21	2,135	24
Construction		-	-	-	-	-	-					-	-	-	-
Other		178	4	208	5	203	6					155	1	165	1
Total consumer		2,744	81	2,043	55	2,314	89					4,436	42	5,192	65
Total	$	13,030	478	14,780	450	11,556	536				$	12,824	164	15,231	244

								Six months ended			Six months ended			Year ended
								June 30, 2019			June 30, 2018			December 31, 2018
								Average		Recognized	Average		Recognized	Average	Recognized
								recorded		interest	recorded		interest	recorded	interest
(dollars in thousands)								investment		income	investment		income	investment	income
Commercial
Owner occupied RE								$	3,123	79		2,804	62	2,784	142
Non-owner occupied RE									2,565	85		3,920	126	2,860	174
Construction									-	-		-	-	-	-
Business									2,700	77		3,380	79	2,883	162
Total commercial									8,388	241		10,104	267	8,527	478
Consumer
Real estate									2,633	45		2,911	81	2,930	151
Home equity									1,670	51		2,172	51	1,453	99
Construction									-	-		-	-	-	-
Other									156	2		167	3	174	5
Total consumer									4,459	98		5,250	135	4,557	255
Total								$	12,847	339		15,354	402	13,084	733

Allowance for Loan Losses

The allowance for loan loss is management’s estimate of credit losses inherent in the loan portfolio. The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

The Company has an established process to determine the adequacy of the allowance for loan losses that assesses the losses inherent in the portfolio. While the Company attributes portions of the allowance to specific portfolio segments, the entire allowance is available to absorb credit losses inherent in the total loan portfolio. The Company’s process involves procedures to appropriately consider the unique risk characteristics of the commercial and consumer loan portfolio segments. For each portfolio segment, impairment is measured individually for each impaired loan. The Company’s allowance levels are influenced by loan volume, loan grade or delinquency status, historic loss experience and other economic conditions.

The following table summarizes the activity related to the allowance for loan losses by commercial and consumer portfolio segments:

Three months ended September 30, 2017
Commercial Consumer
     Owner Non-owner
occupied      occupied           Real Home
(dollars in thousands) RE RE Construction Business Estate equity Construction Other Total
Balance, beginning of period $ 2,964 2,981 350 3,857 3,061 1,608                328 295 15,444
Provision for loan losses (141 ) 634                (122 ) 213 160 (196 ) (47 ) (1 ) 500
Loan charge-offs - - - (388 ) - - - (11 ) (399 )
Loan recoveries - 1 - 31 1 - - 1 34
Net loan charge-offs - 1 - (357 ) 1 - - (10 ) (365 )
Balance, end of period $ 2,823 3,616 228 3,713 3,222 1,412 281 284 15,579
Net charge-offs to average loans (annualized) 0.11%
Allowance for loan losses to gross loans 1.17%
Allowance for loan losses to nonperforming loans 278.05%


													Three months ended September 30, 2016									Three months ended June 30, 2019
		Commercial									Consumer											Commercial									Consumer
		Owner			Non-owner																	Owner			Non-owner
		occupied			occupied						Real		Home									occupied			occupied						Real		Home
(dollars in thousands)			RE		RE		Construction		Business		Estate		equity		Construction		Other		Total			RE			RE		Construction		Business		Estate		equity		Construction	Other		Total
Balance, beginning of period		$	2,797		3,011		350		4,019		2,302		1,296		212		330		14,317			$	2,783		3,886		572		3,796		3,041		1,410		282	281		16,051
Provision for loan losses			98		47		(53	)	337		215		119		(5	)	67		825				135		143		(3	)	(181	)	49		98		36	23		300
Loan charge-offs			-		(25	)	-		(515	)	-		(43	)	-		(100	)	(683	)			(110	)	(13	)	-		-		-		(100	)	-	(14	)	(237	)
Loan recoveries			-		5		-		13		-		-		-		1		19				-		-		-		8		14		1		-	7		30
Net loan charge-offs			-		(20	)	-		(502	)	-		(43	)	-		(99	)	(664	)			(110	)	(13	)	-		8		14		(99	)	-	(7	)	(207	)
Balance, end of period		$	2,895		3,038		297		3,854		2,517		1,372		207		298		14,478			$	2,808		4,016		569		3,623		3,104		1,409		318	297		16,144
Net charge-offs to average loans (annualized)	Net charge-offs to average loans (annualized)																		0.24%		Net charge-offs to average loans (annualized)																	0.05	%
Allowance for loan losses to gross loans	Allowance for loan losses to gross loans																		1.30%		Allowance for loan losses to gross loans																	0.89	%
Allowance for loan losses to nonperforming loans	Allowance for loan losses to nonperforming loans																		258.3%		Allowance for loan losses to nonperforming loans																	277.92	%

																						Three months ended June 30, 2018
																						Commercial									Consumer
													Nine months ended September 30, 2017									Owner			Non-owner
		Commercial									Consumer											occupied			occupied						Real		Home
(dollars in thousands)																						RE			RE		Construction		Business		Estate		equity		Construction	Other		Total
Balance, beginning of period																						$	2,680		3,366		415		3,553		3,391		1,911		256	280		15,852
Provision for loan losses																							19		342		129		280		54		(438	)	26	(12	)	400
Loan charge-offs																							-		(234	)	-		-		-		(77	)	-	-		(311	)
Loan recoveries																							-		107		-		16		1		35		-	-		159
Net loan charge-offs																							-		(127	)	-		16		1		(42	)	-	-		(152	)
Balance, end of period																						$	2,699		3,581		544		3,849		3,446		1,431		282	268		16,100
Net charge-offs to average loans (annualized)																					Net charge-offs to average loans (annualized)																	0.04	%
Allowance for loan losses to gross loans																					Allowance for loan losses to gross loans																	1.05	%
Allowance for loan losses to nonperforming loans																					Allowance for loan losses to nonperforming loans																	208.52	%

																						Six months ended June 30, 2019
																						Commercial									Consumer
		Owner			Non-owner																	Owner			Non-owner
		occupied			occupied						Real		Home									occupied			occupied						Real		Home
(dollars in thousands)		RE			RE		Construction		Business		Estate		equity		Construction		Other		Total			RE			RE		Construction		Business		Estate		equity		Construction	Other		Total
Balance, beginning of period		$	2,843		2,778		295		4,123		2,780		1,475		252		309		14,855			$	2,726		3,811		615		3,616		3,081		1,348		275	290		15,762
Provision for loan losses			(20	)	1,257		(67	)	31		359		(75	)	29		(14	)	1,500				192		217		(46	)	(10	)	(6	)	160		43	50		600
Loan charge-offs			-		(433	)	-		(518	)	-		-		-		(11	)	(962	)			(110	)	(14	)	-		-		-		(100	)	-	(53	)	(277	)
Loan recoveries			-		14		-		77		83		12		-		-		186				-		2		-		17		29		1		-	10		59
Net loan charge-offs			-		(419	)	-		(441	)	83		12		-		(11	)	(776	)			(110	)	(12	)	-		17		29		(99	)	-	(43	)	(218	)
Balance, end of period		$	2,823		3,616		228		3,713		3,222		1,412		281		284		15,579			$	2,808		4,016		569		3,623		3,104		1,409		318	297		16,144
Net charge-offs to average loans (annualized)	Net charge-offs to average loans (annualized)																		0.08%		Net charge-offs to average loans (annualized)																	0.03	%

													Nine months ended September 30, 2016									Six months ended June 30, 2018
		Commercial									Consumer											Commercial									Consumer
		Owner			Non-owner																	Owner			Non-owner
		occupied			occupied						Real		Home									occupied			occupied						Real		Home
(dollars in thousands)		RE			RE		Construction		Business		Estate		equity		Construction		Other		Total
																						RE			RE		Construction		Business		Estate		equity		Construction	Other		Total
Balance, beginning of period		$	2,347		3,187		338		3,800		2,070		1,202		313		372		13,629			$	2,534		3,230		325		3,848		3,495		1,600		210	281		15,523
Provision for loan losses			553		(81	)	2		666		641		236		(106	)	114		2,025				165		478		219		(14	)	25		(64	)	72	19		900
Loan charge-offs			(5	)	(100	)	(43	)	(862	)	(194	)	(66	)	-		(192	)	(1,462	)			-		(234	)	-		(119	)	(77	)	(140	)	-	(34	)	(604	)
Loan recoveries			-		32		-		250		-		-		-		4		286				-		107		-		134		3		35		-	2		281
Net loan charge-offs			(5	)	(68	)	(43	)	(612	)	(194	)	(66	)	-		(188	)	(1,176	)			-		(127	)	-		15		(74	)	(105	)	-	(32	)	(323	)
Balance, end of period		$	2,895		3,038		297		3,854		2,517		1,372		207		298		14,478			$	2,699		3,581		544		3,849		3,446		1,431		282	268		16,100
Net charge-offs to average loans (annualized)	Net charge-offs to average loans (annualized)																		0.15%		Net charge-offs to average loans (annualized)																	0.04	%

The following table disaggregates the allowance for loan losses and recorded investment in loans by impairment methodology.


						September 30, 2017		June 30, 2019
	Allowance for loan losses				Recorded investment in loans			Allowance for loan losses				Recorded investment in loans
(dollars in thousands)	Commercial		Consumer	Total	Commercial	Consumer	Total	Commercial		Consumer	Total	Commercial	Consumer	Total
Individually evaluated	$	2,280	1,462	3,742	9,831	2,726	12,557	$	1,491	554	2,045	8,327	4,417	12,744
Collectively evaluated		8,100	3,737	11,837	856,021	459,161	1,315,182		9,525	4,574	14,099	1,215,375	581,236	1,796,611
Total	$	10,380	5,199	15,579	865,852	461,887	1,327,739	$	11,016	5,128	16,144	1,223,702	585,653	1,809,355

						December 31, 2016							December 31, 2018
	Allowance for loan losses				Recorded investment in loans			Allowance for loan losses				Recorded investment in loans
	Commercial		Consumer	Total	Commercial	Consumer	Total
(dollars in thousands)								Commercial		Consumer	Total	Commercial	Consumer	Total
Individually evaluated	$	1,874	770	2,644	8,867	2,290	11,157	$	1,528	486	2,014	8,089	4,483	12,572
Collectively evaluated		8,165	4,046	12,211	752,590	399,897	1,152,487		9,240	4,508	13,748	1,120,616	544,144	1,664,760
Total	$	10,039	4,816	14,855	761,457	402,187	1,163,644	$	10,768	4,994	15,762	1,128,705	548,627	1,677,332

NOTE 5 – Troubled Debt Restructurings

At ~~September~~June 30, ~~2017,~~2019, the Company had 1925 loans totaling ~~$7.7~~$10.2 million compared to 1726 loans totaling ~~$6.7~~$9.3 million at December 31, ~~2016,~~2018, which were considered as TDRs. The Company considers a loan to be a TDR when the debtor experiences financial difficulties and the Company grants a concession to the debtor that it would not normally consider. Concessions can relate to the contractual interest rate, maturity date, or payment structure of the note. As part of the workout plan for individual loan relationships, the Company may restructure loan terms to assist borrowers facing financial challenges in the current economic environment. To date, the Company has restored ~~four~~three commercial loans previously classified as TDRs to accrual status.

The following table summarizes the concession at the time of modification and the recorded investment in the Company’s TDRs before and after their ~~modification during the nine months ended September 30, 2017 and 2016, respectively.~~modification.


				For the nine months ended September 30, 2017						For the six months ended June 30, 2019
						Pre-		Post-							Pre-		Post-
						modification		modification							modification		modification
	Renewals	Reduced	Converted	Maturity	Total	outstanding		outstanding		Renewals	Reduced	Converted	Maturity	Total	outstanding		outstanding
	deemed a	or deferred	to interest	date	Number	recorded		recorded		deemed a	or deferred	to interest	date	Number	recorded		recorded
(dollars in thousands)	concession	payments	only	extensions	of loans	investment		investment		concession	payments	only	extensions	of loans	investment		investment
Commercial
Non-owner occupied RE	1	-	-	-	1	$	976	$	976
Business	1	1	-	-	2		378		387
Consumer
Home equity										1	-	-	-	1	$	832	$	832
Total loans	2	1	-	-	3	$	1,354	$	1,363	1	-	-	-	1	$	832	$	832

				For thenine months ended September 30, 2016						For the six months ended June 30, 2018
							Pre-		Post-						Pre-		Post-
						modification		modification							modification		modification
	Renewals	Reduced	Converted	Maturity	Total	outstanding		outstanding		Renewals	Reduced	Converted	Maturity	Total	outstanding		outstanding
	deemed a	or deferred	to interest	date	Number	recorded		recorded		deemed a	or deferred	to interest	date	Number	recorded		recorded
(dollars in thousands)	concession	payments	only	extensions	of loans	investment		investment		concession	payments	only	extensions	of loans	investment		investment
Commercial
Owner occupied	1	-	-	-	1	$	18	$	22
Owner occupied RE										1	-	-	-	1	$	506	$	592
Business	1	-	-	-	1		2,381		2,381	4	-	-	-	4		1,207	1,532
Consumer
Real estate	1	-	-	-	1		188		188	2	-	-	-	2		549		669
Other	1	-	-	-	1		26		30
Home equity										-	1	-	-	1		180		180
Total loans	4	-	-	-	4	$	2,613	$	2,621	7	1	-	-	8	$	2,442	$	2,973

As of ~~September~~June 30, ~~2017~~2019 and 2018, there were no loans modified as ~~TDRs~~a TDR for which there was a payment default (60 days past due) within 12 months of the restructuring date. ~~There was one such loan at September 30, 2016 with a recorded investment of $30,000.~~

NOTE 6 – Derivative Financial Instruments

The Company utilizes derivative financial instruments primarily to hedge its exposure to changes in interest rates. All derivative financial instruments are recognized as either assets or liabilities and measured at fair value. The Company accounts for all of its derivatives as free-standing derivatives and does not designate any of these instruments for hedge accounting. Therefore, the gain or loss resulting from the change in the fair value of the derivative is recognized in the Company’s statement of income during the period of change.

The Company enters into commitments to originate residential mortgage loans held for sale, at specified interest rates and within a specified period of time, with clients who have applied for a loan and meet certain credit and underwriting criteria (interest rate lock commitments). These interest rate lock commitments (“IRLCs”) meet the definition of a derivative financial instrument and are reflected in the balance sheet at fair value with changes in fair value recognized in current period earnings. Unrealized gains and losses on the IRLCs are recorded as derivative assets and derivative liabilities, respectively, and are measured based on the value of the underlying mortgage loan, quoted mortgage-backed securities (“MBS”) prices and an estimate of the probability that the mortgage loan will fund within the terms of the interest rate lock commitment, net of estimated commission expenses.

The Company manages the interest rate and price risk associated with its outstanding IRLCs and mortgage loans held for sale by entering into derivative instruments such as forward sales of MBS. Management expects these derivatives will experience changes in fair value opposite to changes in fair value of the IRLCs and mortgage loans held for sale, thereby reducing earnings volatility. The Company takes into account various factors and strategies in determining the portion of the mortgage pipeline (IRLCs and mortgage loans held for sale) it wants to economically hedge.

The following table summarizes the Company’s outstanding financial derivative instruments at ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016.~~2018.


				September 30, 2017			June 30, 2019
				Fair Value						Fair Value
(dollars in thousands)	Notional		Balance Sheet Location	Asset/(Liability)			Notional		Balance Sheet Location	Asset/(Liability)
Mortgage loan interest rate lock commitments	$	29,258	Other assets	$	343		$	64,019	Other assets	$	801
MBS forward sales commitments		18,000	Other assets		46			42,500	Other liabilities		(165	)
Total derivative financial instruments	$	47,258		$	389		$	106,519		$	636

				December 31, 2016			December 31, 2018
				Fair Value						Fair Value
(dollars in thousands)	Notional		Balance Sheet Location	Asset/(Liability)			Notional		Balance Sheet Location	Asset/(Liability)
Mortgage loan interest rate lock commitments	$	17,986	Other assets	$	256		$	20,552	Other assets	$	345
MBS forward sales commitments		14,250	Other assets		(3	)		11,750	Other liabilities		(121	)
Total derivative financial instruments	$	32,236		$	253		$	32,302		$	224

NOTE 7 – Fair Value Accounting

FASB ASC 820, “Fair Value Measurement and Disclosures,” defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. FASB ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

Level 1 – Quoted market price in active markets

Quoted prices in active markets for identical assets or liabilities. Level 1 assets and liabilities include certain debt and equity securities that are traded in an active exchange market.

