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 June 30, 2022
ORMarch 31, 2023

☐ 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~~

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.)

6 Verdae Boulevard
Greenville, ~~S.C.~~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)

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		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:

~~7,991,644~~8,047,975 shares of common stock, par value $0.01 per share, were issued and outstanding as of ~~July 29, 2022.~~April 27, 2023.

Table of Contents

SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARY
~~June 30, 2022~~

March 31, 2023 Form 10-Q

INDEX

~~PART I – CONSOLIDATED FINANCIAL INFORMATION~~		Page

PART I – CONSOLIDATED FINANCIAL INFORMATION		1

Item 1.	Consolidated Financial Statements	1

	Consolidated Balance Sheets	1

	Consolidated Statements of Income	2

	Consolidated Statements of Comprehensive Income	3

	Consolidated Statements of Shareholders’ Equity	4

	Consolidated Statements of Cash Flows	5

	Notes to Unaudited Consolidated Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2923

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	4837

Item 4.	Controls and Procedures	4937

PART II – OTHER INFORMATION		5038

Item 1.	Legal Proceedings	5038

Item 1A.	Risk Factors	5038

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	5039

Item 3.	Defaults upon Senior Securities	5039

Item 4.	Mine Safety Disclosures	5039

Item 5.	Other Information	5039

Item 6.	Exhibits	5140

Table of Contents

PART I. CONSOLIDATED FINANCIAL INFORMATION

Item 1. CONSOLIDATED FINANCIAL STATEMENTS

SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS


	June 30,			December 31,			March 31,			December 31,
(dollars in thousands, except share data)	2022			2021			2023			2022
	(Unaudited)			(Audited)			(Unaudited)			(Audited)
ASSETS
Cash and cash equivalents:
Cash and due from banks	$	21,090			21,770		$	22,213			18,788
Federal funds sold		124,462			86,882			242,642			101,277
Interest-bearing deposits with banks		36,538			58,557			7,350			50,809
Total cash and cash equivalents		182,090			167,209			272,205			170,874
Investment securities:
Investment securities available for sale		98,991			120,281			94,036			93,347
Other investments		5,065			4,021			10,097			10,833
Total investment securities		104,056			124,302			104,133			104,180
Mortgage loans held for sale		18,329			13,556			6,979			3,917
Loans		2,845,205			2,489,877			3,417,945			3,273,363
Less allowance for credit losses		(34,192	)		(30,408	)		(40,435	)		(38,639	)
Loans, net		2,811,013			2,459,469			3,377,510			3,234,724
Bank owned life insurance		50,463			49,833			51,453			51,122
Property and equipment, net		96,674			92,370			97,806			99,183
Deferred income taxes, net		15,078			8,397			12,087			12,522
Accrued interest receivable		7,433			7,624
Other assets		2,527			2,788			15,967			15,459
Total assets	$	3,287,663			2,925,548		$	3,938,140			3,691,981
LIABILITIES
Deposits	$	2,870,158			2,563,826		$	3,426,774			3,133,864
FHLB advances and related debt		50,000			-			125,000			175,000
Subordinated debentures		36,160			36,106			36,241			36,214
Other liabilities		48,708			47,715			50,775			52,391
Total liabilities		3,005,026			2,647,647			3,638,790			3,397,469
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, 7,985,644 and 7,925,819 shares issued and outstanding at June 30, 2022 and December 31, 2021, respectively		80			79
Common stock, par value $.01 per share, 10,000,000 shares authorized, 8,047,975 and 8,011,045 shares issued and outstanding at March 31, 2023 and December 31, 2022, respectively								80			80
Nonvested restricted stock		(3,230	)		(1,435	)		(4,462	)		(3,306	)
Additional paid-in capital		117,714			114,226			120,683			119,027
Accumulated other comprehensive loss		(10,143	)		(740	)		(11,775	)		(13,410	)
Retained earnings		178,216			165,771			194,824			192,121
Total shareholders’ equity		282,637			277,901			299,350			294,512
Total liabilities and shareholders’ equity	$	3,287,663			2,925,548		$	3,938,140			3,691,981

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

Table of Contents

SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)


	For the three months						For the six months						For the three months
	ended June 30,						ended June 30,						ended March 31,
(dollars in thousands, except share data)	2022			2021			2022			2021			2023		2022
Interest income
Loans	$	26,610			22,409			50,541			44,875		$	36,748		23,931
Investment securities		448			269			922			570			613		474
Federal funds sold and interest-bearing deposits with banks		180			53			239			99			969		59
Total interest income		27,238			22,731			51,702			45,544			38,330		24,464
Interest expense
Deposits		1,844			920			2,752			2,075			17,179		908
Borrowings		510			381			902			766			727		392
Total interest expense		2,354			1,301			3,654			2,841			17,906		1,300
Net interest income		24,884			21,430			48,048			42,703			20,424		23,164
Provision for (reversal of) credit losses		1,775			(1,900	)		2,880			(2,200	)
Provision for credit losses														1,825		1,105
Net interest income after provision for credit losses		23,109			23,330			45,168			44,903			18,599		22,059
Noninterest income
Mortgage banking income		1,184			1,983			2,678			6,616			622		1,494
Service fees on deposit accounts		209			173			400			358			325		303
ATM and debit card income		563			521			1,092			991			555		514
Income from bank owned life insurance		315			331			630			598			332		315
Net lender and referral fees on PPP loans		-			268			-			268
Loss on disposal of fixed assets		(394	)		-			(394	)		10
Other income		388			346			788			685			210		301
Total noninterest income		2,265			3,622			5,194			9,526			2,044		2,927
Noninterest expenses
Compensation and benefits		9,915			8,724			19,371			17,834			10,356		9,455
Occupancy		2,219			1,552			3,997			3,190			2,457		1,779
Other real estate owned expenses		-			1			-			388
Outside service and data processing costs		1,528			1,391			3,062			2,704			1,629		1,534
Insurance		367			262			628			563			689		261
Professional fees		693			615			1,292			1,210			660		599
Marketing		329			208			596			398			366		266
Other		737			742			1,528			1,370			947		791
Total noninterest expenses		15,788			13,495			30,474			27,657			17,104		14,685
Income before income tax expense		9,586			13,457			19,888			26,772			3,539		10,301
Income tax expense		2,346			3,134			4,678			6,083			836		2,331
Net income	$	7,240			10,323			15,210			20,689		$	2,703		7,970
Earnings per common share
Basic	$	0.91			1.32			1.91			2.65		$	0.34		1.00
Diluted		0.90			1.29			1.88			2.60			0.33		0.98
Weighted average common shares outstanding
Basic		7,957,631			7,847,516			7,944,814			7,811,217			8,025,876		7,931,855
Diluted		8,054,910			7,987,615			8,075,496			7,948,294			8,092,270		8,096,310

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

Table of Contents

SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)


	For the three months ended June 30,						For the six months ended June 30,						For the three months ended March 31,
(dollars in thousands)	2022			2021			2022			2021			2023			2022
Net income	$	7,240			10,323			15,210			20,689		$	2,703			7,970
Other comprehensive income:
Other comprehensive income (loss):
Unrealized gain (loss) on securities available for sale:
Unrealized holding (loss) gain arising during the period, pretax		(4,749	)		619			(11,890	)		(790	)
Unrealized holding gain (loss) arising during the period, pretax														2,070			(7,141	)
Tax benefit (expense)		997			(129	)		2,497			167			(435	)		1,500
Reclassification of realized gain (loss)		3			-			(12	)		-
Tax (expense) benefit		(1	)		-			2			-
Other comprehensive (loss) income		(3,750	)		490			(9,403	)		(623	)
Reclassification of realized gain														-			(15	)
Tax expense														-			3
Other comprehensive income (loss)														1,635			(5,653	)
Comprehensive income	$	3,490			10,813			5,807			20,066		$	4,338			2,317

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

Table of Contents

SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
~~(Unaudited)~~

(Unaudited)

For the three months ended June 30,

Common stock Preferred stock Nonvested
restricted Additional
paid-in Accumulated
other
comprehensive Retained
(dollars in thousands, except share data) Shares Amount Shares Amount stock capital income (loss) earnings Total
March 31, 2021 7,853,096 $ 79 - $ - $ (1,075 ) $ 111,181 $ (90 ) $ 129,426 $ 239,521
Net income - - - - - - - 10,323 10,323
Proceeds from exercise of stock options 42,835 - - - - 943 - - 943
Issuance of restricted stock 4,000 - - - (212 ) 212 - - -
Compensation expense related to restricted stock, net of tax - - - - 114 - - - 114
Compensation expense related to stock options, net of tax - - - - - 268 - - 268
Other comprehensive income - - - - - - 490 - 490

June 30, 2021
7,899,931 $ 79 - $ - $ (1,173 ) $ 112,604 $ 400 $ 139,749 $ 251,659
March 31, 2022 7,980,519 80 - - (3,425 ) 117,286 (6,393 ) 170,976 278,524
Net income - - - - - - - 7,240 7,240
Proceeds from exercise of stock options 3,625 - - - - 128 - - 128
Issuance of restricted stock 1,500 - - - (71 ) 71 - - -
Compensation expense related to restricted stock, net of tax - - - - 266 - - - 266
Compensation expense related to stock options, net of tax - - - - - 229 - - 229
Other comprehensive loss - - - - - - (3,750 ) - (3,750 )

June 30, 2022 7,985,644 $ 80 - $ - $ (3,230 ) $ 117,714 $ (10,143 ) $ 178,216 $ 282,637

For the six months ended June 30,

Common stock Preferred stock Nonvested
restricted Additional
paid-in Accumulated
other
comprehensive Retained
(dollars in thousands, except share data) Shares Amount Shares Amount stock capital income (loss) earnings Total
December 31, 2020 7,772,748 $ 78 - $ - $ (698 ) $ 108,831 $ 1,023 $ 119,060 $ 228,294
Net income - - - - - - - 20,689 20,689
Proceeds from exercise of stock options 112,433 1 - - - 2,520 - - 2,521
Issuance of restricted stock 14,750 - - - (689 ) 689 - - -
Compensation expense related to restricted stock, net of tax - - - - 214 - - - 214
Compensation expense related to stock options, net of tax - - - - - 564 - - 564
Other comprehensive loss - - - - - - (623 ) - (623 )

June 30, 2021 7,899,931 $ 79 - $ - $ (1,173 ) $ 112,604 $ 400 $ 139,749 $ 251,659
December 31, 2021 7,925,819 79 - - (1,435 ) 114,226 (740 ) 165,771 277,901
Adoption of ASU 2016-13 - - - - - - - (2,765 ) (2,765 )
Net income - - - - - - - 15,210 15,210
Proceeds from exercise of stock options 21,750 1 - - - 706 - - 707
Issuance of restricted stock 38,075 - - - (2,305 ) 2,305 - - -
Compensation expense related to restricted stock, net of tax - - - - 510 - - - 510
Compensation expense related to stock options, net of tax - - - - - 477 - - 477
Other comprehensive loss - - - - - - (9,403 ) - (9,403 )
June 30, 2022 7,985,644 $ 80 - $ - $ (3,230 ) $ 117,714 $ (10,143 ) $ 178,216 $ 282,637

	For the three months ended March 31,
	Common stock				Preferred stock				Nonvested restricted			Additional paid-in		Accumulated other comprehensive			Retained
(dollars in thousands, except share data)	Shares		Amount		Shares		Amount		stock			capital		income (loss)			earnings			Total
December 31, 2021		7,925,819	$	79		-	$	-	$	(1,435	)	$	114,226	$	(740	)	$	165,771		$	277,901
Net income		-		-		-		-		-			-		-			7,970			7,970
Proceeds from exercise of stock options		18,125		-		-		-		-			579		-			-			579
Issuance of restricted stock		36,575		1		-		-		(2,235	)		2,234		-			-			-
Adoption of ASU 2016-13		-		-		-		-		-			-		-			(2,765	)		(2,765	)
Compensation expense related to restricted stock, net of tax		-		-		-		-		245			-		-			-			245
Compensation expense related to stock options, net of tax		-		-		-		-		-			247		-			-			247
Other comprehensive loss		-		-		-		-		-			-		(5,653	)		-			(5,653	)
March 31, 2022		7,980,519	$	80		-	$	-	$	(3,425	)	$	117,286	$	(6,393	)	$	170,976		$	278,524
December 31, 2022		8,011,045	$	80		-	$	-	$	(3,306	)	$	119,027	$	(13,410	)	$	192,121		$	294,512
Net income		-		-		-		-		-			-		-			2,703			2,703
Proceeds from exercise of stock options		1,000		-		-		-		-			17		-			-			17
Issuance of restricted stock		35,930		-		-		-		(1,521	)		1,521		-			-			-
Compensation expense related to restricted stock, net of tax		-		-		-		-		365			-		-			-			365
Compensation expense related to stock options, net of tax		-		-		-		-		-			118		-			-			118
Other comprehensive income		-		-		-		-		-			-		1,635			-			1,635
March 31, 2023		8,047,975	$	80		-	$	-	$	(4,462	)	$	120,683	$	(11,775	)	$	194,824		$	299,350

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

Table of Contents

SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

For the six months ended
June 30,
(dollars in thousands) 2022 2021
Operating activities
Net income $ 15,210 20,689
Adjustments to reconcile net income to cash provided by operating activities:
Provision for (reversal of) credit losses 2,880 (2,200 )
Depreciation and other amortization 1,341 1,092
Accretion and amortization of securities discounts and premium, net 399 518
Loss on sale of real estate owned - 380
(Gain) Loss on sale of fixed assets 394 (10 )
Gain on sale of securities (12 ) -
Net change in operating leases 172 165
Compensation expense related to stock options and restricted stock grants 987 778
Gain on sale of loans held for sale (1,446 ) (8,153 )
Loans originated and held for sale (145,513 ) (303,889 )
Proceeds from sale of loans held for sale 142,185 335,872
Increase in cash surrender value of bank owned life insurance (630 ) (598 )
Decrease in deferred tax asset (3,446 ) (15,341 )
Increase in other assets 452 2,589
Increase in other liabilities 1,400 1,949
Net cash provided by operating activities 14,373 33,841
Investing activities
Increase (decrease) in cash realized from:
Increase in loans, net (355,594 ) (111,672 )
Purchase of property and equipment (8,989 ) (11,105 )
Purchase of investment securities:
Available for sale (10,094 ) (10,338 )
Other investments (11,078 ) (1,000 )
Payments and maturities, calls and repayments of investment securities:
Available for sale 19,095 12,526
Other investments 10,034 1,865
Purchase of bank owned life insurance - (7,500 )
Proceeds from sale of fixed assets 95 50
Proceeds from sale of other real estate owned - 788
Net cash used for investing activities (356,531 ) (126,386 )
Financing activities
Increase (decrease) in cash realized from:
Increase in deposits, net 306,332 168,134
Increase (decrease) in Federal Home Loan Bank advances and other borrowings, net 50,000 (25,000 )
Proceeds from the exercise of stock options 707 2,521
Net cash provided by financing activities 357,039 145,655
Net increase in cash and cash equivalents 14,881 53,110
Cash and cash equivalents at beginning of the period 167,209 100,687
Cash and cash equivalents at end of the period $ 182,090 153,797
Supplemental information
Cash paid for
Interest $ 3,745 3,843
Income taxes 5,950 15,342
Schedule of non-cash transactions
Foreclosure of other real estate - 366
Unrealized loss on securities, net of income taxes (11,902 ) (623 )

