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~~~~March 31, 2020~~
	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~~

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2021
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)

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.		29607
~~Greenville, S.C.~~		~~29607~~
(Address of principal executive offices)		(Zip Code)

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)

~~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)~~

Securities registered pursuant to Section 12(b) of the Act:

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
Common Stock	SFST	~~SFST~~		The Nasdaq Global Market

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 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, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☐	☐	Accelerated filer		☒
Non-accelerated filer	☐	☐	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: ~~7,717,582~~7,853,096 shares of common stock, par value $0.01 per share, were issued and outstanding as of April ~~28, 2020.~~27, 2021.

SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARY

March 31, ~~2020~~2021 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	42 40

Item 4.		Controls and Procedures	42 41

PART II – OTHER INFORMATION
Item 1.Legal Proceedings		41
Item 1.1A.Risk Factors		~~Legal Proceedings~~	42 41

~~Item 1A.~~		~~Risk Factors~~	42

Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds	44 41

Item 3.		Defaults upon Senior Securities	44 42

Item 4.		Mine Safety Disclosures	44 42
Item 5.Other Information			42
~~Item 5.~~		~~Other Information~~	44

Item 6.Exhibits	42	~~Exhibits~~	44

PART I. CONSOLIDATED FINANCIAL INFORMATION

Item 1. CONSOLIDATED FINANCIAL STATEMENTS

SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

March 31, December 31,
(dollars in thousands, except share data) 2020 2019
      (Unaudited)       (Audited)
ASSETS
Cash and cash equivalents:
Cash and due from banks
$      17,521 19,196
Federal funds sold
40,277 89,256
Interest-bearing deposits with banks
83,314 19,364
Total cash and cash equivalents
141,112 127,816
Investment securities:
Investment securities available for sale
70,507 67,694
Other investments
5,341 6,948
Total investment securities
75,848 74,642
Mortgage loans held for sale 34,948 27,046
Loans 2,030,261        1,943,525
Less allowance for loan losses
(22,462 ) (16,642 )
Loans, net
2,007,799 1,926,883
Bank owned life insurance 40,281 40,011
Property and equipment, net 58,656 58,478
Deferred income taxes 4,087 4,275
Other assets 9,518 8,044
Total assets
$ 2,372,249 2,267,195
LIABILITIES
Deposits $ 2,025,698 1,876,124
Federal Home Loan Bank advances and other borrowings 65,000 110,000
Subordinated debentures 35,917 35,890
Other liabilities 35,159 39,321
Total liabilities
2,161,774 2,061,335
SHAREHOLDERS’ EQUITY
Preferred stock, par value $.01 per share, 10,000,000 shares authorized - -
Common stock, par value $.01 per share, 10,000,000 shares authorized, 7,717,582 and 7,672,678 shares issued and outstanding at March 31, 2020 and December 31, 2019, respectively 77 77
Nonvested restricted stock (1,105 ) (803 )
Additional paid-in capital 107,529 106,152
Accumulated other comprehensive income (loss) 410 (298 )
Retained earnings 103,564 100,732
Total shareholders’ equity
210,475 205,860
Total liabilities and shareholders’ equity
$ 2,372,249 2,267,195

	March 31,			December 31,
(dollars in thousands, except share data)	2021				2020
	(Unaudited)				(Audited)
ASSETS
Cash and cash equivalents:
Cash and due from banks	$	12,621				12,920
Federal funds sold		74,268				21,744
Interest-bearing deposits with banks		68,456				66,023
Total cash and cash equivalents		155,345				100,687
Investment securities:
Investment securities available for sale		92,997				94,729
Other investments		1,770				3,635
Total investment securities		94,767				98,364
Mortgage loans held for sale		57,073				60,257
Loans		2,183,682				2,142,867
Less allowance for loan losses		(43,499	)			(44,149	)
Loans, net		2,140,183				2,098,718
Bank owned life insurance		48,869				41,102
Property and equipment, net		61,710				60,236
Deferred income taxes		9,813				9,518
Other assets		12,162				13,705
Total assets	$	2,579,922				2,482,587
LIABILITIES
Deposits	$	2,258,751				2,142,758
Federal Home Loan Bank advances and other borrowings		0-				25,000
Subordinated debentures		36,025				35,998
Other liabilities		45,625				50,537
Total liabilities		2,340,401				2,254,293
SHAREHOLDERS’ EQUITY
Preferred stock, par value $.01 per share, 10,000,000 shares authorized		0-				0-
Common stock, par value $.01 per share, 10,000,000 shares authorized, 7,853,096 and 7,772,748 shares issued and outstanding at March 31, 2021 and December 31, 2020, respectively		79				78
Nonvested restricted stock		(1,075	)			(698	)
Additional paid-in capital		111,181				108,831
Accumulated other comprehensive income (loss)		(90	)			1,023
Retained earnings		129,426				119,060
Total shareholders’ equity		239,521				228,294
Total liabilities and shareholders’ equity	$	2,579,922				2,482,587

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
ended March 31,
(dollars in thousands, except share data) 2020 2019
Interest income
Loans
$ 23,367 20,889
Investment securities
396 549
Federal funds sold and interest-bearing deposits with banks
103 174
Total interest income
23,866 21,612
Interest expense
Deposits
5,174 5,375
Borrowings
594 419
Total interest expense
5,768 5,794
Net interest income
18,098 15,818
Provision for loan losses
6,000 300
Net interest income after provision for loan losses
12,098 15,518
Noninterest income
Mortgage banking income
2,668 1,857
Service fees on deposit accounts
262 265
ATM and debit card income
398 380
Income from bank owned life insurance
270 216
Other income
318 276
Total noninterest income
3,916 2,994
Noninterest expenses
Compensation and benefits
7,871 6,783
Occupancy
1,536 1,339
Outside service and data processing costs
1,192 960
Insurance
320 318
Professional fees
497 439
Marketing
258 260
Other
698 549
Total noninterest expenses
12,372 10,648
Income before income tax expense
3,642 7,864
Income tax expense 810 1,855
Net income available to common shareholders $ 2,832 6,009
Earnings per common share
Basic
$ 0.37 0.81
Diluted
0.36 0.78
Weighted average common shares outstanding
Basic
7,678,598 7,459,342
Diluted
7,827,173 7,741,860

	For the three months
	ended March 31,
(dollars in thousands, except share data)	2021			2020
Interest income
Loans	$	22,465			23,367
Investment securities		301			396
Federal funds sold and interest-bearing deposits with banks		47			103
Total interest income		22,813			23,866
Interest expense
Deposits		1,155			5,174
Borrowings		385			594
Total interest expense		1,540			5,768
Net interest income		21,273			18,098
Provision for loan losses		(300	)		6,000
Net interest income after provision for loan losses		21,573			12,098
Noninterest income
Mortgage banking income		4,633			2,668
Service fees on deposit accounts		185			262
ATM and debit card income		470			398
Income from bank owned life insurance		267			270
Other income		349			318
Total noninterest income		5,904			3,916
Noninterest expenses
Compensation and benefits		6,683			6,390
Mortgage production costs		2,867			1,807
Occupancy		1,637			1,533
Other real estate owned expenses		387			0-
Outside service and data processing costs		1,142			1,070
Insurance		301			320
Professional fees		421			400
Marketing		182			230
Other		542			622
Total noninterest expenses		14,162			12,372
Income before income tax expense		13,315			3,642
Income tax expense		2,949			810
Net income available to common shareholders	$	10,366			2,832
Earnings per common share
Basic	$	1.33			0.37
Diluted		1.31			0.36
Weighted average common shares outstanding
Basic		7,774,515			7,678,598
Diluted		7,908,537			7,827,173

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
ended March 31,
(dollars in thousands) 2020       2019
Net income $      2,832 6,009
Other comprehensive income:
Unrealized gain on securities available for sale:
Unrealized holding gain arising during the period, pretax 895 684
Tax expense (187 ) (143 )
Reclassification of realized gain - (4 )
Tax expense - 1
Other comprehensive income 708 538
Comprehensive income $ 3,540 6,547

	For the three months
	ended March 31,
(dollars in thousands)	2021			2020
Net income	$	10,366			2,832
Other comprehensive income:
Unrealized gain on securities available for sale:
Unrealized holding gain (loss) arising during the period, pretax		(1,409	)		895
Tax (expense) benefit		296			(187	)
Reclassification of realized gain		0-			0-
Tax expense		0-			0-
Other comprehensive income (loss)		(1,113	)		708
Comprehensive income	$	9,253			3,540

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 THREE MONTHS ENDED MARCH 31, ~~2020~~2021 AND ~~2019~~
2020

(Unaudited)

Accumulated
Nonvested Additional other
Common stock Preferred stock restricted paid-in comprehensive Retained
(dollars in thousands, except share data) Shares Amount Shares Amount stock capital loss earnings Total
December 31, 2018 7,466,481 75 - - (741 ) 102,625 (917 ) 72,874 173,916
Net income - - - - - - - 6,009 6,009
Proceeds from exercise of stock options 28,455 - - - - 322 - - 322
Issuance of restricted stock 10,700 - - - (347 ) 347 - - -
Compensation expense related to restricted stock, net of tax - - - - 95 - - - 95
Compensation expense related to stock options, net of tax - - - - - 306 - - 306
Other comprehensive income - - - - - - 538 - 538

March 31, 2019 7,505,636 $ 75 - $ - $ (993 ) $ 103,600 $ (379 ) $ 78,883 $ 181,186
December 31, 2019 7,672,678 77 - - (803 ) 106,152 (298 ) 100,732 205,860
Net income - - - - - - - 2,832 2,832
Proceeds from exercise of stock options 35,404 - - - - 741 - - 741
Issuance of restricted stock 9,500 - - - (406 ) 406 - - -
Compensation expense related to restricted stock, net of tax - - - - 104 - - - 104
Compensation expense related to stock options, net of tax - - - - - 230 - - 230
Other comprehensive income - - - - - - 708 - 708

March 31, 2020 7,717,582 $ 77 - $ - $ (1,105 ) $ 107,529 $ 410 $ 103,564 $ 210,475

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


												Accumulated
							Nonvested			Additional		other
	Common stock			Preferred stock			restricted			paid-in		comprehensive			Retained
(dollars in thousands, except share data)	Shares	Amount		Shares	Amount		stock			capital		income (loss)			earnings		Total
December 31, 2019	7,672,678	$	77	0-	$	0-	$	(803	)	$	106,152	$	(298	)	$	100,732	$	205,860
Net income	-		-	-		-		-			-		-			2,832		2,832
Proceeds from exercise of stock options	35,404		-	-		-		-			741		-			-		741
Issuance of restricted stock	9,500		-	-		-		(406	)		406		-			-		-
Compensation expense related to restricted stock, net of tax	-		-	-		-		104			-		-			-		104
Compensation expense related to stock options, net of tax	-		-	-		-		-			230		-			-		230
Other comprehensive income	-		-	-		-		-			-		708			-		708

March 31, 2020	7,717,582	$	77	0-	$	0-	$	(1,105	)	$	107,529	$	410		$	103,564	$	210,475
December 31, 2020	7,772,748		78	0-		0-		(698	)		108,831		1,023			119,060		228,294
Net income	-		-	-		-		-			-		-			10,366		10,366
Proceeds from exercise of stock options	69,598		1	-		-		-			1,577		-			-		1,578
Issuance of restricted stock	10,750		-	-		-		(477	)		477		-			-		-
Compensation expense related to restricted stock, net of tax	-		-	-		-		100			-		-			-		100
Compensation expense related to stock options, net of tax	-		-	-		-		-			296		-			-		296
Other comprehensive loss	-		-	-		-		-			-		(1,113	)		-		(1,113	)

March 31, 2021	7,853,096	$	79	0-	$	0-	$	(1,075	)	$	111,181	$	(90	)	$	129,426	$	239,521

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 three months ended
       March 31,
(dollars in thousands) 2020 2019
Operating activities
Net income $         2,832 6,009
Adjustments to reconcile net income to cash provided by (used for) operating activities:
Provision for loan losses 6,000 300
Depreciation and other amortization 549 453
Accretion and amortization of securities discounts and premium, net 116 83
Net change in operating leases 55 447
Compensation expense related to stock options and restricted stock grants 334 401
Gain on sale of loans held for sale (2,778 ) (1,775 )
Loans originated and held for sale (95,423 )      (55,178 )
Proceeds from sale of loans held for sale 90,299 56,801
Increase in cash surrender value of bank owned life insurance (270 ) (216 )
Decrease in deferred tax asset - 1
Increase in other assets, net (1,490 ) (400 )
Increase (decrease) in other liabilities (3,782 ) 5,978
Net cash provided by (used for) operating activities (3,558 ) 12,904
Investing activities
Increase (decrease) in cash realized from:
Increase in loans, net (86,916 ) (56,643 )
Purchase of property and equipment (1,119 ) (266 )
Purchase of investment securities:
Available for sale (6,302 ) -
Payments and maturities, calls and repayments of investment securities:
Available for sale 4,269 2,205
Other investments 1,607 812
Net cash used for investing activities (88,461 ) (53,892 )
Financing activities
Increase (decrease) in cash realized from:
Increase in deposits, net 149,574 110,099
Decrease in Federal Home Loan Bank advances and other borrowings, net (45,000 ) (25,000 )
Proceeds from the exercise of stock options and warrants 741 322
Net cash provided by financing activities 105,315 85,421
Net increase in cash and cash equivalents 13,296 44,433
Cash and cash equivalents at beginning of the period 127,816 72,873
Cash and cash equivalents at end of the period $ 141,112 117,306
Supplemental information
Cash paid for
Interest $ 7,103 5,570
Income taxes - -
Schedule of non-cash transactions
Unrealized gain on securities, net of income taxes 708 541
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.~~


	For the three months ended
	March 31,
(dollars in thousands)	2021			2020
Operating activities
Net income	$	10,366			2,832
Adjustments to reconcile net income to cash provided by (used for) operating activities:
Provision for loan losses		(300	)		6,000
Depreciation and other amortization		551			549
Accretion and amortization of securities discounts and premium, net		232			116
Loss on sale of real estate owned		380			0-
Gain on sale of fixed assets		(10	)		0-
Net change in operating leases		121			55
Compensation expense related to stock options and restricted stock grants		396			334
Gain on sale of loans held for sale		(4,813	)		(2,778	)
Loans originated and held for sale		(173,380	)		(95,423	)
Proceeds from sale of loans held for sale		181,377			90,299
Increase in cash surrender value of bank owned life insurance		(267	)		(270	)
Decrease in deferred tax asset		1			0-
Decrease (increase) in other assets		376			(1,490	)
Decrease in other liabilities		(4,461	)		(3,782	)
Net cash provided by (used for) operating activities		10,569			(3,558	)
Investing activities
Increase (decrease) in cash realized from:
Increase in loans, net		(41,165	)		(86,916	)
Purchase of property and equipment		(2,609	)		(1,119	)
Purchase of investment securities:
Available for sale		(5,366	)		(6,302	)
Payments and maturities, calls and repayments of investment securities:
Available for sale		5,458			4,269
Other investments		1,862			1,607
Purchase of bank owned life insurance		(7,500	)		0-
Proceeds from sale of fixed assets		50			0-
Proceeds from sale of other real estate owned		788			0-
Net cash used for investing activities		(48,482	)		(88,461	)
Financing activities
Increase (decrease) in cash realized from:
Increase in deposits, net		115,993			149,574
Decrease in Federal Home Loan Bank advances and other borrowings, net		(25,000	)		(45,000	)
Proceeds from the exercise of stock options		1,578			741
Net cash provided by financing activities		92,571			105,315
Net increase in cash and cash equivalents		54,658			13,296
Cash and cash equivalents at beginning of the period		100,687			127,816
Cash and cash equivalents at end of the period	$	155,345			141,112
Supplemental information
Cash paid for
Interest	$	2,767			7,103
Income taxes		0-			0-
Schedule of non-cash transactions
Unrealized gain (loss) on securities, net of income taxes		(1,113	)		708

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”) is a South Carolina corporation that owns all of the capital stock of Southern First Bank (the “Bank”) and all of the stock of Greenville First Statutory Trusts I and II (collectively, the “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”). 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-month period ended March 31, ~~2020~~2021 are not necessarily indicative of the results that may be expected for the year ending December 31, ~~2020.~~2021. 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, ~~2019~~2020 as filed with the U.S. Securities and Exchange Commission (“SEC”) on March 2, ~~2020.~~2021. 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.

Risks and Uncertainties
~~In December 2019, a novel strain~~

The unprecedented and rapid spread of coronavirus (“COVID-19”) was reported to have surfaced in China, and has since spread to a number of other countries, including the United States. In March 2020, the World Health Organization declared COVID-19 a global pandemic and the United States declared a National Public Health Emergency. The COVID-19 pandemic has severely restricted the level of economic activity in the Bank’s markets. In response to the COVID-19 pandemic, the governments of the states in which the Bank has retail offices, and of most other states, have taken preventative or protective actions, such as imposing restrictions on travel and business operations, advising or requiring individuals to limit or forego their time outside of their homes, and ordering temporary closures of businesses that have been deemed to be non-essential.

~~The impact of the COVID-19 pandemic is fluid and continues to evolve, adversely affecting many of the Bank’s clients. The COVID-19 pandemic~~ and its associated impacts on trade (including supply chains and export levels), travel, employee productivity, unemployment, consumer spending, and other economic activities has resulted in less economic activity, lower equity market valuations and significant volatility and disruption in financial markets, and has had an adverse effect on the Company’s business, financial condition and results of operations. The ultimate extent of the impact of the COVID-19 pandemic on the Company’s business, financial condition and results of operations is currently uncertain and the timing and pace of recovery will depend on various developments and other factors, including, among others, the duration and scope of the pandemic, as well as governmental, regulatory and private sector responses to the pandemic, and the associated impacts on the economy, financial markets and our clients, employees and vendors.

The Company’s business, financial condition and results of operations generally rely upon the ability of the Bank’s borrowers to repay their loans, the value of collateral underlying the Bank’s secured loans, and demand for loans and other products and services the Bank offers, which are highly dependent on the business environment in the Bank’s primary markets where it operates and in the United States as a whole.

On March 3, 2020, the Federal Reserve reduced the target federal funds rate by 50 basis points, followed by an additional reduction of 100 basis points on March 16, 2020. These reductions in interest rates and other effects of the COVID-19 pandemic ~~may adversely affect the~~have had, and are expected to continue to have, possibly materially, an adverse effect on Company’s business, financial condition and results of operations. ~~As a result of~~For instance, the ~~spread of COVID-19, economic uncertainties have arisen which are likely to negatively impact net~~pandemic has had negative effects on the Bank’s interest income, provision for loan losses, and certain transaction-based line items of noninterest income. Other financial ~~impact~~impacts could occur though such potential impact is unknown at this time.

As of March 31, ~~2020,~~2021, the ~~Company~~Company’s and ~~Bank~~the Bank’s capital ratios were in excess of all regulatory requirements. While management believes that we have sufficient capital to withstand an extended economic recession brought about by the COVID-19 pandemic, our reported and regulatory capital ratios could be adversely impacted by further credit losses.

The Company maintains access to multiple sources of liquidity, including a $15.0 million holding company line of credit with another bank which could be used to support capital ratios at the subsidiary bank. As of ~~April 21, 2020,~~March 31, 2021, the ~~entire~~ $15.0 million line was ~~being utilized by the Company.~~unused.

As of March 31, 2020, over 400 of our clients had requested loan payment deferrals or payments of interest only on loans totaling $380.2 million, of which 93.3% were commercial loans. In accordance with interagency guidance issued in March 2020, these short-term deferrals are not considered troubled debt restructurings (“TDRs”) unless the borrower was previously experiencing financial difficulty; however, three client relationships, with loans totaling $2.9 million, were granted short-term loan modifications which were considered TDRs due to the client experiencing financial difficulty prior to the pandemic.Reclassifications

In addition, the risk-rating on COVID-19 modified loans did not change, and these loans will not be considered past due until after the deferral period is over and scheduled payments resume. The credit quality of these loans will be reevaluated after the deferral period ends. The table below provides a breakdown of loan modification requests due to the COVID-19 pandemic by type of concession.

March 31, 2020
(dollars in thousands) # Loans Amount % of Total Portfolio
Payment deferrals 252 $ 208,555 10.3 %
Interest only 170 168,723 8.3 %
Financial difficulty (TDR) 6 2,925 0.1 %
428 $ 380,203 18.7 %

~~Through April 21, 2020, we have modified more than 750 loans totaling $591.8 million which remain predominately in the commercial loan categories.~~

While most industries have and will continue to experience adverse impacts as a result of the COVID-19 pandemic, we have identified nine loan categories considered to be “at-risk” of significant impact. The table below identifies these segments as well as the outstanding, committed and modified loan balances for each industry.