Level 2 – Significant other observable inputs

Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 assets and liabilities include fixed income securities and mortgage-backed securities that are held in the Company’s available-for-sale portfolio and valued by a third-party pricing service, as well as certain impaired loans.

Level 3 – Significant unobservable inputs
Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. These methodologies may result in a significant portion of the fair value being derived from unobservable data.

~~Following is a description~~The methods of ~~valuation methodologies used for assets recorded at fair value.~~

~~Investment Securities~~
Securities available for sale are valued on a recurring basis at quoted market prices where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable securities. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange or U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level 2 securities include mortgage-backed securities and debentures issued by government sponsored entities, municipal bonds and corporate debt securities. In certain cases where there is limited activity or less transparency around inputs to valuations, securities are classified as Level 3 within the valuation hierarchy. Securities held to maturity are valued at quoted market prices or dealer quotes similar to securities available for sale. The carrying value of Other Investments, such as FHLB stock, approximates fair value based on their redemption provisions.

~~Mortgage Loans Held for Sale~~
Loans held for sale include mortgage loans which are saleable into the secondary mortgage markets and their fair values are estimated using observable quoted market or contracted prices or market price equivalents, which would be used by other market participants. These saleable loans are considered Level 2.

~~Loans~~
The Company does not record loans at fair value on a recurring basis. However, from time to time, a loan may be considered impaired and an allowance for loan losses may be established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures the impairment in accordance with FASB ASC 310, “Receivables.” The fair value of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, liquidation value, and discounted cash flows. Those impaired loans not requiring an allowance represent loans for whichdetermining the fair value of ~~the expected repayments or collateral exceed the recorded investments~~assets and liabilities presented in ~~such loans. In accordance~~this note are consistent with ~~FASB ASC 820, “Fair Value Measurement and Disclosures,” impaired loans where an allowance is established based on the fair value of collateral require classification~~our methodologies disclosed in ~~the fair value hierarchy. When the fair value~~Note 13 of the ~~collateral is based on an observable market price or a current appraised value, the Company considers the impaired loan as nonrecurring Level 2.~~Company’s 2018 Form 10-K. The Company’s ~~current~~ loan ~~and appraisal policies require the Bank to obtain updated appraisals on an “as is” basis at renewal, or in the case of an impaired loan, on an annual basis, either through~~portfolio is initially fair valued using a new external appraisal or an appraisal evaluation. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company considers the impaired loan as nonrecurring Level 3. The fair value of impaired loans may also be estimatedsegmented approach, using the ~~present value of expected future cash flows to be realized on the loan, which is also~~eight categories as disclosed in Note 4 – Loans and Allowance for Loan Losses. Loans are considered a Level 3 valuation. These fair value estimates are subject to fluctuations in assumptions about the amount and timing of expected cash flows as well as the choice of discount rate used in the present value calculation.classification.

~~Other Real Estate Owned (“OREO”)~~
OREO, consisting of properties obtained through foreclosure or in satisfaction of loans, is reported at the lower of cost or fair value, determined on the basis of current appraisals, comparable sales, and other estimates of value obtained principally from independent sources, adjusted for estimated selling costs (Level 2). At the time of foreclosure, any excess of the loan balance over the fair value of the real estate held as collateral is treated as a charge against the allowance for loan losses. Gains or losses on sale and generally any subsequent adjustments to the value are recorded as a component of real estate owned activity. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company considers the OREO as nonrecurring Level 3.

~~Derivative Financial Instruments~~
The Company estimates the fair value of IRLCs based on the value of the underlying mortgage loan, quoted MBS prices and an estimate of the probability that the mortgage loan will fund within the terms of the IRLC, net of commission expenses (Level 2). The Company estimates the fair value of forward sales commitments based on quoted MBS prices (Level 2).

Assets and Liabilities Recorded at Fair Value on a Recurring Basis

The tables below present the recorded amount of assets and liabilities measured at fair value on a recurring basis as of ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016.~~2018.

September 30, 2017
(dollars in thousands) Level 1 Level 2 Level 3 Total
Assets
Securities available for sale
US government agencies $ - 8,710 - 8,710
SBA securities - 4,339 - 4,339
State and political subdivisions - 20,357 - 20,357
Mortgage-backed securities - 45,034 - 45,034
Mortgage loans held for sale - 9,124 - 9,124
Interest rate lock commitments - 343 - 343
MBS forward sales commitments - 46 - 46
Total assets measured at fair value on a recurring basis $ - 87,953 - 87,953

December 31, 2016
(dollars in thousands) Level 1 Level 2 Level 3 Total
Assets
Securities available for sale:
US government agencies $ - 6,159 - 6,159
SBA securities - 1,437 - 1,437
State and political subdivisions - 20,474 - 20,474
Mortgage-backed securities - 36,410 - 36,410
Mortgage loans held for sale - 7,801 - 7,801
Interest rate lock commitments - 256 - 256
Total assets measured at fair value on a recurring basis $ - 72,537 - 72,537

Liabilities
MBS forward sales commitments $ - 3 - 3
Total liabilities measured at fair value on a recurring basis $ - 3 - 3

~~The Company has no liabilities carried at fair value or measured at fair value on a recurring basis as of September 30, 2017.~~


	June 30, 2019
(dollars in thousands)	Level 1		Level 2	Level 3	Total
Assets
Securities available for sale
US government agencies	$	-	7,745	-	7,745
SBA securities		-	4,105	-	4,105
State and political subdivisions		-	8,209	-	8,209
Asset-backed securities		-	10,819	-	10,819
Mortgage-backed securities		-	44,374	-	44,374
Mortgage loans held for sale		-	24,509	-	24,509
Mortgage loan interest rate lock commitments		-	801	-	801
Total assets measured at fair value on a recurring basis	$	-	100,562	-	100,562

Liabilities
MBS forward sales commitments	$	-	165	-	165
Total liabilities measured at fair value on a recurring basis	$	-	165	-	165

	December 31, 2018
(dollars in thousands)		Level 1	Level 2	Level 3	Total
Assets
Securities available for sale:
US government agencies	$	-	8,782	-	8,782
SBA securities		-	3,525	-	3,525
State and political subdivisions		-	8,356	-	8,356
Asset-backed securities		-	9,558	-	9,558
Mortgage-backed securities		-	44,684	-	44,684
Mortgage loans held for sale		-	9,241	-	9,241
Mortgage loan interest rate lock commitments		-	345	-	345
Total assets measured at fair value on a recurring basis	$	-	84,491	-	84,491

Liabilities
MBS forward sales commitments	$	-	121	-	121
Total liabilities measured at fair value on a recurring basis	$	-	121	-	121

Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis

The Company is predominantly an asset based lender with real estate serving as collateral on more than 80% of loans as of September 30, 2017. Loans which are deemed to be impaired are valued net of the allowance for loan losses, and other real estate owned is valued at the lower of cost or net realizable value of the underlying real estate collateral. Such market values are generally obtained using independent appraisals, which the Company considers to be level 2 inputs.
The tables below present the recorded amount of assets and liabilities measured at fair value on a nonrecurring basis as of ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016.~~2018.

As of September 30, 2017
(dollars in thousands) Level 1 Level 2 Level 3 Total
Assets
Impaired loans $ - 2,669 6,146 8,815
Other real estate owned - 307 113 420
Total assets measured at fair value on a nonrecurring basis $ - 2,976 6,259 9,235


				As of December 31, 2016		As of June 30, 2019
	Level 1		Level 2	Level 3	Total
(dollars in thousands)						Level 1		Level 2	Level 3	Total
Assets
Impaired loans	$	-	4,075	4,438	8,513	$	-	3,177	7,522	10,699
Other real estate owned		-	526	113	639
Total assets measured at fair value on a nonrecurring basis	$	-	4,601	4,551	9,152	$	-	3,177	7,522	10,699

						As of December 31, 2018
(dollars in thousands)							Level 1	Level 2	Level 3	Total
Assets
Impaired loans						$	-	2,190	8,368	10,558
Total assets measured at fair value on a nonrecurring basis						$	-	2,190	8,368	10,558

The Company ~~has~~had no liabilities carried at fair value or measured at fair value on a nonrecurring ~~basis as of September 30, 2017 and December 31, 2016.~~basis.

For Level 3 assets and liabilities measured at fair value on a recurring or nonrecurring basis as of September 30, 2017, the significant unobservable inputs used in the fair value measurements were as follows:

	~~Valuation Technique~~	~~Significant Unobservable Inputs~~	~~Range of Inputs~~
~~Impaired loans~~	~~Appraised Value/~~ ~~Discounted Cash Flows~~	~~Discounts to appraisals or cash~~ ~~flows for estimated holding and/or~~ ~~selling costs or age of appraisal~~	~~0-25%~~

~~Other real estate owned~~	~~Appraised Value/~~ ~~Comparable Sales~~	~~Discounts to appraisals for~~ ~~estimated holding or selling costs~~	~~0-25%~~

Fair Value of Financial Instruments

Financial instruments require disclosure of fair value information, whether or not recognized in the consolidated balance sheets, when it is practical to estimate the fair value. A financial instrument is defined as cash, evidence of an ownership interest in an entity or a contractual obligation which requires the exchange of cash. Certain items are specifically excluded from the disclosure requirements, including the Company’s common stock, premises and equipment and other assets and liabilities.

~~The following is a description of valuation methodologies used to estimate fair value for certain other financial instruments.~~

Fair value approximates carrying value for the following financial instruments due to the short-term nature of the instrument: cash and due from banks, federal funds sold, federal funds purchased, and securities sold under agreement to repurchase.

~~Deposits –~~Fair value for demand deposit accounts and interest-bearing accounts with no fixed maturity date is equal to the carrying value. The fair value of certificate of deposit accounts are estimated by discounting cash flows from expected maturities using current interest rates on similar instruments.

~~FHLB Advances and Other Borrowings –~~~~Fair value for FHLB advances and other borrowings are estimated by discounting cash flows from expected maturities using current interest rates on similar instruments.~~

~~Junior subordinated debentures~~ ~~– Fair value for junior subordinated debentures are estimated by discounting cash flows from expected maturities using current interest rates on similar instruments.~~

The Company has used management’s best estimate of fair value based on the above assumptions. Thus, the fair values presented may not be the amounts that could be realized in an immediate sale or settlement of the instrument. In addition, any income taxes or other expenses, which would be incurred in an actual sale or settlement, are not taken into consideration in the fair value presented.

The estimated fair values of the Company’s financial instruments at ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016~~2018 are as follows:


					September 30, 2017		June 30, 2019
	Carrying		Fair				Carrying		Fair
(dollars in thousands)	Amount		Value	Level 1	Level 2	Level 3	Amount		Value	Level 1	Level 2	Level 3
Financial Assets:
Other investments, at cost	$	3,064	3,064	-	-	3,064	$	3,311	3,311	-	-	3,311
Loans, net		1,312,160	1,315,125	-	2,669	1,312,456
Loans¹								1,780,467	1,751,792	-	-	1,751,792
Financial Liabilities:
Deposits		1,342,577	1,246,252	-	1,246,252	-		1,854,008	1,761,071	-	1,761,071	-
FHLB and other borrowings		39,200	40,452	-	40,452	-		25,000	26,050	-	26,050	-
Junior subordinated debentures		13,403	12,595	-	12,595	-		13,403	14,083	-	14,083	-

					December 31, 2016		December 31, 2018
	Carrying		Fair					Carrying	Fair
	Amount		Value	Level 1	Level 2	Level 3
(dollars in thousands)								Amount	Value	Level 1	Level 2	Level 3
Financial Assets:
Other investments, at cost	$	5,742	5,742	-	-	5,742	$	4,121	4,121	-	-	4,121
Loans, net		1,148,789	1,149,527	-	4,075	1,145,452
Loans¹								1,648,998	1,618,618	-	-	1,618,618
Financial Liabilities:
Deposits		1,091,151	1,004,923	-	1,004,923	-		1,648,136	1,515,123	-	1,515,123	-
FHLB and other borrowings		115,200	115,825	-	115,825	-		50,000	50,147	-	50,147	-
Junior subordinated debentures		13,403	12,026	-	12,026	-		13,403	14,807	-	14,807	-

¹	Carrying amount is net of the allowance for loan losses and previously presented impaired loans.

NOTE 8 – Leases

Effective January 1, 2019, the Company adopted ASU 2016-02, “Leases (Topic 842)”. As of June 30, 2019, we lease five of our offices under various operating lease agreements. The lease agreements have maturity dates ranging from February 2022 to August 2028, some of which include options for multiple five-year extensions. The weighted average remaining life of the lease term for these leases was 7.64 years as of June 30, 2019.

The discount rate used in determining the lease liability for each individual lease was the FHLB fixed advance rate which corresponded with the remaining lease term as of January 1, 2019 for leases that existed at adoption and as of the lease commencement date for leases subsequently entered in to. The weighted average discount rate for leases was 3.14% as of June 30, 2019.

The total operating lease costs were $520,000 and $1.0 million for the three and six months ended June 30, 2019, respectively. The right-of-use asset, included in property and equipment, and lease liabilities, included in other liabilities, were $14.6 million and $15.1 million as of June 30, 2019, respectively. The right-of-use asset and lease liability are recognized at lease commencement by calculating the present value of lease payments over the lease term.

Maturities of lease liabilities as of June 30, 2019 were as follows:



	Operating
(dollars in thousands)	Leases
2019	$	916
2020		1,862
2021		1,907
2022		1,151
2023		1,020
Thereafter		12,331
Total undiscounted lease payments		19,187
Discount effect of cash flows		4,054
Total lease liability	$	15,133

NOTE 89 – Earnings Per Common Share

The following schedule reconciles the numerators and denominators of the basic and diluted earnings per share computations for the three and ~~nine months~~six month periods ended ~~September~~June 30, ~~2017~~2019 and ~~2016.~~2018. Dilutive common shares arise from the potentially dilutive effect of the Company’s stock options that were outstanding at ~~September~~June 30, ~~2017.~~2019. The assumed conversion of stock options can create a difference between basic and dilutive net income per common share. At ~~September~~June 30, ~~2017~~2019 and ~~2016,~~2018, there were ~~109,450~~262,831 and ~~108,457~~166,172 options, respectively, that were not considered in computing diluted earnings per common share because they were anti-dilutive.


		Three months ended		Nine months ended		Three months ended			Six months ended
	September 30,			September 30,		June 30,			June 30,
(dollars in thousands, except share data)	2017		2016	2017	2016		2019	2018	2019	2018
Numerator:
Net income available to common shareholders	$	4,250	3,433	10,965	9,745	$	7,240	5,510	13,249	10,724
Denominator:
Weighted-average common shares outstanding – basic		7,281,594	6,322,073	6,905,017	6,299,009		7,495,508	7,370,709	7,477,525	7,353,867
Common stock equivalents		386,882	418,678	386,147	403,466		260,313	380,437	271,354	385,215
Weighted-average common shares outstanding – diluted		7,668,476	6,740,751	7,291,164	6,702,475		7,755,821	7,751,146	7,748,879	7,739,082
Earnings per common share:
Basic	$	0.58	0.54	1.59	1.55	$	0.97	0.75	1.77	1.46
Diluted	$	0.55	0.51	1.50	1.45	$	0.93	0.71	1.71	1.39

NOTE 910 – Reportable Segments

The Company’s reportable segments represent the distinct product lines the Company offers and are viewed separately for strategic planning purposes by management. The three segments include Commercial and Retail Banking, Mortgage Banking, and Corporate. The following schedule presents financial information for each reportable segment.