	For the three months ended March 31,
(dollars in thousands)	2023			2022
Operating activities
Net income	$	2,703			7,970
Adjustments to reconcile net income to cash provided by operating activities:
Provision for credit losses		1,825			1,105
Depreciation and other amortization		1,203			583
Accretion and amortization of securities discounts and premium, net		129			210
Gain on sale of securities		-			(15	)
Net change in operating leases		53			108
Compensation expense related to stock options and restricted stock grants		483			492
Gain on sale of loans held for sale		(530	)		(899	)
Loans originated and held for sale		(17,892	)		(75,729	)
Proceeds from sale of loans held for sale		15,360			72,344
Increase in cash surrender value of bank owned life insurance		(331	)		(315	)
Increase in other assets		(508	)		(447	)
Increase (decrease) in other liabilities		(1,258	)		2,460
Net cash provided by operating activities		1,237			7,867
Investing activities
Increase (decrease) in cash realized from:
Increase in loans, net		(144,641	)		(170,787	)
Purchase of property and equipment		(180	)		(5,869	)
Purchase of investment securities:
Available for sale		-			(10,094	)
Other investments		(18,264	)		(2,265	)
Payments and maturities, calls and repayments of investment securities:
Available for sale		1,252			16,046
Other investments		19,000			2,182
Net cash used for investing activities		(142,833	)		(170,787	)
Financing activities
Increase (decrease) in cash realized from:
Increase in deposits, net		292,910			144,348
Decrease in Federal Home Loan Bank advances and other borrowings, net		(50,000	)		-
Proceeds from the exercise of stock options		17			579
Net cash provided by financing activities		242,927			144,927
Net increase (decrease) in cash and cash equivalents		101,331			(17,993	)
Cash and cash equivalents at beginning of the period		170,874			167,209
Cash and cash equivalents at end of the period	$	272,205			149,216
Supplemental information
Cash paid for
Interest	$	16,801			1,789
Income taxes		-			-
Schedule of non-cash transactions
Unrealized gain (loss) on securities, net of income taxes		1,635			(5,641	)

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

Table of Contents

SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – Summary of Significant Accounting Policies

Nature of Business

~~Nature of Business~~

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

~~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- and six- month~~three-month period ended ~~June 30, 2022~~March 31, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, ~~2022.~~2023. 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, ~~2021~~2022 as filed with the U.S. Securities and Exchange Commission (“SEC”) on ~~March 4, 2022.~~February 13, 2023. 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

~~Business Segments~~

The Company, through the Bank, provides a broad range of financial services to individuals and companies in South Carolina, North Carolina, and Georgia. These services include demand, time and savings deposits; lending services; ATM processing and mortgage banking services. While the Company’s management periodically reviews limited production information for these revenue streams, that information is not complete as it does not include a full allocation of revenue, costs and capital from key corporate functions. Management will continue to evaluate these lines of business for separate reporting as facts and circumstances change. Accordingly, the Company’s various banking operations are not considered by management to constitute more than one reportable operating segment.

Risk and Uncertainties

There were two significant bank failures in the first part of March 2023, primarily due to the failed banks’ lack of liquidity as depositors sought to withdraw their deposits. Due to rising interest rates, the failed banks were unable to sell investment securities held to meet liquidity needs without realizing substantial losses. As a result of the March 2023 bank closures and in an effort to strengthen public confidence in the banking system and protect depositors, regulators have announced that any losses to the Deposit Insurance Fund to support uninsured depositors will be recovered by a special assessment on banks, as required by law, which could increase the cost of our FDIC insurance assessments. Additionally, the Federal Reserve announced the creation of a new Bank Term Funding Program in an effort to minimize the need for banks to sell securities at a loss in times of stress. The future impact of these failures on the economy, financial institutions and their depositors, as well as any governmental regulatory responses or actions resulting from the same, is difficult to predict at this time.

Use of Estimates

The preparation of consolidated financial statements in conformity with 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 credit 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~~

The impact of the coronavirus (COVID-19) pandemic is fluid and continues to evolve, adversely affecting many of the Bank’s clients. While vaccine availability and uptake has increased, the longer-term macro-economic effects on global supply chains, inflation, labor shortages and wage increases continue to impact many industries. 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 increases in new COVID-19 cases, hospitalizations and deaths leading to additional government imposed restrictions; refusals to receive the vaccines along with concerns related to new strains of the virus; supply chain issues remaining unresolved longer than anticipated; labor shortages; decreases in consumer confidence and spending; and rising geopolitical tensions.

Table of Contents

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.Reclassifications

As of June 30, 2022, the Company’s and 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 June 30, 2022, the $15.0 million line was unused.

~~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~~

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.

Adoption of New Accounting Standard

In ~~June 2016,~~January 2023, the ~~FASB issued~~ Company adopted ASU ~~2016-13, Financial~~2022-02, “Financial Instruments – Credit Losses (Topic 326). The ASU introduces a new credit loss methodology, the Current Expected Credit Loss (“CECL”) methodology, which requires earlier recognition of credit losses, while also providing additional transparency about credit risk. Since its original issuance in 2016, the FASB has issued several updates to the original ASU.

The CECL methodology utilizes a lifetime “expected credit loss” measurement objective for the recognition of credit losses for loans, held-to-maturity securities and other receivables at the time the financial asset is originated or acquired. It also applies to off-balance sheet credit exposures, such as unfunded commitments to extend credit. The expected credit losses are adjusted each period for changes in expected lifetime credit losses. The methodology replaces the multiple existing impairment methods in current GAAP, which generally require that a loss be incurred before it is recognized. For available-for-sale securities where fair value is less than cost, credit-related impairment, if any, is recognized through an allowance for credit losses and adjusted each period for changes in credit risk.

On January 1, 2022, the Company adopted the guidance prospectively with a cumulative adjustment to retained earnings. Results for reporting periods beginning after January 1, 2022 are presented under CECL while prior period amounts continue to be reported in accordance with the previously applicable incurred loss accounting methodology. The transition adjustment for the adoption of CECL included an increase in the allowance for credit losses on loans of $1.5 million and an increase in the reserve for unfunded loan commitments of $2.0 million, which is recorded within other liabilities. The adoption of CECL had an insignificant impact on the Company’s investment securities portfolio. The Company recorded a net decrease to retained earnings of $2.8 million as of January 1, 2022 for the cumulative effect of adopting CECL, which reflects the transition adjustments noted above, net of the applicable deferred tax assets recorded. Federal banking regulatory agencies provided optional relief to delay the adverse regulatory capital impact of CECL at adoption. The Company did not elect to use this optional relief.

~~Significant Accounting Policy Changes~~

~~Upon adoption of ASC 326, the Company revised the accounting policy for the Allowance for Credit Losses as detailed below.~~

~~Table of Contents~~

~~Allowance for Credit Losses - Securities Available for Sale~~

For available for sale debt securities in an unrealized loss position, the Company first assesses whether it intends to sell, or if it is more likely than not that it will be required to sell the security before recovery of the amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income with the establishment of an allowance under CECL compared to a direct write down of the security under Incurred Loss. For debt securities available for sale that do not meet the aforementioned criteria, the Company evaluates whether any decline in fair value is due to credit loss factors. In making this assessment, management considers any changes to the rating of the security by a rating agency and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of the cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income.

Changes in the allowance for credit losses under CECL are recorded as provision for (or reversal of) credit loss expense. Losses are charged against the allowance when management believes the uncollectibility of an available-for-sale security is confirmed or when either of the criteria regarding intent or requirement to sell is met. At June 30, 2022, there was no allowance for credit losses related to the available-for-sale portfolio.

~~Accrued interest receivable on available for sale debt securities totaled $438,000 at June 30, 2022 and was excluded from the estimate of credit losses.~~

~~Allowance for Credit Losses - Loans~~

Under the current expected credit loss model, the allowance for credit losses on loans is a valuation allowance estimated at each balance sheet date in accordance with GAAP that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on the loans.

Management assesses the adequacy of the allowance on a quarterly basis. This assessment includes procedures to estimate the allowance and test the adequacy and appropriateness of the resulting balance. The level of the allowance is based upon management’s evaluation of historical default and loss experience, current and projected economic conditions, asset quality trends, known and inherent risks in the portfolio, adverse situations that may affect the borrowers’ ability to repay a loan, the estimated value of any underlying collateral, composition of the loan portfolio, industry and peer bank loan quality indications and other pertinent factors, including regulatory recommendations. Management believes the level of the allowance for credit losses is adequate to absorb all expected future losses inherent in the loan portfolio at the balance sheet date. The allowance is increased through provision for credit losses and decreased by charge-offs, net of recoveries of amounts previously charged-off.

The allowance for credit losses is measured on a collective basis for pools of loans with similar risk characteristics. The Company has identified the following pools of financial assets with similar risk characteristics for measuring expected credit losses:

~~Commercial loans~~

●

~~Owner occupied real estate~~ - Owner occupied commercial mortgages consist of loans to purchase or re-finance owner occupied nonresidential properties. This includes office buildings, other commercial facilities, and farmland. Commercial mortgages secured by owner occupied properties are primarily dependent on the ability of borrowers to achieve business results consistent with those projected at loan origination. While these loans and leases are collateralized by real property in an effort to mitigate risk, it is possible the liquidation of collateral will not fully satisfy the obligation.

●

~~Non-owner occupied real estate~~ - Non-owner occupied commercial mortgages consist of loans to purchase or refinance investment nonresidential properties. This includes office buildings and other facilities rented or leased to unrelated parties, as well as farmland and multifamily properties. The primary risk associated with income producing commercial mortgage loans is the ability of the income-producing property that collateralizes the loan to produce adequate cash flow to service the debt. While these loans and leases are collateralized by real property in an effort to mitigate risk, it is possible the liquidation of collateral will not fully satisfy the obligation.

~~Table of Contents~~

●

~~Construction~~ - Construction loans consist of loans to finance land for development of commercial or residential real property and construction of multifamily apartments or other commercial properties. These loans are highly dependent on the supply and demand for commercial real estate as well as the demand for newly constructed residential homes and lots acquired for development. Deterioration in demand could result in decreased collateral values, which could make repayments of outstanding loans difficult for customers.

●

~~Commercial business~~ - Commercial business loans consist of loans or lines of credit to finance accounts receivable, inventory or other general business needs, business credit cards, and lease financing agreements for equipment, vehicles, or other assets. The primary risk associated with commercial and industrial and lease financing loans is the ability of borrowers to achieve business results consistent with those projected at origination. Failure to achieve these projections presents risk the borrower will be unable to service the debt consistent with the contractual terms of the loan or lease.

~~Consumer loans~~

●

~~Real estate~~ - Residential mortgages consist of loans to purchase or refinance the borrower’s primary dwelling, second residence or vacation home and are often secured by 1-4 family residential property. Significant and rapid declines in real estate values can result in borrowers having debt levels in excess of the current market value of the collateral.

●

~~Home equity~~ – Home equity loans consist of home equity lines of credit and other lines of credit secured by first or second liens on the borrower’s primary residence. These loans are secured by both senior and junior liens on the residential real estate and are particularly susceptible to declining collateral values. This risk is elevated for loans secured by junior lines as a substantial decline in value could render the junior lien position effectively unsecured.

●

~~Construction~~ - Construction loans consist of loans to construct a borrower’s primary or secondary residence or vacant land upon which the owner intends to construct a dwelling at a future date. These loans are typically secured by undeveloped or partially developed land in anticipation of completing construction of a 1-4 family residential property. There is risk these construction and development projects can experience delays and cost overruns exceeding the borrower’s financial ability to complete the project. Such cost overruns can result in foreclosure of partially completed and unmarketable collateral.

●

~~Other~~ - Consumer loans consist of loans to finance unsecured home improvements, student loans, automobiles and revolving lines of credit that can be secured or unsecured. The value of the underlying collateral within this class is at risk of potential rapid depreciation which could result in unpaid balances in excess of the collateral.

For all loan pools, the Company uses a lifetime probability of default and loss given default modeling approach to estimate the allowance for credit losses on loans. This method uses historical correlations between default experience and the age of loans to forecast defaults and losses, assuming that a loan in a pool shares similar risk characteristics such as loan product type, risk rating and loan age, and demonstrates similar default characteristics as other loans in that pool, as the loan progresses through its lifecycle. The Company calculates lifetime probability of default and loss given default rates based on historical loss experience, which is used to calculate expected losses based on the pool’s loss rate and the age of loans in the pool. Management believes that the Company’s historical loss experience provides the best basis for its assessment of expected credit losses to determine the allowance for credit losses. The Company uses its own internal data to measure historical credit loss experience within the pools with similar risk characteristics over an economic cycle. The probability of default and loss given default method also includes assumptions of observed migration over the lifetime of the underlying loan data.

~~Table of Contents~~

Management also considers further adjustments to historical loss information for current conditions and reasonable and supportable forecasts that differ from the conditions that exist for the period over which historical information is evaluated as well as other changes in qualitative factors not inherently considered in the quantitative analyses. The qualitative categories and the measurements used to quantify the risks within each of these categories are subjectively selected by management, but measured by objective measurements period over period. The data for each measurement may be obtained from internal or external sources. The current period measurements are evaluated and assigned a factor commensurate with the current level of risk relative to past measurements over time. The resulting qualitative adjustments are applied to the relevant collectively evaluated loan pools. These adjustments are based upon quarterly trend assessments in certain economic factors as well as associate retention and turnover, portfolio concentrations, and growth characteristics. The qualitative analysis increases or decreases the allowance allocation for each loan pool based on the assessment of factors described above.