March 31, 2020
% of
% of Total Total Committed Total
Balance Loans Committed Balance Modified
(dollars in thousands) Outstanding Outstanding Balance Outstanding Balance % Modified
Religious organizations $ 56,306 2.8% $ 88,422 63.6% $ 1,539 2.7%
Entertainment facilities 4,605 0.2% 9,464 48.7% 255 5.5%
Hotels 82,227 4.1% 104,155 78.9% 6,050 7.4%
Personal care businesses 1,349 0.1% 1,385 97.4% 137 10.2%
Restaurants 48,352 2.4% 53,526 90.3% 3,673 7.6%
Sports facilities 22,229 1.1% 22,882 97.1% 683 3.1%
Travel related businesses 3,328 0.2% 4,085 81.5% 555 16.7%
Private healthcare facilities 36,462 1.8% 41,899 87.0% 12,531 34.4%
Non-essential retail 154,450 7.6% 160,702 96.1% 13,843 9.0%
Total $ 409,308 20.2% $ 486,520 84.1% $ 39,266 9.6%

~~As of April 21, 2020, the total outstanding balance within these nine portfolios was $413.4 million with approximately 48% of the balances having been modified.~~

We continue to monitor unfunded commitments through the pandemic, including home equity lines of credit, for evidence of increased credit exposure as borrowers utilize these lines for liquidity purposes.

~~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.

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 was originally 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 its processes.

In November 2019, the FASB issued guidance that addresses issues raised by stakeholders during the implementation of ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”. The amendments affect a variety of Topics in the Accounting Standards Codification. For public business entities that meet the definition of a smaller reporting company, such as the Company, the amendments are effective for fiscal years beginning after December 15, 2022 including interim periods within those fiscal years. Early adoption is permitted in any interim period as long as the Company has adopted to amendments in ASU 2016-13. Currently, the Company is evaluating the impact of adoption on its financial statements and does not expect to adopt the ASU before the effective period.

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:

March 31, 2020
Amortized       Gross Unrealized Fair
(dollars in thousands)       Cost Gains       Losses       Value
Available for sale
US government agencies $      500 - 1 499
SBA securities 519 - 18 501
State and political subdivisions 9,385 295 1 9,679
Asset-backed securities 12,929 - 643 12,286
Mortgage-backed securities
FHLMC 10,034 270 4 10,300
FNMA 33,057 702 135 33,624
GNMA 3,565 53 - 3,618
Total mortgage-backed securities 46,656 1,025 139 47,542
Total investment securities available for sale $ 69,989 1,320 802 70,507

December 31, 2019
Amortized Gross Unrealized Fair
      Cost       Gains          Losses       Value
Available for sale
US government agencies $      500 - 1 499
SBA securities 550 - 19 531
State and political subdivisions 4,205 3 24 4,184
Asset-backed securities 13,351 - 184 13,167
Mortgage-backed securities
FHLMC 10,609 14 15 10,608
FNMA 35,275 34 169 35,140
GNMA 3,581 5 21 3,565
Total mortgage-backed securities 49,465 53 205 49,313
Total $ 68,071 56 433 67,694


	March 31, 2021
	Amortized		Gross Unrealized				Fair
(dollars in thousands)	Cost		Gains		Losses		Value
Available for sale
US government agencies	$	7,494		1		232		7,263
SBA securities		498		0-		18		480
State and political subdivisions		19,632		451		272		19,811
Asset-backed securities		11,234		58		9		11,283
Mortgage-backed securities
FHLMC		13,099		167		254		13,012
FNMA		33,870		424		377		33,917
GNMA		7,284		35		88		7,231
Total mortgage-backed securities		54,253		626		719		54,160
Total investment securities available for sale	$	93,111		1,136		1,250		92,997


	December 31, 2020
	Amortized		Gross Unrealized				Fair
	Cost		Gains		Losses		Value
Available for sale
US government agencies	$	6,500		1		8		6,493
SBA securities		504		0-		19		485
State and political subdivisions		18,614		804		30		19,388
Asset-backed securities		11,587		15		73		11,529
Mortgage-backed securities
FHLMC		12,157		206		47		12,316
FNMA		35,893		507		91		36,309
GNMA		8,179		53		23		8,209
Total mortgage-backed securities		56,229		766		161		56,834
Total	$	93,434		1,586		291		94,729

Contractual maturities and yields on the Company’s investment securities at March 31, ~~2020~~2021 and December 31, ~~2019~~2020 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.


	March 31, 2021
	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	$	0-		0-		2,497		0.36	%		3,832		1.12	%		934		1.48	%		7,263		0.91	%
SBA securities		0-		0-		0-		0-			0-		0-			480		0.99	%		480		0.99	%
State and political subdivisions		0-		0-		470		2.13	%		2,756		1.90	%		16,585		2.18	%		19,811		2.14	%
Asset-backed securities		0-		0-		0-		0-			1,888		1.15	%		9,395		0.97	%		11,283		1.00	%
Mortgage-backed securities		0-		0-		1,743		1.78	%		8,867		1.78	%		43,550		1.15	%		54,160		1.28	%
Total	$	0-		0-		4,710		1.06	%		17,343		1.59	%		70,944		1.37	%		92,997		1.40	%

March 31, 2020
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 $ - - 499 1.11% - - - - 499 1.11%
SBA securities - - - - - - 501 2.39% 501 2.39%
State and political subdivisions - - - - 972 2.65% 8,707 2.86% 9,679 2.84%
Asset-backed securities - - - - 1,402 2.22% 10,884 2.45% 12,286 2.43%
Mortgage-backed securities - - 3,224 1.80% 8,263 2.05% 36,055 2.34% 47,542 2.25%
Total $ - - 3,723 1.71% 10,637 2.13% 56,147 2.44% 70,507 2.36%

December 31, 2019
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 $ - - 499 1.97% - - - - 499 1.97%
SBA securities - - - - - - 531 2.62% 531 2.62%
State and political subdivisions - - 808 2.81% 1,283 2.96% 2,093 2.67% 4,184 2.79%
Asset-backed securities - - - - 1,493 2.34% 11,674 2.61% 13,167 2.58%
Mortgage-backed securities - - 3,368 1.78% 7,638 2.00% 38,307 2.24% 49,313 2.17%
Total $ - - 4,675 1.98% 10,414 2.17% 52,605 2.34% 67,694 2.29%


	December 31, 2020
	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	$	0-		0-		2,501		0.37	%		2,995		1.07	%		997		1.48	%		6,493		0.86	%
SBA securities		0-		0-		0-		0-			0-		0-			485		0.98	%		485		0.98	%
State and political subdivisions		0-		0-		470		2.13	%		3,053		1.98	%		15,865		2.23	%		19,388		2.18	%
Asset-backed securities		0-		0-		0-		0-			1,983		1.17	%		9,546		1.00	%		11,529		1.03	%
Mortgage-backed securities		0-		0-		2,044		1.77	%		9,544		1.74	%		45,246		1.36	%		56,834		1.44	%
Total	$	0-		0-		5,015		1.10	%		17,575		1.60	%		72,139		1.50	%		94,729		1.50	%

The tables below summarize gross unrealized losses on investment securities and the fair market value of the related securities at March 31, ~~2020~~2021 and December 31, ~~2019,~~2020, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position.

March 31, 2020
Less than 12 months 12 months or longer Total
Fair Unrealized Fair Unrealized Fair Unrealized
(dollars in thousands) # value losses # value losses # value losses
Available for sale
US government agencies 1 $ 499 $ 1 - $ - $ - 1 $ 499 $ 1
SBA securities - - - 1 501 18 1 501 18
State and political subdivisions 1 505 1 - - - 1 505 1
Asset-backed securities 5 5,489 365 5 6,797 278 10 12,286 643
Mortgage-backed securities
FHLMC 1 258 4 - - - 1 258 4
FNMA - - - 4 2,778 135 4 2,778 135
Total 8 $ 6,751 $ 371 10 $ 10,076 $ 431 18 $ 16,827 $ 802

December 31, 2019
Less than 12 months 12 months or longer Total
Fair Unrealized Fair Unrealized Fair Unrealized
(dollars in thousands) # value losses # value losses # value losses
Available for sale
US government agencies 1 $ 499 $ 1 - $ - $ - 1 $ 499 $ 1
SBA securities - - - 1 531 19 1 531 19
State and political subdivisions 2 2,093 24 - - - 2 2,093 24
Asset-backed securities 5 5,921 68 5 7,246 116 10 13,167 184
Mortgage-backed securities
FHLMC 4 3,842 2 4 2,323 13 8 6,165 15
FNMA 14 15,500 67 11 9,462 102 25 24,962 169
GNMA 2 2,240 6 1 734 15 3 2,974 21
Total 28 $ 30,095 $ 168 22 $ 20,296 $ 265 50 $ 50,391 $ 433


		March 31, 2021
		Less than 12 months					12 months or longer						Total
			Fair		Unrealized				Fair		Unrealized				Fair		Unrealized
(dollars in thousands)	#		value		losses		#		value		losses		#		value		losses
Available for sale
US government agencies		7	$	6,762	$	232		0-	$	0-	$	0-		7	$	6,762	$	232
SBA securities		0-		0-		0-		1		479		18		1		479		18
State and political subdivisions		11		7,239		272		0-		0-		0-		11		7,239		272
Asset-backed securities		0-		0-		0-		2		1,961		9		2		1,961		9
Mortgage-backed securities
FHLMC		6		6,896		254		0-		0-		0-		6		6,896		254
FNMA		12		14,882		367		2		1,251		10		14		16,133		377
GNMA		3		5,293		88		0-		0-		0-		3		5,293		88
Total		39	$	41,072	$	1,213		5	$	3,691	$	37		44	$	44,763	$	1,250


		December 31, 2020
		Less than 12 months					12 months or longer						Total
			Fair		Unrealized				Fair		Unrealized				Fair		Unrealized
	#		value		losses		#		value		losses		#		value		losses
Available for sale
US government agencies		3	$	2,992	$	8		0-	$	0-	$	0-		3	$	2,992	$	8
SBA securities		0-		0-		0-		1		484		19		1		484		19
State and political subdivisions		8		4,861		30		0-		0-		0-		8		4,861		30
Asset-backed securities		0-		0-		0-		6		6,998		73		6		6,998		73
Mortgage-backed securities
FHLMC		4		5,313		47		0-		0-		0-		4		5,313		47
FNMA		9		11,659		66		3		1,984		25		12		13,643		91
GNMA		2		3,838		23		0-		0-		0-		2		3,838		23
Total		26	$	28,663	$	174		10	$	9,466	$	117		36	$	38,129	$	291

At March 31, ~~2020,~~2021 the Company had ~~eight~~39 individual investments with a fair market value of ~~$6.8~~$41.1 million that were in an unrealized loss position for less than 12 months and ~~ten~~5 individual investments with a fair market value of ~~$10.1~~$3.7 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) March 31, 2020 December 31, 2019
Federal Home Loan Bank stock $ 4,803 6,386
Other investments 135 159
Investment in Trust Preferred securities 403 403
Total other investments $ 5,341 6,948


(dollars in thousands)	March 31, 2021		December 31, 2020
Federal Home Loan Bank stock	$	1,241		3,103
Other investments		126		129
Investment in Trust Preferred securities		403		403
Total other investments	$	1,770		3,635

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 March 31, ~~2020~~2021 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.

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 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 March 31, ~~2020,~~2021, mortgage loans held for sale totaled ~~$34.9~~$57.1 million compared to ~~$27.0~~$60.2 million at December 31, 2019. The $7.9 million increase in mortgage loans held for sale during the first quarter of 2020 was driven by an increase in volume of mortgage loans originated and sold in the favorable mortgage rate environment.2020.

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 to investors by the Company, 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. As appropriate, the Company establishes mortgage repurchase reserves related to various representations and warranties that reflect management’s estimate of losses.

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 ~~$3.6~~$3.9 million as of March 31, ~~2020~~2021 and ~~$3.3 million as of~~ December 31, ~~2019.~~2020.

March 31, 2020 December 31, 2019
(dollars in thousands) Amount % of Total Amount % of Total
Commercial
Owner occupied RE $ 422,124 20.8% $ 407,851 21.0%
Non-owner occupied RE 534,846 26.3% 501,878 25.8%
Construction 74,758 3.7% 80,486 4.1%
Business 317,702 15.7% 308,123 15.9%
Total commercial loans 1,349,430 66.5% 1,298,338 66.8%
Consumer
Real estate 427,697 21.1% 398,245 20.5%
Home equity 183,099 9.0% 179,738 9.3%
Construction 45,240 2.2% 41,471 2.1%
Other 24,795 1.2% 25,733 1.3%
Total consumer loans 680,831 33.5% 645,187 33.2%
Total gross loans, net of deferred fees 2,030,261 100.0% 1,943,525 100.0%
Less—allowance for loan losses (22,462 ) (16,642 )
Total loans, net $ 2,007,799 $ 1,926,883

March 31, 2021
December 31, 2020
(dollars in thousands)
Amount
% of Total
Amount
% of Total
Commercial
Owner occupied RE
$
448,505
20.5
%
$
433,320
20.2
%
Non-owner occupied RE
584,187
26.8
%
585,269
27.3
%
Construction
51,996
2.4
%
61,467
2.9
%
Business
303,895
13.9
%
307,599
14.4
%
Total commercial loans
1,388,583
63.6
%
1,387,655
64.8
%
Consumer
Real estate
574,541
26.3
%
536,311
25.0
%
Home equity
154,157
7.1
%
156,957
7.3
%
Construction
44,170
2.0
%
40,525
1.9
%
Other
22,231
1.0
%
21,419
1.0
%
Total consumer loans
795,099
36.4
%
755,212
35.2
%
Total gross loans, net of deferred fees
2,183,682
100.0
%
2,142,867
100.0
%
Less—allowance for loan losses
(43,499
)
(44,149
)
Total loans, net
$
2,140,183
$
2,098,718

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.

March 31, 2020
After one
One year but within After five
(dollars in thousands)       or less       five years       years       Total
Commercial
Owner occupied RE $      35,613 143,626 242,885 422,124
Non-owner occupied RE 53,806 276,462 204,578 534,846
Construction 12,178 28,280 34,300 74,758
Business 86,055 151,281 80,366 317,702
Total commercial loans 187,652 599,649 562,129 1,349,430
Consumer
Real estate 15,969 74,920 336,808 427,697
Home equity 8,207 26,334 148,558 183,099
Construction 14,698 1,121 29,421 45,240
Other 5,696 14,763 4,336 24,795
Total consumer loans 44,570 117,138 519,123 680,831
Total gross loans, net of deferred fees $ 232,222 716,787 1,081,252 2,030,261
Loans maturing after one year with:
Fixed interest rates $      1,425,015
Floating interest rates 373,024


	March 31, 2021
			After one
	One year		but within		After five
(dollars in thousands)	or less		five years		years		Total
Commercial
Owner occupied RE	$	24,523		134,934		289,048		448,505
Non-owner occupied RE		46,417		328,193		209,577		584,187
Construction		20,043		10,372		21,581		51,996
Business		77,057		136,088		90,750		303,895
Total commercial loans		168,040		609,587		610,956		1,388,583
Consumer
Real estate		13,740		51,884		508,917		574,541
Home equity		3,637		22,883		127,637		154,157
Construction		802		1,361		42,007		44,170
Other		8,205		10,528		3,498		22,231
Total consumer loans		26,384		86,656		682,059		795,099
Total gross loans, net of deferred fees	$	194,424		696,243		1,293,015		2,183,682
Loans maturing after one year with:
Fixed interest rates							$	1,636,382
Floating interest rates								352,876

December 31, 2019
After one
One year but within After five
(dollars in thousands)       or less       five years       years       Total
Commercial
Owner occupied RE $      40,476 147,945 219,430 407,851
Non-owner occupied RE 55,187 267,879 178,812 501,878
Construction 31,035 19,278 30,173 80,486
Business 84,452 146,051 77,620 308,123
Total commercial loans 211,150 581,153 506,035 1,298,338
Consumer
Real estate 16,663 82,445 299,137 398,245
Home equity 9,921 25,828 143,989 179,738
Construction 13,405 1,222 26,844 41,471
Other 6,422 15,022 4,289 25,733
Total consumer 46,411 124,517 474,259 645,187
Total gross loan, net of deferred fees $ 257,561 705,670 980,294 1,943,525
Loans maturing after one year with:
Fixed interest rates $      1,310,744
Floating interest rates 375,220

December 31, 2020
After one
One year
but within
After five
(dollars in thousands)
or less
five years
years
Total
Commercial
Owner occupied RE
$
22,232
136,031
275,057
433,320
Non-owner occupied RE
39,359
335,249
210,661
585,269
Construction
21,824
15,785
23,858
61,467
Business
76,662
140,959
89,978
307,599
Total commercial loans
160,077
628,024
599,554
1,387,655
Consumer
Real estate
14,205
54,863
467,243
536,311
Home equity
4,824
23,835
128,298
156,957
Construction
1,629
1,234
37,662
40,525
Other
6,438
11,413
3,568
21,419
Total consumer
27,096
91,345
636,771
755,212
Total gross loan, net of deferred fees
$
187,173
719,369
1,236,325
2,142,867
Loans maturing after one year with:
Fixed interest rates
$
1,590,171
Floating interest rates
365,523

Paycheck Protection Program (“PPP”)

On March 27, 2020, President Trump signed the Coronavirus Aid, Relief, and Economic Security Act (the “CARES” Act or the “Act”) to provide emergency assistance and health care response for individuals, families, and businesses affected by the coronavirus pandemic. The Small Business Administration (“SBA”) received funding and authority through the Act to modify existing loan programs and establish a new loan program to assist small businesses nationwide adversely impacted by the COVID-19 emergency. The Act temporarily permits the SBA to guarantee 100% of certain loans under a new program titled the “Paycheck Protection Program” and also provides for forgiveness of up to the full principal amount of qualifying loans guaranteed under the PPP.

We became an approved SBA lender in March 2020 and processed 853 loans under the PPP for a total of $97.5 million during the second quarter of 2020. On June 26, 2020, we completed the sale of our PPP loan portfolio to The Loan Source Inc., together with its servicing partner, ACAP SME LLC.

The SBA is offering a second round of PPP loans through May 31, 2021; however, we do not intend to originate any new PPP loans, but through our relationship with The Loan Source Inc., we may receive a referral fee on PPP loans they originate to our clients. We did not receive any referral fees through March 31, 2021.

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 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.~~

•

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.

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

March 31, 2020
Owner Non-owner
(dollars in thousands) occupied RE occupied RE Construction Business Total
Current $ 419,978 531,119 74,758 315,562 1,341,417
30-59 days past due 1,595 3,275 - 1,909 6,779
60-89 days past due - 264 - - 264
Greater than 90 Days 551 188 - 231 970
$ 422,124 534,846 74,758 317,702 1,349,430

December 31, 2019
Owner Non-owner
occupied RE occupied RE Construction Business Total
Current $ 406,594 501,676 80,486 307,710 1,296,466
30-59 days past due 706 151 - 178 1,035
60-89 days past due - - - - -
Greater than 90 Days 551 51 - 235 837
$ 407,851 501,878 80,486 308,123 1,298,338


	March 31, 2021
	Owner		Non-owner
(dollars in thousands)	occupied RE		occupied RE		Construction		Business		Total
Current	$	448,298		583,489		51,996		303,808		1,387,591
30-59 days past due		0-		0-		0-		50		50
60-89 days past due		0-		147		0-		0-		147
Greater than 90 Days		207		551		0-		37		795
	$	448,505		584,187		51,996		303,895		1,388,583


	December 31, 2020
	Owner		Non-owner
(dollars in thousands)	occupied RE		occupied RE		Construction		Business		Total
Current	$	432,711		584,565		61,467		307,261		1,386,004
30-59 days past due		403		282		0-		35		720
60-89 days past due		0-		0-		0-		266		266
Greater than 90 Days		206		422		0-		37		665
	$	433,320		585,269		61,467		307,599		1,387,655

As of March 31, ~~2020~~2021 and December 31, ~~2019,~~2020, loans 30 days or more past due represented ~~0.60%~~0.12% and ~~0.23%~~0.17% of the Company’s total loan portfolio, respectively. Commercial loans 30 days or more past due were ~~0.39%~~0.05% and ~~0.10%~~0.08% of the Company’s total loan portfolio as of March 31, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively.