								Three months ended										Three months ended				Three months ended								Three months ended
								September 30, 2017										September 30, 2016				June 30, 2019								June 30, 2018
	Commercial											Commercial										Commercial								Commercial
	and Retail			Mortgage				Elimin-		Consol-		and Retail		Mortgage				Elimin-		Consol-		and Retail		Mortgage			Elimin-		Consol-	and Retail		Mortgage			Elimin-		Consol-
(dollars in thousands)	Banking			Banking		Corporate		ations		idated		Banking		Banking		Corporate		ations		idated		Banking		Banking	Corporate		ations		idated	Banking		Banking	Corporate		ation		idated
Interest income	$	15,868		87		2		(2	)	15,955		12,824		87		1		-		12,912		$	22,933	155	3		(3	)	23,088	$	18,437	98	2		(2	)	18,535
Interest expense		2,529		-		119		(2	)	2,646		1,932		-		100		-		2,032			6,391	-	161		(3	)	6,549		3,762	-	163		(2	)	3,923
Net interest income (loss)		13,339		87		(117	)	-		13,309		10,892		87		(99	)	-		10,880			16,542	155	(158	)	-		16,539		14,675	98	(161	)	-		14,612
Provision for loan losses		500		-		-		-		500		825		-		-		-		825			300	-	-		-		300		400	-	-		-		400
Noninterest income		1,139		1,403		-		-		2,542		1,014		2,003		-		-		3,017			1,260	2,830	-		-		4,090		1,142	1,629	-		-		2,771
Noninterest expense		7,776		970		60		-		8,806		6,484		1,256		60		-		7,800			9,609	1,699	60		-		11,368		8,754	1,165	60		-		9,979
Net income (loss) before taxes		6,202		520		(177	)	-		6,545		4,597		834		(159	)	-		5,272			7,893	1,286	(218	)	-		8,961		6,663	562	(221	)	-		7,004
Income tax (provision) benefit		(2,165	)	(192	)	62		-		(2,295	)	(1,596	)	(299	)	56		-		(1,839	)
Income tax provision (benefit)																							1,498	270	(47	)	-		1,721		1,422	118	(46	)	-		1,494
Net income (loss)	$	4,037		328		(115	)	-		4,250		3,001		535		(103	)	-		3,433		$	6,395	1,016	(171	)	-		7,240	$	5,241	444	(175	)	-		5,510
Total assets	$	1,548,771		8,476		160,905		(160,468	)	1,557,684		1,277,213		9,678		119,431		(116,576	)	1,289,746		$	2,103,085	12,497	203,335		(202,873	)	2,116,044	$	1,777,952	9,404	174,331		(173,903)		1,787,784

	Nine months ended											Nine months ended										Six months ended								Six months ended
	September 30, 2017											September 30, 2016										June 30, 2019								June 30, 2018
	Commercial											Commercial										Commercial								Commercial
	and Retail			Mortgage				Elimin-		Consol-		and Retail		Mortgage				Elimin-		Consol-		and Retail		Mortgage			Elimin-		Consol-	and Retail		Mortgage			Elimin-		Consol-
(dollars in thousands)	Banking			Banking		Corporate		ations		idated		Banking		Banking		Corporate		ations		idated		Banking		Banking	Corporate		ations		idated	Banking		Banking	Corporate		ations		idated
Interest income	$	44,612		233		9		(9	)	44,845		37,501		243		1		(1	)	37,744		$	44,453	247	6		(6	)	44,700	$	35,515	198	4		(4	)	35,713
Interest expense		7,193		-		393		(9	)	7,577		5,750		-		295		(1	)	6,044			12,023	-	326		(6	)	12,343		6,782	-	282		(4	)	7,060
Net interest income (loss)		37,419		233		(384	)	-		37,268		31,751		243		(294	)	-		31,700			32,430	247	(320	)	-		32,357		28,733	198	(278	)	-		28,653
Provision for loan losses		1,500		-		-		-		1,500		2,025		-		-		-		2,025			600	-	-		-		600		900	-	-		-		900
Noninterest income		3,093		4,063		-		-		7,156		3,036		5,685		-		-		8,721			2,397	4,687	-		-		7,084		2,235	2,957	-		-		5,192
Noninterest expense		22,890		2,853		186		-		25,929		19,516		3,471		183		-		23,170			19,075	2,821	120		-		22,016		16,935	2,129	120		-		19,184
Net income before taxes		16,122		1,443		(570	)	-		16,995		13,246		2,457		(477	)	-		15,226			15,152	2,113	(440	)	-		16,825		13,133	1,026	(398	)	-		13,761
Income tax (provision) benefit		(5,695	)	(534	)	199		-		(6,030	)	(4,686	)	(909	)	114		-		(5,481	)
Income tax provision (benefit)																							3,225	444	(93	)	-		3,576		2,906	215	(84	)	-		3,037
Net income (loss)	$	10,427		909		(371	)	-		10,965		8,560		1,548		(363	)	-		9,745		$	11,927	1,669	(347	)	-		13,249	$	10,227	811	(314	)	-		10,724
Total assets	$	1,548,771		8,476		160,905		(160,468	)	1,557,684		1,277,213		9,678		119,431		(116,576	)	1,289,746		$	2,103,085	12,497	203,335		(202,873	)	2,116,044	$	1,777,952	9,404	174,331		(173,903)		1,787,784

Commercial and retail banking.The Company’s primary business is to provide traditional deposit and lending products and services to its commercial and retail banking clients.

Mortgage banking.The mortgage banking segment provides mortgage loan origination services for loans that will be sold in the secondary market to investors.

Corporate.~~Corporate.~~Corporate is comprised primarily of compensation and benefits for certain members of management and interest on parent company debt.

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following discussion reviews our results of operations for the ~~three-~~three and ~~nine-month~~six month periods ended ~~September~~June 30, ~~2017~~2019 as compared to the ~~three-~~three and ~~nine-month~~six month periods ended ~~September~~June 30, ~~2016~~2018 and assesses our financial condition as of ~~September~~June 30, ~~2017~~2019 as compared to December 31, ~~2016.~~2018. You should read the following discussion and analysis in conjunction with the accompanying consolidated financial statements and the related notes and the consolidated financial statements and the related notes for the year ended December 31, ~~2016~~2018 included in our Annual Report on Form 10-K for that period. Results for the ~~three-~~three and ~~nine-month~~six month periods ended ~~September~~June 30, ~~2017~~2019 are not necessarily indicative of the results for the year ending December 31, ~~2017~~2019 or any future period.

CCautionary Warning Regarding forward-looking statements~~AUTIONARY~~W~~ARNING~~R~~EGARDING FORWARD~~-~~LOOKING STATEMENTS~~

This report, including information included or incorporated by reference in this report, contains statements which constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of ~~1934.~~1934 (the “Exchange Act”). Forward-looking statements may relate to our financial condition, results of operations, plans, objectives, or future performance. These statements are based on many assumptions and estimates and are not guarantees of future performance. Our actual results may differ materially from those anticipated in any forward-looking statements, as they will depend on many factors about which we are unsure, including many factors which are beyond our control. The words “may,” “would,” “could,” “should,” “will,” “expect,” “anticipate,” “predict,” “project,” “potential,” “believe,” “continue,” “assume,” “intend,” “plan,” and “estimate,” as well as similar expressions, are meant to identify such forward-looking statements. Potential risks and uncertainties that could cause our actual results to differ from those anticipated in any forward-looking statements include, but are not limited to, those described under Item ~~1A-~~1A. Risk Factors of our Annual Report on Form 10-K for the year ended December 31, ~~2016,~~2018, as well as the following:

●	Restrictions or conditions imposed by our regulators on our operations;
●	Increases in competitive pressure in the banking and financial services industries;
●	Our ability to identify and retain individuals with experience and relationships in the markets in which we intend to expand, including our recently announced Raleigh, North Carolina and Atlanta, Georgia markets;
●	The time and costs of evaluating new markets, hiring or retaining experienced local management, and opening new offices and the time lags between these activities and the generation of sufficient assets and deposits to support the costs of the expansion;
●	Changes in access to funding or increased regulatory requirements with regard to funding;
●	Changes in deposit flows;
●	Credit losses as a result of declining real estate values, increasing interest rates, increasing unemployment, changes in payment behavior or other factors;
●	Credit losses due to loan concentration;
●	Changes in the amount of our loan portfolio collateralized by real estate and weaknesses in the real estate market;
●	Our ability to successfully execute our business strategy;
●	Our ability to attract and retain key personnel;
●	The success and costs of our expansion into the Greensboro, North Carolina, Raleigh, North Carolina and Atlanta, Georgia markets;
●	Changes in the interest rate environment which could reduce anticipated or actual margins;
●	Changes in political conditions or the legislative or regulatory environment, including governmental initiatives affecting the financial services industry;
●	Changes in economic conditions resulting in, among other things, a deterioration in credit quality;
●	Changes occurring in business conditions and inflation;
●	~~Cybersecurity breaches,~~Increased cybersecurity risk, including potential business disruptions or financial losses;
●	Changes in technology;
●	The adequacy of the level of our allowance for loan losses and the amount of loan loss provisions required in future periods;

●	Examinations by our regulatory authorities, including the possibility that the regulatory authorities may, among other things, require us to increase our allowance for loan losses or write-down assets;
●	Changes in monetary and tax policies;
●	The rate of delinquencies and amounts of loans charged-off;
●	The rate of loan growth in recent years and the lack of seasoning of a portion of our loan portfolio;
●	Our ability to maintain appropriate levels of capital and to comply with our capital ratio requirements;
●	Adverse changes in asset quality and resulting credit risk-related losses and expenses;
●	Changes in accounting policies and practices; and
●	Other risks and uncertainties detailed in Part I,. Item 1A of our Annual Report on Form 10-K for the year ended December 31, ~~2016,~~2018, in Part II, Item 1A of this Quarterly Report on Form 10-Q, and from time to time in our other filings with the ~~Securities and Exchange Commission (the “SEC”).~~ SEC.

If any of these risks or uncertainties materialize, or if any of the assumptions underlying such forward-looking statements proves to be incorrect, our results could differ materially from those expressed in, implied or projected by, such forward-looking statements. For information with respect to factors that could cause actual results to differ from the expectations stated in the forward-looking statements, see “Risk Factors” under Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, ~~2016~~2018 and “Risk Factors” under Part II, Item 1A of this Quarterly Report on Form 10-Q. We urge investors to consider all of these factors carefully in evaluating the forward-looking statements contained in this Quarterly Report on Form 10-Q. We make these forward-looking statements as of the date of this document and we do not intend, and assume no obligation, to update the forward-looking statements or to update the reasons why actual results could differ from those expressed in, or implied or projected by, the forward-looking statements.

OVERVIEW

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

At ~~September~~June 30, ~~2017,~~2019, we had total assets of ~~$1.6~~$2.12 billion, ~~a 16.2%~~an 11.3% increase from total assets of ~~$1.3~~$1.90 billion at December 31, ~~2016.~~2018. The largest components of our total assets are ~~net~~ loans, cash and cash equivalents and securities which were ~~$1.3~~$1.81 billion, $116.8 million and ~~$81.5~~$78.6 million, respectively, at ~~September~~June 30, ~~2017.~~2019. Comparatively, our ~~net~~ loans, cash and cash equivalents and securities totaled ~~$1.2~~$1.68 billion, $72.9 million and ~~$70.2~~$79.0 million, respectively, at December 31, ~~2016.~~2018. Our liabilities and shareholders’ equity at ~~September~~June 30, ~~2017~~2019 totaled ~~$1.4~~$1.93 billion and ~~$147.4~~$189.9 million, respectively, compared to liabilities of ~~$1.2~~$1.73 billion and shareholders’ equity of ~~$109.9~~$173.9 million at December 31, ~~2016.~~2018. The principal component of our liabilities is deposits which were ~~$1.3~~$1.85 billion and ~~$1.1~~$1.65 billion at ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016,~~2018, respectively.

During the second quarter of 2017, we issued a total of 805,000 shares of our common stock at $32.75 per share in a public offering. Proceeds from the offering were used to improve our capital structure, including to repay our former $10 million holding company line of credit, to fund future organic growth, and for working capital and other general corporate purposes.

Like most community banks, we derive the majority of our income from interest received on our loans and investments. Our primary source of funds for making these loans and investments is our deposits, on which we pay interest. Consequently, one of the key measures of our success is our amount of net interest income, or the difference between the income on our interest-earning assets, such as loans and investments, and the expense on our interest-bearing liabilities, such as deposits and borrowings. Another key measure is the spread between the yield we earn on these interest-earning assets and the rate we pay on our interest-bearing liabilities, which is called our net interest spread. In addition to earning interest on our loans and investments, we earn income through fees and other charges to our clients.

Our net income to common shareholders was ~~$4.3~~$7.2 million and ~~$3.4~~$5.5 million for the three months ended ~~September~~June 30, ~~2017~~2019 and ~~2016,~~2018, respectively, an increase of ~~$817 thousand,~~$1.7 million, or ~~23.8%~~31.4%. Diluted earnings per share (“EPS”) was ~~$0.55~~$0.93 for the ~~third~~second quarter of ~~2017~~2019 as compared to ~~$0.51~~$0.71 for the same period in ~~2016.~~2018. The increase in net income resulted primarily from increases in net interest income and noninterest income, which were partially offset by an increase in noninterest expense.

Our net income to common shareholders was $13.2 million and $10.7 million for the six months ended June 30, 2019 and 2018, respectively, an increase of $2.5 million, or 23.5%. Diluted EPS was $1.71 for the six months ended June 30, 2019 as compared to $1.39 for the same period in 2018. The increase in net income resulted primarily from an increase in net interest income and noninterest income, which was partially offset by ~~a decrease in noninterest income and~~ an increase in noninterest expense.

Our net income to common shareholders was $11.0 million and $9.7 million for the nine months ended September 30, 2017 and 2016, respectively, an increase of $1.2 million, or 12.5%. Diluted EPS was $1.50 for the nine months ended September 30, 2017 as compared to $1.45 for the same period in 2016. The increase in net income resulted primarily from an increase in net interest income, partially offset by a decrease in noninterest income and an increase in noninterest expense.

Economic conditions, competition, and the monetary and fiscal policies of the Federal government significantly affect most financial institutions, including the Bank. Lending and deposit activities and fee income generation are influenced by levels of business spending and investment, consumer income, consumer spending and savings, capital market activities, and competition among financial institutions, as well as customer preferences, interest rate conditions and prevailing market rates on competing products in our market areas.

RESULTS OF OPERATIONS

Net Interest Income and Margin
Our level of net interest income is determined by the level of earning assets and the management of our net interest margin. Our net interest income was ~~$13.3~~$16.5 million for the ~~three-month~~three month period ended ~~September~~June 30, ~~2017,~~2019, a ~~22.3%~~13.2% increase over net interest income of ~~$10.9~~$14.6 million for the same period in ~~2016.~~2018. In ~~comparison,~~addition, our average earning assets increased ~~22.8%~~15.3%, or ~~$274.5~~$256.6 million, during the ~~third~~second quarter of ~~2017~~2019 compared to the ~~third~~second quarter of ~~2016,~~2018, while our average interest-bearing liabilities increased by ~~$188.6~~$191.2 million, during the same period. Our net interest income was $37.3 million for the nine-month period ended September 30, 2017, a 17.6% increase over net interest income of $31.7 million for the same period in 2016. In comparison, our average earning assets increased 20.6%, or ~~$240.2 million, during the first nine months of 2017 compared to the first nine months of 2016, while our average interest-bearing liabilities increased by $149.8 million~~15.0%, during the same period. The increase in average earning assets iswas primarily related to an increase in average loans, ~~and~~partially offset by a decrease in average federal funds sold, while the increase in average interest-bearing liabilities iswas primarily a result of an increase in average interest-bearing ~~deposits, partially offset by a decrease in our FHLB advances and other borrowings.~~deposits.