Loans that do not share similar risk characteristics with the collectively evaluated pools are evaluated on an individual basis and are excluded from the collectively evaluated loan pools. Individual loan evaluations are generally performed for impaired loans, which includes nonaccrual loans and loans modified in a troubled debt restructuring (“TDR”). Such loans are evaluated for credit losses based on either discounted cash flows or the fair value of collateral. The Company has elected the practical expedient under ASC 326 to estimate expected credit losses based on the fair value of collateral, which considers selling costs in the event sale of the collateral is expected. Loans for which terms have been modified in a TDR are evaluated using these same individual evaluation methods. In the event the discounted cash flow method is used for a TDR, the original interest rate is used to discount expected cash flows.

While the Company’s policies and procedures used to estimate the allowance for credit losses, as well as the resultant provision for credit losses charged to income, are considered adequate by management and are reviewed periodically by regulators, model validators and internal audit, they are necessarily approximate and imprecise. There are factors beyond the Company’s control, such as changes in projected economic conditions, real estate markets or particular industry conditions which may materially impact asset quality and the adequacy of the allowance for credit losses and thus the resulting provision for credit losses.

~~Accrued Interest Receivable~~

Accrued interest receivable related to loans totaled $7.0 million at June 30, 2022 and was reported in accrued interest receivable on the consolidated balance sheets. The Company elected not to measure an allowance for credit losses for accrued interest receivable and instead elected to reverse interest income on loans or securities that are placed on nonaccrual status, which is generally when the instrument is 90 days past due, or earlier if the Company believes the collection of interest is doubtful. The Company has concluded that this policy results in the timely reversal of uncollectable interest.

~~Unfunded Commitments~~

Effective with the adoption of CECL, the Company estimates expected credit losses on commitments to extend credit over the contractual period in which the Company is exposed to credit risk on the underlying commitments, unless the obligation is unconditionally cancelable by the Company. The allowance for off-balance sheet credit exposures, which is reflected within other liabilities on the consolidated balance sheet, is adjusted for as an increase or decrease to the provision for credit losses. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life. The allowance is calculated using the same aggregate reserve rates calculated for the funded portion of loans at the portfolio level applied to the amount of commitments expected to fund.

~~The Company’s CECL allowances will fluctuate over time due to macroeconomic conditions and forecasts as well as the size and composition of the loan portfolios.~~

~~Table of Contents~~

~~Newly Issued, But Not Yet Effective Accounting Standards~~

~~In March 2022, the FASB amended the Receivables–~~: Troubled Debt ~~Restructuring by Creditors subtopic~~Restructurings and ~~Financial Instruments–Credit Losses subtopic to the Accounting Standards Codification. The amendments eliminate~~Vintage Disclosures” (“ASU 2022-02”), which eliminated the accounting guidance for ~~TDRs by creditors~~troubled debt restructurings (“TDRs”) while enhancing disclosure requirements for certain loan ~~refinancings~~refinancing and restructurings by creditors when a borrower is experiencing financial difficulty. In addition, for public business entities, the ~~amendments require~~guidance requires disclosure of current-period gross write-offs by year of origination for financing receivables and net investments in leases within the scope of Subtopic 326-20. The ~~amendments are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early~~Company adopted the guidance using the modified retrospective method. Upon adoption of this guidance, the Company no longer establishes a specific reserve for modifications to borrowers experiencing financial difficulty. Instead, these modifications are included in their respective cohort and a historical loss rate is applied to the current loan balance to arrive at the quantitative baseline portion of the allowance. The difference between the allowance previously determined and the current allowance was not material to the Company’s financial statements.

Newly Issued, But Not Yet Effective Accounting Standards

In December 2022, the FASB issued amendments ~~is permitted if ASU 2016-13 has been adopted, including adoption~~to defer the sunset date of the Reference Rate Reform Topic of the Accounting Standards Codification from December 31, 2022 to December 31, 2024, because the current relief in ~~an interim period.~~Reference Rate Reform Topic may not cover a period of time during which a significant number of modifications may take place. The amendments were effective upon issuance. The Company does not expect these amendments to have a material effect on its financial statements.

NOTE 2 – Investment Securities

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

June 30, 2022
Amortized Gross Unrealized Fair
(dollars in thousands) Cost Gains Losses Value
Available for sale
Corporate bonds $ 2,185 - 204 1,981
US treasuries 999 - 94 905
US government agencies 13,005 - 1,752 11,253
State and political subdivisions 23,071 4 3,096 19,979
Asset-backed securities 7,922 - 169 7,753
Mortgage-backed securities
FHLMC 21,809 - 2,835 18,974
FNMA 36,865 - 4,200 32,665
GNMA 5,974 - 493 5,481
Total mortgage-backed securities 64,648 - 7,528 57,120
Total investment securities available for sale $ 111,830 4 12,843 98,991

	December 31, 2021
	Amortized		Gross Unrealized				Fair		March 31, 2023
	Cost		Gains		Losses		Value		Amortized		Gross Unrealized				Fair
(dollars in thousands)									Cost		Gains		Losses		Value
Available for sale
Corporate bonds	$	2,198		-		10		2,188	$	2,166		-		250		1,916
US treasuries		999		-		7		992		999		-		107		892
US government agencies		14,504		1		336		14,169		13,008		-		2,024		10,984
SBA securities		429		9		-		438
State and political subdivisions		24,887		549		260		25,176		22,844		8		3,203		19,649
Asset-backed securities		10,136		45		17		10,164		5,966		-		147		5,819
Mortgage-backed securities
FHLMC		23,057		102		494		22,665		23,876		1		3,467		20,410
FNMA		40,924		235		660		40,499		34,612		-		5,029		29,583
GNMA		4,084		3		97		3,990		5,471		-		688		4,783
Total mortgage-backed securities		68,065		340		1,251		67,154		63,959		1		9,184		54,776
Total investment securities available for sale	$	121,218		944		1,881		120,281	$	108,942		9		14,915		94,036

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	December 31, 2022
	Amortized		Gross Unrealized				Fair
	Cost		Gains		Losses		Value
Available for sale
Corporate bonds	$	2,172		-		289		1,883
US treasuries		999		-		128		871
US government agencies		13,007		-		2,390		10,617
State and political subdivisions		22,910		-		4,004		18,906
Asset-backed securities		6,435		-		206		6,229
Mortgage-backed securities
FHLMC		24,086		-		3,745		20,341
FNMA		35,141		-		5,520		29,621
GNMA		5,573		-		694		4,879
Total mortgage-backed securities		64,800		-		9,959		54,841
Total investment securities available for sale	$	110,323		-		16,976		93,347

Contractual maturities and yields on the Company’s investment securities at ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021~~2022 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.

~~Table of Contents~~


															June 30, 2022										March 31, 2023
	Less than one year				One to five years					Five to ten years					Over ten years					Total					Less than one year				One to five years					Five to ten years					Over ten years					Total
(dollars in thousands)	Amount		Yield		Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield		Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield
Available for sale
Corporate bonds	$	-		-		-		-			1,981		1.99	%		-		-			1,981		1.99	%	$	-		-	$	-		-		$	1,916		2.00	%	$	-		-		$	1,916		2.00	%
US treasuries		-		-		-		-			905		1.27	%		-		-			905		1.27	%		-		-		-		-			892		1.27	%		-		-			892		1.27	%
US government agencies		-		-		2,445		0.83	%		8,001		1.49	%		807		1.48	%		11,253		1.34	%		-		-		3,291		0.85	%		7,693		1.55	%		-		-			10,984		1.34	%
State and political subdivisions		-		-		468		2.13	%		4,571		1.62	%		14,940		2.19	%		19,979		2.05	%		-		-		465		2.13	%		5,598		1.80	%		13,586		2.16	%		19,649		2.06	%
Asset-backed securities		-		-		-		-			1,246		3.33	%		6,507		2.03	%		7,753		2.23	%		-		-		-		-			452		4.43	%		5,367		5.62	%		5,819		5.53	%
Mortgage-backed securities		-		-		3,280		1.20	%		4,976		1.43	%		48,864		1.60	%		57,120		1.56	%		-		-		4,902		1.17	%		3,712		1.57	%		46,162		1.95	%		54,776		1.85	%
Total investment securities	$	-		-		6,193		1.12	%		21,680		1.64	%		71,118		1.76	%		98,991		1.69	%	$	-		-	$	8,658		1.10	%	$	20,263		1.72	%	$	65,115		2.30	%	$	94,036		2.06	%

																December 31, 2021										December 31, 2022
	Less than one year					One to five years					Five to ten years					Over ten years					Total					Less than one year				One to five years					Five to ten years					Over ten years					Total
(dollars in thousands)	Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield		Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield
Available for sale
Corporate bonds	$	-		-			-		-			2,188		1.98	%		-		-			2,188		1.98	%	$	-		-	$	-		-		$	1,883		2.00	%	$	-		-		$	1,883		2.00	%
US treasuries		-		-			-		-			992		1.27	%		-		-			992		1.27	%		-		-		-		-			871		1.27	%		-		-			871		1.27	%
US government agencies		-		-			2,481		0.36	%		8,756		1.31	%		2,932		1.79	%		14,169		1.24	%		-		-		3,223		0.85	%		7,394		1.55	%		-		-			10,617		1.34	%
SBA securities		-		-			-		-			-		-			438		1.01	%		438		1.01	%
State and political subdivisions		-		-			471		2.13	%		4,282		1.61	%		20,423		2.21	%		25,176		2.11	%		-		-		460		2.13	%		5,382		1.80	%		13,064		2.16	%		18,906		2.05	%
Asset-backed securities		-		-			-		-			1,614		1.79	%		8,550		0.97	%		10,164		1.10	%		-		-		-		-			554		4.77	%		5,675		5.14	%		6,229		5.10	%
Mortgage-backed securities		387		2.10	%		4,411		1.29	%		9,121		1.59	%		53,235		1.38	%		67,154		1.40	%		-		-		4,594		1.13	%		3,959		1.60	%		46,288		1.90	%		54,841		1.82	%
Total investment securities	$	387		2.10	%		7,363		1.03	%		26,953		1.53	%		85,578		1.55	%		120,281		1.52	%	$	-		-	$	8,277		1.08	%	$	20,043		1.75	%	$	65,027		2.24	%	$	93,347		2.03	%

~~Table of Contents~~

The tables below summarize gross unrealized losses on investment securities and the fair market value of the related securities at ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position.

June 30, 2022
Less than 12 months 12 months or longer Total
(dollars in thousands) # Fair
value Unrealized
losses # Fair
value Unrealized
losses # Fair
value Unrealized
losses
Available for sale
Corporate bonds 1 $ 1,981 $ 204 - $ - $ - 1 $ 1,981 $ 204
US treasures 1 905 94 - - - 1 905 94
US government agencies 4 6,069 942 6 5,184 810 10 11,253 1,752
State and political subdivisions 22 15,137 2,194 9 4,601 902 31 19,738 3,096
Asset-backed 6 5,496 126 2 1,502 43 8 6,998 169
Mortgage-backed securities
FHLMC 14 14,335 1,990 5 4,640 845 19 18,975 2,835
FNMA 24 17,522 2,028 12 15,133 2,172 36 32,655 4,200
GNMA 4 3,805 301 3 1,676 192 7 5,481 493
Total investment securities 76 $ 65,250 $ 7,879 37 $ 32,736 $ 4,964 113 $ 97,986 $ 12,843

December 31, 2021
Less than 12 months 12 months or longer Total
(dollars in thousands) # Fair
value Unrealized
losses # Fair
value Unrealized
losses # Fair
value Unrealized
losses
Available for sale
Corporate bonds 1 $ 2,188 $ 10 - $ - $ - 1 $ 2,188 $ 10
US treasures 1 992 7 - - - 1 992 7
US government agencies 7 9,831 173 4 3,837 163 11 13,668 336
State and political subdivisions 9 7,821 193 6 2,909 67 15 10,730 260
Asset-backed 2 1,751 9 2 1,717 7 4 3,468 16
Mortgage-backed securities
FHLMC 10 13,705 303 4 4,644 192 14 18,349 495
FNMA 11 16,098 296 9 11,264 364 20 27,362 660
GNMA 2 655 4 3 3,215 93 5 3,870 97
Total investment securities 43 $ 53,041 $ 995 28 $ 27,586 $ 886 71 $ 80,627 $ 1,881

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	March 31, 2023
	Less than 12 months						12 months or longer						Total
(dollars in thousands)	#		Fair value		Unrealized losses		#		Fair value		Unrealized losses		#		Fair value		Unrealized losses
Available for sale
Corporate bonds		-	$	-	$	-		1	$	1,916	$	250		1	$	1,916	$	250
US treasuries		-		-		-		1		892		107		1		892		107
US government agencies		-		-		-		10		10,984		2,024		10		10,984		2,024
State and political subdivisions		1		465		5		29		18,404		3,198		30		18,869		3,203
Asset-backed		2		1,228		16		6		4,591		131		8		5,819		147
Mortgage-backed securities
FHLMC		1		1,504		12		19		17,486		3,455		20		18,990		3,467
FNMA		1		5		-		36		29,578		5,029		37		29,583		5,029
GNMA		-		-		-		7		4,783		688		7		4,783		688
Total investment securities		5	$	3,202	$	33		109	$	88,634	$	14,882		114	$	91,836	$	14,915

	December 31, 2022
	Less than 12 months						12 months or longer						Total
(dollars in thousands)	#		Fair value		Unrealized losses		#		Fair value		Unrealized losses		#		Fair value		Unrealized losses
Available for sale
Corporate bonds		-	$	-	$	-		1	$	1,883	$	289		1	$	1,883	$	289
US treasuries		-		-		-		1		871		128		1		871		128
US government agencies		-		-		-		10		10,617		2,390		10		10,617		2,390
State and political subdivisions		10		5,101		763		22		13,805		3,241		32		18,906		4,004
Asset-backed		5		4,291		135		3		1,938		71		8		6,229		206
Mortgage-backed securities
FHLMC		4		3,712		155		17		16,629		3,590		21		20,341		3,745
FNMA		9		2,208		201		28		27,413		5,319		37		29,621		5,520
GNMA		1		103		7		6		4,776		687		7		4,879		694
Total investment securities		29	$	15,415	$	1,261		88	$	77,932	$	15,715		117	$	93,347	$	16,976

At ~~June 30, 2022~~March 31, 2023 the Company had 76114 individual investments ~~with a fair market value of $65.3 million~~ that were in an unrealized loss ~~position for less than 12 months and 37 individual investments with a fair market value of $32.7 million that were in an unrealized loss position for 12 months or longer.~~position. 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 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. The Company does not intend to sell these securities, and it is more likely than not that the Company will not be required to sell these securities before recovery of the amortized cost. The issuers of these securities continue to make timely principal and interest payments under the contractual terms of the securities. As such, there is no allowance for credit losses on available for sale securities recognized as of March 31, 2023.