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

March 31, 2020
Owner Non-owner
(dollars in thousands) occupied RE occupied RE Construction Business Total
Pass $ 418,504 525,927 74,758 310,953 1,330,142
Special mention 1,321 865 - 3,271 5,457
Substandard 2,299 8,054 - 3,478 13,831
Doubtful - - - - -
$ 422,124 534,846 74,758 317,702 1,349,430

December 31, 2019
Owner Non-owner
occupied RE occupied RE Construction Business Total
Pass $ 404,237 492,941 80,486 301,504 1,279,168
Special mention 1,312 744 - 3,108 5,164
Substandard 2,302 8,193 - 3,511 14,006
Doubtful - - - - -
$ 407,851 501,878 80,486 308,123 1,298,338


	March 31, 2021
	Owner		Non-owner
(dollars in thousands)	occupied RE		occupied RE		Construction		Business		Total
Pass	$	445,915		505,500		51,861		297,637		1,300,913
Special mention		2,074		49,394		0-		1,930		53,398
Substandard		516		29,293		135		4,328		34,272
Doubtful		0-		0-		-		0-		0-
	$	448,505		584,187		51,996		303,895		1,388,583

December 31, 2020
Owner
Non-owner
(dollars in thousands)
occupied RE
occupied RE
Construction
Business
Total
Pass
$
430,291
576,095
61,328
301,838
1,369,552
Special mention
624
587
0-
1,703
2,914
Substandard
2,405
8,587
139
4,058
15,189
Doubtful
0-
0-
0-
0-
0-
$
433,320
585,269
61,467
307,599
1,387,655

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

March 31, 2020
(dollars in thousands) Real estate Home equity Construction Other Total
Current $ 426,127 180,486 45,240 24,790 676,643
30-59 days past due 559 1,527 - 5 2,091
60-89 days past due - 886 - - 886
Greater than 90 Days 1,011 200 - - 1,211
$ 427,697 183,099 45,240 24,795 680,831

December 31, 2019
(dollars in thousands) Real estate Home equity Construction Other Total
Current $ 396,445 179,051 41,471 25,650 642,617
30-59 days past due 799 369 - 83 1,251
60-89 days past due - 118 - - 118
Greater than 90 Days 1,001 200 - - 1,201
$ 398,245 179,738 41,471 25,733 645,187


	March 31, 2021
(dollars in thousands)	Real estate		Home equity		Construction		Other		Total
Current	$	573,372		153,771		44,170		22,231		793,544
30-59 days past due		551		189		0-		0-		740
60-89 days past due		0-		0-		0-		0-		0-
Greater than 90 Days		618		197		0-		0-		815
	$	574,541		154,157		44,170		22,231		795,099


	December 31, 2020
(dollars in thousands)	Real estate		Home equity		Construction		Other		Total
Current	$	534,648		156,657		40,525		21,419		753,249
30-59 days past due		0-		0-		0-		0-		0-
60-89 days past due		332		0-		0-		0-		332
Greater than 90 Days		1,331		300		0-		0-		1,631
	$	536,311		156,957		40,525		21,419		755,212

Consumer loans 30 days or more past due were ~~0.21%~~0.07% and ~~0.13%~~0.09% of total loans as of March 31, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively.

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

March 31, 2020
(dollars in thousands) Real estate Home equity Construction Other Total
Pass $ 420,588 178,520 45,240 24,487 668,835
Special mention 3,717 1,097 - 242 5,056
Substandard 3,392 3,482 - 66 6,940
Doubtful - - - - -
$ 427,697 183,099 45,240 24,795 680,831

December 31, 2019
(dollars in thousands) Real estate Home equity Construction Other Total
Pass $ 392,572 176,532 41,471 25,421 635,996
Special mention 2,267 775 - 261 3,303
Substandard 3,406 2,431 - 51 5,888
Doubtful - - - - -
$ 398,245 179,738 41,471 25,733 645,187

March 31, 2021
(dollars in thousands)
Real estate
Home equity
Construction
Other
Total
Pass
$
565,956
147,196
43,970
22,013
779,135
Special mention
3,993
3,888
200
167
8,248
Substandard
4,592
3,073
0-
51
7,716
Doubtful
0-
0-
0-
0-
0-
$
574,541
154,157
44,170
22,231
795,099

December 31, 2020
(dollars in thousands)
Real estate
Home equity
Construction
Other
Total
Pass
$
530,515
152,154
40,525
21,290
744,484
Special mention
1,968
1,005
0-
91
3,064
Substandard
3,828
3,798
0-
38
7,664
Doubtful
0-
0-
0-
0-
0-
$
536,311
156,957
40,525
21,419
755,212

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)       March 31, 2020       December 31, 2019
Commercial
Owner occupied RE $        - -
Non-owner occupied RE 3,268 188
Construction - -
Business 231 235
Consumer
Real estate 1,821 1,829
Home equity 427 431
Construction - -
Other - -
Nonaccruing troubled debt restructurings 4,186 4,111
Total nonaccrual loans, including nonaccruing TDRs 9,933 6,794
Other real estate owned - -
Total nonperforming assets $ 9,933 6,794
Nonperforming assets as a percentage of:
Total assets 0.42 % 0.30 %
Gross loans 0.49 % 0.35 %
Total loans over 90 days past due $ 2,181 2,038
Loans over 90 days past due and still accruing - -
Accruing troubled debt restructurings 7,939               5,219

(dollars in thousands)
March 31, 2021
December 31, 2020
Commercial
Owner occupied RE
$
0-
0-
Non-owner occupied RE
1,127
1,143
Construction
135
139
Business
190
195
Consumer
Real estate
2,762
2,536
Home equity
439
547
Construction
0-
0-
Other
0-
0-
Nonaccruing troubled debt restructurings
3,150
3,509
Total nonaccrual loans, including nonaccruing TDRs
7,803
8,069
Other real estate owned
0-
1,169
Total nonperforming assets
$
7,803
9,238
Nonperforming assets as a percentage of:
Total assets
0.30
%
0.37
%
Gross loans
0.36
%
0.43
%
Total loans over 90 days past due
$
1,610
2,296
Loans over 90 days past due and still accruing
0-
0-
Accruing troubled debt restructurings
4,379
4,893

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.

March 31, 2020
Recorded investment
Impaired loans Impaired loans
Unpaid with no related with related Related
Principal Impaired allowance for allowance for allowance for
(dollars in thousands) Balance loans loan losses loan losses loan losses
Commercial
Owner occupied RE $ 2,787 2,722 2,268 454 76
Non-owner occupied RE 7,586 7,085 5,485 1,600 486
Construction - - - - -
Business 2,628 2,539 540 1,999 824
Total commercial 13,001 12,346 8,293 4,053 1,386
Consumer
Real estate 3,036 3,030 1,966 1,064 362
Home equity 2,403 2,352 2,174 178 65
Construction - - - - -
Other 144 144 - 144 15
Total consumer 5,583 5,526 4,140 1,386 442
Total $ 18,584 17,872 12,433 5,439 1,828


			March 31, 2021
			Recorded investment
				Impaired loans		Impaired loans
	Unpaid			with no related		with related		Related
	Principal		Impaired	allowance for		allowance for		allowance for
(dollars in thousands)	Balance		loans	loan losses		loan losses		loan losses
Commercial
Owner occupied RE	$	1,593	1,490		1,490		0-		0-
Non-owner occupied RE		3,208	2,133		695		1,438		363
Construction		139	135		135		0-		0-
Business		2,302	2,209		277		1,932		808
Total commercial		7,242	5,967		2,597		3,370		1,171
Consumer
Real estate		4,767	4,393		2,933		1,460		388
Home equity		1,797	1,690		1,631		59		59
Construction		0-	0-		0-		0-		0-
Other		132	132		0-		132		17
Total consumer		6,696	6,215		4,564		1,651		464
Total	$	13,938	12,182		7,161		5,021		1,635

December 31, 2019
Recorded investment
Impaired loans Impaired loans
Unpaid with no related with related Related
Principal Impaired allowance for allowance for allowance for
(dollars in thousands) Balance loans loan losses loan losses loan losses
Commercial
Owner occupied RE $ 2,791 2,726 2,270 456 75
Non-owner occupied RE 4,512 4,051 2,419 1,632 465
Construction - - - - -
Business 1,620 1,531 558 973 452
Total commercial 8,923 8,308 5,247 3,061 992
Consumer
Real estate 2,727 2,720 1,638 1,082 364
Home equity 885 838 459 379 66
Construction - - - - -
Other 147 147 - 147 16
Total consumer 3,759 3,705 2,097 1,608 446
Total $ 12,682 12,013 7,344 4,669 1,438


			December 31, 2020
			Recorded investment
				Impaired loans		Impaired loans
	Unpaid			with no related		with related		Related
	Principal		Impaired	allowance for		allowance for		allowance for
(dollars in thousands)	Balance		loans	loan losses		loan losses		loan losses
Commercial
Owner occupied RE	$	1,753	1,649		1,497		152		76
Non-owner occupied RE		3,212	2,188		705		1,483		366
Construction		141	139		139		0-		0-
Business		2,892	2,449		279		2,170		897
Total commercial		7,998	6,425		2,620		3,805		1,339
Consumer
Real estate		4,362	4,031		3,108		923		190
Home equity		2,498	2,371		2,096		275		163
Construction		0-	0-		0-		0-		0-
Other		135	135		0-		135		17
Total consumer		6,995	6,537		5,204		1,333		370
Total	$	14,993	12,962		7,824		5,138		1,709

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 Year ended
March 31, 2020 March 31, 2019 December 31, 2019
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 $ 2,725 18 2,757 30 2,739 128
Non-owner occupied RE 7,108 62 2,977 49 4,161 255
Construction - - - - - -
Business 2,553 28 2,567 40 1,582 79
Total commercial 12,386 108 8,301 119 8,482 462
Consumer
Real estate 3,036 26 2,761 25 2,771 131
Home equity 2,355 12 1,677 30 853 42
Construction - - - - - -
Other 145 1 157 1 153 5
Total consumer 5,536 39 4,595 56 3,777 178
Total $ 17,922 147 12,896 175 12,259 640

Three months ended
Three months ended
Year ended
March 31, 2021
March 31, 2020
December 31, 2020
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
$
1,569
16
2,725
18
2,423
88
Non-owner occupied RE
2,161
62
7,108
62
4,217
221
Construction
137
2
0-
0-
56
6
Business
2,329
34
2,553
28
2,306
243
Total commercial
6,196
114
12,386
108
9,002
558
Consumer
Real estate
4,212
43
3,036
26
3,372
170
Home equity
2,030
16
2,355
12
2,128
5
Construction
0-
0-
0-
0-
0-
0-
Other
134
1
145
1
141
79
Total consumer
6,376
60
5,536
39
5,641
254
Total
$
12,572
174
17,922
147
14,643
812

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 March 31, 2020
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 $ 2,835 4,304 541 3,692 3,278 1,447 268 277 16,642
Provision for loan losses      1,170 1,711 153 1,006 1,326 381 147 106 6,000
Loan charge-offs - (221 ) - - - - - (45 ) (266 )
Loan recoveries - - - 16 2 68 - - 86
Net loan charge-offs - (221 ) - 16 2 68 - (45 ) (180 )
Balance, end of period $ 4,005         5,794 694 4,714      4,606 1,896 415    338 22,462
Net charge-offs to average loans (annualized) 0.04 %
Allowance for loan losses to gross loans 1.11 %
Allowance for loan losses to nonperforming loans 226.14 %

Three months ended March 31, 2019
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 $      2,726 3,811                615 3,616 3,081 1,348 275    290 15,762
Provision for loan losses 57 74 (43 ) 171 (56 ) 61 7 29 300
Loan charge-offs - - - - - - - (41 ) (41 )
Loan recoveries - 1 - 9 16 1 - 3 30
Net loan charge-offs - 1 - 9 16 1 - (38 ) (11 )
Balance, end of period $ 2,783 3,886 572 3,796     3,041 1,410 282 281 16,051
Net charge-offs to average loans (annualized) 0.00 %
Allowance for loan losses to gross loans 0.93 %
Allowance for loan losses to nonperforming loans 265.35 %


	Three months ended March 31, 2021
	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	$	8,145			12,049		1,154			7,845			10,453			3,249			747			507			44,149
Provision for loan losses		(991	)		3,146		(327	)		(785	)		(787	)		(423	)		(62	)		(71	)		(300	)
Loan charge-offs		0-			0-		0-			(267	)		0-			(139	)		0-			0-			(406	)
Loan recoveries		0-			0-		0-			55			0-			1			0-			0-			56
Net loan charge-offs		0-			0-		0-			(212	)		0-			(138	)		0-			0-			(350	)
Balance, end of period	$	7,154			15,195		827			6,848			9,666			2,688			685			436			43,499
Net charge-offs to average loans (annualized)																									0.07	%
Allowance for loan losses to gross loans																									1.99	%
Allowance for loan losses to nonperforming loans																									557.47	%


	Three months ended March 31, 2020
	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	$	2,835		4,304			541		3,692		3,278		1,447		268		277			16,642
Provision for loan losses		1,170		1,711			153		1,006		1,326		381		147		106			6,000
Loan charge-offs		0-		(221	)		0-		0-		0-		0-		0-		(45	)		(266	)
Loan recoveries		0-		0-			0-		16		2		68		0-		0-			86
Net loan charge-offs		0-		(221	)		0-		16		2		68		0-		(45	)		(180	)
Balance, end of period	$	4,005		5,794			694		4,714		4,606		1,896		415		338			22,462
Net charge-offs to average loans (annualized)																				0.04	%
Allowance for loan losses to gross loans																				1.11	%
Allowance for loan losses to nonperforming loans																				226.14	%

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

March 31, 2020
Allowance for loan losses Recorded investment in loans
(dollars in thousands) Commercial Consumer Total Commercial Consumer Total
Individually evaluated $ 1,386 442 1,828 12,346 5,526 17,872
Collectively evaluated 13,822 6,812 20,634 1,337,084 675,305 2,012,389
Total $ 15,208 7,254 22,462 1,349,430 680,831 2,030,261

December 31, 2019
Allowance for loan losses Recorded investment in loans
(dollars in thousands) Commercial Consumer Total Commercial Consumer Total
Individually evaluated $ 992 446 1,438 8,308 3,705 12,013
Collectively evaluated 10,380 4,824 15,204 1,290,030 641,482 1,931,512
Total $ 11,372 5,270 16,642 1,298,338 645,187 1,943,525


	March 31, 2021
	Allowance for loan losses				Recorded investment in loans
(dollars in thousands)	Commercial		Consumer	Total	Commercial	Consumer	Total
Individually evaluated	$	1,171	464	1,635	5,967	6,215	12,182
Collectively evaluated		28,853	13,011	41,864	1,382,616	788,884	2,171,500
Total	$	30,024	13,475	43,499	1,388,583	795,099	2,183,682


	December 31, 2020
	Allowance for loan losses				Recorded investment in loans
(dollars in thousands)	Commercial		Consumer	Total	Commercial	Consumer	Total
Individually evaluated	$	1,339	370	1,709	6,425	6,537	12,962
Collectively evaluated		27,826	14,614	42,440	1,381,230	748,675	2,129,905
Total	$	29,165	14,984	44,149	1,387,655	755,212	2,142,867

NOTE 5 – Troubled Debt Restructurings

At March 31, ~~2020,~~2021, the Company had 2417 loans totaling ~~$12.1~~$7.5 million compared to 1920 loans totaling ~~$9.3~~$8.4 million at December 31, ~~2019,~~2020, 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.

A restructuring that results in only a delay in payments that is insignificant is not considered an economic concession. In accordance with ~~interagency guidance, short term deferrals granted due~~the CARES Act, the Company implemented loan modification programs in response to the COVID-19 pandemic, ~~are~~and the Company elected the accounting policy in the CARES Act to not ~~considered TDRs unless~~apply TDR accounting to loans modified for borrowers impacted by the borrower was experiencing financial difficulty prior to the pandemic; however, three client relationships, with loans totaling $2.9 million, were granted short-term loan modifications which were considered TDRs due to the client experiencing financial difficulty prior to theCOVID-19 pandemic.

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 for the three months ended March 31, 2021 and 2020. ~~There were no loans determined to be a TDR during the three months ended March 31, 2019.~~

For the three months ended March 31, 2020
Pre- Post-
    modification modification
Renewals Reduced Converted Maturity Total outstanding outstanding
      deemed a       or deferred       to interest       date       Number       recorded       recorded
(dollars in thousands) concession payments only extensions of loans investment investment
Commercial
Business 1 1 $      1,037 $      1,037
Consumer
Real estate 1 1 322 322
Home equity 3 - - - 3 1,522 1,522
Total loans 5 - - - 5 $ 2,881 $ 2,881


	For the three months ended March 31, 2021
											Pre-			Post-
											modification			modification
	Renewals		Reduced		Converted		Maturity		Total		outstanding			outstanding
	deemed a		or deferred		to interest		date		Number		recorded			recorded
(dollars in thousands)	concession		payments		only		extensions		of loans			investment			investment
Consumer
Real estate		1		0-		0-		0-		1		$	153		$	153
Total loans		1		0-		0-		0-		1		$	153		$	153


	For the three months ended March 31, 2020
											Pre-			Post-
											modification			modification
	Renewals		Reduced		Converted		Maturity		Total		outstanding			outstanding
	deemed a		or deferred		to interest		date		Number		recorded			recorded
(dollars in thousands)	concession		payments		only		extensions		of loans			investment			investment
Commercial
Business		1		0-		0-		0-		1		$	1,037		$	1,037
Consumer
Real estate		1		0-		0-		0-		1			322			322
Home equity		3		0-		0-		0-		3			1,522			1,522
Total loans		5		0-		0-		0-		5		$	2,881		$	2,881

As of March 31, ~~2020~~2021 and ~~2019,~~2020, there were no loans modified as a TDR for which there was a payment default (60 days past due) within 12 months of the restructuring date.

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 March 31, ~~2020~~2021 and December 31, ~~2019.~~2020.

March 31, 2020
Fair Value
(dollars in thousands) Notional Balance Sheet Location Asset/(Liability)
Mortgage loan interest rate lock commitments $ 109,337 Other assets $ 1,649
MBS forward sales commitments 63,000 Other liabilities (1,087 )
Total derivative financial instruments $ 172,337 $ 562

December 31, 2019
Fair Value
(dollars in thousands) Notional Balance Sheet Location Asset/(Liability)
Mortgage loan interest rate lock commitments $ 26,446 Other assets $ 344
MBS forward sales commitments 20,500 Other liabilities (39 )
Total derivative financial instruments $ 46,946 $ 305


	March 31, 2021
				Fair Value
(dollars in thousands)	Notional		Balance Sheet Location	Asset/(Liability)
Mortgage loan interest rate lock commitments	$	95,689	Other assets	$	794
MBS forward sales commitments		63,000	Other assets		497
Total derivative financial instruments	$	158,689		$	1,291


	December 31, 2020
				Fair Value
(dollars in thousands)	Notional		Balance Sheet Location	Asset/(Liability)
Mortgage loan interest rate lock commitments	$	107,569	Other assets	$	2,385
MBS forward sales commitments		75,500	Other liabilities		(501	)
Total derivative financial instruments	$	183,069		$	1,884

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.

The methods of determining the fair value of assets and liabilities presented in this note are consistent with our methodologies disclosed in Note 14 of the Company’s ~~2019~~2020 Annual Report on Form 10-K. The Company’s loan portfolio is initially fair valued using a segmented approach, using the eight categories of loans as disclosed in Note 4 – Loans and Allowance for Loan Losses. Loans are considered a Level 3 classification.

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 March 31, ~~2020~~2021 and December 31, ~~2019.~~2020.

March 31, 2020
(dollars in thousands) Level 1 Level 2 Level 3 Total
Assets
Securities available for sale
US government agencies $ - 499 - 499
SBA securities - 501 - 501
State and political subdivisions - 9,679 - 9,679
Asset-backed securities - 12,286 - 12,286
Mortgage-backed securities - 47,542 - 47,542
Mortgage loans held for sale - 34,948 - 34,948
Mortgage loan interest rate lock commitments - 1,649 - 1,649
Total assets measured at fair value on a recurring basis $ - 107,104 - 107,104

Liabilities
MBS forward sales commitments $ - 1,087 - 1,087
Total liabilities measured at fair value on a recurring basis $ - 1,087 - 1,087

December 31, 2019
(dollars in thousands) Level 1 Level 2 Level 3 Total
Assets
Securities available for sale:
US government agencies $ - 499 - 499
SBA securities - 531 - 531
State and political subdivisions - 4,184 - 4,184
Asset-backed securities - 13,167 - 13,167
Mortgage-backed securities - 49,313 - 49,313
Mortgage loans held for sale - 27,046 - 27,046
Mortgage loan interest rate lock commitments - 344 - 344
Total assets measured at fair value on a recurring basis $ - 95,084 - 95,084

Liabilities
MBS forward sales commitments $ - 39 - 39
Total liabilities measured at fair value on a recurring basis $ - 39 - 39

March 31, 2021
(dollars in thousands)
Level 1
Level 2
Level 3
Total
Assets
Securities available for sale
US government agencies
$
0-
7,263
0-
7,263
SBA securities
0-
480
0-
480
State and political subdivisions
0-
19,811
0-
19,811
Asset-backed securities
0-
11,283
0-
11,283
Mortgage-backed securities
0-
54,160
0-
54,160
Mortgage loans held for sale
0-
57,073
0-
57,073
Mortgage loan interest rate lock commitments
0-
794
0-
794
MBS forward sales commitments
0-
497
0-
497
Total assets measured at fair value on a recurring basis
$
0-
151,361
0-
151,361

December 31, 2020
(dollars in thousands)
Level 1
Level 2
Level 3
Total
Assets
Securities available for sale:
US government agencies
$
0-
6,493
0-
6,493
SBA securities
0-
485
0-
485
State and political subdivisions
0-
19,388
0-
19,388
Asset-backed securities
0-
11,529
0-
11,529
Mortgage-backed securities
0-
56,834
0-
56,834
Mortgage loans held for sale
0-
60,257
0-
60,257
Mortgage loan interest rate lock commitments
0-
2,385
0-
2,385
Total assets measured at fair value on a recurring basis
$
0-
157,371
0-
157,371

Liabilities
MBS forward sales commitments
$
0-
501
0-
501
Total liabilities measured at fair value on a recurring basis
$
0-
501
0-
501

Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis

The tables below present the recorded amount of assets and liabilities measured at fair value on a nonrecurring basis as of March 31, ~~2020~~2021 and December 31, ~~2019.~~2020.