We have included a number of tables to assist in our description of various measures of our financial performance. For example, the “Average Balances, Income and Expenses, Yields and Rates” table reflects the average balance of each category of our assets and liabilities as well as the yield we earned or the rate we paid with respect to each category during the ~~three-~~three and ~~nine-~~six month periods ended ~~September~~June 30, ~~2017~~2019 and ~~2016.~~2018. A review of this table shows that our loans typically provide higher interest yields than do other types of interest-earning assets, which is why we direct a substantial percentage of our earning assets into our loan portfolio. Similarly, the “Rate/Volume Analysis” table demonstrates the effect of changing interest rates and changing volume of assets and liabilities on our financial condition during the periods shown. We also track the sensitivity of our various categories of assets and liabilities to changes in interest rates, and we have included tables to illustrate our interest rate sensitivity with respect to interest-earning accounts and interest-bearing accounts.

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

Average Balances, Income and Expenses, Yields and Rates
Average Balances, Income andExpenses, Yields and Rates											Average Balances, Income andExpenses, Yields and Rates

	For the Three Months Ended September 30,											For the Three Months Ended June 30,
					2017					2016		2019						2018
	Average		Income/		Yield/	Average		Income/		Yield/		Average		Income/		Yield/		Average		Income/		Yield/
(dollars in thousands)	Balance		Expense		Rate⁽¹⁾	Balance		Expense		Rate⁽¹⁾		Balance		Expense		Rate⁽¹⁾		Balance		Expense		Rate⁽¹⁾
Interest-earning assets
Federal funds sold	$	69,907	$	230	1.31%	$	22,611	$	31	0.55%		$	71,905	$	451	2.52	%	$	113,238	$	514	1.82	%
Investment securities, taxable		63,258		327	2.05%		60,219		267	1.76%			74,172		501	2.71	%		62,780		390	2.49	%
Investment securities, nontaxable⁽²⁾		20,222		187	3.67%		21,095		206	3.89%			5,288		49	3.74	%		5,661		52	3.68	%
Loans⁽³⁾		1,322,193		15,282	4.59%		1,097,201		12,486	4.53%			1,786,532		22,098	4.96	%		1,499,625		17,591	4.70	%
Total interest-earning assets		1,475,580		16,026	4.31%		1,201,126		12,990	4.30%			1,937,897		23,099	4.78	%		1,681,304		18,547	4.42	%
Noninterest-earning assets		74,295					60,801						94,673						75,851
Total assets	$	1,549,875				$	1,261,927					$	2,032,570					$	1,757,155


Interest-bearing liabilities
NOW accounts	$	214,929		98	0.18%	$	205,795		78	0.15%		$	199,118		140	0.28	%	$	235,235		102	0.17	%
Savings & money market		518,918		1,098	0.84%		326,722		329	0.40%			849,570		3,879	1.83	%		671,065		2,099	1.25	%
Time deposits		326,732		888	1.08%		267,609		550	0.82%			381,593		2,156	2.27	%		329,325		1,323	1.61	%
Total interest-bearing deposits		1,060,579		2,084	0.78%		800,126		957	0.48%			1,430,281		6,175	1.73	%		1,235,625		3,524	1.14	%
FHLB advances and other borrowings		50,418		446	3.51%		122,308		980	3.19%			25,136		217	3.46	%		28,600		239	3.35	%
Junior subordinated debentures		13,403		116	3.43%		13,403		95	2.82%			13,403		157	4.70	%		13,403		160	4.79	%
Total interest-bearing liabilities		1,124,400		2,646	0.93%		935,837		2,032	0.86%			1,468,820		6,549	1.79	%		1,277,628		3,923	1.23	%
Noninterest-bearing liabilities		280,181					221,797						379,023						321,952
Shareholders’ equity		145,294					104,293						184,727						157,575
Total liabilities and shareholders’ equity	$	1,549,875				$	1,261,927					$	2,032,570					$	1,757,155
Net interest spread					3.38%					3.44%						2.99	%					3.19	%
Net interest income (tax equivalent) / margin			$	13,380	3.60%			$	10,958	3.63%				$	16,550	3.43	%			$	14,624	3.49	%
Less: tax-equivalent adjustment⁽²⁾				71					78						11						12
Net interest income			$	13,309				$	10,880					$	16,539					$	14,612

	(1)		Annualized for the three month period.
	(2)		The tax-equivalent adjustment to net interest income adjusts the yield for assets earning tax-exempt income to a comparable yield on a taxable basis.
	(3)		Includes mortgage loans held for sale.

Our net interest margin, on a tax-equivalent basis, was ~~3.60%~~3.43% for the three months ended ~~September~~June 30, ~~2017~~2019 compared to ~~3.63%~~3.49% for the ~~third~~second quarter of ~~2016.~~2018. The ~~three~~six basis point ~~decline~~decrease in net interest margin was ~~primarily~~ driven by the increase in rate on our interest-bearing liabilities, partially offset by the increased rate on our ~~interest-bearing deposits~~interest-earning assets as compared to the prior ~~year.~~year period. Our average interest-earning assets grew by ~~$274.5~~$256.6 million during the ~~third~~second quarter of ~~2017~~2019 as compared to the same period in ~~2016, and~~2018, while the average yield on these assets ~~slightly~~ increased ~~as well. However,~~by 36 basis points. In addition, our average interest-bearing liabilities grew by ~~$188.6~~$191.2 million during the ~~2017~~2019 period ~~as compared to the same period in 2016,~~ while the rate on these liabilities increased ~~seven~~56 basis points to ~~0.93%~~1.79% for the three months ended ~~September~~June 30, ~~2017.~~2019.

The ~~$274.5 million~~ increase in average interest-earning assets for the three months ended ~~September~~June 30, ~~2017,~~2019 as compared to the same ~~quarter~~period in ~~2016,~~2018 related primarily ~~related~~ to a ~~$225.0~~$286.9 million increase in our average loan balances, partially offset by a $30.3 million decrease in our average Federal funds sold and ~~a $47.3 million increase in federal funds sold.~~investment balances. The ~~slight~~36 basis point increase in yield on these assets was driven by a 26 basis point increase in our loan yield due to loans being originated or renewed at market rates which are higher than those in the past.

In addition, the increase in our average loan balances with higher yields on new loans originated and renewed during the quarter than when compared to the past. The increase in yield was partially offset due to the increase in federal funds sold. The increase of federal funds sold is a result of our efforts to improve our liquidity position for future cash needs.

~~In addition, our average~~ interest-bearing liabilities increased by $188.6 million during the third quarter of 2017 as compared to the third quarter of 2016, while the cost of our interest-bearing liabilities increased by seven basis points during the same period. The increased rate during the 2017 period resulted primarily from a ~~$260.5~~$194.7 million increase in our interest-bearing deposits at an average rate of ~~0.78%~~1.73%, a 3059 basis point increase from the ~~third~~average rate in the second quarter of ~~2016. In addition,~~2018. The increase in the cost of our ~~other interest-bearing liabilities,~~deposits is primarily the ~~majority~~result of ~~which are at variable rates tied to Libor, increased in relation to current~~continued competition for deposits within our market ~~rates and trends.~~areas.

Our net interest spread was ~~3.38%~~2.99% for the three months ended ~~September~~June 30, ~~2017~~2019 compared to ~~3.44%~~3.19% for the same period in ~~2016.~~2018. The net interest spread is the difference between the yield we earn on our interest-earning assets and the rate we pay on our interest-bearing liabilities. The ~~one~~36 basis point increase in yield on our interest-earning assets and the ~~seven~~56 basis point increase in rate on our interest-bearing liabilities, resulted in a ~~six~~20 basis point decrease in our net interest spread for the ~~2017~~2019 period. We anticipate continued pressure on our net interest spread and net interest margin in future periods based on the competitive rate environment around our deposits and a potential cut in rates by the Federal Reserve.


	For the Nine Months Ended September 30,										For the Six Months Ended June 30,
					2017					2016	2019						2018
	Average		Income/		Yield/	Average		Income/		Yield/	Average		Income/		Yield/		Average		Income/		Yield/
(dollars in thousands)	Balance		Expense		Rate(1)	Balance		Expense		Rate(1)	Balance		Expense		Rate⁽¹⁾		Balance		Expense		Rate⁽¹⁾
Interest-earning assets
Federal funds sold	$	65,026	$	548	1.13%	$	27,746	$	122	0.59%	$	51,395	$	625	2.45	%	$	87,632	$	761	1.75	%
Investment securities, taxable		55,545		850	2.05%		64,502		949	1.97%		73,032		1,009	2.79	%		60,413		711	2.37	%
Investment securities, nontaxable (2)		19,984		577	3.86%		20,745		634	4.08%		5,356		101	3.81	%		6,354		113	3.59	%
Loans(3)		1,265,408		43,089	4.55%		1,052,804		36,280	4.60%		1,751,246		42,988	4.95	%		1,472,137		34,154	4.68	%
Total interest-earning assets		1,405,963		45,064	4.29%		1,165,797		37,985	4.35%		1,881,029		44,723	4.79	%		1,626,536		35,739	4.43	%
Noninterest-earning assets		68,852					70,827					90,575						75,272
Total assets	$	1,474,815				$	1,236,624				$	1,971,604					$	1,701,808
Interest-bearing liabilities
NOW accounts	$	220,066		304	0.18%	$	201,257		242	0.16%	$	192,630		227	0.24	%	$	237,020		193	0.16	%
Savings & money market		451,490		2,471	0.73%		325,271		999	0.41%		815,034		7,179	1.78	%		633,361		3,677	1.17	%
Time deposits		309,679		2,298	0.99%		269,780		1,650	0.82%		376,672		4,144	2.22	%		322,374		2,393	1.50	%
Total interest-bearing deposits		981,235		5,073	0.69%		796,308		2,891	0.48%		1,384,336		11,550	1.68	%		1,192,755		6,263	1.06	%
Note payable and other borrowings		82,810		2,172	3.51%		117,934		2,873	3.25%
FHLB advances and other borrowings												28,202		473	3.38	%		31,925		521	3.29	%
Junior subordinated debentures		13,403		332	3.31%		13,403		280	2.79%		13,403		320	4.81	%		13,403		276	4.15	%
Total interest-bearing liabilities		1,077,448		7,577	0.94%		927,645		6,044	0.87%		1,425,941		12,343	1.75	%		1,238,083		7,060	1.15	%
Noninterest-bearing liabilities		267,365					208,396					364,585						308,737
Shareholders’ equity		130,002					100,583					181,078						154,988
Total liabilities and shareholders’ equity	$	1,474,815				$	1,236,624				$	1,971,604					$	1,701,808
Net interest spread					3.35%					3.48%					3.04	%					3.28	%
Net interest income (tax equivalent) / margin			$	37,487	3.56%			$	31,941	3.66%			$	32,380	3.47	%			$	28,679	3.56	%
Less: tax-equivalent adjustment (2)				219					241					23						26
Net interest income			$	37,268				$	31,700				$	32,357					$	28,653

	(1)		Annualized for the ~~nine~~six month period.
	(2)		The tax-equivalent adjustment to net interest income adjusts the yield for assets earning tax-exempt income to a comparable yield on a taxable basis.
	(3)		Includes mortgage loans held for sale.

Our net interest margin, on a tax-equivalent basis, was 3.47% for the six months ended June 30, 2019 compared to 3.56% for the ~~nine months ended September 30, 2017 compared to 3.66% for the~~ first ~~nine~~six months of ~~2016.~~2018. The ~~ten~~nine basis point decrease in net interest margin was driven by the increase in rate on our interest-bearing liabilities, partially offset by the increased rate on our interest-earning assets as compared to the prior year period. Our average interest-earning assets grew by $254.5 million during the same period, with the average yield on these assets increasing by 36 basis points. In addition, our average interest-bearing liabilities grew by $187.9 million, while the rate on these liabilities increased 60 basis points, for the six months ended June 30, 2019.

The increase in average interest earning assets for the six months ended June 30, 2019 as compared to the same period in ~~2016 was driven primarily by a six basis point reduction in the yield on our interest-earning assets, combined with a seven basis point increase in the cost of our interest-bearing liabilities.~~

~~Our average interest-earning assets increased by $240.2 million as compared to the 2016 period~~2018 related primarily to a ~~$212.6~~$279.1 million increase in our average loan balances, ~~for the 2017 period. However, the~~partially offset by a $24.6 million decrease in our average Federal funds sold and investment balances. The 36 basis point increase in yield on our interest-earning assets ~~decreased~~was driven by ~~six basis points due primarily to~~ a ~~five~~27 basis point ~~decrease~~increase in our loan yield combined with an increase in our average federal funds sold balances during the period which yielded a lower rate when compared to our loan portfolio and other investments. The decline in yield on our loan portfolio was driven primarily by loans being originated or renewed during the 2017 period at market rates which are lower than those in the past.yield.

In addition, our average interest-bearing liabilities increased by ~~$149.8~~$187.9 million during the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 as compared to the first ~~nine~~six months of ~~2016. The~~2018, while the cost of our interest-bearing liabilities increased ~~seven~~60 basis points during the same ~~period,~~period. The increased cost during the first six months of 2019 was driven by a ~~$184.9~~$191.6 million increase in our average interest-bearing deposits at an average rate of 1.68%, a 62 basis point increase from the average rate ~~21 basis points higher than in~~for the ~~third quarter~~first six months of ~~2016.~~2018.

Our net interest spread was ~~3.35%~~3.04% for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 compared to ~~3.48%~~3.28% for the same period in ~~2016.~~2018. The 1324 basis point decrease in our net interest spread for the ~~2017~~2019 period was ~~driven by~~a result of the ~~six basis point reduction in yield on our interest-earning assets paired with the seven~~60 basis point increase in cost on our interest-bearing ~~liabilities.~~liabilities, partially offset by the 36 basis point increase in yield on our interest-earning assets.

Rate/Volume Analysis

Net interest income can be analyzed in terms of the impact of changing interest rates and changing volume. The following table sets forth the effect which the varying levels of interest-earning assets and interest-bearing liabilities and the applicable rates have had on changes in net interest income for the periods presented.