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


(dollars in thousands)	June 30, 2022		December 31, 2021		March 31, 2023		December 31, 2022
Federal Home Loan Bank stock	$	3,632		1,241	$	7,534		9,250
Other nonmarketable investments		1,030		2,377		2,160		1,180
Investment in Trust Preferred subsidiaries		403		403		403		403
Total other investments	$	5,065		4,021	$	10,097		10,833

The Company has evaluated other investments for impairment and determined that the other investments are not impaired as of ~~June 30, 2022~~March 31, 2023 and that ultimate recoverability of the par value of the investments is probable. All of the FHLB stock is used to collateralize advances with the FHLB.

Table of Contents

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 ~~June 30, 2022,~~March 31 2023, mortgage loans held for sale totaled ~~$18.3~~$7.0 million compared to ~~$13.6~~$3.9 million at December 31, ~~2021.~~2022.

NOTE 4 – Loans and Allowance for Credit 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 ~~$6.2~~$7.4 million as of ~~June 30, 2022~~March 31, 2023 and ~~$5.0~~$7.3 million as of December 31, ~~2021.~~2022.


	June 30, 2022						December 31, 2021						March 31, 2023						December 31, 2022
(dollars in thousands)	Amount			% of Total			Amount			% of Total			Amount			% of Total			Amount			% of Total
Commercial
Owner occupied RE		551,544			19.4	%	$	488,965			19.6	%	$	615,094			18.0	%	$	612,901			18.7	%
Non-owner occupied RE		741,263			26.1	%		666,833			26.8	%		928,059			27.2	%		862,579			26.3	%
Construction		84,612			3.0	%		64,425			2.6	%		94,641			2.8	%		109,726			3.4	%
Business		389,790			13.7	%		333,049			13.4	%		495,161			14.5	%		468,112			14.3	%
Total commercial loans		1,767,209			62.2	%		1,553,272			62.4	%		2,132,955			62.5	%		2,053,318			62.7	%
Consumer
Real estate		812,130			28.5	%		694,401			27.9	%		993,258			29.1	%		931,278			28.4	%
Home equity		161,512			5.6	%		154,839			6.2	%		180,974			5.3	%		179,300			5.5	%
Construction		76,878			2.7	%		59,846			2.4	%		71,137			2.1	%		80,415			2.5	%
Other		27,476			1.0	%		27,519			1.1	%		39,621			1.0	%		29,052			0.9	%
Total consumer loans		1,077,996			37.8	%		936,605			37.6	%		1,284,990			37.5	%		1,220,045			37.3	%
Total gross loans, net of deferred fees		2,845,205			100.0	%		2,489,877			100.0	%		3,417,945			100.0	%		3,273,363			100.0	%
Less—allowance for credit losses		(34,192	)					(30,408	)					(40,435	)					(38,639	)
Total loans, net	$	2,811,013					$	2,459,469					$	3,377,510					$	3,234,724

~~Table of Contents~~

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, 2023
(dollars in thousands)	One year or less		After one but within five years		After five but within fifteen years		After fifteen years		Total
Commercial
Owner occupied RE	$	9,295		144,602		418,450		42,747		615,094
Non-owner occupied RE		57,909		449,859		394,421		25,870		928,059
Construction		2,742		30,409		59,103		2,387		94,641
Business		92,502		211,145		187,033		4,481		495,161
Total commercial loans		162,448		836,015		1,059,007		75,485		2,132,955
Consumer
Real estate		9,871		46,324		280,204		656,859		993,258
Home equity		1,028		20,452		154,189		5,305		180,974
Construction		1,014		227		32,358		37,538		71,137
Other		3,569		21,975		13,272		805		39,621
Total consumer loans		15,482		88,978		480,023		700,507		1,284,990
Total gross loans, net of deferred fees	$	177,930		924,993		1,539,030		775,992		3,417,945

June 30, 2022
(dollars in thousands) One year
or less After one
but within
five years After five but
within fifteen
years After
fifteen
years Total
Commercial
Owner occupied RE $ 13,891 117,631 377,520 42,502 551,544
Non-owner occupied RE 38,324 347,550 327,641 27,748 741,263
Construction 4,763 23,348 44,728 11,773 84,612
Business 77,526 159,130 148,909 4,225 389,790
Total commercial loans 134,504 647,659 898,798 86,248 1,767,209
Consumer
Real estate $ 8,016 43,504 207,090 553,520 812,130
Home equity 1,554 22,238 132,251 5,469 161,512
Construction 1,102 591 14,226 60,959 76,878
Other 3,867 19,360 3,461 788 27,476
Total consumer loans 14,539 85,693 357,028 620,736 1,077,996
Total gross loans, net of deferred fees $ 149,043 733,352 1,255,826 706,984 2,845,205

December 31, 2021
(dollars in thousands) One year
or less After one
but within
five years After five
but within
fifteen years After
fifteen
years Total
Commercial
Owner occupied RE $ 16,858 120,480 316,261 35,366 488,965
Non-owner occupied RE 47,453 329,085 263,317 26,978 666,833
Construction 4,882 16,393 29,310 13,840 64,425
Business 66,833 152,732 109,008 4,476 333,049
Total commercial loans 136,026 618,690 717,896 80,660 1,553,272
Consumer
Real estate 14,632 45,219 162,655 471,895 694,401
Home equity 2,178 21,280 125,427 5,954 154,839
Construction 961 594 8,956 49,335 59,846
Other 8,071 15,711 3,341 396 27,519
Total consumer 25,842 82,804 300,379 527,580 936,605
Total gross loan, net of deferred fees $ 161,868 701,494 1,018,275 608,240 2,489,877

Table of Contents


	December 31, 2022
(dollars in thousands)	One year or less		After one but within five years		After five but within fifteen years		After fifteen years		Total
Commercial
Owner occupied RE	$	10,574		133,017		420,881		48,429		612,901
Non-owner occupied RE		44,570		419,976		371,208		26,825		862,579
Construction		5,509		36,537		61,009		6,671		109,726
Business		96,157		194,489		173,259		4,207		468,112
Total commercial loans		156,810		784,019		1,026,357		86,132		2,053,318
Consumer
Real estate		12,137		38,948		260,005		620,188		931,278
Home equity		1,336		20,933		151,696		5,335		179,300
Construction		665		182		23,788		55,780		80,415
Other		3,926		21,890		2,458		778		29,052
Total consumer loans		18,064		81,953		437,947		682,081		1,220,045
Total gross loans, net of deferred fees	$	174,874		865,972		1,464,304		768,213		3,273,363

The following table summarizes the loans due after one year by category.


	June 30, 2022				December 31, 2021				March 31, 2023				December 31, 2022
	Interest Rate						Interest Rate		Interest Rate						Interest Rate
(dollars in thousands)	Fixed		Floating or Adjustable		Fixed		Floating or Adjustable		Fixed		Floating or Adjustable		Fixed		Floating or Adjustable
Commercial
Owner occupied RE	$	534,364		3,289		463,589		8,518	$	602,302		3,497		598,513		3,814
Non-owner occupied RE		631,885		71,054		533,565		85,815		784,868		85,282		742,763		75,246
Construction		74,537		5,312		57,139		2,404		75,041		16,858		90,246		13,971
Business		240,839		71,425		191,522		74,694		310,976		91,683		298,866		73,089
Total commercial loans		1,481,625		151,080		1,245,815		171,431		1,773,187		197,320		1,730,388		166,120
Consumer
Real estate		804,102		12		679,756		13		983,376		11		919,130		11
Home equity		11,946		148,012		12,850		139,811		13,508		166,438		14,173		163,791
Construction		75,776		-		58,884		-		70,123		-		79,750		-
Other		17,522		6,087		13,220		6,228		19,173		16,879		19,113		6,013
Total consumer loans		909,346		154,111		764,710		146,052		1,086,180		183,328		1,032,166		169,815
Total gross loans, net of deferred fees	$	2,390,971		305,191		2,010,525		317,483	$	2,859,367		380,648		2,762,554		335,935

Credit Quality Indicators

The Company tracks credit quality based on its internal risk ratings. Upon origination, a loan is assigned an initial risk grade, which is generally based on several factors such as the borrower’s credit score, the loan-to-value ratio, the debt-to-income ratio, etc. After loans are initially graded, they are monitored regularly for credit quality based on many factors, such as payment history, the borrower’s financial status, and changes in collateral value. Loans can be downgraded or upgraded depending on management’s evaluation of these factors. Internal risk-grading policies are consistent throughout each loan type.

A description of the general characteristics of the risk grades is as follows:

●

Pass—~~These loans range~~ A pass loan ranges from minimal to average credit ~~risk~~risk; however, still ~~have~~has acceptable credit risk.

●	Watch—A watch loan exhibits above average credit risk due to minor weaknesses and warrants closer scrutiny by management.

●	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.

Table of Contents

The following table presents loan balances classified by credit quality indicators by year of origination as of ~~June 30, 2022.~~March 31, 2023.


													June 30, 2022							March 31, 2023
(dollars in thousands)	2022		2021		2020		2019		2018		Prior		Revolving		Revolving Converted to Term		Total			2023		2022			2021	2020			2019		Prior		Revolving		Revolving Converted to Term		Total
Commercial
Owner occupied RE
Pass	$	84,469		134,506		90,382		75,694		37,899		127,229		-		-		550,179		$	19,874		160,403		143,384		76,171			65,408		121,520		-		169		586,929
Watch																					-		3,548		475		9,281			3,628		6,716		-		-		23,648
Special Mention		-		159		-		-		-		156		-		-		315			-		196		-		-			-		3,133		-		-		3,329
Substandard		-		-		648		-		294		108		-		-		1,050			-		-		-		-			-		1,188		-		-		1,188
Total Owner occupied RE		84,469		134,665		91,030		75,694		38,193		127,493		-		-		551,544			19,874		164,147		143,859		85,452			69,036		132,557		-		169		615,094

Non-owner occupied RE
Pass		135,632		175,361		118,012		74,974		79,186		130,248		603		-		714,016			47,280		298,161		177,421		112,850			59,025		181,699		623		-		877,059
Watch																					200		972		9,496		-			7,555		13,070		-		-		31,293
Special Mention		-		204		-		310		5,494		5,533		-		-		11,541			-		-		201		-			8,893		906		-		-		10,000
Substandard		-		139		-		13,659		306		1,602		-		-		15,706			-		615		-		-			7,996		1,096		-		-		9,707
Total Non-owner occupied RE		135,632		175,704		118,012		88,943		84,986		137,383		603		-		741,263			47,480		299,748		187,118		112,850			83,469		196,771		623		-		928,059

Construction
Pass		17,630		54,916		8,762		2,771		-		533		-		-		84,612			942		62,604		22,778		6,737			246		-		-		-		93,307
Watch																					-		1,334		-		-			-		-		-		-		1,334
Special Mention		-		-		-		-		-		-		-		-		-			-		-		-		-			-		-		-		-		-
Substandard		-		-		-		-		-		-		-		-		-			-		-		-		-			-		-		-		-		-
Total Construction		17,630		54,916		8,762		2,771		-		533		-		-		84,612			942		63,938		22,778		6,737			246		-		-		-		94,641

Business
Pass		63,532		65,669		35,262		25,887		37,371		34,691		122,374		625		385,411			17,705		140,684		54,235		21,675			20,611		58,086		147,734		442		461,172
Watch																					145		14,571		2,031		1,627			1,061		3,607		5,420		-		28,462
Special Mention		961		-		394		-		-		165		113		183		1,816			-		1,259		236		463			279		424		15		99		2,775
Substandard		-		-		1,065		182		345		946		25		-		2,563			-		495		-		28			202		1,344		683		-		2,752
Total Business		64,493		65,669		36,721		26,069		37,716		35,802		122,512		808		389,790			17,850		157,009		56,502		23,793			22,153		63,461		153,852		541		495,161

Total Commercial loans		302,224		430,954		254,525		193,477		160,895		301,211		123,115		808		1,767,209			86,146		684,842		410,257		228,832			174,904		392,789		154,475		710		2,132,955

Consumer
Real estate
Pass		143,204		260,391		193,806		77,863		41,377		86,659		-		-		803,300			49,330		253,611		284,238		183,939			69,806		112,705		-		-		953,629
Watch																					494		5,765		8,023		4,016			2,086		4,582		-		-		24,966
Special Mention		-		1,105		1,376		1,191		564		1,094		-		-		5,330			-		2,346		1,687		2,152			2,444		3,127		-		-		11,756
Substandard		-		895		229		418		406		1,552		-		-		3,500			-		-		646		224			330		1,707		-		-		2,907
Total Real estate		143,204		262,391		195,411		79,472		42,347		89,305		-		-		812,130			49,824		261,722		294,594		190,331			74,666		122,121		-		-		993,258

Home equity
Pass		-		-		-		-		-		-		156,910		-		156,910			-		-		-		-			-		-		167,694		-		167,694
Watch																					-		-		-		-			-		-		6,701		-		6,701
Special Mention		-		-		-		-		-		-		2,122		-		2,122			-		-		-		-			-		-		3,861		-		3,861
Substandard		-		-		-		-		-		-		2,480		-		2,480			-		-		-		-			-		-		2,718		-		2,718
Total Home equity		-		-		-		-		-		-		161,512		-		161,512			-		-		-		-			-		-		180,974		-		180,974

Construction
Pass		19,945		42,828		13,799		-		-		-		-		-		76,572			2,656		47,570		20,066		845			-		-		-		-		71,137
Watch																					-		-		-		-			-		-		-		-		-
Special Mention		-		-		-		306		-		-		-		-		306			-		-		-		-			-		-		-		-		-
Substandard		-		-		-		-		-		-		-		-		-			-		-		-		-			-		-		-		-		-
Total Construction		19,945		42,828		13,799		306		-		-		-		-		76,878			2,656		47,570		20,066		845			-		-		-		-		71,137

Other
Pass		2,726		2,706		2,076		1,778		639		3,590		13,801		-		27,316	��		390		3,375		2,829		1,645			1,433		3,205		25,359		-		38,236
Watch																					10		42		363		11			4		183		118		-		731
Special Mention		5		-		7		34		56		6		32		-		140			-		11		-		-			37		90		93		-		231
Substandard		-		-		-		9		-		-		11		-		20			-		327		88		-			3		-		5		-		423
Total Other		2,731		2,706		2,083		1,821		695		3,596		13,844		-		27,476			400		3,755		3,280		1,656			1,477		3,478		25,575		-		39,621

Total Consumer loans		165,880		307,925		211,293		81,599		43,042		92,901		175,356		-		1,077,996			52,880		313,047		317,940		192,832			76,143		125,599		206,549		-		1,284,990
Total loans	$	468,104		738,879		465,818		275,076		203,937		394,112		298,471		808		2,845,205		$	139,026		997,889		728,197		421,664			251,047		518,388		361,024		710		3,417,945
Current period gross write-offs																							(160	)			(1	)										(161	)

Table of Contents

The following table presents loan balances classified by credit quality indicators ~~and loan categories~~by year of origination as of December 31, ~~2021.~~2022.