As of March 31, 2020
(dollars in thousands) Level 1 Level 2 Level 3 Total
Assets
Impaired loans $ - 10,552 5,492 16,044
Total assets measured at fair value on a nonrecurring basis $ - 10,552 5,492 16,044

As of December 31, 2019
(dollars in thousands) Level 1 Level 2 Level 3 Total
Assets
Impaired loans $ - 5,634 4,941 10,575
Total assets measured at fair value on a nonrecurring basis $ - 5,634 4,941 10,575


	As of March 31, 2021
(dollars in thousands)	Level 1		Level 2	Level 3	Total
Assets
Impaired loans	$	0-	7,833	2,714	10,547
Total assets measured at fair value on a nonrecurring basis	$	0-	7,833	2,714	10,547


	As of December 31, 2020
(dollars in thousands)	Level 1		Level 2	Level 3	Total
Assets
Impaired loans	$	0-	8,144	3,109	11,253
Other real estate owned		0-	1,169	0-	1,169
Total assets measured at fair value on a nonrecurring basis	$	0-	9,313	3,109	12,422

The Company had no liabilities carried at fair value or measured at fair value on a nonrecurring basis.

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 estimated fair values of the Company’s financial instruments at March 31, ~~2020~~2021 and December 31, ~~2019~~2020 are as follows:

March 31, 2020
Carrying Fair
(dollars in thousands) Amount Value Level 1 Level 2 Level 3
Financial Assets:
Other investments, at cost $ 5,341 5,341 - - 5,341
Loans¹ 1,989,927 1,942,206 - - 1,942,206
Financial Liabilities:
Deposits 2,025,698 1,947,258 - 1,947,258 -
FHLB and other borrowings 65,000 65,021 - 65,021 -
Subordinated debentures 35,917 31,989 - 31,989 -

December 31, 2019
Carrying Fair
(dollars in thousands) Amount Value Level 1 Level 2 Level 3
Financial Assets:
Other investments, at cost $ 6,948 6,948 - - 6,948
Loans¹ 1,914,870 1,900,216 - - 1,900,216
Financial Liabilities:
Deposits 1,876,124 1,772,121 - 1,772,121 -
FHLB and other borrowings 110,000 109,737 - 109,737 -
Subordinated debentures 35,890 33,250 - 33,250 -

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


	March 31, 2021
	Carrying		Fair
(dollars in thousands)	Amount		Value	Level 1	Level 2	Level 3
Financial Assets:
Other investments, at cost	$	1,770	1,770	0-	0-	1,770
Loans¹		2,128,001	2,078,530	0-	0-	2,078,530
Financial Liabilities:
Deposits		2,258,751	2,085,976	0-	2,085,976	0-
Subordinated debentures		36,025	30,548	0-	30,548	0-

December 31, 2020
Carrying
Fair
(dollars in thousands)
Amount
Value
Level 1
Level 2
Level 3
Financial Assets:
Other investments, at cost
$
3,635
3,635
0-
0-
3,635
Loans¹
2,085,756
2,060,698
0-
0-
2,060,698
Financial Liabilities:
Deposits
2,142,758
2,008,317
0-
2,008,317
0-
FHLB and other borrowings
25,000
24,972
0-
24,972
0-
Subordinated debentures
35,998
30,371
0-
30,371
0-

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 March 31, ~~2020,~~2021, we ~~lease seven~~leased six of our offices under various operating lease agreements. The lease agreements have maturity dates ranging from February 2022 to October 2029, some of which include options for multiple five-year extensions. The weighted average remaining life of the lease term for these leases was ~~7.78~~6.90 years as of March 31, ~~2020.~~2021.

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.~~into. The weighted average discount rate for leases was ~~2.86%~~2.70% as of March 31, ~~2020.~~2021.

The total operating lease costs were ~~$596,000~~$714,000 and ~~$528,000~~$596,000 for the three months ended March 31, ~~2020~~2021 and ~~2019,~~2020, respectively. The ~~ROU~~right-of-use (ROU) asset, included in property and equipment, and lease liabilities, included in other liabilities, were ~~$19.1~~$18.2 million and ~~$19.7~~$19.1 million as of March 31, ~~2020,~~2021, respectively, compared to ~~$19.5~~$18.8 million and ~~$20.1~~$19.5 million as of December 31, ~~2019,~~2020, respectively. The ROU 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 March 31, ~~2020~~2021 were as follows:

(dollars in thousands) Operating
Leases
2020 $ 1,581
2021 2,152
2022 1,400
2023 1,273
2024 1,305
Thereafter 17,405
Total undiscounted lease payments 25,116
Discount effect of cash flows 5,407
Total lease liability $ 19,709


	Operating
(dollars in thousands)	Leases
2021	$	1,755
2022		1,587
2023		1,462
2024		1,501
2025		1,544
Thereafter		15,886
Total undiscounted lease payments		23,735
Discount effect of cash flows		4,653
Total lease liability	$	19,082

NOTE 9 – Earnings Per Common Share

The following schedule reconciles the numerators and denominators of the basic and diluted earnings per share computations for the ~~three-month~~three month periods ended March 31, ~~2020~~2021 and ~~2019.~~2020. Dilutive common shares arise from the potentially dilutive effect of the Company’s stock options that were outstanding at March 31, ~~2020.~~2021. The assumed conversion of stock options can create a difference between basic and dilutive net income per common share. At March 31, ~~2020~~2021 and ~~2019,~~2020, there were ~~288,053~~210,899 and ~~271,034~~288,053 options, respectively, that were not considered in computing diluted earnings per common share because they were anti-dilutive.

      Three months ended
March 31,
(dollars in thousands, except share data) 2020       2019
Numerator:
Net income available to common shareholders    $ 2,832 6,009
Denominator:
Weighted-average common shares outstanding – basic 7,678,598 7,459,342
Common stock equivalents 148,575 282,518
Weighted-average common shares outstanding – diluted 7,827,173 7,741,860
Earnings per common share:
Basic $ 0.37 0.81
Diluted $ 0.36 0.78


	Three months ended
	March 31,
(dollars in thousands, except share data)		2021	2020
Numerator:
Net income available to common shareholders	$	10,366	2,832
Denominator:
Weighted-average common shares outstanding – basic		7,774,515	7,678,598
Common stock equivalents		134,022	148,575
Weighted-average common shares outstanding – diluted		7,908,537	7,827,173
Earnings per common share:
Basic	$	1.33	0.37
Diluted	$	1.31	0.36

NOTE 10 – 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~~3 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
	March 31, 2021										March 31, 2020
	Commercial										Commercial
	and Retail			Mortgage			Elimin-		Consol-		and Retail		Mortgage			Elimin-		Consol-
(dollars in thousands)	Banking			Banking	Corporate		ations		idated		Banking		Banking	Corporate		ation		idated
Interest income	$	22,414		399	3		(3	)	22,813		$	23,670	196	4		(4	)	23,866
Interest expense		1,161		0-	382		(3	)	1,540			5,333	0-	439		(4	)	5,768
Net interest income (loss)		21,253		399	(379	)	0-		21,273			18,337	196	(435	)	0-		18,098
Provision for loan losses		(300	)	0-	0-		0-		(300	)		6,000	0-	0-		0-		6,000
Noninterest income		1,271		4,633	0-		0-		5,904			1,248	2,668	0-		0-		3,916
Noninterest expense		11,233		2,867	62		0-		14,162			10,499	1,807	66		0-		12,372
Net income (loss) before taxes		11,591		2,165	(441	)	0-		13,315			3,086	1,057	(501	)	0-		3,642
Income tax provision (benefit)		2,564		478	(93	)	0-		2,949			693	222	(105	)	0-		810
Net income (loss)	$	9,027		1,687	(348	)	0-		10,366		$	2,393	835	(396	)	0-		2,832
Total assets	$	2,516,869		62,530	275,941		(275,418	)	2,579,922		$	2,335,160	36,577	246,424		(245,912	)	2,372,249

Three months ended
March 31, 2020 Three months ended
March 31, 2019
(dollars in thousands)    Commercial
and Retail
Banking    Mortgage
Banking    Corporate    Elimin-
ations    Consol-
idated    Commercial
and Retail
Banking    Mortgage
Banking    Corporate     Elimin-
ation    Consol-
idated
Interest income $ 23,670 196 4 (4) 23,866 $ 21,519 93 3 (3) 21,612
Interest expense 5,333 - 439 (4) 5,768 5,631 - 166 (3) 5,794
Net interest income (loss) 18,337 196 (435) - 18,098 15,888 93 (163 ) - 15,818
Provision for loan losses 6,000 - - - 6,000 300 - - - 300
Noninterest income 1,248 2,668 - - 3,916 1,137 1,857 - - 2,994
Noninterest expense 10,499 1,807 66 - 12,372 9,465 1,123 60 - 10,648
Net income (loss) before taxes 3,086 1,057 (501) - 3,642 7,260 827 (223 ) - 7,864
Income tax provision (benefit) 693 222 (105) - 810 1,728 174 (47 ) - 1,855
Net income (loss) $ 2,393 835 (396) - 2,832 $ 5,532 653 (176 ) - 6,009
Total assets $ 2,335,160 36,577 246,424 (245,912) 2,372,249 $ 2,002,957 11,003 194,671 (194,205 ) 2,014,426

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 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 month period ended March 31, ~~2020~~2021 as compared to the three month period ended March 31, ~~2019~~2020 and assesses our financial condition as of March 31, ~~2020~~2021 as compared to December 31, ~~2019.~~2020. 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, ~~2019~~2020 included in our Annual Report on Form 10-K for that period. Results for the three month period ended March 31, ~~2020~~2021 are not necessarily indicative of the results for the year ending December 31, ~~2020~~2021 or any future period.

Unless the context requires otherwise, references to the “Company,” “we,” “us,” “our,” or similar references mean Southern First Bancshares, Inc. and its ~~subsidiaries.~~consolidated subsidiary. References to the “Bank” refer to Southern First Bank.

C~~AUTIONARY~~W~~ARNING~~R~~EGARDING FORWARD~~-~~LOOKING STATEMENTS~~Cautionary Warning Regarding 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 (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:

•

The impact of the outbreak of the novel coronavirus, or COVID-19, on our business, including the impact of the actions taken by governmental authorities to ~~those described under~~try and contain the virus or address the impact of the virus on the United States economy (including, without limitation, the Coronavirus Aid, Relief and Economic Security Act, or the CARES Act), and the resulting effect of these items on our operations, liquidity and capital position, and on the financial condition of our borrowers and other customers;

•

Restrictions or conditions imposed by our regulators on our operations;

•

Increases in competitive pressure in the banking and financial services industries;

•

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 Charlotte, North Carolina, Greensboro, North Carolina and Atlanta, Georgia markets and into potential new 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, including as a result of the new presidential administration and Democratic control of Congress;

•

Changes in economic conditions resulting in, among other things, a deterioration in credit quality;

•

Changes occurring in business conditions and inflation;

•

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;

•

Risks associated with actual or potential litigation or investigations by customers, regulatory agencies or others;

•

Adverse effects of failures by our vendors to provide agreed upon services in the manner and at the cost agreed;

•

The potential effects of events beyond our control that may have a destabilizing effect on financial markets and the economy, such as epidemics and pandemics (including COVID-19), war or terrorist activities, disruptions in our customers’ supply chains, disruptions in transportation, essential utility outages or trade disputes and related tariffs; and

•

Other risks and uncertainties detailed in Part I, Item ~~1A. Risk Factors~~1A, “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, ~~2019, as well as~~2020, in Part II, Item 1A, “Risk Factors” of our Quarterly Reports on Form 10-Q, and in our other filings with the ~~following:~~SEC.

●	~~Restrictions or conditions imposed by our regulators on our operations;~~
●	~~Increases in competitive pressure in the banking and financial services industries;~~
●	~~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 and into potential new 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, including, but not limited to, the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act;
●	Changes in economic conditions in the United States and the strength of the local economies in which we conduct our operations, including, but not limited to, due to the negative impacts and disruptions resulting from the recent outbreak of COVID-19 on the economies and communities we serve, which may have an adverse impact on our business, operations and performance, and could have a negative impact on our credit portfolio, share price, borrowers, and on the economy as a whole, both domestically and globally;
●	~~Changes occurring in business conditions and inflation;~~
●	~~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, practices or guidelines;~~
●	~~Adverse effects of failures by our vendors to provide agreed upon services in the manner and at the cost agreed;~~
●	The potential effects of events beyond our control that may have a destabilizing effect on financial markets and the economy, such as epidemics and pandemics, including the potential effects of coronavirus on trade (including supply chains and export levels, travel, employee activity and other economic activities), war or terrorist activities, essential utility outages or trade disputes and related tariffs; 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, 2019, in Part II, Item 1A of this Quarterly Report on Form 10-Q, and from time to time in our other filings with the 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, 2019 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.~~statements, except as required by law.

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."~~“ClientFIRST.”

At March 31, ~~2020,~~2021, we had total assets of ~~$2.37~~$2.58 billion, a ~~4.6%~~3.9% increase from total assets of ~~$2.27~~$2.48 billion at December 31, ~~2019.~~2020. The largest components of our total assets are loans which were ~~$2.03~~$2.18 billion and ~~$1.94~~$2.14 billion at March 31, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively. Our liabilities and shareholders’ equity at March 31, ~~2020~~2021 totaled ~~$2.16~~$2.34 billion and ~~$210.5~~$239.5 million, respectively, compared to liabilities of ~~$2.06~~$2.25 billion and shareholders’ equity of ~~$205.9~~$228.3 million at December 31, ~~2019.~~2020. The principal component of our liabilities is deposits which were ~~$2.03~~$2.26 billion and ~~$1.88~~$2.14 billion at March 31, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively.

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 ~~$2.8~~$10.4 million and ~~$6.0~~$2.8 million for the three months ended March 31, ~~2020~~2021 and ~~2019,~~2020, respectively. Diluted earnings per share (“EPS”) was ~~$0.36~~$1.31 for the first quarter of ~~2020~~2021 as compared to ~~$0.78~~$0.36 for the same period in ~~2019.~~2020. The ~~decrease~~increase in net income resulted primarily from a ~~$5.7~~$6.3 million ~~increase~~decrease in loan loss provision recorded in the first quarter of ~~2020~~2021 compared to the same period in ~~2019, partially offset by~~2020, a ~~$2.3~~$3.2 million increase in net interest income, ~~and~~ a ~~$922,000~~$2.0 million increase in noninterest ~~income.~~income and partially offset by a $1.8 million 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.recent events – covid-19 pandemic

~~RECENT EVENTS~~–~~COVID~~~~-19~~ ~~PANDEMIC~~

In December 2019, a novel strain of coronavirus (COVID-19) was reported to have surfaced in China, and has since spread to a number of other countries, including the United States. In March 2020, the World Health Organization declared COVID-19 a global pandemic and the United States declared a National Public Health Emergency. The COVID-19 pandemic has severely restricted the level of economic activity in our markets. In response to the COVID-19 pandemic, the governments of the states in which we have retail offices, and of most other states, have taken preventative or protective actions, such as imposing restrictions on travel and business operations, advising or requiring individuals to limit or forego their time outside of their homes, and ordering temporary closures of businesses that have been deemed to be non-essential.

The impact of the COVID-19 pandemic is fluid and continues to evolve, adversely affecting many of the Bank’s clients. The COVID-19 pandemic and its associated impacts on trade (including supply chains and export levels), travel, employee productivity, unemployment, consumer spending, and other economic activities has resulted in less economic activity, lower equity market valuations and significant volatility and disruption in financial markets, and has had an adverse effect on our business, financial condition and results of operations. The ultimate extent of the impact of the COVID-19 pandemic on our business, financial condition and results of operations is currently uncertain and will depend on various developments and other factors, including, among others, the duration and scope of the pandemic, as well as governmental, regulatory and private sector responses to the pandemic, and the associated impacts on the economy, financial markets and our customers, employees and vendors.

Our business, financial condition and results of operations generally rely upon the ability of our borrowers to repay their loans, the value of collateral underlying our secured loans, and demand for loans and other products and services we offer, which are highly dependent on the business environment in our primary markets where we operate and in the United States as a whole. The COVID-19 pandemic has begun to have a significant impact on our business, industry and ~~operations. As part~~clients. Twelve months ago, unemployment rates were at historical highs, our bank lobbies were closed to guests, and the majority of our ~~efforts~~team was working remotely. As of March 31, 2021, normalcy has begun to ~~exercise social distancing,~~return as unemployment rates have decreased to near pre-COVID levels, our bank lobbies have re-opened, and our team members have returned to the office. Our digital technology channels are also stronger and better utilized as a result of the pandemic.

Beginning in March 2020, we closed all of our banking lobbies and are conducting most of our business at this time through drive-thru tellers and through electronic and online means. To support the health and well-being of our employees, approximately 70% of our workforce is working from home. We are focused on servicing the financial needs of our commercial and consumer clients with flexible loan payment arrangements, including short-termbegan granting loan modifications or ~~forbearance payments and reducing or waiving~~deferrals to certain ~~fees~~borrowers affected by the pandemic on ~~deposit accounts. Future governmental actions may require these and other types~~a short-term basis of ~~client-related responses.~~

Atthree to six months. As of March 31, ~~2020, more than 400 clients, with aggregate outstanding loan principal balances~~2021, all but two of ~~approximately $380.2 million, have been granted deferrals on loan payments.~~ these loans are under a normal payment structure.

We are also a small business administration approved lender and have begun processing customer applications under the Paycheck Protection Program (“PPP”), established under the Coronavirus Aid, Relief, and Economic Security Act, or CARES Act.

~~At March 31, 2020, our non-performing assets were not yet materially impacted by the economic pressures of COVID-19. In addition, as we closely~~continue to monitor credit risk and our exposure to increased loan losses resulting from the impact of COVID-19 on our commercial ~~clients,~~clients. In doing so, we ~~have identified nine portfolios considered~~believe that the hospitality and tourism industry is still at risk for credit loss due to ~~be “at-risk”~~reduced business and recreational travel in our regions. We will not know the depth of ~~significant impact from~~ the pandemic. For additional information on the nine identified portfolios, see Note 1 –Nature of Business and Basis of Presentation, in the accompanying condensed notes to consolidated financial statements included elsewhere in this report.

We are monitoring the impact of the COVID-19 pandemic on the operations and value of our investments. We mark to market our publicly traded investments and will review our investment portfolio for impairment at period end. Because of changing economic and market conditions affecting issuers, we may be required to recognize further impairments on the securities we hold as well as reductions in other comprehensive income. We cannot currently determine the ultimate impact of the pandemic on the ~~long-term value~~hospitality and tourism industry until a significant portion of the population has received the vaccine and travel restrictions have been lifted.

Hotel portfolio as of March 31, 2021:

•

21 loans totaled $109.7 million

•

2 loans totaled $13.5 million remained under a deferral arrangement

•

0% of hotel loans were 30 days or more past due

•

0% of hotel loans were on nonaccrual

•

4 hotel loans totaling $48.8 million were downgraded to special mention during the first quarter of 2021

•

7 hotel loans totaling $26.2 million were downgraded to substandard during the first quarter of 2021

During the first quarter of 2021, our ~~portfolio.~~classified asset ratio rose to 14.42% as a result of $26.2 million of hotel loans we downgraded to substandard. Downgrading these loans reflects our commitment to closely monitor our most at-risk clients.

As of March 31, ~~2020,~~2021, all of our capital ratios, and ~~our subsidiary bank’s~~the Bank’s capital ratios, were in excess of all regulatory requirements. While we believe that we have sufficient capital to withstand an extended economic recession brought about by the COVID-19 pandemic, our ~~reported and~~ regulatory capital ratios could be adversely impacted by further credit losses.

We maintain access to multiple sources of liquidity, including a $15.0 million holding company line of credit with another bank which could be used to support capital ratios at the ~~subsidiary bank.~~Bank.

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 ~~$18.1~~$21.3 million for the ~~three month period ended March 31, 2020,~~first quarter of 2021, a ~~14.4%~~17.5% increase over net interest income of ~~$15.8~~$18.1 million for the ~~same period in 2019.~~prior year resulting primarily from lower deposit costs, partially offset by lower yields on interest-earning assets. In addition, our ~~average earning assets increased 16.3%~~net interest margin, on a tax-equivalent basis (TE), ~~or $296.6 million, during~~was 3.60% for the first quarter of ~~2020~~2021 compared to ~~the first quarter of 2019, while our interest-bearing liabilities increased by $210.7 million, or 15.2%, during the same period. The increase~~3.43% in average earning assets was primarily related to an increase in average loans, while the increase in average interest-bearing liabilities was primarily a result of an increase in interest-bearing deposits.2020.