	Three Months Ended																	Three Months Ended
				September 30, 2017 vs. 2016								September 30, 2016 vs. 2015						June 30, 2019 vs. 2018									June 30, 2018 vs. 2017
				Increase (Decrease) Due to								Increase (Decrease) Due to						Increase (Decrease) Due to									Increase (Decrease) Due to
						Rate/								Rate/									Rate/									Rate/
(dollars in thousands)	Volume			Rate		Volume		Total		Volume		Rate		Volume		Total		Volume			Rate		Volume		Total		Volume			Rate		Volume		Total
Interest income
Loans	$	2,599		164		33		2,796		1,343		(195	)	(24	)	1,124		$	3,366		958		183		4,507		$	2,716		500		95		3,311
Investment securities		11		36		1		48		116		(69	)	(23	)	24			69		34		6		109			(25	)	70		(5	)	40
Federal funds sold		65		43		91		199		(18	)	32		(16	)	(2	)		(188	)	197		(72	)	(63	)		49		171		33		253
Total interest income		2,675		243		125		3,043		1,441		(232	)	(63	)	1,146			3,247		1,189		117		4,553			2,740		741		123		3,604
Interest expense
Deposits		304		626		197		1,127		85		(63	)	(6	)	16			533		1,840		278		2,651			384		1,147		254		1,785
FHLB advances and other borrowings		(576	)	96		(54	)	(534	)	54		21		1		76			(29	)	8		(1	)	(22	)		(453	)	(98	)	61		(490	)
Junior subordinated debt		-		21		-		21		-		12		-		12			-		(3	)	-		(3	)		-		49		-		49
Total interest expense		(272	)	743		143		614		139		(30	)	(5	)	104			504		1,845		277		2,626			(69	)	1,098		315		1,344
Net interest income	$	2,947		(500	)	(18	)	2,429		1,302		(202	)	(58	)	1,042		$	2,743		(656	)	(160	)	1,927		$	2,809		(357	)	(192	)	2,260

Net interest income, the largest component of our income, was ~~$13.3 million for the three-month period ended September 30, 2017 and $10.9~~$16.5 million for the three months ended ~~September~~June 30, ~~2016,~~2019 and $14.6 million for the three months ended June 30, 2018, a ~~$2.4~~$1.9 million, or ~~22.3%~~13.2%, increase during the ~~third~~second quarter of ~~2017.~~2019. The increase in net interest income is due to a ~~$3.0~~$4.6 million increase in interest income, partially offset by a ~~$614,000~~$2.6 million increase in interest expense. During the ~~third~~second quarter of ~~2017, the primary driver of the increase in net interest income was the $225.0 million increase in~~2019, our average ~~loan balances~~interest-earning assets increased $256.6 million as ~~compared to the third quarter of 2016.~~

Nine Months Ended
September 30, 2017 vs. 2016 September 30, 2016 vs. 2015
Increase (Decrease) Due to Increase (Decrease) Due to
Rate/ Rate/
(dollars in thousands) Volume Rate Volume Total Volume Rate Volume Total
Interest income
Loans $ 7,455 (538 ) (108 ) 6,809 3,713 (122 ) (14 ) 3,577
Investment securities (149 ) 17 (2 ) (134 ) 495 (175 ) (80 ) 240
Federal funds sold 165 112 149 426 (17 ) 76 (16 ) 43
Total interest income 7,471 (409 ) 39 7,101 4,191 (221 ) (110 ) 3,860
Interest expense
Deposits 712 1,181 289 2,182 382 (47 ) (7 ) 328
FHLB advances and other borrowings (848 ) 210 (63 ) (701 ) (10 ) 206 (1 ) 195
Junior subordinated debt - 52 - 52 - 36 - 36
Total interest expense (136 ) 1,443 226 1,533 372 195 (8 ) 559
Net interest income $ 7,607 (1,852 ) (187 ) 5,568 3,819 (416 ) (102 ) 3,301

Net interest income for the nine months ended September 30, 2017 was $37.3 million compared to $31.7 million for the first nine months ended September 30, 2016, a $5.6 million, or 17.6% increase during the first nine months of 2017 compared to the same period in ~~2016.~~2018, resulting in $3.2 million of additional interest income, while higher rates on our interest-earning assets also increased interest income by $1.2 million from the prior year period. While our average interest-bearing liabilities increased by $191.2 million during the second quarter of 2019, higher rates on these liabilities had a greater impact on our net interest income with an increase of $1.8 million from the prior year period.


	Six Months Ended
	June 30, 2019 vs. 2018									June 30, 2018 vs. 2017
	Increase (Decrease) Due to									Increase (Decrease) Due to
						Rate/									Rate/
(dollars in thousands)	Volume			Rate		Volume		Total		Volume			Rate		Volume		Total
Interest income
Loans	$	6,476		1,982		376		8,834		$	5,298		882		168		6,348
Investment securities		139		128		22		289			(51	)	89		(6	)	32
Federal funds sold		(315	)	305		(126	)	(136	)		128		225		90		443
Total interest income		6,300		2,415		272		8,987			5,375		1,196		252		6,823
Interest expense
Deposits		975		3,731		581		5,287			742		2,027		505		3,274
FHLB advances and other borrowings		(61	)	15		(2	)	(48	)		(1,171	)	(107	)	72		(1,206	)
Junior subordinated debt		-		44		-		44			-		61		-		61
Total interest expense		914		3,790		579		5,283			(429	)	1,981		577		2,129
Net interest income	$	5,386		(1,375	)	(307	)	3,704		$	5,804		(785	)	(325	)	4,694

Net interest income for the six months ended June 30, 2019 was $32.4 million compared to $28.7 million for the first six months ended June 30, 2018, a $3.7 million, or 12.9%, increase during the first six months of 2019 compared to the same period in 2018. The increase in net interest income is due to a ~~$7.1~~$9.0 million increase in interest income, offset in part by a ~~$1.5~~$5.3 million increase in interest expense. The ~~$212.6~~primary driver of the increase in interest income for the first six months of 2019 was the $279.1 million increase in average loan balances ~~during the nine months ended September 30, 2017~~ as compared to the ~~nine~~six months ended ~~September~~June 30, ~~2016 was~~2018. In contrast, the ~~primary driver of~~higher interest rates on our interest-bearing deposits drove the increase in ~~net~~ interest ~~income during~~expense for the ~~2017~~first six months of 2019 compared to the prior year period.

Provision for Loan Losses

We have established an allowance for loan losses through a provision for loan losses charged as an expense on our consolidated statements of income. We review our loan portfolio periodically to evaluate our outstanding loans and to measure both the performance of the portfolio and the adequacy of the allowance for loan losses. Please see the discussion ~~below under “Balance Sheet Review~~included in Note 4 – Loans and Allowance for Loan ~~Losses”~~Losses for a description of the factors we consider in determining the amount of the provision we expense each period to maintain this allowance.

For the three and ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2019, we incurred a noncash ~~expense~~expenses related to the provision for loan losses of ~~$500,000~~$300,000 and ~~$1.5 million,~~$600,000, respectively, which resulted in an allowance for loan losses of ~~$15.6~~$16.1 million, or ~~1.17%~~0.89% of gross ~~loans, as of September 30, 2017.~~loans. For the three and ~~nine~~six months ended ~~September~~June 30, ~~2016,~~2018, our ~~provision~~provisions for loan losses of ~~$825,000~~$400,000 and ~~$2.0 million,~~$900,000, respectively, resulted in an allowance for loan losses of ~~$14.5~~$16.1 million, or ~~1.30%~~1.05% of gross ~~loans, as of September 30, 2016.~~loans. During the past 12 months, our loan balances increased by ~~$213.6~~$275.9 million, while the ~~amount~~percentage of our nonperforming loans and classified loans have declined. Factors such as these are also considered in determining the amount of loan loss provision necessary to maintain our allowance for loan losses at an adequate level.

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


	Three months ended			Nine months ended			Three months ended			Six months ended
	September 30,			September 30,			June 30,			June 30,
(dollars in thousands)	2017		2016	2017		2016	2019		2018	2019	2018
Mortgage banking income	$	1,403	2,003	4,063		5,685	$	2,830	1,629	4,687	2,957
Service fees on deposit accounts		324	269	886		732		265	256	530	512
ATM and debit card income								443	371	823	705
Income from bank owned life insurance		224	187	590		553		222	220	438	441
Gain on sale of investment securities		-	106	2		431
Loss on disposal of fixed assets		-	-	(50	)	-
Other income		591	452	1,665		1,320		330	295	606	577
Total noninterest income	$	2,542	3,017	7,156		8,721	$	4,090	2,771	7,084	5,192

Noninterest income ~~decreased $475,000,~~increased $1.3 million, or ~~15.7%~~47.6%, for the ~~third~~second quarter of ~~2017~~2019 as compared to the same period in ~~2016.~~2018. The ~~decrease~~increase in total noninterest income during the ~~2017~~2019 period resulted primarily from the following:

●	Mortgage banking income ~~decreased~~increased by ~~$600,000,~~$1.2 million, or ~~30.0%~~73.7%, driven by ~~lower~~higher mortgage origination volume during the ~~third~~second quarter of 2019 due in part to ~~an overall increase in~~ the ~~average market~~favorable interest rate environment for ~~new~~ mortgage ~~loan originations.~~loans.
●	~~There were no gains/losses recognized on the sale of investment securities~~ ATM and debit card income increased by $72,000, or 19.4%, driven by an increase in ~~the third quarter of 2017 while there was a $106,000 gain recognized during the same period in 2016.~~transaction volume.

Partially offsetting these decreases in noninterest income was a $55,000 increase in service fees on deposit accounts, driven by non-sufficient funds (“NSF”) fee income, and a $139,000 increase in other income due to increased loan fee income, including late charges, and ATM/debit card exchange income.

Noninterest income ~~decreased $1.6~~increased $1.9 million, or ~~17.9%~~36.4%, during the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 as compared to the same period in ~~2016.~~2018. The ~~decrease~~increase in total noninterest income during the ~~nine months ended September 30, 2017~~2019 period resulted primarily from ~~a $1.6 million decrease in mortgage banking income and a $429,000 decrease in gain on sale of investment securities as compared to~~ the prior period. Partially offsetting these decreases in noninterest income, was a $154,000 increase in service fees on deposit accounts and a $345,000 increase in other income which consists primarily of ATM/debit card transactions as well as wire transfer fees.following:

●	Mortgage banking income increased $1.7 million, or 58.5%, driven by higher origination volume.
●	ATM and debit card income increased $118,000, or 16.7%, primarily due to an increase in transaction volume.

In accordance with the requirements set forth under the Dodd-Frank Wall Street Reform and Consumer Protection Act, in June 2011, the Federal Reserve approved a final rule which caps an issuer's base interchange fee at 21 cents per transaction and allows an additional 5 basis point charge per transaction to help cover fraud losses. Although the rule does not apply to institutions with less than $10 billion in assets, such as our Bank, there is concern that the price controls may harm community banks, which could be pressured by the marketplace to lower their own interchange rates. Our ATM/Debit card fee income is included in other noninterest income and was $295,000 and $220,000 for the three months ended September 30, 2017 and 2016, respectively, and $847,000 and $641,000 for the nine months ended September 30, 2017 and 2016, respectively, the majority of which related to interchange fee income.

Noninterest expenses

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


	Three months ended			Nine months ended		Three months ended			Six months ended
	September 30,			September 30,		June 30,			June 30,
(dollars in thousands)	2017		2016	2017	2016	2019		2018	2019	2018
Compensation and benefits	$	5,698	4,948	16,496	14,353	$	7,399	6,365	14,182	12,208
Occupancy		1,043	908	3,042	2,670		1,343	1,276	2,682	2,413
Real estate owned expenses		28	81	38	725
Outside service and data processing		794	690	2,362	1,916
Outside service and data processing costs							1,045	824	2,005	1,560
Insurance		258	227	845	678		280	297	598	610
Professional fees		334	326	1,029	864		414	457	853	933
Marketing		199	195	605	625		236	229	496	438
Other		452	425	1,512	1,339		651	531	1,200	1,022
Total noninterest expense	$	8,806	7,800	25,929	23,170	$	11,368	9,979	22,016	19,184

Noninterest expense was ~~$8.8~~$11.4 million for the three months ended ~~September~~June 30, ~~2017,~~2019, a ~~$1.0~~$1.4 million, or ~~12.9%~~13.9%, increase from noninterest expense of ~~$7.8~~$10.0 million for the three months ended ~~September~~June 30, ~~2016. Significant fluctuations~~2018. The increase in noninterest expenses ~~resulted from~~during the 2019 period was driven by the following:

●	Compensation and benefits expense increased ~~$750,000,~~$1.0 million, or ~~15.1%~~16.2%, relating primarily to increases in base compensation, incentive compensation, and benefits expenses. ~~Base compensation increased by $492,000~~The increases were driven by the cost of 2120 additional employees, ~~compared to the prior year, six~~12 of which were hired in conjunction with the opening of our new offices in ~~Raleigh,~~Atlanta, Georgia and Greensboro, North Carolina and Atlanta, Georgia; six of which were hired as additional team leaders or mortgage executives in our existing markets; and the remainder of which were hired to support loan and deposit growth. Incentive compensation increased by $50,000 and benefits expense increased by $233,000 during the 2017 period. The increase in incentive compensation related to the additional number of employees at September 30, 2017 while the increase in benefits expenses was driven by an increase in payroll taxes and group insurance costs for the 2017 period.
●	~~Occupancy expenses increased by $135,000, or 14.9%, driven primarily by increased depreciation, property taxes and other building related expenses on the properties we own.~~Carolina.
●	Outside service and data processing ~~costs~~fees increased by ~~$104,000,~~$221,000, or ~~15.1%~~26.8%, primarily due to increased electronic banking and software licensing costs.
●	Other expenses increased by $120,000, or 22.6%, driven by an increase in travel and entertainment, dues and subscriptions, and collection expenses.

Noninterest expense was $22.0 million for the six months ended June 30, 2019, a $2.8 million, or 14.8%, increase from noninterest expense of $19.2 million for the six months ended June 30, 2018. The increase in total noninterest expense resulted primarily from the following:

●	Compensation and benefits expense increased ~~item~~$2.0 million, or 16.2%, relating primarily to the addition of 20 new employees.
●	Occupany expense increased $269,000, or 11.1%, relating primarily to the opening of our new office in Atlanta, Georgia during the second quarter of 2018.
●	Outside service and data processing fees increased by $445,000, or 28.5%, primarily due to increased electronic banking and ~~ATM/debit card related~~software licensing costs.
●	Other expenses ~~as well as bank service charges.~~increased by $178,000, or 17.4%, driven by an increase in travel and entertainment and dues and subscriptions expenses.

~~Partially offsetting the increases in noninterest expense was a decrease in real estate owned expenses of $53,000, or 65.4%, due primarily to a loss on sale of property during the 2016 period.~~

Noninterest expense for the nine months ended September 30, 2017 increased 11.9%, or $2.8 million, as compared to the nine months ended September 30, 2016. The increase was driven primarily by the $2.1 million increase in compensation and benefits expense, $446,000 in outside service and data processing fees, and $372,000 in occupancy fees. Partially offsetting the increases in noninterest expense was a decrease of $687,000 in real estate owned expenses during the first nine months of 2017.

Our efficiency ratio was ~~55.5%~~55.1% for the ~~third~~second quarter of ~~2017~~2019 compared to ~~56.1%~~57.4% for the same period in ~~2016.~~2018. The efficiency ratio represents the percentage of one dollar of expense required to be incurred to earn a full dollar of revenue and is computed by dividing noninterest expense by the sum of net interest income and noninterest income. The ~~decrease~~improvement during the ~~2017~~2019 period relates primarily to the increase in interest income and noninterest income, partially offset by the increase in noninterest expense ~~as well as a decrease in noninterest income~~ compared to the prior year.

We incurred income tax expense of ~~$2.3~~$1.7 million and ~~$1.8~~$1.5 million for the three months ended ~~September~~June 30, ~~2017~~2019 and ~~2016,~~2018, respectively, and ~~$6.0~~$3.6 million and ~~$5.5~~$3.0 million for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 and ~~2016,~~June 30, 2018, respectively. Our effective tax rate was ~~35.1%~~21.3% and ~~34.9%~~22.1% for the ~~three~~six months ended ~~September~~June 30, ~~2017~~2019 and ~~2016, respectively, and 35.5% and 36.0% for~~2018, respectively. The lower tax rate in the ~~nine months ended September 30, 2017 and 2016, respectively. In~~2019 period relates to the ~~first quarter of 2017, we adopted~~favorable tax impact from various employee stock option transactions that occurred during the new FASB guidance which simplified several aspects of the accounting for share-based payment award transactions, including income tax consequences. As a result, our income tax expense was reduced by $207,000 for the nine months ended September 30, 2017.second quarter.

~~Balance Sheet Review~~BALANCESHEETREVIEW

Investment Securities
At ~~September~~June 30, ~~2017,~~2019, the ~~$81.5~~$78.6 million in our investment securities portfolio represented approximately ~~5.2%~~3.7% of our total assets.Our available for sale investment portfolio included USU.S. government agency securities, SBA securities, state and political subdivisions, asset-backed securities and mortgage-backed securities witha fair value of ~~$78.4~~$75.3 million and an amortized cost of ~~$78.6~~$75.0 million, resulting in an unrealized ~~loss~~gain of ~~$140,000.~~$238,000. At December 31, ~~2016,~~2018, the ~~$70.2~~$79.0 million in our investment securities portfolio represented approximately ~~5.2%~~4.2% of our total assets. At December 31, ~~2016,~~2018, we held investment securities available for sale with a fair value of ~~$64.5~~$74.9 million and an amortized cost of ~~$65.2~~$76.1 million for an unrealized loss of ~~$764,000.~~$1.2 million.