	December 31, 2022
(dollars in thousands)	2022		2021		2020		2019		2018		Prior		Revolving		Revolving Converted to Term		Total
Commercial
Owner occupied RE
Pass	$	169,083		122,654		85,867		66,299		36,718		93,915		-		-		574,536
Watch		14,648		479		9,339		3,658		-		6,792		-		-		34,916
Special Mention		200		-		-		-		-		2,960		-		-		3,160
Substandard		-		-		-		-		289		-		-		-		289
Total Owner occupied RE		183,931		123,133		95,206		69,957		37,007		103,667		-		-		612,901

Non-owner occupied RE
Pass		281,890		169,599		113,264		59,550		79,722		106,967		604		137		811,733
Watch		1,061		9,491		-		10,683		1,408		11,660		-		-		34,303
Special Mention		-		202		-		6,087		-		930		-		-		7,219
Substandard		-		134		-		7,992		327		871		-		-		9,324
Total Non-owner occupied RE		282,951		179,426		113,264		84,312		81,457		120,428		604		137		862,579

Construction
Pass		48,420		55,129		4,811		247		-		-		-		-		108,607
Watch		1,119		-		-		-		-		-		-		-		1,119
Special Mention		-		-		-		-		-		-		-		-		-
Substandard		-		-		-		-		-		-		-		-		-
Total Construction		49,539		55,129		4,811		247		-		-		-		-		109,726

Business
Pass		136,489		57,804		29,864		21,808		35,249		28,914		136,337		709		447,174
Watch		3,186		2,058		1,318		1,282		179		3,074		3,783		439		15,319
Special Mention		1,137		260		386		210		-		252		115		642		3,002
Substandard		498		-		188		233		315		911		472		-		2,617
Total Business		141,310		60,122		31,756		23,533		35,743		33,151		140,707		1,790		468,112
Total Commercial loans		657,731		417,810		245,037		178,049		154,207		257,246		141,311		1,927		2,053,318

Consumer
Real estate
Pass		243,589		269,565		189,075		72,499		39,042		76,172		-		-		889,942
Watch		6,196		8,256		3,847		2,278		494		3,671		-		-		24,742
Special Mention		3,114		1,938		2,644		2,258		955		2,639		-		-		13,548
Substandard		-		648		227		341		408		1,422		-		-		3,046
Total Real estate		252,899		280,407		195,793		77,376		40,899		83,904		-		-		931,278

Home equity
Pass		-		-		-		-		-		-		165,847		-		165,847
Watch		-		-		-		-		-		-		7,226		-		7,226
Special Mention		-		-		-		-		-		-		4,055		-		4,055
Substandard		-		-		-		-		-		-		2,172		-		2,172
Total Home equity		-		-		-		-		-		-		179,300		-		179,300

Construction
Pass		41,138		34,039		4,923		-		-		-		-		-		80,100
Watch		-		-		-		-		-		-		-		-		-
Special Mention		-		-		-		315		-		-		-		-		315
Substandard		-		-		-		-		-		-		-		-		-
Total Construction		41,138		34,039		4,923		315		-		-		-		-		80,415

Other
Pass		3,894		3,038		1,702		1,534		341		3,015		14,465		-		27,989
Watch		46		367		15		5		16		175		93		-		717
Special Mention		94		-		-		44		75		23		97		-		332
Substandard		-		-		-		5		-		-		9		-		14
Total Other		4,034		3,405		1,717		1,588		432		3,213		14,663		-		29,052
Total Consumer loans		298,071		317,851		202,433		79,279		41,331		87,117		193,963		-		1,220,045
Total loans	$	955,802		735,661		447,470		257,328		195,538		344,363		335,274		1,927		3,273,363

Table of Contents

December 31, 2021

Commercial Consumer
(dollars in thousands) Owner
occupied
RE Non-owner
occupied
RE Construction Business Real
Estate Home
Equity Construction Other Total
Pass $ 487,422 589,280 64,425 328,371 684,923 148,933 59,846 27,365 2,390,565
Special mention 327 48,310 - 1,530 4,294 2,986 - 129 57,576
Substandard 1,216 29,243 - 3,148 5,184 2,920 - 25 41,736
Total loans $ 488,965 666,833 64,425 333,049 694,401 154,839 59,846 27,519 2,489,877

The following tables present loan balances by age and payment status.


	March 31, 2023
(dollars in thousands)	Accruing 30-59 days past due		Accruing 60-89 days past due		Accruing 90 days or more past due		Nonaccrual loans		Accruing current		Total
Commercial
Owner occupied RE	$	-		-		-		-		615,094		615,094
Non-owner occupied RE		151		-		-		1,384		926,524		928,059
Construction		-		-		-		-		94,641		94,641
Business		135		235		-		1,196		493,595		495,161
Consumer
Real estate		886		-		-		1,075		991,297		993,258
Home equity		587		-		-		1,078		179,309		180,974
Construction		-		-		-		-		71,137		71,137
Other		1		88		-		-		39,532		39,621
Total loans	$	1,760		323		-		4,733		3,411,129		3,417,945
Total loans over 90 days past due		-		-		-		-		-		192


	June 30, 2022												December 31, 2022
(dollars in thousands)	Accruing 30-59 days past due		Accruing 60-89 days past due		Accruing 90 days or more past due		Nonaccrual loans		Accruing current		Total		Accruing 30-59 days past due		Accruing 60-89 days past due		Accruing 90 days or more past due		Nonaccrual loans		Accruing current		Total
Commercial
Owner occupied RE	$	-		-		-		-		551,544		551,544	$	-		-		-		-		612,901		612,901
Non-owner occupied RE		-		-		-		981		740,282		741,263		119		757		-		247		861,456		862,579
Construction		-		-		-		-		84,612		84,612		-		-		-		-		109,726		109,726
Business		91		-		-		-		389,699		389,790		24		1		-		182		467,905		468,112
Consumer
Real estate		482		697		-		552		810,399		812,130		330		-		-		1,099		929,849		931,278
Home equity		-		-		-		1,398		160,114		161,512		50		-		-		1,099		178,151		179,300
Construction		-		-		-		-		76,878		76,878		-		-		-		-		80,415		80,415
Other		-		-		-		-		27,476		27,476		88		-		-		-		28,964		29,052
Total loans	$	573		697		-		2,931		2,839,806		2,845,205	$	611		758		-		2,627		3,269,367		3,273,363
Total loans over 90 days past due														-		-		-		-		-		402

December 31, 2021

(dollars in thousands) Accruing 30-59
days past due Accruing 60-89
days past due Accruing 90
days or more
past due Nonaccrual
loans Accruing
current Total
Commercial
Owner occupied RE $ - - - - 488,965 488,965
Non-owner occupied RE - - - 1,069 665,764 666,833
Construction - - - - 64,425 64,425
Business - - - - 333,049 333,049
Consumer
Real estate 136 - - 1,750 692,515 694,401
Home equity 417 174 - 2,045 152,203 154,839
Construction - - - - 59,846 59,846
Other 5 - - - 27,514 27,519
Total loans $ 558 174 - 4,864 2,484,281 2,489,877

As of ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, loans 30 days or more past due represented ~~0.10% and 0.09%~~0.11% of the Company’s total loan ~~portfolio, respectively.~~portfolio. Commercial loans 30 days or more past due were ~~0.01% and 0.00%~~0.03% of the Company’s total loan portfolio as of ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021, respectively.~~2022. Consumer loans 30 days or more past due were ~~0.09%~~0.08% of total loans as of ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021.~~2022.

~~Nonperforming assets~~

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. The following table shows the nonperforming assets and the related percentage of nonperforming assets to total assets and gross loans.

Table of Contents

(dollars in thousands) June 30, 2022 December 31, 2021
Nonaccrual loans $ 642 -
Nonaccruing TDRs 2,289 2,952
Total nonaccrual loans, including nonaccruing TDRs 2,931 4,864
Other real estate owned - -
Total nonperforming assets $ 2,931 4,864
Nonperforming assets as a percentage of:
Total assets 0.09 % 0.17 %
Gross loans 0.10 % 0.20 %
Total loans over 90 days past due $ - 554
Loans over 90 days past due and still accruing - -
Accruing troubled debt restructurings 3,558 3,299

The table below summarizes nonaccrual loans by major categories for the periods presented.


	CECL						Incurred loss
	June 30, 2022						December 31, 2021		March 31, 2023						December 31, 2022
	Nonaccrual		Nonaccrual						Nonaccrual		Nonaccrual				Nonaccrual		Nonaccrual
	loans		loans		Total		Total		loans		loans		Total		loans		loans		Total
	with no		with an		nonaccrual		nonaccrual		with no		with an		nonaccrual		with no		with an		nonaccrual
(dollars in thousands)	allowance		allowance		loans		loans		allowance		allowance		loans		allowance		allowance		loans
Commercial
Owner occupied RE		-		-		-		-		-		-		-		-		-		-
Non-owner occupied RE	$	121		860		981		1,070	$	615		769		1,384		114		133		247
Construction		-		-		-		-		-		-		-		-		-		-
Business		-		-		-		-		1,045		151		1,196		-		182		182
Total commercial		121		860		981		1,070		1,660		920		2,580		114		315		429
Consumer
Real estate		-		552		552		1,750		-		1,075		1,075		-		1,099		1,099
Home equity		200		1,198		1,398		2,044		192		886		1,078		194		905		1,099
Construction		-		-		-		-		-		-		-		-		-		-
Other		-		-		-		-		-		-		-		-		-		-
Total consumer		200		1,750		1,950		3,794		192		1,961		2,153		194		2,004		2,198
Total	$	321		2,610		2,931		4,864
Total nonaccrual loans										1,852		2,881		4,733		308		2,319		2,627

~~Table of Contents~~

~~The table below summarizes key information for loans individually evaluated for impairment loans under the incurred loss methodology. These loans include loans~~We did not recognize interest income on nonaccrual ~~status~~loans for the three months ended March 31, 2023 and ~~loans modified in a TDR, whether on accrual or nonaccrual status. These loans may have estimated impairment which is included in~~March 31, 2022. Accrued interest of $23,000 was reversed during the ~~allowance for credit losses.~~three months ended March 31, 2023. Accrued interest of $3,000 was reversed during the three months ended March 31, 2022.

December 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 credit losses credit losses credit losses
Commercial
Owner occupied RE $ 1,261 1,261 1,261 - -
Non-owner occupied RE 2,012 1,070 270 800 171
Construction - - - - -
Business 1,104 1,104 - 1,104 452
Total commercial 4,377 3,435 1,531 1,904 623
Consumer
Real estate 2,638 2,561 1,743 818 144
Home equity 2,206 2,044 1,989 55 55
Construction - - - - -
Other 123 123 - 123 14
Total consumer 4,967 4,728 3,732 996 213
Total gross loans $ 9,344 8,163 5,263 2,900 836

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.~~below summarizes information regarding nonperforming assets.

Three months ended
June 30, 2022 Three months ended
June 30, 2021
(dollars in thousands) Average
recorded
investment Recognized
interest
income Average
recorded
investment Recognized
interest
income
Commercial
Owner occupied RE $ 1,247 11 1,379 16
Non-owner occupied RE 874 36 2,073 32
Construction - - 68 -
Business 1,051 10 2,118 20
Total commercial 3,172 57 5,638 68
Consumer
Real estate 1,908 17 4,337 60
Home equity 1,611 (3 ) 1,679 18
Construction - - - -
Other 118 1 131 1
Total consumer 3,637 15 6,147 79
Total gross loans $ 6,809 72 11,785 147


(dollars in thousands)	March 31, 2023			December 31, 2022
Nonaccrual loans	$	4,733			2,627
Other real estate owned		-			-
Total nonperforming assets	$	4,733			2,627
Nonperforming assets as a percentage of:
Total assets		0.12	%		0.07	%
Gross loans		0.14	%		0.08	%
Total loans over 90 days past due	$	192			402
Loans over 90 days past due and still accruing		-			-
Accruing troubled debt restructurings		-			4,503

Six months ended
June 30, 2022 Six months ended
June 30, 2021 Year ended
December 31, 2021
(dollars in thousands) Average
recorded
investment Recognized
interest
income Average
recorded
investment Recognized
interest
income Average
recorded
investment Recognized
interest
income
Commercial
Owner occupied RE $ 1,253 32 1,469 32 1,387 65
Non-owner occupied RE 896 78 2,111 94 3,128 182
Construction - - 91 2 55 -
Business 1,070 28 2,229 54 2,218 62
Total commercial 3,219 138 5,900 182 6,788 309
Consumer
Real estate 2,045 39 4,235 103 3,641 98
Home equity 1,621 21 1,910 34 1,964 85
Construction - - - - - -
Other 120 2 132 2 129 4
Total consumer 3,786 62 6,277 139 5,734 187
Total gross loans $ 7,005 200 12,177 321 12,522 496

Modifications to Borrowers Experiencing Financial Difficulty

The Company adopted Accounting Standards Update (“ASU”) 2022-02, Financial Instruments - Credit Losses (Topic 326) Troubled Debt Restructurings and Vintage Disclosures (“ASU 2022-02”) effective January 1, 2023. The amendments in ASU 2022-02 eliminated the recognition and measure of troubled debt restructurings and enhanced disclosures for loan modifications to borrowers experiencing financial difficulty. There were no loan modifications to borrowers experiencing financial difficulty during the three months ended March 31, 2023.

Allowance for Credit Losses

The Company maintains an allowance for credit losses to provide for expected credit losses. Losses are charged against the allowance when management believes that the principal is uncollectable. Subsequent recoveries, if any, are credited to the allowance. Allocations of the allowance are made for specific loans and for pools of similar types of loans, although the entire allowance is available for any loan that, in management’s judgment, should be charged against the allowance. A provision for credit losses is taken based on management’s ongoing evaluation of the appropriate allowance balance.