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 month periods ended March 31, ~~2020~~2021 and ~~2019.~~2020. 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 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
For the Three Months Ended March 31,
2020 2019
Average Income/ Yield/ Average Income/ Yield/
(dollars in thousands)    Balance    Expense    Rate⁽¹⁾    Balance    Expense    Rate⁽¹⁾
Interest-earning assets
Federal funds sold and interest-bearing
deposits with banks $ 46,101 $ 103 0.90 % $ 30,656 $ 174 2.30 %
Investment securities, taxable 66,640 381 2.30 % 71,876 508 2.87 %
Investment securities, nontaxable⁽²⁾ 3,815 19 2.05 % 5,427 53 3.98 %
Loans⁽³⁾ 2,003,554 23,367 4.69 % 1,715,570 20,889 4.94 %
Total interest-earning assets 2,120,110 23,870 4.53 % 1,823,529 21,624 4.81 %
Noninterest-earning assets 111,338 86,431
Total assets $ 2,231,448 $ 1,909,960
Interest-bearing liabilities
NOW accounts $ 227,688 168 0.30 % $ 186,070 86 0.19 %
Savings & money market 956,588 3,369 1.42 % 780,115 3,300 1.72 %
Time deposits 329,664 1,637 2.00 % 371,694 1,989 2.17 %
Total interest-bearing deposits 1,513,940 5,174 1.37 % 1,337,879 5,375 1.63 %
FHLB advances and other borrowings 43,470 158 1.46 % 31,302 256 3.32 %
Subordinated debentures 35,900 436 4.88 % 13,403 163 4.93 %
Total interest-bearing liabilities 1,593,310 5,768 1.46 % 1,382,584 5,794 1.70 %
Noninterest-bearing liabilities 427,992 349,988
Shareholders’ equity 210,146 177,388
Total liabilities and shareholders’ equity $      2,231,448 $      1,909,960
Net interest spread 3.07 % 3.11 %
Net interest income (tax equivalent) / margin $      18,102 3.43 % $      15,830 3.52 %
Less: tax-equivalent adjustment⁽²⁾ 4 12
Net interest income $ 18,098 $ 15,818

Average Balances, Income and Expenses, Yields and Rates
	For the Three Months Ended March 31,
	2021						2020
	Average		Income/		Yield/		Average		Income/		Yield/
(dollars in thousands)	Balance		Expense		Rate⁽¹⁾		Balance		Expense		Rate⁽¹⁾
Interest-earning assets
Federal funds sold and interest-bearing
deposits with banks	$	89,522	$	47	0.21	%	$	46,101	$	103	0.90	%
Investment securities, taxable		85,136		245	1.17	%		66,640		381	2.30	%
Investment securities, nontaxable⁽²⁾		11,000		73	2.68	%		3,815		19	2.05	%
Loans⁽³⁾		2,209,569		22,465	4.12	%		2,003,554		23,367	4.69	%
Total interest-earning assets		2,395,227		22,830	3.87	%		2,120,110		23,870	4.53	%
Noninterest-earning assets		101,932						111,338
Total assets	$	2,497,159					$	2,231,448
Interest-bearing liabilities
NOW accounts	$	280,737		46	0.07	%	$	227,688		168	0.30	%
Savings & money market		1,084,467		586	0.22	%		956,588		3,369	1.42	%
Time deposits		213,378		523	0.99	%		329,664		1,637	2.00	%
Total interest-bearing deposits		1,578,582		1,155	0.30	%		1,513,940		5,174	1.37	%
FHLB advances and other borrowings		2,809		5	0.72	%		43,470		158	1.46	%
Subordinated debentures		36,008		380	4.28	%		35,900		436	4.88	%
Total interest-bearing liabilities		1,617,399		1,540	0.39	%		1,593,310		5,768	1.46	%
Noninterest-bearing liabilities		648,969						427,992
Shareholders’ equity		230,791						210,146
Total liabilities and shareholders’ equity	$	2,497,159					$	2,231,448
Net interest spread					3.48	%					3.07	%
Net interest income (tax equivalent) / margin			$	21,290	3.60	%			$	18,102	3.43	%
Less: tax-equivalent adjustment⁽²⁾				17						4
Net interest income			$	21,273					$	18,098

~~(1)~~	(1)	Annualized for the three month period.
~~(2)~~	(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)~~	(3)	Includes mortgage loans held for sale.

Our net interest margin ~~on a tax-equivalent~~(TE) increased 17 basis ~~(TE), was 3.43% for the three months ended March 31, 2020 compared~~points to ~~3.52% for~~3.60% during the first quarter of ~~2019. The nine basis point decrease~~2021 primarily due to a reduction in ~~net interest margin (TE) was driven~~cost on our interest-bearing liabilities, partially offset by the decreased yield on our interest-earning ~~assets, partially offset by the decreased rates on our interest-bearing liabilities as compared to the prior year period.~~assets. Our average interest-earning assets grew by ~~$296.6~~$275.1 million during the first ~~three months~~quarter of 2020, ~~as compared to the same period in 2019,~~ while the average yield on these assets decreased by 2866 basis ~~points.~~points to 3.87%. In addition, our average interest-bearing liabilities grew by ~~$210.7~~$24.1 million during the ~~2020~~2021 period while the rate on these liabilities decreased 24107 basis points to ~~1.46% for the three months ended March 31, 2020.~~0.39%.

The increase in average interest-earning assets for the ~~three months ended March 31, 2020 as compared to the same period in 2019~~first quarter of 2021 related primarily to an increase of ~~$288.0~~$206.0 million in our average loan ~~balances.~~balances combined with a $43.4 million increase in federal funds sold and interest-bearing deposits with banks. The ~~28 basis point~~ decrease in yield ~~during the same period~~on our interest earning assets was driven by a 2557 basis point decrease in loan yield ~~due~~as our loan portfolio continues to ~~loans being originated or renewed at market rates which are lower than those in~~show the ~~past. The~~impact of the Federal ~~Reserve reduced interest rates by~~Reserve’s aggregate 225 basis ~~points~~point interest rate reduction since August ~~2019 which~~2019. These rate reductions resulted in the decreased loan yield, ~~as well as~~ a ~~significant~~ decrease in yield on our ~~Federal~~federal funds sold and interest ~~bearing deposits~~bearing-deposits with banks and a decrease in yield on our investment securities.

~~In addition, the~~The increase in our average interest-bearing liabilities resulted primarily from a ~~$176.1~~$64.6 million increase in our interest-bearing deposits at an average rate of ~~1.37%~~0.30%, a 26107 basis point decrease from the ~~average rate in the~~ first quarter of ~~2019. In addition,~~2020, partially offset by a $40.7 million decrease in our ~~average subordinated debentures increased due to the issuance of $23 million on September 30, 2019.~~FHLB advances and other borrowings.

Our net interest spread was ~~3.07%~~3.48% for the ~~three months ended March 31, 2020~~first quarter of 2021 compared to ~~3.11%~~3.07% for the same period in ~~2019.~~2020. 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 ~~28 basis point~~ decrease in both the yield on our interest-earning assets and the ~~24 basis point decrease in~~ rate on our interest-bearing liabilities resulted in ~~the four~~a 41 basis point ~~decrease~~increase in our net interest spread for the ~~2020~~2021 period. We anticipate ~~continued~~ pressure on our net interest spread and net interest margin in future periods ~~based on the Federal Reserve’s 225 basis point interest rate decrease since August 2019.~~as our loan yield continues to decline due to new and renewed loans pricing at rates lower than our current portfolio rate.

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
March 31, 2020 vs. 2019 March 31, 2019 vs. 2018
Increase (Decrease) Due to Increase (Decrease) Due to
Rate/ Rate/
(dollars in thousands)       Volume       Rate       Volume       Total       Volume       Rate       Volume       Total
Interest income
Loans $ 3,507 (881 ) (148 ) 2,478 $ 3,110 1,024 192 4,326
Investment securities (49 ) (114 ) 10 (153 ) 69 94 18 181
Federal funds sold and interest-bearing
deposits with banks 88 (106 ) (53 ) (71 ) (124 ) 103 (52 ) (73 )
Total interest income 3,546 (1,101 ) (191 ) 2,254 3,055 1,221 158 4,434
Interest expense
Deposits 790 (864 ) (127 ) (201 ) 439 1,894 304 2,637
FHLB advances and other borrowings 100 (142 ) (56 ) (98 ) (32 ) 6 (1 ) (27 )
Subordinated debentures 273 - - 273 - 48 - 48
Total interest expense 1,163 (1,006 ) (183 ) (26 ) 407 1,948 303 2,658
Net interest income $      2,383 (95 ) (8 ) 2,280 $      2,648 (727 ) (145 ) 1,776


	Three Months Ended
	March 31, 2021 vs. 2020									March 31, 2020 vs. 2019
	Increase (Decrease) Due to									Increase (Decrease) Due to
						Rate/									Rate/
(dollars in thousands)	Volume			Rate		Volume		Total		Volume			Rate		Volume		Total
Interest income
Loans	$	2,403		(2,996	)	(309	)	(902	)	$	3,507		(881	)	(148	)	2,478
Investment securities		144		(175	)	(64	)	(95	)		(49	)	(114	)	10		(153	)
Federal funds sold and interest-bearing deposits with banks		97		(79	)	(74	)	(56	)		88		(106	)	(53	)	(71	)
Total interest income		2,644		(3,250	)	(447	)	(1,053	)		3,546		(1,101	)	(191	)	2,254
Interest expense
Deposits		(889	)	(3,778	)	648		(4,019	)		790		(864	)	(127	)	(201	)
FHLB advances and other borrowings		(148	)	(112	)	105		(155	)		100		(142	)	(56	)	(98	)
Subordinated debentures		1		(55	)	-		(54	)		273		-		-		273
Total interest expense		(1,036	)	(3,945	)	753		(4,228	)		1,163		(1,006	)	(183	)	(26	)
Net interest income	$	3,680		695		(1,200	)	3,175		$	2,383		(95	)	(8	)	2,280

Net interest income, the largest component of our income, was ~~$18.1~~$21.3 million for ~~the three months ended March 31, 2020 and $15.8 million for the three months ended March 31, 2019, a $2.3 million, or 14.4%, increase during~~ the first quarter of ~~2020. The increase in net interest income is due to a $2.3~~2021 and $18.1 million ~~increase in interest income and a $26,000 decrease in interest expense. During~~for the first quarter of 2020, ~~our average interest-earning assets increased $296.6~~a $3.2 million, ~~as compared~~or 17.5%, increase. The increase during 2021 was driven by a $4.2 million decrease in interest expense primarily due to ~~the same period in 2019, resulting in $3.5 million of additional interest income, while~~ lower rates on our ~~interest-earning assets decreased~~interest-bearing liabilities. In addition, interest income decreased by $1.1 million ~~from the prior year period. In contrast, our~~due to a decrease in rates across all interest ~~expense decreased $26,000 during the first quarter of 2020, despite a $210.7 million~~earning assets, partially offset by an increase in ~~average~~volume of loans, investment securities and federal funds sold and interest-bearing ~~liabilities as the lower rates on our~~ deposits ~~and borrowing outweighed the increase in volume.~~with banks.

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 included in Note 4 – Loans and Allowance for Loan 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 months ended March 31, ~~2020,~~2021, we ~~incurred~~recorded a ~~noncash expense related to the~~negative provision for loan losses of $300,000 which resulted in an allowance for loan losses of $43.5 million, or 1.99% of gross loans. Comparatively, our provision for loan losses was $6.0 million for the three months ended March 31, 2020 which resulted in an allowance for loan losses of $22.5 million, or 1.11% of gross loans. ~~For the three months ended March 31, 2019, our~~The negative provision for ~~loan losses of $300,000 resulted in an allowance for loan losses of $16.1 million, or 0.93% of gross loans. The increased provision during~~ the first quarter of ~~2020 is related primarily to the COVID-19 pandemic and~~2021 was driven by a reduction in qualitative adjustment factors related to improvement in the ~~uncertain~~ economic and business conditions at both the national and regional levels as ~~well as a small increase in past due and nonaccrual loans at~~of March 31, ~~2020.~~2021, partially offset by downgrades in our hotel loan portfolio as we believe the tourism and hospitality industry remains at risk of credit losses due to the pandemic.

Noninterest Income

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


	Three months ended				Three months ended
				March 31,	March 31,
(dollars in thousands)		2020		2019	2021		2020
Mortgage banking income		$	2,668	1,857	$	4,633	2,668
Service fees on deposit accounts			262	265		185	262
ATM and debit card income			398	380		470	398
Income from bank owned life insurance			270	216		267	270
Other income			318	276		349	318
Total noninterest income		$	3,916	2,994	$	5,904	3,916

Noninterest income increased ~~$922,000,~~$2.0 million, or ~~30.8%~~50.8%, for the first quarter of ~~2020~~2021 as compared to the same period in ~~2019.~~2020. The increase in total noninterest income ~~during the 2020 period~~ resulted primarily from the following:

●	Mortgage banking income increased by $811,000, or 43.7%, driven by higher mortgage origination volume during the first quarter of 2020 due to the favorable interest rate environment for mortgage loans.
●	~~Income from bank owned life insurance increased $54,000, or 25%, due to $5 million of policy purchases during the second quarter of 2019.~~

•

Mortgage banking income increased by $2.0 million, or 73.7%, driven by higher mortgage origination volume due to the favorable interest rate environment for mortgage loans.

•

ATM and debit card income increased by $72,000, or 18.1%, due to an increase in debit card transactions.

•

Other income increased by $31,000, or 9.7%, related to higher loan and wire transfer fees.

Offsetting the above increases was a decrease in service fees on deposit accounts primarily due to lower non-sufficient funds fees in the 2021 period.

Noninterest expenses

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

Three months ended
      March 31,
(dollars in thousands) 2020       2019
Compensation and benefits $      7,871 6,783
Occupancy 1,536 1,339
Outside service and data processing costs 1,192 960
Insurance 320 318
Professional fees 497 439
Marketing 258 260
Other 698 549
Total noninterest expense $ 12,372 10,648


	Three months ended
	March 31,
(dollars in thousands)	2021		2020
Compensation and benefits	$	6,683	6,390
Mortgage production costs		2,867	1,807
Occupancy		1,637	1,533
Real estate owned expenses		387	-
Outside service and data processing costs		1,142	1,070
Insurance		301	320
Professional fees		421	400
Marketing		182	230
Other		542	622
Total noninterest expense	$	14,162	12,372

Noninterest expense was ~~$12.4~~$14.2 million for the ~~three months ended March 31, 2020,~~first quarter of 2021, a ~~$1.7~~$1.8 million, or ~~16.2%~~14.5%, increase from noninterest expense of ~~$10.6~~$12.4 million for the ~~three months ended March 31, 2019.~~first quarter of 2020. The increase in noninterest expenses ~~during the 2020 period~~ was driven primarily by the following:

●	Compensation and benefits expense increased $1.1 million, or 16.0%, relating primarily to increases in base compensation and benefits expenses. The increases were driven by the cost of 18 additional team members which were hired to support client growth.
●	~~Occupancy expense increased $197,000, or 14.7%, primarily related to opening new office space in Summerville, SC and Greensboro, NC during the second half of 2019.~~
●	~~Outside service and data processing fees increased by $232,000, or 24.2%, primarily due to increased electronic banking, ATM/debit card related fees and software licensing costs.~~
●	~~Other expenses increased $149,000, or 27.1%, primarily related to higher travel and entertainment, collection expenses and business license and tax costs.~~

•

Compensation and benefits expense increased $293,000, or 4.6%, relating primarily to increases in base and incentive compensation.

•

Mortgage production costs increased $1.1 million, or 58.7%, due to higher commission expense related to the increased mortgage activity resulting from the current favorable interest rate environment.

•

Occupancy expense increased $104,000, or 6.8%, primarily related to the expansion of our current office space in Atlanta that took place during the third quarter of 2020.

•

Real estate owned expenses increased $387,000 primarily due to a loss on sale of one commercial property.

•

Outside service and data processing fees increased by $72,000, or 6.7%, primarily due to increased electronic banking and software licensing costs.

Offsetting the above increases were decreases in marketing expenses, due to fewer corporate sponsorships, and in other expenses, primarily due to lower travel costs.

Our efficiency ratio was 52.1% for the first quarter of 2021 compared to 56.2% for the first quarter of ~~2020 compared to 56.6% for the same period in 2019.~~2020. 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 ~~slight~~ improvement during the ~~2020~~2021 period relates primarily to the ~~decrease~~increase in ~~noninterest expenses as a percentage of net interest and noninterest income compared to the prior year.~~mortgage banking income.

We incurred income tax expense of ~~$810,000~~$2.9 million and ~~$1.9 million~~$810,000 for the three months ended March 31, ~~2020~~2021 and ~~2019,~~2020, respectively. Our effective tax rate was ~~22.2%~~22.1% and ~~23.6%~~22.2% for the three months ended March 31, 2021 and 2020, ~~and 2019,~~ respectively. ~~The lower tax rate for the 2020 period relates to the greater impact of our tax exempt income on our taxable income.~~

B~~ALANCE~~S~~HEET~~R~~EVIEW~~Balance Sheet Review

Investment Securities

At March 31, ~~2020,~~2021, the ~~$75.8~~$94.8 million in our investment securities portfolio represented approximately ~~3.2%~~3.7% of our total ~~assets.Our~~assets. Our available for sale investment portfolio included U.S. government agency securities, SBA securities, state and political subdivisions, asset-backed securities and mortgage-backed securities ~~witha~~with a fair value of ~~$70.5~~$93.0 million and an amortized cost of ~~$70.0~~$93.1 million, resulting in an unrealized ~~gain~~loss of ~~$518,000.~~$114,000. At December 31, ~~2019,~~2020, the ~~$74.6~~$98.4 million in our investment securities portfolio represented approximately ~~3.3%~~4.0% of our total ~~assets. At December 31, 2019, we held~~assets, including investment securities ~~available for sale~~ with a fair value of ~~$67.7~~$94.7 million and an amortized cost of ~~$68.1~~$93.4 million for an unrealized ~~loss~~gain of ~~$377,000.~~$1.3 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 excluding mortgage loans held for sale for the three months ended March 31, 2021 and 2020 ~~and 2019~~ were ~~$1.98~~$2.15 billion and ~~$1.71~~$1.98 billion, respectively. Before the allowance for loan losses, total loans outstanding at March 31, ~~2020~~2021 and December 31, ~~2019~~2020 were ~~$2.03~~$2.18 billion and ~~$1.94~~$2.14 billion, respectively.

The principal component of our loan portfolio is loans secured by real estate mortgages. As of March 31, ~~2020,~~2021, our loan portfolio included ~~$1.69~~$1.86 billion, or ~~83.1%~~85.1%, of real estate loans, compared to ~~$1.61~~$1.81 billion, or ~~82.8%~~84.6%, ~~of real estate loans~~ at December 31, ~~2019.~~2020. 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~~in order 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 ~~$183.1~~$154.2 million as of March 31, ~~2020,~~2021, of which approximately ~~44%~~48% were in a first lien position, while the remaining balance was second ~~liens, compared to $179.7 million as of~~liens. At December 31, ~~2019, also~~2020, our home equity lines of credit totaled $157.0 million, of which approximately ~~44%~~45% were in first lien positions, ~~with~~while the remaining balance was in second liens. The average loan had a balance of approximately ~~$91,000~~$81,000 and a loan to value of ~~67%~~61% as of March 31, ~~2020,~~2021, compared to an average loan balance of ~~$90,000~~$83,000 and a loan to value of approximately ~~68%~~62% as of December 31, ~~2019.~~2020. Further, ~~1.4%~~0.3% and ~~0.4%~~0.2% of our total home equity lines of credit were over 30 days past due as of March 31, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively.

Following is a summary of our loan composition at March 31, ~~2020~~2021 and December 31, ~~2019.~~2020. During the first three months of ~~2020,~~2021, our loan portfolio increased by ~~$86.7~~$40.8 million, or ~~4.5%. Our commercial and consumer loan portfolios each experienced growth during the three months ended March 31, 2020~~1.9%, with a ~~3.9% increase in commercial loans and a 5.5%~~5.3% increase in consumer loans while commercial loans remained stable during the period. ~~Of the $86.7 million in loan growth during the first three months of 2020, $78.1 million~~The majority of the increase was in loans secured by real ~~estate with the remainder in commercial business loans.~~estate. 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 ~~$394,000,~~$437,000, a term of 1520 years, and an average rate of ~~4.32%~~3.67% as of March 31, ~~2020,~~2021, compared to a principal balance of ~~$386,000,~~$429,000, a term of 1419 years, and an average rate of ~~4.46%~~3.82% as of December 31, ~~2019.~~2020.