Loans
Since loans typically provide higher interest yields than other types of interest earning assets, a substantial percentage of our earning assets are invested in our loan portfolio. Average loans for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 and ~~2016~~2018 were ~~$1.3~~$1.75 billion and ~~$1.1~~$1.47 billion, respectively. Before the allowance for loan losses, total loans outstanding at ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016~~2018 were ~~$1.3~~$1.81 billion and ~~$1.2~~$1.68 billion, respectively.

The principal component of our loan portfolio is loans secured by real estate mortgages. As of ~~September~~June 30, ~~2017,~~2019, our loan portfolio included ~~$1.1~~$1.49 billion, or ~~82.1%~~82.4%, of real estate loans. As of December 31, ~~2016,~~2018, real estate loans made up ~~81.1%~~82.3% of our loan portfolio and totaled ~~$943.5 million.~~$1.38 billion. Most of our real estate loans are secured by residential or commercial property. We obtain a security interest in real estate, in addition to any other available collateral. This collateral is taken to increase the likelihood of the ultimate repayment of the loan. Generally, we limit the loan-to-value ratio on loans to coincide with the appropriate regulatory guidelines. We attempt to maintain a relatively diversified loan portfolio to help reduce the risk inherent in concentration in certain types of collateral and business types. We do not generally originate traditional long term residential mortgages to hold in our loan portfolio, but we do issue traditional second mortgage residential real estate loans and home equity lines of credit. Home equity lines of credit totaled ~~$150.4~~$170.9 million as of ~~September~~June 30, ~~2017,~~2019, of which approximately ~~42%~~77% were in a first lien position, while the remaining balance was second liens, compared to ~~$137.1~~$165.9 million as of December 31, ~~2016,~~2018, with approximately ~~39%~~56% in first lien positions and the remaining balance in second liens. The average loan had a balance of approximately ~~$89,000~~$87,000 and a loan to value of ~~71%~~69% as of ~~September~~June 30, ~~2017,~~2019, compared to an average loan balance of ~~$91,000~~$88,000 and a loan to value of approximately ~~73%~~70% as of December 31, ~~2016.~~2018. Further, ~~0.3%~~0.7% and 0.1% of our total home equity lines of credit were over 30 days past due as of ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016,~~2018, respectively.

Following is a summary of our loan composition at ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016.~~2018. During the first ~~nine~~six months of ~~2017,~~2019, our loan portfolio increased by ~~$164.1~~$132.0 million, or ~~14.1%~~7.9%. Our commercial and consumer loan portfolios each experienced growth during the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 with ~~a 13.7%~~an 8.4% increase in commercial loans and a ~~14.8%~~6.8% increase in consumer loans during the period. Of the ~~$164.1~~$132.0 million in loan growth during the first ~~nine~~six months of ~~2017, $147.1~~2019, $109.8 million of the increase was in loans secured by real estate, ~~$12.3~~$19.6 million in commercial business loans, and ~~$4.7~~$2.6 million in other consumer loans. Our consumer real estate portfolio includes high quality 1-4 family consumer real estate loans. Our average consumer real estate loan currently has a principal balance of ~~$358,000,~~$374,000, a term of ~~ten~~eleven years, and an average rate of ~~4.34%~~4.38% as of ~~September~~June 30, ~~2017,~~2019, compared to a ~~$341,000~~ principal balance of $377,000, a term of ~~nine~~eleven years, and an average rate of ~~4.34%~~4.47% as of December 31, ~~2016.~~2018.


		September 30, 2017				December 31, 2016			June 30, 2019					December 31, 2018
(dollars in thousands)	Amount			% of Total	Amount			% of Total	Amount			% of Total		Amount			% of Total
Commercial
Owner occupied RE	$	317,262		23.9%	$	285,938		24.6%	$	390,727		21.6	%	$	367,018		21.9	%
Non-owner occupied RE		301,360		22.7%		239,574		20.6%		455,346		25.2	%		404,296		24.1	%
Construction		32,332		2.4%		33,393		2.9%		85,065		4.7	%		84,411		5.0	%
Business		214,898		16.2%		202,552		17.4%		292,564		16.2	%		272,980		16.3	%
Total commercial loans		865,852		65.2%		761,457		65.5%		1,223,702		67.7	%		1,128,705		67.3	%

Consumer
Real estate		250,483		18.9%		215,588		18.5%		342,100		18.9	%		320,943		19.1	%
Home equity		150,371		11.3%		137,105		11.8%		170,861		9.4	%		165,937		9.9	%
Construction		38,766		2.9%		31,922		2.7%		46,247		2.6	%		37,925		2.3	%
Other		22,267		1.7%		17,572		1.5%		26,445		1.4	%		23,822		1.4	%
Total consumer loans		461,887		34.8%		402,187		34.5%		585,653		32.3	%		548,627		32.7	%
Total gross loans, net of deferred fees		1,327,739		100.0%		1,163,644		100.0%		1,809,355		100.0	%		1,677,332		100.0	%
Less—allowance for loan losses		(15,579	)			(14,855	)			(16,144	)				(15,762	)
Total loans, net	$	1,312,160			$	1,148,789			$	1,793,211				$	1,661,570

Nonperforming assets
Nonperforming assets include real estate acquired through foreclosure or deed taken in lieu of foreclosure and loans on nonaccrual status. Generally, a loan is placed on nonaccrual status when it becomes 90 days past due as to principal or interest, or when we believe, after considering economic and business conditions and collection efforts, that the borrower’s financial condition is such that collection of the contractual principal or interest on the loan is doubtful. A payment of interest on a loan that is classified as nonaccrual is recognized as a reduction in principal when received. Our policy with respect to nonperforming loans requires the borrower to make a minimum of six consecutive payments in accordance with the loan terms and to show capacity to continue performing into the future before that loan can be placed back on accrual status. As of ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016,~~2018, we had no loans 90 days past due and still accruing.

Following is a summary of our nonperforming assets, including nonaccruing TDRs.


(dollars in thousands)	September 30, 2017		December 31, 2016	June 30, 2019		December 31, 2018
Commercial	$	3,409	3,673	$	437	291
Consumer		1,464	819		2,152	2,998
Nonaccruing troubled debt restructurings		730	990		3,220	2,541
Total nonaccrual loans		5,603	5,482		5,809	5,830
Other real estate owned		420	639		-	-
Total nonperforming assets	$	6,023	6,121	$	5,809	5,830

At ~~September~~June 30, ~~2017,~~2019, nonperforming assets were ~~$6.0~~$5.8 million, or ~~0.39%~~0.27% of total assets and ~~0.45%~~0.32% of gross loans. Comparatively, nonperforming assets were ~~$6.1~~$5.8 million, or ~~0.46%~~0.31% of total assets and ~~0.53%~~0.35% of gross loans at December 31, ~~2016.~~2018. Nonaccrual loans were ~~$5.6~~$5.8 million at ~~September~~June 30, ~~2017,~~2019, a ~~$121,000 increase~~slight decrease from December 31, ~~2016.~~2018. During the first ~~nine~~six months of ~~2017, six~~2019, four loans were put on nonaccrual status and 12three nonaccrual loans were either paid off or ~~charged-off.~~returned to accrual status. The amount of foregone interest income on the nonaccrual loans in the first ~~nine~~six months of ~~2017~~2019 and ~~2016~~2018 was approximately ~~$251,000~~$54,000 and ~~$341,000,~~$126,000, respectively.

~~Nonperforming assets include other real estate owned which totaled $420,000 at September~~At June 30, ~~2017, a $219,000 decrease from December 31, 2016. The balance at September 30, 2017 includes six commercial properties totaling $367,000~~2019 and two residential properties totaling $53,000. All of these properties are located in the Upstate of South Carolina. We believe that these properties are appropriately valued at the lower of cost or market as of September 30, 2017.

~~At September 30, 2017 and 2016,~~2018, the allowance for loan losses represented ~~278.1%~~277.9% and ~~258.3%~~208.5% of the total amount of nonperforming loans, respectively. A significant portion, or ~~79%~~approximately 86%, of nonperforming loans at ~~September~~June 30, ~~2017 is~~2019 was secured by real estate. Our nonperforming loans have been written down to approximately ~~54%~~80% of their original nonperforming balance. We have evaluated the underlying collateral on these loans and believe that the collateral on these loans is sufficient to minimize future losses. Based on the level of coverage on nonperforming loans and analysis of our loan portfolio, we believe the allowance for loan losses of ~~$15.6~~$16.1 million as of ~~September~~June 30, ~~2017~~2019 to be adequate.

As a general practice, most of our loans are originated with relatively short maturities of less than 10 ~~years.~~years for commercial loans and less than 15 years for consumer loans. As a result, when a loan reaches its maturity we frequently renew the loan and thus extend its maturity using the same credit standards as those used when the loan was first originated. Due to these loan practices, we may, at times, renew loans which are classified as nonperforming after evaluating the loan’s collateral value and financial strength of its guarantors. Nonperforming loans are renewed at terms generally consistent with the ultimate source of repayment and rarely at reduced rates. In these cases, ~~the Company~~we will seek additional credit enhancements, such as additional collateral or additional guarantees to further protect the loan. When a loan is no longer performing in accordance with its stated terms, ~~the Company~~we will typically seek performance under the guarantee.

In addition, at ~~September~~June 30, ~~2017, 82.1%~~2019, 82.4% of our loans ~~are~~were collateralized by real estate and ~~80.0%~~78% of our impaired loans ~~are~~were secured by real estate. ~~The Company utilizes~~We utilize third party appraisers to determine the fair value of collateral dependent loans. Our current loan and appraisal policies require ~~the Company~~us to obtain updated appraisals on an annual basis, either through a new external appraisal or an appraisal evaluation. Impaired loans are individually reviewed on a quarterly basis to determine the level of impairment. As of ~~September~~June 30, ~~2017,~~2019, we dodid not have any impaired real estate loans carried at a value in excess of the appraised value. We typically charge-off a portion or create a specific reserve for impaired loans when we do not expect repayment to occur as agreed upon under the original terms of the loan agreement.

At ~~September~~June 30, ~~2017,~~2019, impaired loans totaled ~~$12.6~~$12.7 million, for which ~~$9.4~~$6.5 million of these loans ~~have~~had a reserve of approximately ~~$3.7~~$2.0 million allocated in the allowance. During the first ~~nine~~six months of ~~2017,~~2019, the average recorded investment in impaired loans was approximately ~~$13.0~~$12.8 million. Comparatively, impaired loans totaled ~~$11.2~~$12.6 million at December 31, ~~2016,~~2018, and ~~$7.5~~$6.2 million of these loans had a reserve of approximately ~~$2.6~~$2.0 million allocated in the allowance. During ~~2016,~~2018, the average recorded investment in impaired loans was approximately ~~$11.6~~$13.1 million.

We consider a loan to be a TDR when the debtor experiences financial difficulties and we provide concessions such that we will not collect all principal and interest in accordance with the original terms of the loan agreement. Concessions can relate to the contractual interest rate, maturity date, or payment structure of the note. As part of our workout plan for individual loan relationships, we may restructure loan terms to assist borrowers facing challenges in the current economic environment. As of ~~September~~June 30, ~~2017,~~2019, we determined that we had loans totaling ~~$7.7~~$10.2 million that we considered TDRs. As of December 31, ~~2016,~~2018, we had loans totaling ~~$6.7~~$9.3 million that we considered TDRs.

Allowance for Loan Losses
The allowance for loan losses was ~~$15.6 million and $14.5~~$16.1 million at ~~September~~June 30, ~~2017~~2019 and ~~2016, respectively,~~2018, or ~~1.17%~~0.89% of outstanding loans at ~~September~~June 30, ~~2017~~2019 and ~~1.30%~~1.05% of outstanding loans at ~~September~~June 30, ~~2016.~~2018. At December 31, ~~2016,~~2018, our allowance for loan losses was ~~$14.9~~$15.8 million, or ~~1.28%~~0.94% of outstanding ~~loans, and we had net loans charged-off of $1.1 million for the year ended December 31, 2016.~~loans.

During the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2019, we charged-off ~~$962,000~~$277,000 of loans and recorded ~~$186,000~~$59,000 of recoveries on loans previously charged-off, for net charge-offs of ~~$776,000,~~$218,000, or ~~0.08%~~0.03% of average loans, annualized. Comparatively, we charged-off ~~$1.5 million~~$604,000 of loans and recorded ~~$286,000~~$281,000 of recoveries on loans previously charged-off during the first six months of 2018, resulting in net charge-offs of ~~$1.2 million,~~$323,000, or ~~0.15%~~0.04% of average loans, ~~annualized, for~~annualized. For the ~~first nine months~~year ended December 31, 2018, we had net charge-offs of ~~2016.~~$1.7 million, or 0.11% of average loans.

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


	Nine months ended							Six months ended
	September 30,					Year ended		June 30,					Year ended
(dollars in thousands)	2017			2016		December 31, 2016			2019		2018		December 31, 2018
Balance, beginning of period	$	14,855		13,629		13,629		$	15,762		15,523		15,523
Provision		1,500		2,025		2,300			600		900		1,900
Loan charge-offs		(962	)	(1,462	)	(1,648	)		(277	)	(604	)	(2,146	)
Loan recoveries		186		286		574			59		281		485
Net loan charge-offs		(776	)	(1,176	)	(1,074	)		(218	)	(323	)	(1,661	)
Balance, end of period	$	15,579		14,478		14,855		$	16,144		16,100		15,762

Deposits and Other Interest-Bearing Liabilities
Our primary source of funds for loans and investments is our deposits and advances from the ~~FHLB, and structured repurchase agreements.~~FHLB. In the past, we have chosen to obtain a portion of our certificates of deposits from areas outside of our market in ~~orderto~~order to obtain longer term deposits than are readily available in our local market. ~~We have adopted~~Our internal guidelines regarding ~~our~~the use of brokered CDs ~~that~~ limit our brokered CDs to 20% of total deposits. In addition, we do not obtain time deposits ~~and dictate that our current interest rate risk profile determines~~of $100,000 or more through the ~~terms.~~Internet. These guidelines allow us to take advantage of the attractive terms that wholesale funding can offer while mitigating the related inherent risk.

Our retail deposits represented ~~$1.3~~$1.78 billion, or ~~95.7%~~96.2% of total deposits at ~~September~~June 30, ~~2017,~~2019, while our out-of-market, or brokered, deposits represented ~~$57.3~~$71.2 million, or ~~4.3%~~3.8% of our total deposits at ~~September~~June 30, ~~2017.~~2019. At December 31, ~~2016,~~2018, retail deposits represented ~~$1.0~~$1.57 billion, or ~~94.6%~~95.2% of our total deposits, and brokered CDs were ~~$59.1~~$79.3 million, representing ~~5.4%~~4.8% of our total deposits. Our loan-to-deposit ratio was ~~99%~~98% at ~~September~~June 30, ~~2017~~2019 and ~~107%~~102% at December 31, ~~2016.~~2018.

The following is a detail of our deposit accounts:


	September 30,		December 31,	June 30,		December 31,
(dollars in thousands)	2017		2016	2019		2018
Non-interest bearing	$	272,758	235,538	$	368,906	346,570
Interest bearing:
NOW accounts		209,607	234,949		229,109	186,795
Money market accounts		533,575	345,117		857,478	730,765
Savings		15,659	14,942		15,180	15,486
Time, less than $100,000		54,133	48,638		59,382	63,073
Time and out-of-market deposits, $100,000 and over		256,845	211,967		323,953	305,447
Total deposits	$	1,342,577	1,091,151	$	1,854,008	1,648,136

During the past 12 months, we continued our focus on increasing core deposits, which exclude out-of-market deposits and time deposits of $250,000 or more, in order to provide a relatively stable funding source for our loan portfolio and other earning assets. Our core deposits were ~~$1.2~~$1.62 billion and ~~$937.5 million~~$1.43 billion at ~~September~~June 30, ~~2017,~~2019, and December 31, ~~2016,~~2018, respectively.

The following table shows the average balance amounts and the average rates paid on deposits.