Table of Contents

~~Allowance~~A formal evaluation of the adequacy of the credit loss allowance is conducted quarterly. This assessment includes procedures to estimate the allowance and test the adequacy and appropriateness of the resulting balance. The level of the allowance is based upon management’s evaluation of historical default and loss experience, current and projected economic conditions, asset quality trends, known and inherent risks in the portfolio, adverse situations that may affect the borrowers’ ability to repay a loan, the estimated value of any underlying collateral, composition of the loan portfolio, industry and peer bank loan quality indications and other pertinent factors, including regulatory recommendations. Management believes the level of the allowance for ~~Credit Losses~~credit losses is adequate to absorb all expected future losses inherent in the loan portfolio at the balance sheet date. The allowance is increased through provision for credit losses and decreased by charge-offs, net of recoveries of amounts previously charged-off.

The Company uses a lifetime probability of default and loss given default modeling approach to estimate the allowance for credit losses on loans. This method uses historical correlations between default experience and the age of loans to forecast defaults and losses, assuming that a loan in a pool shares similar risk characteristics such as loan product type, risk rating and loan age, and demonstrates similar default characteristics as other loans in that pool, as the loan progresses through its lifecycle. The Company calculates lifetime probability of default and loss given default rates based on historical loss experience, which is used to calculate expected losses based on the pool’s loss rate and the age of loans in the pool. Management believes that the Company’s historical loss experience provides the best basis for its assessment of expected credit losses to determine the allowance for credit losses. The Company uses its own internal data to measure historical credit loss experience within the pools with similar risk characteristics over an economic cycle. The probability of default and loss given default method also includes assumptions of observed migration over the lifetime of the underlying loan data. Loans that do not share risk characteristics are evaluated for expected credit losses on an individual basis and excluded from the collective evaluation.

Management also considers further adjustments to historical loss information for current conditions and reasonable and supportable forecasts that differ from the conditions that exist for the period over which historical information is evaluated as well as other changes in qualitative factors not inherently considered in the quantitative analyses. The Company generally utilizes a four-quarter forecast period in evaluating the appropriateness of the reasonable and supportable forecast scenarios which are incorporated through qualitative adjustments. There is immediate reversion to historical loss rates. The qualitative categories and the measurements used to quantify the risks within each of these categories are subjectively selected by management but measured by objective measurements period over period. The data for each measurement may be obtained from internal or external sources. The current period measurements are evaluated and assigned a factor commensurate with the current level of risk relative to past measurements over time. The resulting qualitative adjustments are applied to the relevant collectively evaluated loan pools. These adjustments are based upon quarterly trend assessments in certain economic factors such as labor, inflation, consumer sentiment and real disposable income, as well as associate retention and turnover, portfolio concentrations, and growth characteristics. The qualitative analysis increases or decreases the allowance allocation for each loan pool based on the assessment of factors described above.

The following table summarizes the activity related to the allowance for credit losses for the ~~six~~three months ended ~~June 30, 2022~~March 31, 2023 under the CECL methodology.

Three months ended June 30, 2022
Commercial Consumer
(dollars in thousands) Owner
occupied
RE Non-
owner
occupied
RE Construction Business Real
Estate Home
Equity Construction Other Total
Balance, beginning of period $ 4,898 9,973 929 6,217 7,602 2,197 844 284 32,944
Provision for credit losses (69 ) 37 131 524 390 407 7 98 1,525
Loan charge-offs - - - (55 ) - (170 ) - (91 ) (316 )
Loan recoveries - - - 31 - 8 - - 39
Net loan recoveries (charge-offs) - - - (24 ) - (162 ) - (91 ) (277 )
Balance, end of period $ 4,829 10,010 1,060 6,717 7,992 2,442 851 291 34,192
Net charge-offs to average loans (annualized) 0.04 %
Allowance for credit losses to gross loans 1.20 %
Allowance for credit losses to nonperforming loans 1166.70 %


										Six months ended June 30, 2022																		Three months ended March 31, 2023
		Commercial											Consumer															Commercial											Consumer
(dollars in thousands)		Owner occupied RE			Non- owner occupied RE			Construction		Business			Real Estate			Home Equity			Construction		Other			Total				Owner occupied RE		Non-owner occupied RE			Construction			Business			Real Estate		Home Equity		Construction			Other		Total
Balance, beginning of period		$	4,700			10,518			625		4,887			7,083			1,697			578		320			30,408			$	5,867		10,376			1,292			7,861			9,487		2,551		893			312		38,639
Adjustment for CECL			(313	)		333			154		1,057			(294	)		438			130		(5	)		1,500
Provision for credit losses			442			(841	)		281		683			1,203			572			143		67			2,550				117		1,038			(182	)		150			592		53		(83	)		170		1,855
Loan charge-offs			-			-			-		(55	)		-			(339	)		-		(91	)		(485	)			-		(160	)		-			(1	)		-		-		-			-		(161	)
Loan recoveries			-			-			-		145			-			74			-		-			219				-		31			-			12			-		59		-			-		102
Net loan recoveries (charge-offs)			-			-			-		90			-			(265	)		-		(91	)		(266	)			-		(129	)		-			11			-		59		-			-		(59	)
Balance, end of period		$	4,829			10,010			1,060		6,717			7,992			2,442			851		291			34,192			$	5,984		11,285			1,110			8,022			10,079		2,663		810			482		40,435
Net charge-offs (recoveries) to average loans (annualized)																									0.02	%
Net charge-offs to average loans (annualized)																											Net charge-offs to average loans (annualized)																						0.01	%
Allowance for credit losses to gross loans	Allowance for credit losses to gross loans																								1.20	%	Allowance for credit losses to gross loans																						1.18	%
Allowance for credit losses to nonperforming loans	Allowance for credit losses to nonperforming loans																								1166.70	%	Allowance for credit losses to nonperforming loans																						854.33	%

Table of Contents


	Three months ended March 31, 2022
	Commercial										Consumer
(dollars in thousands)	Owner occupied RE			Non-owner occupied RE			Construction		Business		Real Estate			Home Equity			Construction		Other			Total
Balance, beginning of period	$	4,700			10,518			625		4,887		7,083			1,697			578		320			30,408
Adjustment for CECL		(313	)		333			154		1,057		(294	)		438			130		(5	)		1,500
Provision for credit losses		511			(878	)		150		159		813			165			136		(31	)		1,025
Loan charge-offs		-			-			-		-		-			(169	)		-		-			(169	)
Loan recoveries		-			-			-		114		-			66			-		-			180
Net loan recoveries (charge-offs)		-			-			-		114		-			(103	)		-		-			11
Balance, end of period	$	4,898			9,973			929		6,217		7,602			2,197			844		284			32,944
Net charge-offs (recoveries) to average loans (annualized)																							0.00	%
Allowance for credit losses to gross loans																							1.24	%
Allowance for credit losses to nonperforming loans																							726.88	%

Prior to the adoption of ASC 326 on January 1, 2022, the Company calculated the allowance for loan losses under the incurred loss methodology. The following two tables are disclosures related to the allowance for loan losses in prior periods under this methodology.

Three months ended June 30, 2021
Commercial Consumer
(dollars in thousands) Owner occupied RE Non-owner occupied RE Construction Business Real
Estate Home
equity Construction Other Total
Balance, beginning of period $ 7,154 15,195 827 6,848 9,666 2,688 685 436 43,499
Provision for loan losses (149 ) (2,096 ) 124 (226 ) 362 (129 ) 68 146 (1,900 )
Loan charge-offs - - - - - - - (8 ) (8 )
Loan recoveries 94 124 - 100 - 3 - - 321
Net loan recoveries (charge-offs) 94 124 - 100 - 3 - (8 ) 313
Balance, end of period $ 7,099 13,223 951 6,722 10,028 2,562 753 574 41,912
Net charge-offs (recoveries) to average loans (annualized) (0.06 %)
Allowance for loan losses to gross loans 1.86 %
Allowance for loan losses to nonperforming loans 619.47 %

Six months ended June 30, 2021

Commercial Consumer
(dollars in thousands) Owner occupied RE Non-owner occupied RE Construction Business Real
Estate Home 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 (1,140 ) 1,050 (203 ) (1,011 ) (425 ) (552 ) 6 75 (2,200 )
Loan charge-offs - - - (268 ) - (139 ) - (8 ) (415 )
Loan recoveries 94 124 - 156 - 4 - - 378
Net loan recoveries (charge-offs) 94 124 - (112 ) - (135 ) - (8 ) (37 )
Balance, end of period $ 7,099 13,223 951 6,722 10,028 2,562 753 574 41,912
Net charge-offs to average loans (annualized) 0.00 %

The ~~following table disaggregates~~$1.9 million provision for credit losses for the three months ended March 31, 2023 was driven by $144.6 million in loan growth for the quarter. In addition to loan growth, the provision for credit losses was impacted by slightly lower expected loss rates due to continued low charge-offs during the first quarter of 2023, while minor adjustments to an internal qualitative factor increased the qualitative component of the allowance ~~for loan losses~~ and ~~recorded investment in loans by impairment methodology under the incurred loss methodology.~~related provision expense.

December 31, 2021
Allowance for loan losses Recorded investment in loans
(dollars in thousands) Commercial Consumer Total Commercial Consumer Total
Individually evaluated $ 623 213 836 3,435 4,728 8,163
Collectively evaluated 20,107 9,465 29,572 1,549,837 931,877 2,481,714
Total $ 20,730 9,678 30,408 1,553,272 936,605 2,489,877

June 30, 2021
Allowance for loan losses Recorded investment in loans
(dollars in thousands) Commercial Consumer Total Commercial Consumer Total
Individually evaluated $ 1,454 134 1,588 5,308 6,079 11,387
Collectively evaluated 26,536 13,788 40,324 1,415,635 827,113 2,242,748
Total $ 27,995 13,917 41,912 1,420,943 833,192 2,254,135

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Collateral dependent loans are loans for which the repayment is expected to be provided substantially through the operation or sale of the collateral and the borrower is experiencing financial difficulty. The Company reviews individually evaluated loans for designation as collateral dependent loans, as well as other loans that management of the Company designates as having higher risk. These loans do not share common risk characteristics and are not included within the collectively evaluated loans for determining the allowance for credit losses.

The following ~~table presents~~tables present an analysis of collateral-dependent loans of the ~~Company as of June 30, 2022.~~Company.

					June 30, 2022
	Real		Business										March 31, 2023
(dollars in thousands)	estate		assets		Other		Total		Real estate		Business assets		Other		Total
Commercial
Owner occupied RE	$	-		-		-		-	$	-		-		-		-
Non-owner occupied RE		121		-		-		121		651		-		-		651
Construction		-		-		-		-		-		-		-		-
Business		-		-		-		-		28		-		1,045		1,073
Total commercial		121		-		-		121		679		-		1,045		1,724
Consumer
Real estate		-		-		-		-		197		-		-		197
Home equity		200		-		-		200		192		-		-		192
Construction		-		-		-		-		-		-		-		-
Other		-		-		-		-		-		-		-		-
Total consumer		200		-		-		200		389		-		-		389
Total	$	321		-		-		321	$	1,068		-		1,045		2,113

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					December 31, 2022
	Real		Business
(dollars in thousands)	estate		assets		Other		Total
Commercial
Owner occupied RE	$	-		-		-		-
Non-owner occupied RE		114		-		-		114
Construction		-		-		-		-
Business		30		-		-		30
Total commercial		144		-		-		144
Consumer
Real estate		207		-		-		207
Home equity		194		-		-		194
Construction		-		-		-		-
Other		-		-		-		-
Total consumer		401		-		-		401
Total	$	545		-		-		545

Under CECL, for collateral dependent loans, the Company has adopted the practical expedient to measure the allowance for credit losses based on the fair value of collateral. The allowance for credit losses is calculated on an individual loan basis based on the shortfall between the fair value of the loan’s collateral, which is adjusted for liquidation costs/discounts, and amortized cost. If the fair value of the collateral exceeds the amortized cost, no allowance is required.

Allowance for Credit Losses - Unfunded Loan Commitments

The allowance for credit losses for unfunded loan commitments was ~~$2.3~~$2.8 million at ~~June 30, 2022~~March 31, 2023 and is separately classified on the balance sheet within other liabilities. ~~Prior to the adoption of CECL, the Company’s reserve for unfunded commitments was not material.~~ The following table presents the balance and activity in the allowance for credit losses for unfunded loan commitments for the ~~six~~three months ended ~~June 30,~~March 31, 2023 and for the twelve months ended December 31, 2022.


	Six months ended		Three months ended			Twelve months ended
(dollars in thousands)	June 30, 2022		March 31, 2023			December 31, 2022
Balance, beginning of period		-	$	2,780			-
Adjustment for adoption of CECL	$	2,000		-			2,000
Provision for loan losses		330
Provision (reversal of) for credit losses				(30	)		780
Balance, end of period	$	2,330	$	2,750			2,780
Unfunded Loan Commitments			$	882,489			878,324
Reserve for Unfunded Commitments to Unfunded Loan Commitments				0.31	%		0.32	%

~~NOTE 5 – Troubled Debt Restructurings~~

At June 30, 2022, the Company had 13 loans totaling $5.8 million compared to 14 loans totaling $6.3 million at December 31, 2021, 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.

The were no renewals or modifications to any loans considered TDRs during the three and six months ended June 30, 2022. For the three and six months ended June 30, 2021, renewals and modifications were not material.

~~As of June 30, 2022 and 2021, 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.~~

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NOTE 65 – 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.

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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 ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021.~~2022.


	March 31, 2023
					Fair Value
(dollars in thousands)	Notional		Balance Sheet Location		Asset/(Liability)
Mortgage loan interest rate lock commitments	$	13,384		Other assets	$	187
MBS forward sales commitments		10,000		Other liabilities		(86	)
Total derivative financial instruments	$	23,384			$	101


				June 30, 2022			December 31, 2022
				Fair Value							Fair Value
(dollars in thousands)	Notional		Balance Sheet Location	Asset/(Liability)			Notional		Balance Sheet Location		Asset/(Liability)
Mortgage loan interest rate lock commitments	$	23,136	Other assets	$	250		$	6,793		Other assets	$	49
MBS forward sales commitments		15,000	Other liabilities		(31	)		5,750		Other assets		27
Total derivative financial instruments	$	38,136		$	219		$	12,543			$	76

				December 31, 2021
				Fair Value
(dollars in thousands)	Notional		Balance Sheet Location	Asset/(Liability)
Mortgage loan interest rate lock commitments	$	32,478	Other assets	$	425
MBS forward sales commitments		21,000	Other liabilities		(41	)
Total derivative financial instruments	$	53,478		$	384

NOTE 76 – 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.