March 31, 2020 December 31, 2019
(dollars in thousands) Amount % of Total Amount % of Total
Commercial
Owner occupied RE $ 422,124 20.8 % $ 407,851 21.0 %
Non-owner occupied RE 534,846 26.3 % 501,878 25.8 %
Construction 74,758 3.7 % 80,486 4.1 %
Business 317,702 15.7 % 308,123 15.9 %
Total commercial loans 1,349,430 66.5 % 1,298,338 66.8 %

Consumer
Real estate 427,697 21.1 % 398,245 20.5 %
Home equity 183,099 9.0 % 179,738 9.3 %
Construction 45,240 2.2 % 41,471 2.1 %
Other 24,795 1.2 % 25,733 1.3 %
Total consumer loans 680,831 33.5 % 645,187 33.2 %
Total gross loans, net of deferred fees 2,030,261 100.0 % 1,943,525    100.0 %
Less—allowance for loan losses (22,462 ) (16,642 )
Total loans, net $      2,007,799 $      1,926,883

March 31, 2021
December 31, 2020
(dollars in thousands)
Amount
% of Total
Amount
% of Total
Commercial
Owner occupied RE
$
448,505
20.5
%
$
433,320
20.2
%
Non-owner occupied RE
584,187
26.8
%
585,269
27.3
%
Construction
51,996
2.4
%
61,467
2.9
%
Business
303,895
13.9
%
307,599
14.4
%
Total commercial loans
1,388,583
63.6
%
1,387,655
64.8
%

Consumer
Real estate
574,541
26.3
%
536,311
25.0
%
Home equity
154,157
7.1
%
156,957
7.3
%
Construction
44,170
2.0
%
40,525
1.9
%
Other
22,231
1.0
%
21,419
1.0
%
Total consumer loans
795,099
36.4
%
755,212
35.2
%
Total gross loans, net of deferred fees
2,183,682
100.0
%
2,142,867
100.0
%
Less—allowance for loan losses
(43,499
)
(44,149
)
Total loans, net
$
2,140,183
$
2,098,718

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 March 31, ~~2020~~2021 and December 31, ~~2019,~~2020, 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) March 31, 2020 December 31, 2019
Commercial $ 3,499 423
Consumer 2,248 2,260
Nonaccruing troubled debt restructurings 4,186 4,111
Total nonaccrual loans 9,933 6,794
Other real estate owned - -
Total nonperforming assets $ 9,933 6,794


(dollars in thousands)	March 31, 2021		December 31, 2020
Commercial	$	1,452		1,477
Consumer		3,201		3,083
Nonaccruing troubled debt restructurings		3,150		3,509
Total nonaccrual loans		7,803		8,069
Other real estate owned		-		1,169
Total nonperforming assets	$	7,803		9,238

At March 31, ~~2020,~~2021, nonperforming assets were ~~$9.9~~$7.8 million, or ~~0.42%~~0.30% of total assets and ~~0.49%~~0.36% of gross loans. Comparatively, nonperforming assets were ~~$6.8~~$9.2 million, or ~~0.30%~~0.37% of total assets and ~~0.35%~~0.43% of gross loans at December 31, ~~2019.~~2020. Nonaccrual loans ~~increased $3.1 million~~decreased $266,000 during the first ~~quarter~~three months of ~~2020~~2021 due primarily to ~~two~~$452,000 of nonaccrual loans ~~put~~returned to accrual status and $365,000 of loans paid or charged off, partially offset by $551,000 of new loans on ~~nonaccrual status.~~nonaccrual. The amount of foregone interest income on the nonaccrual loans in the first three months of ~~2020~~2021 and ~~2019~~2020 was approximately $1,000 and $51,000, ~~and $20,000,~~ respectively.

At March 31, ~~2020~~2021 and ~~2019,~~2020, the allowance for loan losses represented ~~226.1%~~557.5% and ~~265.4%~~226.1% of the total amount of nonperforming loans, respectively. A significant portion, or approximately 98%, of nonperforming loans at March 31, ~~2020~~2021 was secured by real estate. 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 $22.5 million as of March 31, 2020 to be adequate.~~

As a general practice, most of our commercial loans and a portion of our consumer loans are originated with relatively short maturities of less than ten years. As a result, when a loan reaches its maturity we frequently renew the loan and thus extend its maturity using similar 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 nonaccrual after evaluating the loan’s collateral value and financial strength of its guarantors. Nonaccrual loans are renewed at terms generally consistent with the ultimate source of repayment and rarely at reduced rates. In these cases, we will generally 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, we will typically seek performance under the guarantee.

In addition, at March 31, ~~2020, 83.1%~~2021, 85.1% of our loans were collateralized by real estate and 91% of our impaired loans were secured by real estate. We utilize third party appraisers to determine the fair value of collateral dependent loans. Our current loan and appraisal policies require 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 March 31, ~~2020,~~2021, we did 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 March 31, ~~2020,~~2021, impaired loans totaled ~~$17.9~~$12.2 million, for which ~~$5.4~~$5.0 million of these loans had a reserve of approximately ~~$1.8~~$1.6 million allocated in the allowance. During the first three months of 2021, the average recorded investment in impaired loans was approximately $12.6 million. Comparatively, impaired loans totaled $13.0 million at December 31, 2020 for which $5.1 million of these loans had a reserve of approximately $1.7 million allocated in the allowance. During 2020, the average recorded investment in impaired loans was approximately $17.9 million. Comparatively, impaired loans totaled $12.0 million at December 31, 2019 for which $4.7 million of these loans had a reserve of approximately $1.4 million allocated in the allowance. During 2019, the average recorded investment in impaired loans was approximately $12.3$14.6 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 March 31, ~~2020,~~2021, we determined that we had loans totaling ~~$12.1~~$7.5 million that we considered TDRs compared to ~~$9.3~~$8.4 million as of December 31, ~~2019.~~2020. The ~~increase~~decrease during the first ~~quarter~~three months of ~~2020~~2021 was driven by ~~three~~four client relationships with loans totaling ~~$2.9 million~~$908,000 that were ~~modified due to~~paid off or removed from TDR status during the ~~COVID-19 pandemic, and considered to be TDRs due to experiencing financial difficulty prior to the COVID-19 pandemic.~~quarter.

Allowance for Loan Losses

The allowance for loan losses was ~~$22.5~~$43.5 million and ~~$16.1~~$22.5 million at March 31, ~~2020~~2021 and ~~2019,~~2020, respectively, or 1.99% of outstanding loans at March 31, 2021 and 1.11% of outstanding loans at March 31, ~~2020 and 0.93% of outstanding loans at March 31, 2019.~~2020. At December 31, ~~2019,~~2020, our allowance for loan losses was ~~$16.6~~$44.1 million, or ~~0.86%~~2.06% of outstanding loans.

During the three months ended March 31, ~~2020,~~2021, we charged-off $406,000 of loans and recorded $56,000 of recoveries on loans previously charged-off, for net charge-offs of $350,000. Comparatively, we charged-off $266,000 of loans and recorded $86,000 of recoveries on loans previously charged-off, ~~for net charge-offs of $180,000. Comparatively, we charged-off $41,000 of loans and recorded $30,000 of recoveries on loans previously charged-off,~~ resulting in net charge-offs of ~~$11,000~~$180,000 for the first three months of ~~2019.~~2020. The ~~$5.8 million increase~~$650,000 decrease in the allowance for loan losses during the first three months of ~~2020~~2021 is driven by ~~the impact of the COVID-19 pandemic and~~a reduction in qualitative adjustment factors related to the ~~uncertain~~improvement in economic conditions ~~as well as an increase in past due~~at both the national and ~~nonaccrual loans~~regional levels at March 31, ~~2020. We expect economic uncertainty to continue for~~2021, partially offset by downgrades in our hotel loan portfolio as we believe the ~~next few months which may result in a significant increase~~tourism and hospitality industry remains at risk of credit losses due to the ~~allowance for loan losses for the second quarter of 2020.~~pandemic.

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

Three months ended
March 31, Year ended
(dollars in thousands) 2020 2019 December 31, 2019
Balance, beginning of period $ 16,642 15,762 15,762
Provision 6,000 300 2,300
Loan charge-offs (266 ) (41 ) (1,515 )
Loan recoveries 86 30 95
Net loan charge-offs (180 ) (11 ) (1,420 )
Balance, end of period $ 22,462 16,051 16,642

Three months ended
March 31,
Year ended
(dollars in thousands)
2021
2020
December 31, 2020
Balance, beginning of period
$
44,149
16,642
16,642
Provision
(300
)
6,000
29,600
Loan charge-offs
(406
)
(266
)
(3,414
)
Loan recoveries
56
86
1,321
Net loan charge-offs
(350
)
(180
)
(2,093
)
Balance, end of period
$
43,499
22,462
44,149

Deposits and Other Interest-Bearing Liabilities

Our primary source of funds for loans and investments is our deposits and advances from the FHLB. In the past, we have chosen to obtain a portion of our certificates of deposits from areas outside of our market in order to obtain longer term deposits than are readily available in our local market. Our internal guidelines regarding the use of brokered CDs limit our brokered CDs to 20% of total deposits. In addition, we do not obtain time deposits of $100,000 or more through the 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 ~~$1.94~~$2.26 billion, or ~~95.8%~~100% of total deposits at March 31, ~~2020, while our out-of-market, or brokered, deposits represented $84.1 million, or 4.2% of our total deposits at March 31, 2020.~~2021. At December 31, ~~2019,~~2020, retail deposits represented ~~$1.81~~$2.12 billion, or ~~96.4%~~99.0% of our total deposits, and brokered CDs were ~~$67.4~~$22.0 million, representing ~~3.6%~~1.0% of our total deposits. Our loan-to-deposit ratio was ~~100%~~97% at March 31, ~~2020~~2021 and ~~104%~~100% at December 31, ~~2019.~~2020.

The following is a detail of our deposit accounts:

March 31, December 31,
(dollars in thousands) 2020 2019
Non-interest bearing $ 437,855 397,331
Interest bearing:
NOW accounts 260,320 228,680
Money market accounts 979,861 898,923
Savings 19,563 16,258
Time, less than $100,000 43,596 47,941
Time and out-of-market deposits, $100,000 and over 284,503 286,991
Total deposits $ 2,025,698 1,876,124


	March 31,		December 31,
(dollars in thousands)	2021		2020
Non-interest bearing	$	677,282		576,610
Interest bearing:
NOW accounts		304,530		268,739
Money market accounts		1,064,659		1,042,745
Savings		31,588		27,254
Time, less than $100,000		31,856		36,454
Time and out-of-market deposits, $100,000 and over		148,836		190,956
Total deposits	$	2,258,751		2,142,758

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 ~~$1.79~~$2.16 billion and ~~$1.66~~$2.01 billion at March 31, ~~2020,~~2021, and December 31, ~~2019,~~2020, respectively.

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

Three months ended
March 31,
2020 2019
(dollars in thousands) Amount Rate Amount Rate
Noninterest-bearing demand deposits $ 391,761 - % $ 323,800 - %
Interest-bearing demand deposits 227,688 0.30 % 186,070 0.19 %
Money market accounts 938,808 1.44 % 764,638 1.75 %
Savings accounts 17,780 0.05 % 15,477 0.05 %
Time deposits less than $100,000 48,775 1.61 % 62,371 1.85 %
Time deposits greater than $100,000 280,889 2.06 % 309,323 2.24 %
Total deposits $ 1,905,701 1.09 % $ 1,661,679 1.31 %


	Three months ended
	March 31,
	2021				2020
(dollars in thousands)	Amount		Rate		Amount		Rate
Noninterest-bearing demand deposits	$	603,292	-	%	$	391,761	-	%
Interest-bearing demand deposits		280,737	0.07	%		227,688	0.30	%
Money market accounts		1,055,678	0.22	%		938,808	1.44	%
Savings accounts		28,789	0.05	%		17,780	0.05	%
Time deposits less than $100,000		34,416	0.80	%		48,775	1.61	%
Time deposits greater than $100,000		178,962	1.03	%		280,889	2.06	%
Total deposits	$	2,181,874	0.21	%	$	1,905,701	1.09	%

During the first three months ~~ended March 31, 2020,~~of 2021, our average transaction account balances increased by ~~$286.1~~$392.5 million, or ~~22.2%~~24.9%, from the ~~three months ended March 31, 2019,~~prior year, while our average time deposit balances decreased by ~~$42.0~~$116.3 million, or ~~11.3%, during the same three-month period.~~35.3%.

All of our time deposits are certificates of deposits. The maturity distribution of our time deposits of $100,000 or more at March 31, ~~2020~~2021 was as follows:


(dollars in thousands)	March 31, 2020		March 31, 2021
Three months or less	$	56,241	$	37,817
Over three through six months		54,008		32,177
Over six through twelve months		142,352		51,691
Over twelve months		31,902		27,151
Total	$	284,503	$	148,836

~~Included in time deposits of $100,000 or more at March 31, 2020 is $84.1 million of wholesale CDs scheduled to mature within the next 12 months at a weighted average rate of 1.90%.~~ Time deposits that meet or exceed the FDIC insurance limit of $250,000 at March 31, ~~2020~~2021 and December 31, ~~2019~~2020 were ~~$236.8~~$97.0 million and ~~$220.1~~$130.9 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. We have not experienced any unusual pressure on our deposit balances or our liquidity position as a result of the COVID-19 pandemic.

At March 31, ~~2020~~2021 and December 31, ~~2019,~~2020 cash and cash equivalents ~~amounted to $141.1~~totaled $155.3 million and ~~$127.8~~$100.7 million, respectively, or ~~5.9%~~6.0% and ~~5.6%~~4.1% of total assets, respectively. Our investment securities at March 31, ~~2020~~2021 and December 31, ~~2019~~2020 amounted to ~~$75.8~~$94.8 million and ~~$74.6~~$98.4 million, respectively, or ~~3.2%~~3.7% and ~~3.3%~~4.0% of total assets, ~~respectively.Investment~~respectively. Investment securities traditionally provide a secondary source of liquidity since they can be converted into cash in a timely 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~~five federal funds purchased lines of credit with correspondent banks totaling ~~$72.0~~$118.5 million for which there were no borrowings against the lines of credit at March 31, ~~2020.~~2021.

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 March 31, ~~2020~~2021 was ~~$385.9~~$511.9 million, based on the Bank’s ~~$4.8~~$1.2 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 March 31, ~~2020~~2021 and December 31, ~~2019~~2020 we had ~~$229.3~~$232.8 million and ~~$238.1~~$206.2 million, respectively, of letters of credit outstanding with the FHLB to secure client deposits.

We also have a line of credit with another financial institution for $15.0 million, which was unused at March 31, ~~2020.~~2021. The line of credit ~~bears~~has an interest atrate of LIBOR plus ~~2.50%~~3.50% and ~~matures on June 30, 2020. As noted in Note 1 – Nature~~a maturity date of ~~Business and Basis of Presentation, we have utilized $15.0 million of the line subsequent to March~~December 31, ~~2020.~~2021.

We believe that our existing stable base of core deposits, federal funds purchased lines of credit with correspondent banks, and borrowings from the FHLB 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 ~~$210.5~~$239.5 million at March 31, ~~2020~~2021 and ~~$205.9~~$228.3 million at December 31, ~~2019.~~2020. The ~~$4.6~~$11.2 million increase from December 31, ~~2019~~2020 is primarily related to net income of ~~$2.8~~$10.4 million during the first three months of ~~2020,~~2021, stock option exercises and expenses of $2.0 million, partially offset by a $1.1 million ~~and $708,000 in~~ other comprehensive ~~income.~~loss.

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 three months ended March 31, ~~2020~~2021 and the year ended December 31, ~~2019.~~2020. Since our inception, we have not paid cash dividends.

March 31, 2020 December 31, 2019
Return on average assets 0.51 % 1.35 %
Return on average equity 5.42 % 14.72 %
Return on average common equity 5.42 % 14.72 %
Average equity to average assets ratio 9.42 % 9.16 %
Tangible common equity to assets ratio 8.87 % 9.08 %


	March 31, 2021		December 31, 2020
Return on average assets	1.68	%	0.76	%
Return on average equity	18.22	%	8.49	%
Return on average common equity	18.22	%	8.49	%
Average equity to average assets ratio	9.24	%	9.01	%
Tangible common equity to assets ratio	9.28	%	9.20	%

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.

Regulatory capital rules adopted in July 2013 and fully-phased in as of January 1, 2019, which we refer to Basel III, impose minimum capital requirements for bank holding companies and banks. The Basel III rules apply to all national and state banks and savings associations regardless of size and bank holding companies and savings and loan holding companies other than “small bank holding companies,” generally holding companies with consolidated assets of less than $3 billion (such as the Company). In order to avoid restrictions on capital distributions or discretionary bonus payments to executives, a covered banking organization must maintain a “capital conservation buffer” on top of our minimum risk-based capital requirements. This buffer must consist solely of common equity Tier 1, but the buffer applies to all three measurements (common equity Tier 1, Tier 1 capital and total capital). The capital conservation buffer consists of an additional amount of CET1 equal to 2.5% of risk-weighted assets.

To be considered “well-capitalized” for purposes of certain rules and prompt corrective action requirements, the Bank must maintain a minimum total risked-based capital ratio of at least 10%, a total Tier 1 capital ratio of at least 8%, a common equity Tier 1 capital ratio of at least 6.5%, and a leverage ratio of at least 5%. As of March 31, ~~2020,~~2021, our capital ratios exceed these ratios and we remain “well capitalized.”

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

March 31, 2020
For capital To be well capitalized
adequacy purposes under prompt
minimum plus the corrective
capital conservation action provisions
Actual buffer minimum
(dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
Total Capital (to risk weighted assets) $ 259,896 13.16 % 158,033 10.50 % 197,542 10.00 %
Tier 1 Capital (to risk weighted assets) 237,433 12.02 % 118,525 8.50 % 158,033 8.00 %
Common Equity Tier 1 Capital (to risk weighted assets) 237,433 12.02 % 88,894 7.00 % 128,402 6.50 %
Tier 1 Capital (to average assets) 237,433 10.64 % 89,255 4.00 % 111,569 5.00 %

December 31, 2019
For capital To be well capitalized
adequacy purposes under prompt
minimum plus the corrective
capital conservation action provisions
Actual buffer minimum
(dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
Total Capital (to risk weighted assets) $ 250,847 13.31 % $ 150,807 10.50 % $ 188,510 10.00 %
Tier 1 Capital (to risk weighted assets) 234,205 12.42 % 113,106 8.50 % 150,807 8.00 %
Common Equity Tier 1 Capital (to risk weighted assets) 234,205 12.42 % 84,829 7.00 % 122,531 6.50 %
Tier 1 Capital (to average assets) 234,205 10.80 % 86,772 4.00 % 108,465 5.00 %


	March 31, 2021
				For capital			To be well capitalized
				adequacy purposes			under prompt
				minimum plus the			corrective
				capital conservation			action provisions
			Actual	buffer			minimum
(dollars in thousands)	Amount		Ratio	Amount		Ratio	Amount		Ratio
Total Capital (to risk weighted assets)	$	290,432	14.29%		213,370	10.50%		203,209	10.00%
Tier 1 Capital (to risk weighted assets)		264,807	13.03%		172,728	8.50%		162,568	8.00%
Common Equity Tier 1 Capital (to risk weighted assets)		264,807	13.03%		142,247	7.00%		132,086	6.50%
Tier 1 Capital (to average assets)		264,807	10.61%		99,853	4.00%		124,816	5.00%


	December 31, 2020
				For capital			To be well capitalized
				adequacy purposes			under prompt
				minimum plus the			corrective
				capital conservation			action provisions
			Actual	buffer			minimum
(dollars in thousands)	Amount		Ratio	Amount		Ratio	Amount		Ratio
Total Capital (to risk weighted assets)	$	279,414	13.92%	$	160,554	8.00%	$	200,693	10.00%
Tier 1 Capital (to risk weighted assets)		254,092	12.66%		120,416	6.00%		160,554	8.00%
Common Equity Tier 1 Capital (to risk weighted assets)		254,092	12.66%		90,312	4.50%		130,451	6.50%
Tier 1 Capital (to average assets)		254,092	10.26%		99,094	4.00%		123,867	5.00%

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


	March 31, 2021
						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)	$	301.236	14.82%	213,370	10.50%	N/A	N/A
Tier 1 Capital (to risk weighted assets)		252,611	12.43%	172,728	8.50%	N/A	N/A
Common Equity Tier 1 Capital (to risk weighted assets)		239,611	11.79%	142,247	7.00%	N/A	N/A
Tier 1 Capital (to average assets)		252,611	10.12%	99,853	4.00%	N/A	N/A

December 31, 2019
For capital To be well capitalized
adequacy purposes under prompt
minimum corrective
plus the capital action provisions
Actual conservation buffer⁽¹⁾ minimum
(dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
Total Capital (to risk weighted assets) $ 258,800 13.73 % $ 150,807 10.50 % N/A N/A
Tier 1 Capital (to risk weighted assets) 219,158 11.63 % 113,106 8.50 % N/A N/A
Common Equity Tier 1 Capital (to risk weighted assets) 206,158 10.94 % 84,829 7.00 % N/A N/A
Tier 1 Capital (to average assets) 219,158 10.10 % 86,772 4.00 % N/A N/A


	December 31, 2020
							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)	$	288,593	14.38%	$	160,554	8.00%	N/A	N/A
Tier 1 Capital (to risk weighted assets)		240,271	11.97%		120,416	6.00%	N/A	N/A
Common Equity Tier 1 Capital (to risk weighted assets)		227,271	11.32%		90,312	4.50%	N/A	N/A
Tier 1 Capital (to average assets)		240,271	9.70%		99,094	4.00%	N/A	N/A

⁽¹⁾

Under the Federal Reserve’s Small Bank Holding Company Policy Statement, the Company is not subject to the minimum capital adequacy and capital conservation buffer capital requirements at the holding company level, unless otherwise advised by the Federal Reserve (such capital requirements are applicable only at the Bank level)~~. Although~~.Although the minimum regulatory capital requirements are not applicable to the Company, we calculate these ratios for our own planning and monitoring purposes.