	Nine months ended					Six months ended
	September 30,					June 30,
	2017			2016		2019				2018
(dollars in thousands)	Amount		Rate	Amount	Rate	Amount		Rate		Amount		Rate
Noninterest bearing demand deposits	$	256,731	-%	198,166	-%
Interest bearing demand deposits		220,066	0.18%	201,257	0.16%
Noninterest-bearing demand deposits						$	335,060	-	%	$	295,058	-	%
Interest-bearing demand deposits							192,630	0.24	%		237,020	0.16	%
Money market accounts		435,939	0.76%	312,833	0.42%		799,707	1.81	%		617,359	1.20	%
Savings accounts		15,551	0.05%	12,438	0.05%		15,327	0.06	%		16,002	0.06	%
Time deposits less than $100,000		50,345	0.81%	56,034	0.73%		63,730	1.90	%		57,797	1.23	%
Time deposits greater than $100,000		259,258	1.03%	213,746	0.84%		312,942	2.28	%		264,577	1.55	%
Total deposits	$	1,237,890	0.55%	994,474	0.39%	$	1,719,396	1.35	%	$	1,487,813	0.85	%

During the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2019, our average transaction account balances increased by ~~$203.6~~$177.3 million, or ~~28.1%~~15.2%, from the ~~nine~~six months ended ~~September~~June 30, ~~2016,~~2018, while our average time deposit balances increased by ~~$39.8~~$54.3 million, or 16.8%, during the same ~~nine~~six month period.

All of our time deposits are certificates of deposits. The maturity distribution of our time deposits of $100,000 or more at ~~September~~June 30, ~~2017~~2019 was as follows:


(dollars in thousands)	September 30, 2017		June 30, 2019
Three months or less	$	54,404	$	53,661
Over three through six months		69,842		77,868
Over six through twelve months		72,512		121,610
Over twelve months		60,087		70,814
Total	$	256,845	$	323,953

Included in time deposits of $100,000 or more at ~~September~~June 30, ~~2017~~2019 is ~~$57.3~~$56.8 million of wholesale CDs scheduled to mature within the next 12 months at a weighted average rate of ~~1.08%~~2.45%. Time deposits that meet or exceed the FDIC insurance limit of $250,000 at ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016~~2018 were ~~$181.7~~$234.3 million and ~~$153.7~~$214.0 million, respectively.

Liquidity and Capital Resources

Liquidity represents the ability of a company to convert assets into cash or cash equivalents without significant loss, and the ability to raise additional funds by increasing liabilities. Liquidity management involves monitoring our sources and uses of funds in order to meet our day-to-day cash flow requirements while maximizing profits. Liquidity management is made more complicated because different balance sheet components are subject to varying degrees of management control. For example, the timing of maturities of our investment portfolio is fairly predictable and subject to a high degree of control at the time investment decisions are made. However, net deposit inflows and outflows are far less predictable and are not subject to the same degree of control.

At ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016, our liquid assets, consisting of~~2018, cash and ~~due from banks and federal funds sold,~~cash equivalents amounted to ~~$74.6~~$116.8 million and ~~$46.6~~$72.9 million, respectively, or ~~4.8%~~5.5% and ~~3.5%~~3.8% of total assets, respectively. ~~Our investment securities at September 30, 2017 and December 31, 2016 amounted to $81.5~~The $43.9 million ~~and $70.2 million, or 5.2% of total assets for both periods. The~~ increase in cash and cash equivalents ~~is primarily attributable~~during the first six months of 2019 was driven by our growth in deposit balances. Our investment securities at June 30, 2019 and December 31, 2018 amounted to ~~our effort to increase the amount~~$78.6 million and $79.0 million, respectively, or 3.7% and 4.2% of ~~on balance sheet liquidity. In addition, investment~~total assets, respectively.Investment securities traditionally provide a secondary source of liquidity since they can be converted into cash in a timely manner; however, approximately 12.5% of these securities are pledged against outstanding debt. Therefore, the related debt would need to be repaid prior to the securities being sold in order for these securities to be converted to cash.manner.

Our ability to maintain and expand our deposit base and borrowing capabilities serves as our primary source of liquidity. We plan to meet our future cash needs through the liquidation of temporary investments, the generation of deposits, loan payoffs, and from additional borrowings. In addition, we will receive cash upon the maturity and sale of loans and the maturity of investment securities. We maintain four federal funds purchased lines of credit with correspondent banks totaling $72.0 million for which there were no borrowings against the lines of credit at ~~September~~June 30, ~~2017.~~2019.

We are also a member of the FHLB, from which applications for borrowings can be made. The FHLB requires that securities, qualifying mortgage loans, and stock of the FHLB owned by the Bank be pledged to secure any advances from the FHLB. The unused borrowing capacity currently available from the FHLB at ~~September~~June 30, ~~2017~~2019 was ~~$243.0~~$368.7 million, based on the Bank’s ~~$2.5~~$2.8 million investment in FHLB stock, as well as qualifying mortgages available to secure any future borrowings. However, we are able to pledge additional securities to the FHLB in order to increase our available borrowing capacity. In addition, at ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016~~2018 we had ~~$188.8~~$212.5 million and ~~$130.1~~$194.7 million, respectively, of letters of credit outstanding with the FHLB to secure client deposits.

We ~~entered into~~also have a ~~new, unsecured interest only~~ line of credit ~~for $15.0 million~~ with another financial institution ~~effective~~for $15.0 million, which was unused at June 30, ~~2017.~~2019. The line of credit bears interest at LIBOR plus 2.50% and matures on June 30, 2020. ~~As of September 30, 2017, the line of credit was unused. The loan agreement contains various financial covenants related to capital, earnings and asset quality.~~

We believe that our existing stable base of core deposits, federal funds purchased lines of credit with correspondent banks, and borrowings from the FHLB ~~and short-term repurchase agreements~~ will enable us to successfully meet our long-term liquidity needs. However, as short-term liquidity needs arise, we have the ability to sell a portion of our investment securities portfolio to meet those needs.

Total shareholders’ equity was ~~$147.4~~$189.9 million at ~~September~~June 30, ~~2017~~2019 and ~~$109.9~~$173.9 million at December 31, ~~2016.~~2018. The ~~$37.6~~$15.9 million increase from December 31, ~~2016~~2018 is primarily related to ~~the issuance of 805,000 shares of common stock on May 2, 2017 in a public offering. The common stock was issued at $32.75 per share for~~ net proceeds of $24.8 million. Proceeds from the offering were used to improve our capital structure, including to repay our former $10 million line of credit with another financial institution, to fund future organic growth, and for working capital and other general corporate purposes. Net income of ~~$11.0~~$13.2 million ~~for~~during the first ~~nine~~six months of ~~2017 also contributed to the increase~~2019, stock option exercises and expenses of $1.6 million, and $1.1 million in ~~shareholders’ equity.~~other comprehensive income.

The following table shows the return on average assets (net income divided by average total assets), return on average equity (net income divided by average equity), equity to assets ratio (average equity divided by average assets), and tangible common equity ratio (total equity less preferred stock divided by total assets) annualized for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 and the year ended December 31, ~~2016.~~2018. Since our inception, we have not paid cash dividends.


	September 30, 2017	December 31, 2016	June 30, 2019		December 31, 2018
Return on average assets	0.99%	1.04%	1.36	%	1.27	%
Return on average equity	11.28%	12.73%	14.75	%	13.83	%
Return on average common equity	11.28%	12.73%	14.75	%	13.83	%
Average equity to average assets ratio	8.81%	8.16%	9.18	%	9.15	%
Tangible common equity to assets ratio	9.47%	8.19%	8.97	%	9.15	%

Under the capital adequacy guidelines, regulatory capital is classified into two tiers. These guidelines require an institution to maintain a certain level of Tier 1 and Tier 2 capital to risk-weighted assets. Tier 1 capital consists of common shareholders’ equity, excluding the unrealized gain or loss on securities available for sale, minus certain intangible assets. In determining the amount of risk-weighted assets, all assets, including certain off-balance sheet assets, are multiplied by a risk-weight factor of 0% to 100% based on the risks believed to be inherent in the type of asset. Tier 2 capital consists of Tier 1 capital plus the general reserve for loan losses, subject to certain limitations. We are also required to maintain capital at a minimum level based on total average assets, which is known as the Tier 1 leverage ratio.

At both the ~~holding company~~Company and Bank level, we are subject to various regulatory capital requirements administered by the federal banking agencies. Under the capital adequacy guidelines and the regulatory framework for prompt corrective action, we must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. Our capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors, and the regulators can lower classifications in certain cases. Failure to meet various capital requirements can initiate regulatory action that could have a direct material effect on the financial statements.

~~Regulatory~~The capital rules released in July 2013 to implement capital standards referred to as Basel III and developed by an international body known as the Basel Committee on Banking Supervision, impose higher minimum capital requirements for bank holding companies and banks. The rules apply to all national and staterequire banks ~~and savings associations regardless of size~~ and bank holding companies ~~and savings and loan holding companies with more than $1 billion in~~to maintain a minimum total ~~consolidated assets. The requirements in the rule began to phase in for us on January 1, 2015 and will be fully phased in by January 1, 2019.~~

~~The rule includes certain new and higher risk-based~~risked-based capital ~~and leverage requirements than those currently in place. Specifically, the following minimum capital requirements apply to us:~~

●	~~a new common equity Tier 1 risk-based capital ratio of 4.5%;~~
●	~~a Tier 1 risk-based capital ratio of 6% (increased from the former 4% requirement);~~
●	ratio of at least 8%, a total ~~risk-based capital ratio of 8% (unchanged from the former requirement); and~~
●	~~a leverage ratio of 4% (also unchanged from the former requirement).~~

~~Under the rule,~~ Tier 1 capital ~~is redefined to include two components: Common Equity~~ratio of at least 6%, a minimum common equity Tier 1 capital ratio of at least 4.5%, and ~~additional Tier 1 capital. The new~~a leverage ratio of at least 4%. Bank holding companies and ~~highest form~~banks are also required to hold a capital conservation buffer of ~~capital, Common Equity~~common equity Tier 1 capital ~~consists solely~~ of common stock (plus related surplus), retained earnings, accumulated other comprehensive income, and limited amounts of minority interests that are in the form of common stock. Additional Tier 1 capital includes other perpetual instruments historically included in Tier 1 capital, such as noncumulative perpetual preferred stock. Tier 2 capital consists of instruments that currently qualify in Tier 2 capital plus instruments that the rule has disqualified from Tier 1 capital treatment. Cumulative perpetual preferred stock, formerly includable in Tier 1 capital, is now included only in Tier 2 capital. Accumulated other comprehensive income (AOCI) is presumptively included in Common Equity Tier 1 capital and often would operate to reduce this category of capital. The rule provided a one-time opportunity at the end of the first quarter of 2015 for covered banking organizations to opt out of much of this treatment of AOCI. We made this opt-out election and, as a result, will retain the pre-existing treatment for AOCI.

~~In addition, in order~~2.5% to avoid ~~restrictions~~limitations on capital distributions orand discretionary bonus payments to executives, a covered banking organization must maintain a “capital conservation buffer” on top of its minimum risk-based capital requirements. This buffer must consist solely of Tier 1 Common Equity, but the buffer applies to all three measurements (Common Equity Tier 1, Tier 1 capital and total capital).executive compensation payments. The capital conservation buffer ~~will be phased in incrementally over time, becoming~~became fully effective on January 1, 2019, and ~~will consist~~consists of an additional amount of common equity equal to 2.5% of risk-weighted assets. As

To be considered “well-capitalized” for purposes of ~~January 1, 2016, we are required to hold~~certain rules and prompt corrective action requirements, the Bank must maintain a minimum total risked-based capital ~~conservation buffer~~ratio of ~~0.625%~~at least 10%, ~~increasing by that amount each successive year until 2019.~~

In general, the rules have had the effect of increasing capital requirements by increasing the risk weights on certain assets, including high volatility commercial real estate, certain loans past due 90 days or more or in nonaccrual status, mortgage servicing rights not includable in Common Equitya total Tier 1 capital ratio of at least 8%, a common equity ~~exposures,~~Tier 1 capital ratio of at least 6.5%, and ~~claims on securities firms, that are used in the denominator~~a leverage ratio of ~~the three risk-based~~at least 5%. As of June 30, 2019, our capital ~~ratios.~~

~~It is management’s belief that, as of September 30, 2017, the Company~~ratios exceed these ratios and ~~the Bank would have met all capital adequacy requirements under Basel III on a fully phased-in basis if such requirements were currently effective.~~we remain “well capitalized.”

The following table summarizes the capital amounts and ratios of the Bank and the regulatory minimum requirements.


	September 30, 2017							June 30, 2019
						To be well capitalized								To be well capitalized
						under prompt								under prompt
				For capital		corrective					For capital			corrective
				adequacy purposes		action provisions					adequacy purposes			action provisions
			Actual	minimum		minimum				Actual	minimum			minimum
(dollars in thousands)	Amount		Ratio	Amount	Ratio	Amount	Ratio	Amount		Ratio	Amount		Ratio	Amount		Ratio
Total Capital (to risk weighted assets)	$	172,876	13.33%	103,772	8.00%	129,715	10.00%	$	212,174	11.94%		142,195	8.00%		177,743	10.00%
Tier 1 Capital (to risk weighted assets)		157,297	12.13%	77,829	6.00%	103,772	8.00%		196,030	11.03%		106,646	6.00%		142,195	8.00%
Common Equity Tier 1 Capital (to risk weighted assets)		157,297	12.13%	58,372	4.50%	84,314	6.50%		196,030	11.03%		79,984	4.50%		115,533	6.50%
Tier 1 Capital (to average assets)		157,297	10.15%	61,992	4.00%	77,490	5.00%		196,030	9.63%		81,452	4.00%		101,815	5.00%

														December 31, 2018
														To be well capitalized
														under prompt
											For capital			corrective
											adequacy purposes			action provisions
										Actual	minimum			minimum
(dollars in thousands)								Amount		Ratio	Amount		Ratio	Amount		Ratio
Total Capital (to risk weighted assets)								$	198,195	12.16%	$	130,368	8.00%	$	162,960	10.00%
Tier 1 Capital (to risk weighted assets)									182,433	11.20%		97,776	6.00%		130,368	8.00%
Common Equity Tier 1 Capital (to risk weighted assets)									182,433	11.20%		73,332	4.50%		105,924	6.50%
Tier 1 Capital (to average assets)									182,433	9.84%		74,126	4.00%		92,658	5.00%

The following table summarizes the capital amounts and ratios of the Company and the minimum regulatory requirements.

September 30, 2017

June 30, 2019

To be well capitalized

under prompt

For capital

corrective

For capital

corrective

adequacy purposes

action provisions

adequacy purposes

action provisions

Actual

minimum

Actual

minimum

(dollars in thousands)

Amount

Ratio

Amount

Ratio

Amount

Ratio

Amount

Ratio

Amount

Ratio

Amount

Ratio

Total Capital (to risk weighted assets)

176,121

13.58%

103,772

8.00%

N/A

218,810

12.31%

142,198

8.00%

N/A

Tier 1 Capital (to risk weighted assets)

160,542

12.38%

77,829

6.00%

N/A

202,666

11.40%

106,649

6.00%

N/A

Common Equity Tier 1 Capital (to risk weighted assets)

147,542

11.37%

58,372

4.50%

N/A

189,666

10.67%

79,987

4.50%

N/A

Tier 1 Capital (to average assets)

160,542

10.36%

62,010

4.00%

N/A

202,666

9.95%

81,470

4.00%

N/A

December 31, 2018

To be well capitalized

under prompt

For capital

corrective

adequacy purposes

action provisions

Actual

minimum

(dollars in thousands)

Amount

Ratio

Amount

Ratio

Amount

Ratio

Total Capital (to risk weighted assets)

203,595

12.49%

130,368

8.00%

N/A

Tier 1 Capital (to risk weighted assets)

187,833

11.53%

97,776

6.00%

N/A

Common Equity Tier 1 Capital (to risk weighted assets)

174,833

10.73%

73,332

4.50%

N/A

Tier 1 Capital (to average assets)

187,833

10.14%

74,126

4.00%

N/A

The ability of the Company to pay cash dividends is dependent upon receiving cash in the form of dividends from the Bank. The dividends that may be paid by the Bank to the Company are subject to legal limitations and regulatory capital requirements.