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	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.

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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 ~~2021~~2022 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 Credit 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 ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021.~~2022.


	March 31, 2023
(dollars in thousands)	Level 1		Level 2		Level 3		Total
Assets
Securities available for sale
Corporate bonds	$	-		1,916		-		1,916
US treasuries		-		892		-		892
US government agencies		-		10,984		-		10,984
State and political subdivisions		-		19,649		-		19,649
Asset-backed securities		-		5,819		-		5,819
Mortgage-backed securities		-		54,776		-		54,776
Mortgage loans held for sale		-		6,979		-		6,979
Mortgage loan interest rate lock commitments		-		187		-		187
Total assets measured at fair value on a recurring basis	$	-		101,202		-		101,202

Liabilities
MBS forward sales commitments	$	-		86		-		86
Total liabilities measured at fair value on a recurring basis	$	-		86		-		86

	December 31, 2022
(dollars in thousands)	Level 1		Level 2		Level 3		Total
Assets
Securities available for sale:
Corporate bonds	$	-		1,883		-		1,883
US treasuries		-		871		-		871
US government agencies		-		10,617		-		10,617
State and political subdivisions		-		18,906		-		18,906
Asset-backed securities		-		6,229		-		6,229
Mortgage-backed securities		-		54,841		-		54,841
Mortgage loans held for sale		-		3,917		-		3,917
Mortgage loan interest rate lock commitments		-		49		-		49
MBS forward sales commitments		-		27		-		27
Total assets measured at fair value on a recurring basis	$	-		97,340		-		97,340

The Company had no liabilities recorded for fair value on a recurring basis as of December 31, 2022.

June 30, 2022
(dollars in thousands) Level 1 Level 2 Level 3 Total
Assets
Securities available for sale
Corporate bonds $ - 1,981 - 1,981
US treasuries - 905 - 905
US government agencies - 11,253 - 11,253
State and political subdivisions - 19,979 - 19,979
Asset-backed securities - 7,753 - 7,753
Mortgage-backed securities - 57,120 - 57,120
Mortgage loans held for sale - 18,329 - 18,329
Mortgage loan interest rate lock commitments - 250 - 250
Total assets measured at fair value on a recurring basis $ - 117,570 - 117,570

Liabilities
MBS forward sales commitments $ - 31 - 31
Total liabilities measured at fair value on a recurring basis $ - 31 - 31

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December 31, 2021
(dollars in thousands) Level 1 Level 2 Level 3 Total
Assets
Securities available for sale:
Corporate bonds $ - 2,188 - 2,188
US treasuries - 992 - 992
US government agencies - 14,169 - 14,169
SBA securities - 438 - 438
State and political subdivisions - 25,176 - 25,176
Asset-backed securities - 10,164 - 10,164
Mortgage-backed securities - 67,154 - 67,154
Mortgage loans held for sale - 13,556 - 13,556
Mortgage loan interest rate lock commitments - 425 - 425
Total assets measured at fair value on a recurring basis $ - 134,262 - 134,262

Liabilities
MBS forward sales commitments $ - 41 - 41
Total liabilities measured at fair value on a recurring basis $ - 41 - 41

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 ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021.~~2022.


	As of March 31, 2023
(dollars in thousands)	Level 1		Level 2		Level 3		Total
Assets
Individually evaluated	$	-		1,972		3,695		5,667
Total assets measured at fair value on a nonrecurring basis	$	-		1,972		3,695		5,667


	As of June 30, 2022								As of December 31, 2022
(dollars in thousands)	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Assets
Individually assessed loans	$	-		321		3,688		4,009
Individually evaluated									$	-		429		4,071		4,500
Total assets measured at fair value on a nonrecurring basis	$	-		321		3,688		4,009	$	-		429		4,071		4,500

As of December 31, 2021
(dollars in thousands) Level 1 Level 2 Level 3 Total
Assets
Impaired loans $ - 5,262 2,065 7,327
Total assets measured at fair value on a nonrecurring basis $ - 5,262 2,065 7,327

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

For Level 3 assets and liabilities measured at fair value on a recurring or nonrecurring basis as of March 31, 2023 and December 31, 2022, the significant unobservable inputs used in the fair value measurements were as follows:

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

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.

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The estimated fair values of the Company’s financial instruments at ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021~~2022 are as follows:


	March 31, 2023
(dollars in thousands)	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
Financial Assets:
Other investments, at cost	$	10,097		10,097		-		-		10,097
Loans¹		3,368,332		3,176,788		-		-		3,176,788
Financial Liabilities:
Deposits		3,426,774		3,065,819		-		3,065,819		-
Subordinated debentures		36,241		40,369		-		40,369		-


	June 30, 2022										December 31, 2022
(dollars in thousands)	Carrying Amount		Fair Value		Level 1		Level 2		Level 3		Carrying Amount		Fair Value		Level 1		Level 2		Level 3
Financial Assets:
Other investments, at cost	$	5,065		5,065		-		-		5,065	$	10,833		10,833		-		-		10,833
Loans¹		2,804,524		2,688,356		-		-		2,688,356		3,227,455		3,057,891		-		-		3,057,891
Financial Liabilities:
Deposits		2,822,594		2,419,809		-		2,419,809		-		3,133,864		2,717,900		-		2,717,900		-
Subordinated debentures		36,160		36,651		-		36,651		-		36,214		39,885		-		39,885		-

December 31, 2021
(dollars in thousands) Carrying
Amount Fair
Value Level 1 Level 2 Level 3
Financial Assets:
Other investments, at cost $ 4,021 4,021 - - 4,021
Loans¹ 2,451,306 2,422,621 - - 2,422,621
Financial Liabilities:
Deposits 2,563,826 2,327,055 - 2,327,055 -
Subordinated debentures 36,106 33,936 - 33,936 -

¹Carrying amount is net of the allowance for credit losses and individually evaluated loans.

~~Carrying amount is net of the allowance for credit losses or loan losses, as applicable, and previously presented individually assessed or impaired loans.~~

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NOTE 87 – Leases

~~Effective January 1, 2019, the~~The Company ~~adopted ASU 2016-02, “Leases (Topic 842)”. As~~had operating right-of-use assets, included in property and equipment, of ~~June 30,~~$23.2 million and $23.6 million as of March 31, 2023 and December 31, 2022, ~~we leased six~~respectively. The Company had lease liabilities, included in other liabilities, of ~~our offices under~~$25.5 million and $25.8 million as of March 31, 2023 and December 31, 2022, respectively. We maintain operating leases on land and buildings for various ~~operating lease agreements.~~office spaces. The lease agreements have maturity dates ranging from ~~August 2028~~April 2025 to February 2032, some of which include options for multiple five-year extensions. The weighted average remaining life of the lease term for these leases was ~~7.39~~6.74 years as of ~~June 30, 2022.~~March 31, 2023. The ROU asset and lease liability are recognized at lease commencement by calculating the present value of lease payments over the lease term.

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 asat implementation of ~~January 1, 2019 for leases that existed at adoption~~the accounting standard and as of the lease commencement date for leases subsequently entered into. The weighted average discount rate for leases was ~~2.28%~~2.32% as of ~~June 30, 2022.~~March 31, 2023.

The total operating lease costs were ~~$768,000~~$595,000 and ~~$640,000~~$778,000 for the three months ended ~~June 30,~~March 31, 2023 and 2022, ~~and 2021, respectively, and $1.5 million and $1.4 million for the six months ended June 30, 2022 and 2021,~~ respectively. The right-of-use (ROU) asset, included in property and equipment, and lease liability, included in other liabilities, was $23.7 million and $25.3 million as of June 30, 2022, respectively, compared to $26.6 million and $28.0 million as of December 31, 2021, respectively. The ROU asset and lease liability are recognized at lease commencement by calculating the present value of lease payments over the lease term.

~~Table of Contents~~

Maturities of lease liabilities as of ~~June 30, 2022~~March 31, 2023 were as follows:


	Operating		Operating
(dollars in thousands)	Leases		Leases
2022	$	377
2023		1,938	$	1,513
2024		1,990		2,067
2025		2,045		2,124
2026		2,096		2,176
2027				2,232
Thereafter		24,093		22,200
Total undiscounted lease payments		32,539		32,312
Discount effect of cash flows		7,263		6,813
Total lease liability	$	25,276	$	25,499

NOTE 98 – Earnings Per Common Share

The following schedule reconciles the numerators and denominators of the basic and diluted earnings per share computations for the ~~three- and six- month~~three-month periods ended ~~June 30, 2022~~March 31, 2023 and ~~2021.~~2022. Dilutive common shares arise from the potentially dilutive effect of the Company’s stock options that were outstanding at ~~June 30, 2022.~~March 31, 2023. The assumed conversion of stock options can create a difference between basic and dilutive net income per common share. At ~~June 30,~~March 31, 2023 and 2022, ~~and 2021,~~ there were ~~162,366~~205,689 and ~~113,239~~9,000 options, respectively, that were not considered in computing diluted earnings per common share because they were anti-dilutive.


	Three months ended June 30,				Six months ended June 30,				Three months ended March 31,
(dollars in thousands, except share data)	2022		2021		2022		2021		2023		2022
Numerator:
Net income available to common shareholders	$	7,240		10,323		15,210		20,689	$	2,703		7,970
Denominator:
Weighted-average common shares outstanding – basic		7,957,631		7,847,516		7,944,814		7,811,217		8,025,876		7,931,855
Common stock equivalents		97,279		140,099		130,682		137,077		66,394		164,455
Weighted-average common shares outstanding – diluted		8,054,910		7,987,615		8,075,496		7,948,294		8,092,270		8,096,310
Earnings per common share:
Basic	$	0.91		1.32		1.91		2.65	$	0.34		1.00
Diluted	$	0.90		1.29		1.88		2.60		0.33		0.98

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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 ~~and six~~ month ~~periods~~period ended ~~June 30, 2022~~March 31, 2023 as compared to the three ~~and six~~ month ~~periods~~period ended ~~June 30, 2021~~March 31, 2022 and assesses our financial condition as of ~~June 30, 2022~~March 31, 2023 as compared to December 31, ~~2021.~~2022. 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, ~~2021~~2022 included in our Annual Report on Form 10-K for that period. Results for the three ~~and six~~ month ~~periods~~period ended ~~June 30, 2022~~March 31, 2023 are not necessarily indicative of the results for the year ending December 31, ~~2022~~2023 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 consolidated subsidiary. References to the “Bank” refer to Southern First Bank.

Cautionary Warning Regarding forward-looking statements

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,” “seek to,” “strive,” “focus,” “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 continuing impact of COVID-19 and its variants on our business, including the impact of the actions taken by governmental authorities to 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;~~funding, which could impair our liquidity;

●

Changes in deposit ~~flows;~~flows, which may be negatively affected by a number of factors, including rates paid by competitors, general interest rate levels, regulatory capital requirements, returns available to clients on alternative investments and general economic or industry conditions;

	●	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;

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	●	Risks with respect to future mergers or acquisitions, including our ability to successfully expand and integrate the businesses and operations that we acquire and realize the anticipated benefits of the mergers or acquisitions;

	●	Changes in the interest rate environment which could reduce anticipated or actual margins;

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	●	Changes in political conditions or the legislative or regulatory environment, including new governmental initiatives affecting the financial services industry;

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

	●	Changes occurring in business conditions and inflation;

	●	Increased cybersecurity risk, including potential business disruptions or financial losses;

	●	Changes in technology;

	●	The adequacy of the level of our allowance for credit 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 credit losses or write-down assets;

	●	Changes in U.S. monetary policy, the level and ~~tax policies;~~volatility of interest rates, the capital markets and other market conditions that may affect, among other things, our liquidity and the value of our assets and liabilities;

	●	Any increase in FDIC assessments which will increase our cost of doing business;

	●	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 standards, rules and interpretations and the related impact on our financial ~~statements, including the effects from our adoption of the current expected credit losses (“CECL”) model on January 1, 2022;~~statements;

	●	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” of our Annual Report on Form 10-K for the year ended December 31, ~~2021,~~2022, in Part II, Item 1A, “Risk Factors” of our Quarterly Reports on Form 10-Q, and 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. 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, except as required by law.

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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 ~~June 30, 2022,~~March 31, 2023, we had total assets of ~~$3.29~~$3.94 billion, a ~~12.4%~~6.7% increase from total assets of ~~$2.93~~$3.69 billion at December 31, ~~2021.~~2022. The largest component of our total assets is loans which were ~~$2.85~~$3.42 billion and ~~$2.49~~$3.27 billion at ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, respectively. Our liabilities and shareholders’ equity at ~~June 30, 2022~~March 31, 2023 totaled ~~$3.01~~$3.64 billion and ~~$282.6~~$299.4 million, respectively, compared to liabilities of ~~$2.65~~$3.40 billion and shareholders’ equity of ~~$277.9~~$294.5 million at December 31, ~~2021.~~2022. The principal component of our liabilities is deposits which were ~~$2.87~~$3.43 billion and ~~$2.56~~$3.13 billion at ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, 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 ~~$7.2~~$2.7 million and ~~$10.3~~$8.0 million for the three months ended ~~June 30,~~March 31, 2023 and 2022, ~~and 2021,~~ respectively. Diluted earnings per share (“EPS”) was ~~$0.90~~$0.33 for the ~~second~~first quarter of ~~2022~~2023 as compared to ~~$1.29~~$0.98 for the same period in ~~2021.~~2022. The decrease in net income was primarily driven by a decrease in net interest income resulting from higher costs on our deposit accounts related to the Federal Reserve’s cumulative 475 basis point interest rate increase during the past 14 months, combined with an increase in ~~the provision for credit losses~~non-interest expenses.

results of operations

Net Interest Income and ~~a decrease in mortgage banking income, as well as an increase in noninterest expense.~~Margin

Our net income to common shareholders was $15.2 million and $20.7 million for the six months ended June 30, 2022 and 2021. Diluted EPS was $1.88 for the six months ended June 30, 2022 as compared to $2.60 for the same period in 2021. The decrease in net income was primarily driven by an increase in the provision for credit losses and a decrease in mortgage banking income, as well as an increase in noninterest expenses.