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. Since our inception, we have not paid cash dividends.

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 March 31, ~~2020,~~2021, unfunded commitments to extend credit were ~~$458.7~~$490.1 million, of which ~~$137.6~~$116.5 million were at fixed rates and ~~$321.1~~$373.6 million were at variable rates. At December 31, ~~2019,~~2020, unfunded commitments to extend credit were ~~$426.6~~$480.1 million, of which approximately ~~$105.0~~$114.6 million were at fixed rates and ~~$321.7~~$365.5 million were at variable rates. A significant portion of the unfunded commitments related to consumer home equity lines of credit. 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.

At March 31, ~~2020~~2021 and December 31, ~~2019,~~2020, there were commitments under letters of credit for ~~$9.3~~$9.0 million and ~~$9.9~~$8.7 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 March 31, ~~2020,~~2021, 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.

~~Interest rate scenario~~	Change in net interest
Interest rate scenario	income from base
Up 300 basis points	~~2.87~~ 17.93	%
Up 200 basis points	~~1.31~~ 12.11	%
Up 100 basis points	~~0.12~~ 6.14	%
Base	-
Down 100 basis points	~~1.58~~ (2.93)	%
Down 200 basis points	~~4.68~~ (4.88)	%
Down 300 basis points	~~5.60~~ (6.50)	%

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, ~~2019,~~2020, 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 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. A brief discussion of each of these areas appears in our ~~2019~~2020 Annual Report on Form 10-K. During the first three months of ~~2020,~~2021, we did not significantly alter the manner in which we applied our Critical Accounting Policies or developed related assumptions and estimates.

Accounting, Reporting, and Regulatory Matters

See Note 1 – Nature of Business and Basis of Presentation in the accompanying condensed notes to consolidated financial statements included elsewhere in this report for details of recently issued accounting pronouncements and their expected impact on our consolidated financial statements.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

As a “smaller reporting company” as defined by Item 10 of Regulation S-K, the Company is not required to provide information required by this Item.

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 March 31, ~~2020,~~2021, 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 1A. 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, ~~2019,~~2020, as well as cautionary statements contained in this Quarterly Report on Form 10-Q, including those under the caption “Cautionary Warning Regarding Forward-Looking Statements” set forth in Part I, Item 2 of this ~~Quarterly Report on~~ Form 10-Q, risks and matters described elsewhere in this ~~Quarterly Report on~~ Form 10-Q, and in our other filings with the SEC.

~~We are providing this additional risk factor~~There have been no material changes to ~~supplement~~ the risk factors ~~contained~~disclosed in Item 1A. of Part I in our Annual Report on Form 10-K for the year ended December 31, ~~2019.~~2020.

The COVID-19 pandemic has adversely affected our business, financial condition and results of operations, and the ultimate impacts of the pandemic on our business, financial condition and results of operations will depend on future developments and other factors that are highly uncertain and will be impacted by the scope and duration of the pandemic and actions taken by governmental authorities in response to the pandemic.

The ongoing COVID-19 global and national health emergency has caused significant disruption in the international and United States economies and financial markets and has had an adverse effect on our business, financial condition and results of operations. The spread of COVID-19 has caused illness, quarantines, cancellation of events and travel, business and school shutdowns, reduction in business activity and financial transactions, supply chain interruptions and overall economic and financial market instability. In response to the COVID-19 pandemic, the governments of the states in which we have retail offices, and of most other states, have taken preventative or protective actions, such as imposing restrictions on travel and business operations, advising or requiring individuals to limit or forego their time outside of their homes, and ordering temporary closures of businesses that have been deemed to be non-essential. These restrictions and other consequences of the pandemic have resulted in significant adverse effects for many different types of businesses, including, among others, those in the travel, hospitality and food and beverage industries, and have resulted in a significant number of layoffs and furloughs of employees nationwide and in the regions in which we operate.

The ultimate effects of COVID-19 on the broader economy and the markets that we serve are not known nor is the ultimate length of the restrictions described above and any accompanying effects. Moreover, the Federal Reserve has taken action to lower the Federal Funds rate, which may negatively affect our interest income and, therefore, earnings, financial condition and results of operation. Additional impacts of COVID-19 on our business could be widespread and material, and may include, or exacerbate, among other consequences, the following:

●	~~employees contracting COVID-19;~~
●	~~reductions in our operating effectiveness as our employees work from home;~~
●	~~a work stoppage, forced quarantine, or other interruption of our business;~~
●	~~unavailability of key personnel necessary to conduct our business activities;~~
●	~~effects on key employees, including operational management personnel and those charged with preparing, monitoring and evaluating our financial reporting and internal controls;~~
●	~~sustained closures of our branch lobbies or the offices of our customers;~~
●	~~declines in demand for loans and other banking services and products;~~
●	~~reduced consumer spending due to both job losses and other effects attributable to COVID-19;~~
●	~~unprecedented volatility in United States financial markets;~~
●	~~volatile performance of our investment securities portfolio;~~
●	~~decline in the credit quality of our loan portfolio, owing to the effects of COVID-19 in the markets we serve, leading to a need to increase our allowance for loan losses;~~
●	~~declines in value of collateral for loans, including real estate collateral;~~
●	~~declines in the net worth and liquidity of borrowers and loan guarantors, impairing their ability to honor commitments to us; and~~
●	declines in demand resulting from businesses being deemed to be “non-essential” by governments in the markets we serve, and from “non-essential” and “essential” businesses suffering adverse effects from reduced levels of economic activity in our markets.

These factors, together or in combination with other events or occurrences that may not yet be known or anticipated, may materially and adversely affect our business, financial condition and results of operations.

The ongoing COVID-19 pandemic has resulted in meaningfully lower stock prices for many companies, as well as the trading prices for many other securities. The further spread of the COVID-19 outbreak, as well as ongoing or new governmental, regulatory and private sector responses to the pandemic, may materially disrupt banking and other economic activity generally and in the areas in which we operate. This could result in further decline in demand for our banking products and services, and could negatively impact, among other things, our liquidity, regulatory capital and our growth strategy. Any one or more of these developments could have a material adverse effect on our business, financial condition and results of operations.

We are taking precautions to protect the safety and well-being of our employees and customers. However, no assurance can be given that the steps being taken will be adequate or deemed to be appropriate, nor can we predict the level of disruption which will occur to our employee’s ability to provide customer support and service. If we are unable to recover from a business disruption on a timely basis, our business, financial condition and results of operations could be materially and adversely affected. We may also incur additional costs to remedy damages caused by such disruptions, which could further adversely affect our business, financial condition and results of operations.

As a participating lender in the SBA Paycheck Protection Program (“PPP”), the Company and the Bank are subject to additional risks of litigation from the Bank’s clients or other parties regarding the Bank’s processing of loans for the PPP and risks that the SBA may not fund some or all PPP loan guaranties.

On March 27, 2020, President Trump signed the CARES Act, which included a $349 billion loan program administered through the SBA referred to as the PPP. Under the PPP, small businesses and other entities and individuals can apply for loans from existing SBA lenders and other approved regulated lenders that enroll in the program, subject to numerous limitations and eligibility criteria. The Bank is participating as a lender in the PPP. The PPP opened on April 3, 2020; however, because of the short timeframe between the passing of the CARES Act and the opening of the PPP, there is some ambiguity in the laws, rules and guidance regarding the operation of the PPP, which exposes the Company to risks relating to noncompliance with the PPP. On or about April 16, 2020, the SBA notified lenders that the $349 billion earmarked for the PPP was exhausted. Congress has approved additional funding for the PPP and President Trump signed the new legislation on April 24, 2020. Since the opening of the PPP, several other larger banks have been subject to litigation regarding the process and procedures that such banks used in processing applications for the PPP. The Company and the Bank may be exposed to the risk of litigation, from both clients and non-clients that approached the Bank regarding PPP loans, regarding its process and procedures used in processing applications for the PPP. If any such litigation is filed against the Company or the Bank and is not resolved in a manner favorable to the Company or the Bank, it may result in significant financial liability or adversely affect the Company’s reputation. In addition, litigation can be costly, regardless of outcome. Any financial liability, litigation costs or reputational damage caused by PPP related litigation could have a material adverse impact on our business, financial condition and results of operations.

The Bank also has credit risk on PPP loans if a determination is made by the SBA that there is a deficiency in the manner in which the loan was originated, funded, or serviced by the Bank, such as an issue with the eligibility of a borrower to receive a PPP loan, which may or may not be related to the ambiguity in the laws, rules and guidance regarding the operation of the PPP. In the event of a loss resulting from a default on a PPP loan and a determination by the SBA that there was a deficiency in the manner in which the PPP loan was originated, funded, or serviced by the Company, the SBA may deny its liability under the guaranty, reduce the amount of the guaranty, or, if it has already paid under the guaranty, seek recovery of any loss related to the deficiency from the Company.

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

	(a)	Not applicable.
	(b)	Not applicable.
~~(c)~~	~~Issuer Purchases of Registered Equity Securities~~(c)	Issuer Purchases of Registered Equity Securities

The following table reflects share repurchase activity during the first quarter of ~~2020:~~2021:

					(d) Maximum
				(c) Total	Number (or
				Number of	Approximate
				Shares (or	Dollar Value) of
				Units)	Shares (or
	(a) Total			Purchased as	Units) that May
	Number of			Part of Publicly	Yet Be
	Shares (or	(b) Average		Announced	Purchased
	Units)	Price Paid per		Plans or	Under the Plans
Period	Purchased	Share (or Unit)		Programs	or Programs
January 1 – January 31	-	$	-	-	388,612
~~January~~ February 1 ~~- January 31~~– February 28	-	$	-	-	- 388,612
~~February~~ March 1 ~~- February 29~~– March 31	-		-	-	- 388,612
~~March 1 - March 31~~ Total	-		-	-	~~383,650~~ 388,612*
~~Total~~	-			-	383,650*

*On March ~~11, 2020,~~9, 2021, the Company announced a share repurchase plan allowing us to repurchase up to ~~383,650~~388,612 shares of our common stock (the “Repurchase Plan”). As of March 31, ~~2020,~~2021, we have not repurchased any of the shares authorized for repurchase under the Repurchase Plan. The Company is not obligated to purchase any such shares under the Repurchase Plan, and the Repurchase Plan may be discontinued, suspended or restarted at any time; however, repurchases under the Repurchase Plan after December 31, ~~2020~~2021 would require additional approval of our Board of Directors and the Federal Reserve.

Item 3. DEFAULTS UPON SENIOR SECURITIES.

None.

Item 4. MINE SAFETY DISCLOSURES.

Not applicable.

Item 5. OTHER INFORMATION.

None.

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.

INDEX TO EXHIBITS

Exhibit ~~Number~~		~~Description~~
Number		Description
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 March 31, ~~2020,~~2021, formatted in iXBRL (Inline eXtensible Business Reporting ~~Language (XBRL)~~Language): (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.

104		Cover Page Interactive Data File (embedded within the Inline XBRL document)

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: April ~~28, 2020~~29, 2021		/s/R. Arthur Seaver, Jr.
		R. Arthur Seaver, Jr.
		Chief Executive Officer (Principal Executive Officer)

Date: April ~~28, 2020~~29, 2021		/s/Michael D. Dowling
		Michael D. Dowling
		Chief Financial Officer (Principal Financial and Accounting Officer)

4644


	March 31,			December 31,
(dollars in thousands, except share data)	2020			2019
	(Unaudited)			(Audited)
ASSETS
Cash and cash equivalents:
Cash and due from banks	$	17,521		19,196
Federal funds sold		40,277		89,256
Interest-bearing deposits with banks		83,314		19,364
Total cash and cash equivalents		141,112		127,816
Investment securities:
Investment securities available for sale		70,507		67,694
Other investments		5,341		6,948
Total investment securities		75,848		74,642
Mortgage loans held for sale		34,948		27,046
Loans		2,030,261		1,943,525
Less allowance for loan losses		(22,462	)	(16,642	)
Loans, net		2,007,799		1,926,883
Bank owned life insurance		40,281		40,011
Property and equipment, net		58,656		58,478
Deferred income taxes		4,087		4,275
Other assets		9,518		8,044
Total assets	$	2,372,249		2,267,195
LIABILITIES
Deposits	$	2,025,698		1,876,124
Federal Home Loan Bank advances and other borrowings		65,000		110,000
Subordinated debentures		35,917		35,890
Other liabilities		35,159		39,321
Total liabilities		2,161,774		2,061,335
SHAREHOLDERS’ EQUITY
Preferred stock, par value $.01 per share, 10,000,000 shares authorized		-		-
Common stock, par value $.01 per share, 10,000,000 shares authorized, 7,717,582 and 7,672,678 shares issued and outstanding at March 31, 2020 and December 31, 2019, respectively		77		77
Nonvested restricted stock		(1,105	)	(803	)
Additional paid-in capital		107,529		106,152
Accumulated other comprehensive income (loss)		410		(298	)
Retained earnings		103,564		100,732
Total shareholders’ equity		210,475		205,860
Total liabilities and shareholders’ equity	$	2,372,249		2,267,195


	For the three months
	ended March 31,
(dollars in thousands, except share data)	2020		2019
Interest income
Loans	$	23,367	20,889
Investment securities		396	549
Federal funds sold and interest-bearing deposits with banks		103	174
Total interest income		23,866	21,612
Interest expense
Deposits		5,174	5,375
Borrowings		594	419
Total interest expense		5,768	5,794
Net interest income		18,098	15,818
Provision for loan losses		6,000	300
Net interest income after provision for loan losses		12,098	15,518
Noninterest income
Mortgage banking income		2,668	1,857
Service fees on deposit accounts		262	265
ATM and debit card income		398	380
Income from bank owned life insurance		270	216
Other income		318	276
Total noninterest income		3,916	2,994
Noninterest expenses
Compensation and benefits		7,871	6,783
Occupancy		1,536	1,339
Outside service and data processing costs		1,192	960
Insurance		320	318
Professional fees		497	439
Marketing		258	260
Other		698	549
Total noninterest expenses		12,372	10,648
Income before income tax expense		3,642	7,864
Income tax expense		810	1,855
Net income available to common shareholders	$	2,832	6,009
Earnings per common share
Basic	$	0.37	0.81
Diluted		0.36	0.78
Weighted average common shares outstanding
Basic		7,678,598	7,459,342
Diluted		7,827,173	7,741,860


												Accumulated
							Nonvested			Additional		other
	Common stock			Preferred stock			restricted			paid-in		comprehensive			Retained
(dollars in thousands, except share data)	Shares	Amount		Shares	Amount		stock			capital		loss			earnings		Total
December 31, 2018	7,466,481		75	-		-		(741	)		102,625		(917	)		72,874		173,916
Net income	-		-	-		-		-			-		-			6,009		6,009
Proceeds from exercise of stock options	28,455		-	-		-		-			322		-			-		322
Issuance of restricted stock	10,700		-	-		-		(347	)		347		-			-		-
Compensation expense related to restricted stock, net of tax	-		-	-		-		95			-		-			-		95
Compensation expense related to stock options, net of tax	-		-	-		-		-			306		-			-		306
Other comprehensive income	-		-	-		-		-			-		538			-		538

March 31, 2019	7,505,636	$	75	-	$	-	$	(993	)	$	103,600	$	(379	)	$	78,883	$	181,186
December 31, 2019	7,672,678		77	-		-		(803	)		106,152		(298	)		100,732		205,860
Net income	-		-	-		-		-			-		-			2,832		2,832
Proceeds from exercise of stock options	35,404		-	-		-		-			741		-			-		741
Issuance of restricted stock	9,500		-	-		-		(406	)		406		-			-		-
Compensation expense related to restricted stock, net of tax	-		-	-		-		104			-		-			-		104
Compensation expense related to stock options, net of tax	-		-	-		-		-			230		-			-		230
Other comprehensive income	-		-	-		-		-			-		708			-		708

March 31, 2020	7,717,582	$	77	-	$	-	$	(1,105	)	$	107,529	$	410		$	103,564	$	210,475


	For the three months ended
				March 31,
(dollars in thousands)	2020			2019
Operating activities
Net income	$	2,832		6,009
Adjustments to reconcile net income to cash provided by (used for) operating activities:
Provision for loan losses		6,000		300
Depreciation and other amortization		549		453
Accretion and amortization of securities discounts and premium, net		116		83
Net change in operating leases		55		447
Compensation expense related to stock options and restricted stock grants		334		401
Gain on sale of loans held for sale		(2,778	)	(1,775	)
Loans originated and held for sale		(95,423	)	(55,178	)
Proceeds from sale of loans held for sale		90,299		56,801
Increase in cash surrender value of bank owned life insurance		(270	)	(216	)
Decrease in deferred tax asset		-		1
Increase in other assets, net		(1,490	)	(400	)
Increase (decrease) in other liabilities		(3,782	)	5,978
Net cash provided by (used for) operating activities		(3,558	)	12,904
Investing activities
Increase (decrease) in cash realized from:
Increase in loans, net		(86,916	)	(56,643	)
Purchase of property and equipment		(1,119	)	(266	)
Purchase of investment securities:
Available for sale		(6,302	)	-
Payments and maturities, calls and repayments of investment securities:
Available for sale		4,269		2,205
Other investments		1,607		812
Net cash used for investing activities		(88,461	)	(53,892	)
Financing activities
Increase (decrease) in cash realized from:
Increase in deposits, net		149,574		110,099
Decrease in Federal Home Loan Bank advances and other borrowings, net		(45,000	)	(25,000	)
Proceeds from the exercise of stock options and warrants		741		322
Net cash provided by financing activities		105,315		85,421
Net increase in cash and cash equivalents		13,296		44,433
Cash and cash equivalents at beginning of the period		127,816		72,873
Cash and cash equivalents at end of the period	$	141,112		117,306
Supplemental information
Cash paid for
Interest	$	7,103		5,570
Income taxes		-		-
Schedule of non-cash transactions
Unrealized gain on securities, net of income taxes		708		541
Right-of-use assets obtained in exchange for lease obligations:
Operating leases		-		15,395


				March 31, 2020
(dollars in thousands)	# Loans	Amount		% of Total Portfolio
Payment deferrals	252	$	208,555	10.3	%
Interest only	170		168,723	8.3	%
Financial difficulty (TDR)	6		2,925	0.1	%
	428	$	380,203	18.7	%


	March 31, 2020
						% of
			% of Total	Total		Committed	Total
	Balance		Loans	Committed		Balance	Modified
(dollars in thousands)	Outstanding		Outstanding	Balance		Outstanding	Balance		% Modified
Religious organizations	$	56,306	2.8%	$	88,422	63.6%	$	1,539	2.7%
Entertainment facilities		4,605	0.2%		9,464	48.7%		255	5.5%
Hotels		82,227	4.1%		104,155	78.9%		6,050	7.4%
Personal care businesses		1,349	0.1%		1,385	97.4%		137	10.2%
Restaurants		48,352	2.4%		53,526	90.3%		3,673	7.6%
Sports facilities		22,229	1.1%		22,882	97.1%		683	3.1%
Travel related businesses		3,328	0.2%		4,085	81.5%		555	16.7%
Private healthcare facilities		36,462	1.8%		41,899	87.0%		12,531	34.4%
Non-essential retail		154,450	7.6%		160,702	96.1%		13,843	9.0%
Total	$	409,308	20.2%	$	486,520	84.1%	$	39,266	9.6%


	March 31, 2020
	Amortized		Gross Unrealized		Fair
(dollars in thousands)	Cost		Gains	Losses	Value
Available for sale
US government agencies	$	500	-	1	499
SBA securities		519	-	18	501
State and political subdivisions		9,385	295	1	9,679
Asset-backed securities		12,929	-	643	12,286
Mortgage-backed securities
FHLMC		10,034	270	4	10,300
FNMA		33,057	702	135	33,624
GNMA		3,565	53	-	3,618
Total mortgage-backed securities		46,656	1,025	139	47,542
Total investment securities available for sale	$	69,989	1,320	802	70,507