Effect of Inflation and Changing Prices

The effect of relative purchasing power over time due to inflation has not been taken into account in our consolidated financial statements. Rather, our financial statements have been prepared on an historical cost basis in accordance with generally accepted accounting principles.

Unlike most industrial companies, our assets and liabilities are primarily monetary in nature. Therefore, the effect of changes in interest rates will have a more significant impact on our performance than will the effect of changing prices and inflation in general. In addition, interest rates may generally increase as the rate of inflation increases, although not necessarily in the same magnitude. As discussed previously, we seek to manage the relationships between interest sensitive assets and liabilities in order to protect against wide rate fluctuations, including those resulting from inflation.

Off-Balance Sheet Risk

Commitments to extend credit are agreements to lend money to a client as long as the client has not violated any material condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require the payment of a fee. At ~~September~~June 30, ~~2017,~~2019, unfunded commitments to extend credit were ~~$265.2~~$379.1 million, of which ~~$68.2~~$116.3 million was at fixed rates and ~~$197.0~~$262.8 million was at variable rates. At December 31, ~~2016,~~2018, unfunded commitments to extend credit were ~~$226.6~~$399.4 million, of which approximately ~~$57.8~~$130.5 million was at fixed rates and ~~$168.8~~$269.0 million was at variable rates. A significant portion of the unfunded commitments related to consumer equity lines of credit. Based on historical experience, we anticipate that a significant portion of these lines of credit will not be funded. We evaluate each client’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by us upon extension of credit, is based on our credit evaluation of the borrower. The type of collateral varies but may include accounts receivable, inventory, property, plant and equipment, and commercial and residential real estate. ~~As disclosed in Note 6 – Derivative Financial Instruments, we had mortgage loan interest rate lock commitments of $29.3 million and $18.0 million as of September~~

At June 30, ~~2017~~2019 and December 31, ~~2016, respectively.~~

~~At September 30, 2017 and December 31, 2016,~~2018, there were commitments under letters of credit for ~~$6.0~~$9.5 million and ~~$4.4~~$10.0 million, respectively. The credit risk and collateral involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Since most of the letters of credit are expected to expire without being drawn upon, they do not necessarily represent future cash requirements.

Except as disclosed in this report, we are not involved in off-balance sheet contractual relationships, unconsolidated related entities that have off-balance sheet arrangements or transactions that could result in liquidity needs or other commitments that significantly impact earnings.

Market Risk and Interest Rate Sensitivity

Market risk is the risk of loss from adverse changes in market prices and rates, which principally arises from interest rate risk inherent in our lending, investing, deposit gathering, and borrowing activities. Other types of market risks, such as foreign currency exchange rate risk and commodity price risk, do not generally arise in the normal course of our business.

We actively monitor and manage our interest rate risk exposure in order to control the mix and maturities of our assets and liabilities utilizing a process we call asset/liability management. The essential purposes of asset/liability management are to ensure adequate liquidity and to maintain an appropriate balance between interest sensitive assets and liabilities in order to minimize potentially adverse impacts on earnings from changes in market interest rates. Our asset/liability management committee (“ALCO”) monitors and considers methods of managing exposure to interest rate risk. We have both an internal ALCO consisting of senior management that meets at various times during each month and a board ALCO that meets monthly. The ALCOs are responsible for maintaining the level of interest rate sensitivity of our interest sensitive assets and liabilities within board-approved limits.

As of ~~September~~June 30, ~~2017,~~2019, the following table summarizes the forecasted impact on net interest income using a base case scenario given upward and downward movements in interest rates of 100, 200, and 300 basis points based on forecasted assumptions of prepayment speeds, nominal interest rates and loan and deposit repricing rates. Estimates are based on current economic conditions, historical interest rate cycles and other factors deemed to be relevant. However, underlying assumptions may be impacted in future periods which were not known to management at the time of the issuance of the Consolidated Financial Statements. Therefore, management’s assumptions may or may not prove valid. No assurance can be given that changing economic conditions and other relevant factors impacting our net interest income will not cause actual occurrences to differ from underlying assumptions. In addition, this analysis does not consider any strategic changes to our balance sheet which management may consider as a result of changes in market conditions.

	Change in net interest
Interest rate scenario	income from base
Up 300 basis points	~~7.01~~	(5.53)%
Up 200 basis points	~~5.35~~	(2.88)%
Up 100 basis points	~~3.12~~	(0.94)%
Base	-
Down 100 basis points	~~(4.39~~	)(3.16)%
Down 200 basis points	~~(5.26~~	)(4.66)%
Down 300 basis points	~~(7.22~~	)(3.04)%

Critical Accounting Policies

We have adopted various accounting policies that govern the application of accounting principles generally accepted in the United States and with general practices within the banking industry in the preparation of our financial statements. Our significant accounting policies are described in the footnotes to our audited consolidated financial statements as of December 31, ~~2016,~~2018, as filed in our Annual Report on Form 10-K.

Certain accounting policies involve significant judgments and assumptions by us that have a material impact on the carrying value of certain assets and liabilities. We consider these accounting policies to be critical accounting policies. The judgment and assumptions we use are based on historical experience and other factors, which we believe to be reasonable under the circumstances. Our Critical Accounting Policies are the allowance for loan losses, fair value of financial instruments, other-than-temporary impairment analysis, other real estate owned, and income taxes. Because of the nature of the judgment and assumptions we make, actual results could differ from these judgments and estimates that could have a material impact on the carrying values of our assets and liabilities and our results of operations.

Accounting, Reporting, and Regulatory Matters

~~Recently Issued Accounting Standards~~
~~The following is a summary~~See Note 1 – Nature of ~~recent authoritative pronouncements that could affect accounting, reporting,~~Business and ~~disclosure~~Basis of ~~financial information by us:~~

~~In May 2014,~~Presentation in the ~~FASB issued guidance~~accompanying condensed notes to change the recognition of revenue from contracts with customers. The core principle of the new guidance is that an entity should recognize revenue to reflect the transfer of goods and services to customers in an amount equal to the consideration the entity receives or expects to receive. The guidance will be effective for the Company for reporting periods beginning after December 15, 2017.

The Company’s revenue is comprised of net interest income and noninterest income. The scope of the guidance explicitly excludes net interest income as well as many other revenues for financial assets and liabilities including loans, leases, securities, and derivatives. Accordingly, the majority of our revenues will not be affected. The Company is currently assessing our revenue contracts related to revenue streams that are within the scope of the standard. Our accounting policies will not change materially since the principles of revenue recognition from the ASU are largely consistent with existing guidance and current practices applied by our businesses. We have not identified material changes to the timing or amount of revenue recognition. Based on the updated guidance, we do anticipate changes in our disclosures associated with our revenues.

In November 2015, the FASB amended the Income Taxes topic of the Accounting Standards Codification to simplify the presentation of deferred income taxes by requiring that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The amendments will be effective forconsolidated financial statements included elsewhere in this report for details of recently issued ~~for annual periods beginning after December 15, 2016,~~accounting pronouncements and interim periods within those annual periods, with early adoption permitted as of the beginning of an interim or annual reporting period. The Company does not expect these amendments to have a material effect on its financial statements.

In January 2016, the FASB amended the Financial Instruments topic of the ASC to address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The amendments will be effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company will apply the guidance by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The amendments related to equity securities without readily determinable fair values will be applied prospectively to equity investments that exist as of the date of adoption of the amendments. The Company does not expect these amendments to have a material effect on its financial statements.

In February 2016, the FASB amended the Leases topic of the Accounting Standards Codification to revise certain aspects of recognition, measurement, presentation, and disclosure of leasing transactions. The amendments will be effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years

We expect to adopt the guidance using the modified retrospective method and practical expedients for transition. The practical expedients allow us to largely account for our existing leases consistent with current guidance except for the incremental balance sheet recognition for lessees. We have started an initial evaluation of our leasing contracts and activities. We have also started developing our methodology to estimate the right-of use assets and lease liabilities, which is based on the present value of lease payments (the December 31, 2016 future minimum lease payments were $10.2 million). We do not expect a material change to the timing of expense recognition, but we are early in the implementation process and will continue to evaluate the impact. We are evaluating our existing disclosures and may need to provide additional information as a result of adoption of the ASU.

In March 2016, the FASB issued guidance to simplify several aspects of the accounting for share-based payment award transactions including the income tax consequences, the classification of awards as either equity or liabilities, and the classification on the statement of cash flows. Additionally, the guidance simplifies two areas specific to entities other than public business entities allowing them to apply a practical expedient to estimate thetheir expected term for all awards with performance or service conditions that have certain characteristics and also allowing them to make a one-time election to switch from measuring all liability-classified awards at fair value to measuring them at intrinsic value. The amendments will be effective for the Company for annual periods beginning after December 15, 2016 and interim periods within those annual periods. These amendments did not have a material effect on the Company’s financial statements.

In June 2016, the FASB issued guidance to change the accounting for credit losses and modify the impairment model for certain debt securities. The amendments will be effective for the Company for reporting periods beginning after December 15, 2019. Early adoption is permitted for all organizations for periods beginning after December 15, 2018.

The Company will apply the amendments to the ASU through a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption. While early adoption is permitted beginning in first quarter 2019, we do not expect to elect that option. We are evaluating the impact ~~of the ASU~~ on our consolidated financial statements. In addition to our allowance for loan losses, we will also record an allowance for credit losses on debt securities instead of applying the impairment model currently utilized. The amount of the adjustments will be impacted by each portfolio’s composition and credit quality at the adoption date as well as economic conditions and forecasts at that time.

In August 2016, the FASB amended the Statement of Cash Flows topic of the Accounting Standards Codification to clarify how certain cash receipts and cash payments are presented and classified in the statement of cash flows, and in November 2016, the FASB amended the Statement of Cash Flows topic of the Accounting Standards Codification to clarify the presentation and classification how restricted cash is presented and classified in the statement of cash flows. The amendments will be effective for the Company for fiscal years beginning after December 15, 2017 including interim periods within those fiscal years. The Company does not expect these amendments to have a material effect on its financial statements.

In November 2016, the FASB amended the Statement of Cash Flows topic of the Accounting Standards Codification to clarify how restricted cash is presented and classified in the statement of cash flows. The amendments will be effective for the Company for fiscal years beginning after December 15, 2017 including interim periods within those fiscal years. Early adoption is permitted. The Company does not expect these amendments to have a material effect on its financial statements.

In January 2017, the FASB updated the Accounting Changes and Error Corrections and the Investments—Equity Method and Joint Ventures Topics of the Accounting Standards Codification. The ASU incorporates into the Accounting Standards Codification recent SEC guidance about disclosing, under SEC SAB Topic 11.M, the effect on financial statements of adopting the revenue, leases, and credit losses standards. The ASU was effective upon issuance. The Company is currently evaluating the impact on additional disclosure requirements as each of the standards is adopted, however it does not expect these amendments to have a material effect on its financial position, results of operations or cash flows.

In May 2017, the FASB amended the requirements in the Compensation—Stock Compensation Topic of the Accounting Standards Codification related to changes to the terms or conditions of a share-based payment award. The amendments provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. The amendments will be effective for the Company for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted. The Company does not expect these amendments to have a material effect on its financial statements.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

See Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Market Risk and Interest Rate Sensitivity and – Liquidity ~~Risk.~~and Capital Resources.

Item 4. CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures

Management, including our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports we file and submit under the Exchange Act is (i) recorded, processed, summarized and reported as and when required and (ii) accumulated and communicated to our management, including our Chief Executive Officer and the Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There has been no change in the Company’s internal control over financial reporting during the three months ended ~~September~~June 30, ~~2017,~~2019, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS.

We are a party to claims and lawsuits arising in the course of normal business activities. Management is not aware of any material pending legal proceedings against the Company which, if determined adversely, would have a material adverse impact on the company’s financial position, results of operations or cash flows.

Item 1A1A. RISK FACTORS.

Investing in shares of our common stock involves certain risks, including those identified and described in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2016,~~2018, as well as cautionary statements contained in this Form 10-Q, including those under the caption “Cautionary Warning Regarding Forward-Looking Statements” set forth in Part 1, Item 2 of this Form 10-Q, risks and matters described elsewhere in this Form 10-Q, and in our other filings with the SEC.

There have been no material changes to the risk factors disclosed in Item 1A. of Part I in our Annual Report on Form 10-K for the year ended December 31, 2018.

Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

~~Not applicable~~None.

Item 3. DEFAULTS UPON SENIOR SECURITIES.

~~Not applicable~~None.

Item 4. MINE SAFETY DISCLOSURES.

~~Not applicable~~None.

Item 5. OTHER INFORMATION.

~~Not applicable~~Effective April 9, 2019, the Company entered into a contract with a company owned by one of its directors, Mr. Mark Cothran, to provide development services related to the purchase of land and construction of a new office building in Greenville, South Carolina. The contract provides for monthly payments of $50,000 related to these services through December 31, 2019.

Item 6. EXHIBITS.

The exhibits required to be filed as part of this Quarterly Report on Form 10-Q are listed in the Index to Exhibits attached hereto and are incorporated herein by reference.

~~SIGNATURES~~

~~Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.~~

	~~SOUTHERN FIRST BANCSHARES, INC.~~
	~~Registrant~~

~~Date: October 30, 2017~~	~~/s/R. Arthur Seaver, Jr.~~
	~~R. Arthur Seaver, Jr.~~
	~~Chief Executive Officer (Principal Executive Officer)~~

~~Date: October 30, 2017~~	~~/s/Michael D. Dowling~~
	~~Michael D. Dowling~~
	~~Chief Financial Officer (Principal Financial and Accounting Officer)~~

INDEX TO EXHIBITS

Exhibit
Number		Description
~~1.1~~10.1		~~Loan~~Development Services Agreement between the Bank and ~~Security Agreement,~~Cothran Properties, LLC dated as of June 30, 2017, by and between Southern First Bancshares, Inc. and CenterState Bank, National Association (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed July 3, 2017).April 9, 2019.

~~1.2~~31.1		Promissory Note, dated as of June 30, 2017, by and between Southern First Bancshares, Inc. and CenterState Bank, National Association (incorporated by reference to Exhibit 10.2 of the Company’s Form 8-K filed July 3, 2017).

~~1.3~~		Pledge Agreement, dated as of June 30, 2017, by and between Southern First Bancshares, Inc. and CenterState Bank, National Association (incorporated by reference to Exhibit 10.3 of the Company’s Form 8-K filed July 3, 2017).

~~31.1~~		Rule 13a-14(a) Certification of the Principal Executive Officer.

31.2		Rule 13a-14(a) Certification of the Principal Financial Officer.

32		Section 1350 Certifications.

101		The following materials from the Quarterly Report on Form 10-Q of Southern First Bancshares, Inc. for the quarter ended ~~September~~June 30, ~~2017,~~2019, formatted in eXtensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statement of Changes in Shareholders’ Equity, (v) Consolidated Statements of Cash Flows and (vi) Notes to Unaudited Consolidated Financial Statements.

*		Management contract or compensatory plan or arrangement

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		SOUTHERN FIRST BANCSHARES, INC.
		Registrant

Date: August 2, 2019		/s/R. Arthur Seaver, Jr.
		R. Arthur Seaver, Jr.
		Chief Executive Officer (Principal Executive Officer)

Date: August 2, 2019		/s/Michael D. Dowling
		Michael D. Dowling
		Chief Financial Officer (Principal Financial and Accounting Officer)

4845

	~~864-679-9000~~
	~~(Registrant’s telephone number, including area code)~~
	~~Not Applicable~~
	~~(Former name, former address, and former fiscal year, if changed since last report)~~


				As of September 30, 2017
(dollars in thousands)	Level 1		Level 2	Level 3	Total
Assets
Impaired loans	$	-	2,669	6,146	8,815
Other real estate owned		-	307	113	420
Total assets measured at fair value on a nonrecurring basis	$	-	2,976	6,259	9,235