	December 31, 2019
	Amortized		Gross Unrealized		Fair
	Cost		Gains	Losses	Value
Available for sale
US government agencies	$	500	-	1	499
SBA securities		550	-	19	531
State and political subdivisions		4,205	3	24	4,184
Asset-backed securities		13,351	-	184	13,167
Mortgage-backed securities
FHLMC		10,609	14	15	10,608
FNMA		35,275	34	169	35,140
GNMA		3,581	5	21	3,565
Total mortgage-backed securities		49,465	53	205	49,313
Total	$	68,071	56	433	67,694


	March 31, 2020
	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	$	-	-	499	1.11%	-	-	-	-	499	1.11%
SBA securities		-	-	-	-	-	-	501	2.39%	501	2.39%
State and political subdivisions		-	-	-	-	972	2.65%	8,707	2.86%	9,679	2.84%
Asset-backed securities		-	-	-	-	1,402	2.22%	10,884	2.45%	12,286	2.43%
Mortgage-backed securities		-	-	3,224	1.80%	8,263	2.05%	36,055	2.34%	47,542	2.25%
Total	$	-	-	3,723	1.71%	10,637	2.13%	56,147	2.44%	70,507	2.36%

	December 31, 2019
	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	$	-	-	499	1.97%	-	-	-	-	499	1.97%
SBA securities		-	-	-	-	-	-	531	2.62%	531	2.62%
State and political subdivisions		-	-	808	2.81%	1,283	2.96%	2,093	2.67%	4,184	2.79%
Asset-backed securities		-	-	-	-	1,493	2.34%	11,674	2.61%	13,167	2.58%
Mortgage-backed securities		-	-	3,368	1.78%	7,638	2.00%	38,307	2.24%	49,313	2.17%
Total	$	-	-	4,675	1.98%	10,414	2.17%	52,605	2.34%	67,694	2.29%


	March 31, 2020
	Less than 12 months					12 months or longer					Total
		Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
(dollars in thousands)	#	value		losses		#	value		losses		#	value		losses
Available for sale
US government agencies	1	$	499	$	1	-	$	-	$	-	1	$	499	$	1
SBA securities	-		-		-	1		501		18	1		501		18
State and political subdivisions	1		505		1	-		-		-	1		505		1
Asset-backed securities	5		5,489		365	5		6,797		278	10		12,286		643
Mortgage-backed securities
FHLMC	1		258		4	-		-		-	1		258		4
FNMA	-		-		-	4		2,778		135	4		2,778		135
Total	8	$	6,751	$	371	10	$	10,076	$	431	18	$	16,827	$	802

	December 31, 2019
	Less than 12 months					12 months or longer					Total
			Fair		Unrealized		Fair		Unrealized			Fair		Unrealized
(dollars in thousands)	#		value		losses	#	value		losses		#	value		losses
Available for sale
US government agencies	1	$	499	$	1	-	$	-	$	-	1	$	499	$	1
SBA securities	-		-		-	1		531		19	1		531		19
State and political subdivisions	2		2,093		24	-		-		-	2		2,093		24
Asset-backed securities	5		5,921		68	5		7,246		116	10		13,167		184
Mortgage-backed securities
FHLMC	4		3,842		2	4		2,323		13	8		6,165		15
FNMA	14		15,500		67	11		9,462		102	25		24,962		169
GNMA	2		2,240		6	1		734		15	3		2,974		21
Total	28	$	30,095	$	168	22	$	20,296	$	265	50	$	50,391	$	433


	March 31, 2020
			After one
	One year		but within	After five
(dollars in thousands)	or less		five years	years	Total
Commercial
Owner occupied RE	$	35,613	143,626	242,885		422,124
Non-owner occupied RE		53,806	276,462	204,578		534,846
Construction		12,178	28,280	34,300		74,758
Business		86,055	151,281	80,366		317,702
Total commercial loans		187,652	599,649	562,129		1,349,430
Consumer
Real estate		15,969	74,920	336,808		427,697
Home equity		8,207	26,334	148,558		183,099
Construction		14,698	1,121	29,421		45,240
Other		5,696	14,763	4,336		24,795
Total consumer loans		44,570	117,138	519,123		680,831
Total gross loans, net of deferred fees	$	232,222	716,787	1,081,252		2,030,261
Loans maturing after one year with:
Fixed interest rates					$	1,425,015
Floating interest rates						373,024


	March 31, 2020
	Owner		Non-owner
(dollars in thousands)	occupied RE		occupied RE	Construction	Business	Total
Current	$	419,978	531,119	74,758	315,562	1,341,417
30-59 days past due		1,595	3,275	-	1,909	6,779
60-89 days past due		-	264	-	-	264
Greater than 90 Days		551	188	-	231	970
	$	422,124	534,846	74,758	317,702	1,349,430

	December 31, 2019
	Owner		Non-owner
	occupied RE		occupied RE	Construction	Business	Total
Current	$	406,594	501,676	80,486	307,710	1,296,466
30-59 days past due		706	151	-	178	1,035
60-89 days past due		-	-	-	-	-
Greater than 90 Days		551	51	-	235	837
	$	407,851	501,878	80,486	308,123	1,298,338


	March 31, 2020
(dollars in thousands)	Real estate		Home equity	Construction	Other	Total
Current	$	426,127	180,486	45,240	24,790	676,643
30-59 days past due		559	1,527	-	5	2,091
60-89 days past due		-	886	-	-	886
Greater than 90 Days		1,011	200	-	-	1,211
	$	427,697	183,099	45,240	24,795	680,831

	December 31, 2019
(dollars in thousands)	Real estate		Home equity	Construction	Other	Total
Current	$	396,445	179,051	41,471	25,650	642,617
30-59 days past due		799	369	-	83	1,251
60-89 days past due		-	118	-	-	118
Greater than 90 Days		1,001	200	-	-	1,201
	$	398,245	179,738	41,471	25,733	645,187


			March 31, 2020
			Recorded investment
				Impaired loans	Impaired loans
	Unpaid			with no related	with related	Related
	Principal		Impaired	allowance for	allowance for	allowance for
(dollars in thousands)	Balance		loans	loan losses	loan losses	loan losses
Commercial
Owner occupied RE	$	2,787	2,722	2,268	454	76
Non-owner occupied RE		7,586	7,085	5,485	1,600	486
Construction		-	-	-	-	-
Business		2,628	2,539	540	1,999	824
Total commercial		13,001	12,346	8,293	4,053	1,386
Consumer
Real estate		3,036	3,030	1,966	1,064	362
Home equity		2,403	2,352	2,174	178	65
Construction		-	-	-	-	-
Other		144	144	-	144	15
Total consumer		5,583	5,526	4,140	1,386	442
Total	$	18,584	17,872	12,433	5,439	1,828


	Three months ended			Three months ended		Year ended
	March 31, 2020			March 31, 2019		December 31, 2019
	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	$	2,725	18	2,757	30	2,739	128
Non-owner occupied RE		7,108	62	2,977	49	4,161	255
Construction		-	-	-	-	-	-
Business		2,553	28	2,567	40	1,582	79
Total commercial		12,386	108	8,301	119	8,482	462
Consumer
Real estate		3,036	26	2,761	25	2,771	131
Home equity		2,355	12	1,677	30	853	42
Construction		-	-	-	-	-	-
Other		145	1	157	1	153	5
Total consumer		5,536	39	4,595	56	3,777	178
Total	$	17,922	147	12,896	175	12,259	640


	Three months ended					Three months ended				Year ended
	March 31, 2021					March 31, 2020				December 31, 2020
	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	$	1,569		16		2,725		18		2,423		88
Non-owner occupied RE		2,161		62		7,108		62		4,217		221
Construction		137		2		0-		0-		56		6
Business		2,329		34		2,553		28		2,306		243
Total commercial		6,196		114		12,386		108		9,002		558
Consumer
Real estate		4,212		43		3,036		26		3,372		170
Home equity		2,030		16		2,355		12		2,128		5
Construction		0-		0-		0-		0-		0-		0-
Other		134		1		145		1		141		79
Total consumer		6,376		60		5,536		39		5,641		254
Total	$	12,572		174		17,922		147		14,643		812


	Three months ended March 31, 2020
	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	$	2,835	4,304		541	3,692	3,278	1,447	268	277		16,642
Provision for loan losses		1,170	1,711		153	1,006	1,326	381	147	106		6,000
Loan charge-offs		-	(221	)	-	-	-	-	-	(45	)	(266	)
Loan recoveries		-	-		-	16	2	68	-	-		86
Net loan charge-offs		-	(221	)	-	16	2	68	-	(45	)	(180	)
Balance, end of period	$	4,005	5,794		694	4,714	4,606	1,896	415	338		22,462
Net charge-offs to average loans (annualized)												0.04	%
Allowance for loan losses to gross loans												1.11	%
Allowance for loan losses to nonperforming loans												226.14	%

	Three months ended March 31, 2019
	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	$	2,726	3,811	615		3,616	3,081		1,348	275	290		15,762
Provision for loan losses		57	74	(43	)	171	(56	)	61	7	29		300
Loan charge-offs		-	-	-		-	-		-	-	(41	)	(41	)
Loan recoveries		-	1	-		9	16		1	-	3		30
Net loan charge-offs		-	1	-		9	16		1	-	(38	)	(11	)
Balance, end of period	$	2,783	3,886	572		3,796	3,041		1,410	282	281		16,051
Net charge-offs to average loans (annualized)													0.00	%
Allowance for loan losses to gross loans													0.93	%
Allowance for loan losses to nonperforming loans													265.35	%


	March 31, 2020
	Allowance for loan losses				Recorded investment in loans
(dollars in thousands)	Commercial		Consumer	Total	Commercial	Consumer	Total
Individually evaluated	$	1,386	442	1,828	12,346	5,526	17,872
Collectively evaluated		13,822	6,812	20,634	1,337,084	675,305	2,012,389
Total	$	15,208	7,254	22,462	1,349,430	680,831	2,030,261

	December 31, 2019
	Allowance for loan losses				Recorded investment in loans
(dollars in thousands)	Commercial		Consumer	Total	Commercial	Consumer	Total
Individually evaluated	$	992	446	1,438	8,308	3,705	12,013
Collectively evaluated		10,380	4,824	15,204	1,290,030	641,482	1,931,512
Total	$	11,372	5,270	16,642	1,298,338	645,187	1,943,525


				For the three months ended March 31, 2020
						Pre-		Post-
						modification		modification
	Renewals	Reduced	Converted	Maturity	Total	outstanding		outstanding
	deemed a	or deferred	to interest	date	Number	recorded		recorded
(dollars in thousands)	concession	payments	only	extensions	of loans	investment		investment
Commercial
Business	1				1	$	1,037	$	1,037
Consumer
Real estate	1				1		322		322
Home equity	3	-	-	-	3		1,522		1,522
Total loans	5	-	-	-	5	$	2,881	$	2,881


	March 31, 2020
				Fair Value
(dollars in thousands)	Notional		Balance Sheet Location	Asset/(Liability)
Mortgage loan interest rate lock commitments	$	109,337	Other assets	$	1,649
MBS forward sales commitments		63,000	Other liabilities		(1,087	)
Total derivative financial instruments	$	172,337		$	562

	December 31, 2019
				Fair Value
(dollars in thousands)	Notional		Balance Sheet Location	Asset/(Liability)
Mortgage loan interest rate lock commitments	$	26,446	Other assets	$	344
MBS forward sales commitments		20,500	Other liabilities		(39	)
Total derivative financial instruments	$	46,946		$	305


	March 31, 2020
(dollars in thousands)	Level 1		Level 2	Level 3	Total
Assets
Securities available for sale
US government agencies	$	-	499	-	499
SBA securities		-	501	-	501
State and political subdivisions		-	9,679	-	9,679
Asset-backed securities		-	12,286	-	12,286
Mortgage-backed securities		-	47,542	-	47,542
Mortgage loans held for sale		-	34,948	-	34,948
Mortgage loan interest rate lock commitments		-	1,649	-	1,649
Total assets measured at fair value on a recurring basis	$	-	107,104	-	107,104

Liabilities
MBS forward sales commitments	$	-	1,087	-	1,087
Total liabilities measured at fair value on a recurring basis	$	-	1,087	-	1,087

	December 31, 2019
(dollars in thousands)	Level 1		Level 2	Level 3	Total
Assets
Securities available for sale:
US government agencies	$	-	499	-	499
SBA securities		-	531	-	531
State and political subdivisions		-	4,184	-	4,184
Asset-backed securities		-	13,167	-	13,167
Mortgage-backed securities		-	49,313	-	49,313
Mortgage loans held for sale		-	27,046	-	27,046
Mortgage loan interest rate lock commitments		-	344	-	344
Total assets measured at fair value on a recurring basis	$	-	95,084	-	95,084


Liabilities
MBS forward sales commitments	$	-	39	-	39
Total liabilities measured at fair value on a recurring basis	$	-	39	-	39


	As of March 31, 2020
(dollars in thousands)	Level 1		Level 2	Level 3	Total
Assets
Impaired loans	$	-	10,552	5,492	16,044
Total assets measured at fair value on a nonrecurring basis	$	-	10,552	5,492	16,044

	As of December 31, 2019
(dollars in thousands)	Level 1		Level 2	Level 3	Total
Assets
Impaired loans	$	-	5,634	4,941	10,575
Total assets measured at fair value on a nonrecurring basis	$	-	5,634	4,941	10,575


	March 31, 2020
	Carrying		Fair
(dollars in thousands)	Amount		Value	Level 1	Level 2	Level 3
Financial Assets:
Other investments, at cost	$	5,341	5,341	-	-	5,341
Loans¹		1,989,927	1,942,206	-	-	1,942,206
Financial Liabilities:
Deposits		2,025,698	1,947,258	-	1,947,258	-
FHLB and other borrowings		65,000	65,021	-	65,021	-
Subordinated debentures		35,917	31,989	-	31,989	-

	December 31, 2019
		Carrying	Fair
(dollars in thousands)		Amount	Value	Level 1	Level 2	Level 3
Financial Assets:
Other investments, at cost	$	6,948	6,948	-	-	6,948
Loans¹		1,914,870	1,900,216	-	-	1,900,216
Financial Liabilities:
Deposits		1,876,124	1,772,121	-	1,772,121	-
FHLB and other borrowings		110,000	109,737	-	109,737	-
Subordinated debentures		35,890	33,250	-	33,250	-


(dollars in thousands)	Operating Leases
2020	$	1,581
2021		2,152
2022		1,400
2023		1,273
2024		1,305
Thereafter		17,405
Total undiscounted lease payments		25,116
Discount effect of cash flows		5,407
Total lease liability	$	19,709


	Three months ended March 31,
(dollars in thousands, except share data)		2020	2019
Numerator:
Net income available to common shareholders	$	2,832	6,009
Denominator:
Weighted-average common shares outstanding – basic	7,678,598		7,459,342
Common stock equivalents	148,575		282,518
Weighted-average common shares outstanding – diluted	7,827,173		7,741,860
Earnings per common share:
Basic	$	0.37	0.81
Diluted	$	0.36	0.78


	Three months ended March 31, 2020						Three months ended March 31, 2019
(dollars in thousands)	Commercial and Retail Banking		Mortgage Banking	Corporate	Elimin- ations	Consol- idated	Commercial and Retail Banking		Mortgage Banking	Corporate		Elimin- ation		Consol- idated
Interest income	$	23,670	196	4	(4)	23,866	$	21,519	93	3		(3)		21,612
Interest expense		5,333	-	439	(4)	5,768		5,631	-	166		(3)		5,794
Net interest income (loss)		18,337	196	(435)	-	18,098		15,888	93	(163	)	-		15,818
Provision for loan losses		6,000	-	-	-	6,000		300	-	-		-		300
Noninterest income		1,248	2,668	-	-	3,916		1,137	1,857	-		-		2,994
Noninterest expense		10,499	1,807	66	-	12,372		9,465	1,123	60		-		10,648
Net income (loss) before taxes		3,086	1,057	(501)	-	3,642		7,260	827	(223	)	-		7,864
Income tax provision (benefit)		693	222	(105)	-	810		1,728	174	(47	)	-		1,855
Net income (loss)	$	2,393	835	(396)	-	2,832	$	5,532	653	(176	)	-		6,009
Total assets	$	2,335,160	36,577	246,424	(245,912)	2,372,249	$	2,002,957	11,003	194,671		(194,205	)	2,014,426

Average Balances, Income and Expenses, Yields and Rates
	For the Three Months Ended March 31,
						2020						2019
		Average		Income/		Yield/		Average		Income/		Yield/
(dollars in thousands)		Balance		Expense		Rate⁽¹⁾		Balance		Expense		Rate⁽¹⁾
Interest-earning assets
Federal funds sold and interest-bearing
deposits with banks		$	46,101	$	103	0.90	%	$	30,656	$	174	2.30	%
Investment securities, taxable			66,640		381	2.30	%		71,876		508	2.87	%
Investment securities, nontaxable⁽²⁾			3,815		19	2.05	%		5,427		53	3.98	%
Loans⁽³⁾			2,003,554		23,367	4.69	%		1,715,570		20,889	4.94	%
Total interest-earning assets			2,120,110		23,870	4.53	%		1,823,529		21,624	4.81	%
Noninterest-earning assets			111,338						86,431
Total assets		$	2,231,448					$	1,909,960
Interest-bearing liabilities
NOW accounts		$	227,688		168	0.30	%	$	186,070		86	0.19	%
Savings & money market			956,588		3,369	1.42	%		780,115		3,300	1.72	%
Time deposits			329,664		1,637	2.00	%		371,694		1,989	2.17	%
Total interest-bearing deposits			1,513,940		5,174	1.37	%		1,337,879		5,375	1.63	%
FHLB advances and other borrowings			43,470		158	1.46	%		31,302		256	3.32	%
Subordinated debentures			35,900		436	4.88	%		13,403		163	4.93	%
Total interest-bearing liabilities			1,593,310		5,768	1.46	%		1,382,584		5,794	1.70	%
Noninterest-bearing liabilities			427,992						349,988
Shareholders’ equity			210,146						177,388
Total liabilities and shareholders’ equity		$	2,231,448					$	1,909,960
Net interest spread						3.07	%					3.11	%
Net interest income (tax equivalent) / margin				$	18,102	3.43	%			$	15,830	3.52	%
Less: tax-equivalent adjustment⁽²⁾					4						12
Net interest income				$	18,098					$	15,818

													Three Months Ended
	March 31, 2020 vs. 2019												March 31, 2019 vs. 2018
	Increase (Decrease) Due to												Increase (Decrease) Due to
						Rate/									Rate/
(dollars in thousands)	Volume			Rate		Volume		Total		Volume			Rate		Volume			Total
Interest income
Loans	$	3,507		(881	)	(148	)	2,478		$	3,110		1,024			192		4,326
Investment securities		(49	)	(114	)	10		(153	)		69		94			18		181
Federal funds sold and interest-bearing
deposits with banks		88		(106	)	(53	)	(71	)		(124	)	103			(52	)	(73	)
Total interest income		3,546		(1,101	)	(191	)	2,254			3,055		1,221			158		4,434
Interest expense
Deposits		790		(864	)	(127	)	(201	)		439		1,894			304		2,637
FHLB advances and other borrowings		100		(142	)	(56	)	(98	)		(32	)	6			(1	)	(27	)
Subordinated debentures		273		-		-		273			-		48			-		48
Total interest expense		1,163		(1,006	)	(183	)	(26	)		407		1,948			303		2,658
Net interest income	$	2,383		(95	)	(8	)	2,280		$	2,648		(727	)		(145	)	1,776


	March 31, 2020
					For capital				To be well capitalized
					adequacy purposes				under prompt
					minimum plus the				corrective
					capital conservation				action provisions
			Actual		buffer				minimum
(dollars in thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio
Total Capital (to risk weighted assets)	$	259,896	13.16	%		158,033	10.50	%		197,542	10.00	%
Tier 1 Capital (to risk weighted assets)		237,433	12.02	%		118,525	8.50	%		158,033	8.00	%
Common Equity Tier 1 Capital (to risk weighted assets)		237,433	12.02	%		88,894	7.00	%		128,402	6.50	%
Tier 1 Capital (to average assets)		237,433	10.64	%		89,255	4.00	%		111,569	5.00	%


	December 31, 2019
					For capital				To be well capitalized
					adequacy purposes				under prompt
					minimum plus the				corrective
					capital conservation				action provisions
			Actual		buffer				minimum
(dollars in thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio
Total Capital (to risk weighted assets)	$	250,847	13.31	%	$	150,807	10.50	%	$	188,510	10.00	%
Tier 1 Capital (to risk weighted assets)		234,205	12.42	%		113,106	8.50	%		150,807	8.00	%
Common Equity Tier 1 Capital (to risk weighted assets)		234,205	12.42	%		84,829	7.00	%		122,531	6.50	%
Tier 1 Capital (to average assets)		234,205	10.80	%		86,772	4.00	%		108,465	5.00	%