In addition, during the second quarter of 2022, we relocated our headquarters in Greenville, South Carolina to a newly constructed, 107,000 square foot building. As a result of the relocation, we disposed of assets with a book value of $489,000, including leasehold improvements and furniture and fixtures, and recorded a net loss on disposal of $394,000.

~~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 ~~$24.9~~$20.4 million for the ~~second~~first quarter of ~~2022, a 16.1% increase~~2023, an 11.8% decrease over net interest income of ~~$21.4~~$23.2 million for the ~~second~~first quarter of ~~2021,~~2022, driven primarily by anthe increase in interest ~~income~~expense on ~~loans as a result of loan growth during the past 12 months.~~our deposit accounts. In addition, our net interest margin, on a tax-equivalent basis (TE), was ~~3.35%~~2.36% for the ~~second~~first quarter of ~~2022~~2023 compared to ~~3.50%~~3.37% for the same period in ~~2021.~~2022.

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 ~~and six~~ month periods ended ~~June 30, 2022~~March 31, 2023 and ~~2021.~~2022. 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” tables demonstrate 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.

Table of Contents

The following tables entitled “Average Balances, Income and Expenses, Yield and Rates” set 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 June 30,
2022 2021
(dollars in thousands) Average
Balance Income/
Expense Yield/
Rate⁽¹⁾ Average
Balance Income/
Expense Yield/
Rate⁽¹⁾
Interest-earning assets
Federal funds sold and interest-bearing deposits with banks $ 80,909 $ 180 0.89 % $ 119,211 $ 53 0.18 %
Investment securities, taxable 98,527 404 1.64 % 85,306 212 1.00 %
Investment securities, nontaxable⁽²⁾ 10,382 56 2.16 % 11,599 74 2.56 %
Loans⁽³⁾ 2,795,274 26,610 3.82 % 2,240,236 22,409 4.01 %
Total interest-earning assets 2,985,092 27,250 3.66 % 2,456,352 22,748 3.71 %
Noninterest-earning assets 154,659 117,836
Total assets $ 3,139,751 $ 2,574,188
Interest-bearing liabilities
NOW accounts $ 389,563 144 0.15 % $ 298,446 46 0.06 %
Savings & money market 1,267,174 1,200 0.38 % 1,131,391 580 0.21 %
Time deposits 278,101 500 0.72 % 175,612 294 0.67 %
Total interest-bearing deposits 1,934,838 1,844 0.38 % 1,605,449 920 0.23 %
FHLB advances and other borrowings 53,179 105 0.79 % 44 2 18.23 %
Subordinated debentures 36,143 405 4.49 % 36,035 379 4.22 %
Total interest-bearing liabilities 2,024,160 2,354 0.47 % 1,641,528 1,301 0.32 %
Noninterest-bearing liabilities 833,943 688,576
Shareholders’ equity 281,648 244,084
Total liabilities and shareholders’ equity $ 3,139,751 $ 2,574,188
Net interest spread 3.19 % 3.39 %
Net interest income (tax equivalent) / margin $ 24,896 3.35 % $ 21,447 3.50 %
Less: tax-equivalent adjustment⁽²⁾ (12 ) 17
Net interest income $ 24,884 $ 21,430


	For the Three Months Ended March 31,
	2023							2022
(dollars in thousands)	Average Balance		Income/ Expense		Yield/ Rate⁽¹⁾			Average Balance		Income/ Expense		Yield/ Rate⁽¹⁾
Interest-earning assets
Federal funds sold and interest-bearing deposits with banks	$	85,966	$	969		4.57	%	$	89,096	$	59		0.27	%
Investment securities, taxable		87,521		530		2.46	%		113,101		425		1.52	%
Investment securities, nontaxable⁽²⁾		10,266		106		4.21	%		11,899		64		2.17	%
Loans⁽³⁾		3,334,530		36,748		4.47	%		2,573,978		23,931		3.77	%
Total interest-earning assets		3,518,283		38,353		4.42	%		2,788,074		24,479		3.56	%
Noninterest-earning assets		161,310							152,565
Total assets	$	3,679,593						$	2,940,639
Interest-bearing liabilities
NOW accounts	$	303,176		440		0.59	%	$	406,054		115		0.11	%
Savings & money market		1,661,878		11,992		2.93	%		1,242,225		618		0.20	%
Time deposits		543,425		4,747		3.54	%		158,720		175		0.45	%
Total interest-bearing deposits		2,508,479		17,179		2.78	%		1,806,999		908		0.20	%
FHLB advances and other borrowings		18,243		200		4.45	%		16,626		12		0.29	%
Subordinated debentures		36,224		527		5.90	%		36,116		380		4.27	%
Total interest-bearing liabilities		2,562,946		17,906		2.83	%		1,859,741		1,300		0.28	%
Noninterest-bearing liabilities		818,123							802,298
Shareholders’ equity		298,524							278,600
Total liabilities and shareholders’ equity	$	3,679,593						$	2,940,639
Net interest spread						1.59	%						3.28	%
Net interest income (tax equivalent) / margin			$	20,447		2.36	%			$	23,179		3.37	%
Less: tax-equivalent adjustment⁽²⁾				23							15
Net interest income			$	20,424						$	23,164

(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.

Table of Contents

Our net interest margin (TE) decreased 15101 basis points to ~~3.35%~~2.36% during the ~~second~~first quarter of 2023, compared to the first quarter of 2022, ~~compared to the second quarter of 2021,~~ primarily due to ~~a reduction in yield on our interest-earning assets combined with~~ higher costs on our interest-bearing liabilities. Our average interest-bearing liabilities grew by $703.2 million during the first quarter of 2023, while the rate on these liabilities increased 255 basis points to 2.83%. In contrast, our average interest-earning assets grew by ~~$528.7~~$730.2 million during the ~~second~~first quarter of ~~2022,~~2023 while the average yield on these assets ~~decreased~~increased by ~~five~~86 basis points to ~~3.66%~~4.42% during the same period. ~~In addition, our average interest-bearing liabilities grew by $382.6 million during the second quarter of 2022, while the rate on these liabilities increased 15 basis points to 0.47%.~~

The increase in average interest-earning assets for the ~~second~~first quarter of ~~2022~~2023 related primarily to an increase of ~~$555.0~~$760.6 million in our average loan balances. The ~~decrease~~86 basis point increase in yield on our interest-earning assets was driven by a 1970 basis point ~~decrease~~increase in loan yield as our loan portfolio has repriced at rates ~~lower~~higher than ~~historic~~historical rates for the majority of the past 12 months. ~~Following the Federal Reserve’s recent interest rate hikes, our loan yield has begun to increase, resulting in a five basis point gain from 3.77% in the first quarter of 2022.~~

The increase in our average interest-bearing liabilities during the ~~second~~first quarter of ~~2022~~2023 resulted primarily from a ~~$329.4~~$701.5 million increase in our interest-bearing deposits, ~~and a $53.1 million increase in FHLB advances and other borrowings,~~ while the ~~15 basis~~255-basis point increase in rate on our interest-bearing liabilities resulted primarily from a 15258 basis point increase in deposit rates.

Our net interest spread was ~~3.19%~~1.59% for the ~~second~~first quarter of ~~2022~~2023 compared to ~~3.39%~~3.28% for the same period in ~~2021.~~2022. 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 ~~decrease in the yield on our interest-earning assets and the~~255 basis point increase in the rate on our interest-bearing liabilities ~~resulted~~was partially offset by an 86 basis point increase in yield on our interest-bearing assets, resulting in a 20169 basis point decrease in our net interest spread for the ~~2022~~2023 period. We anticipate continued pressure on our net interest spread and net interest margin in future periods as a significant portion of our loan portfolio is at fixed rates which do not move with the Federal Reserve’s interest rate increases, while our deposit accounts reprice much more quickly.

33Rate/Volume Analysis

~~Table of Contents~~

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

For the Six Months Ended June 30,
2022 2021
(dollars in thousands) Average
Balance Income/
Expense Yield/
Rate⁽¹⁾ Average
Balance Income/
Expense Yield/
Rate⁽¹⁾
Interest-earning assets
Federal funds sold and interest-bearing deposits with banks $ 84,980 $ 239 0.57 % $ 104,449 $ 99 0.19 %
Investment securities, taxable 105,771 829 1.58 % 85,222 458 1.08 %
Investment securities, nontaxable⁽²⁾ 11,139 121 2.19 % 11,300 147 2.62 %
Loans⁽³⁾ 2,685,237 50,541 3.80 % 2,224,987 44,875 4.07 %
Total interest-earning assets 2,887,127 51,730 3.61 % 2,425,958 45,579 3.79 %
Noninterest-earning assets 153,618 109,928
Total assets $ 3,040,745 $ 2,535,886
Interest-bearing liabilities
NOW accounts $ 397,763 259 0.13 % $ 289,640 93 0.06 %
Savings & money market 1,254,768 1,818 0.29 % 1,108,059 824 0.15 %
Time deposits 218,741 675 0.62 % 194,781 1,087 1.13 %
Total interest-bearing deposits 1,871,272 2,752 0.30 % 1,592,480 2,004 0.25 %
FHLB advances and other borrowings 35,004 118 0.68 % 1,419 78 11.08 %
Subordinated debentures 36,130 784 4.38 % 36,022 759 4.25 %
Total interest-bearing liabilities 1,942,406 3,654 0.38 % 1,629,921 2,841 0.35 %
Noninterest-bearing liabilities 818,207 668,491
Shareholders’ equity 280,132 237,474
Total liabilities and shareholders’ equity $ 3,040,745 $ 2,535,886
Net interest spread 3.23 % 3.44 %
Net interest income (tax equivalent) / margin $ 48,076 3.36 % $ 42,738 3.55 %
Less: tax-equivalent adjustment⁽²⁾ (28 ) 35
Net interest income $ 48,048 $ 42,703

During the first six months of 2022, our net interest margin (TE) decreased by 19 basis points to 3.36%, compared to 3.55% for the first six months of 2021, driven by the decrease in yield on our interest-earning assets, combined with the higher yield on our interest-bearing liabilities. Our average interest-earning assets grew by $461.2 million from the prior year, with the average yield decreasing by 18 basis points to 3.61%. In addition, our average interest-bearing liabilities grew by $312.5 million, while the rate on these liabilities increased three basis points to 0.38%.

The increase in average interest-earning assets for the first half of 2022 related primarily to a $460.3 million increase in our average loan balances. The decrease in yield on our interest-earning assets was driven by a 27 basis point decrease in our loan yield primarily related to the interest rate reductions by the Federal Reserve which occurred during 2020. Recently, the yield on our loan portfolio has begun to increase as the Federal Reserve has raised interest rates by 150 basis points during the first six months of 2022.

~~Table of Contents~~

The increase in average interest-bearing liabilities for the first half of 2022 was driven by an increase in interest-bearing deposits of $278.8 million and a $33.6 million increase in FHLB advances and other borrowings, while the increase in cost was driven by a five basis point increase on our interest-bearing deposits.

Our net interest spread was 3.23% for the first half of 2022 compared to 3.44% for the same period in 2021. The 21 basis point decrease in our net interest spread was driven by the 18 basis point decrease in yield on our interest-earning assets.

~~Rate/Volume Analysis~~

Net interest income can be analyzed in terms of the impact of changing interest rates and changing volume. The following tables set 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
June 30, 2022 vs. 2021 June 30, 2021 vs. 2020
Increase (Decrease) Due to Increase (Decrease) Due to
(dollars in thousands) Volume Rate Rate/
Volume Total Volume Rate Rate/
Volume Total
Interest income
Loans $ 5,417 (979 ) (237 ) 4,201 $ 980 (2,040 ) (85 ) (1,145 )
Investment securities 33 130 16 179 110 (175 ) (50 ) (115 )
Federal funds sold and interest-bearing deposits with banks (17 ) 212 (68 ) 127 10 (9 ) (1 ) -
Total interest income 5,433 (637 ) (289 ) 4,507 1,100 (2,224 ) (136 ) (1,260 )
Interest expense
Deposits 195 602 127 924 318 (2,781 ) (244 ) (2,707 )
FHLB advances and other borrowings 2,415 (2 ) (2,309 ) 104 (175 ) 3,501 (3,500 ) (174 )
Subordinated debentures 1 24 - 25 1 (36 ) - (35 )
Total interest expense 2,611 624 (2,182 ) 1,053 144 684 (3,744 ) (2,916 )
Net interest income $ 2,822 (1,261 ) 1,893 3,454 $ 956 (2,908 ) 3,608 1,656


	Three Months Ended
	March 31, 2023 vs. 2022												March 31, 2022 vs. 2021
	Increase (Decrease) Due to												Increase (Decrease) Due to
(dollars in thousands)	Volume			Rate			Rate/ Volume			Total			Volume		Rate			Rate/ Volume			Total
Interest income
Loans	$	7,189			4,328			1,300			12,817		$	3,571		(1,816	)		(289)			1,466
Investment securities		(103	)		309			(67	)		139			90		64			19			173
Federal funds sold and interest-bearing deposits with banks		(2	)		945			(33	)		910			-		12			-			12
Total interest income		7,084			5,582			1,200			13,866			3,661		(1,740	)		(270	)		1,651
Interest expense
Deposits		253			12,521			3,497			16,271			721		(596	)		(372	)		(247	)
FHLB advances and other borrowings		1			170			17			188			14		(1	)		(4	)		9
Subordinated debentures		1			146			-			147			1		(3	)		-			(2	)
Total interest expense		255			12,837			3,514			16,606			736		(600	)		(376	)		(240	)
Net interest income	$	6,829			(7,255	)		(2,314	)		(2,740	)	$	2,925		(1,140	)		106			1,891

Net interest income, the largest component of our income, was ~~$24.9~~$20.4 million for the ~~second~~first quarter of 2023 and $23.2 million for the first quarter of 2022, ~~and $21.4 million for the second quarter of 2021,~~ a ~~$3.5~~$2.7 million, or ~~16.2%~~11.8%, ~~increase.~~decrease year over year. The ~~increase~~decrease during ~~2022~~2023 was driven by a ~~$4.5~~$16.6 million increase in interest ~~income~~expense primarily due to higher ~~volume of loans.~~rates on our interest-bearing deposits. In addition, interest ~~expense~~income increased by ~~$1.1~~$13.9 million primarily due to an increase in volume of ~~FHLB advances~~loans and ~~other borrowings at decreased rates.~~the rates on loans.

Table of Contents

Six Months Ended
June 30, 2022 vs. 2021 June 30, 2021 vs. 2020
Increase (Decrease) Due to Increase (Decrease) Due to
(dollars in thousands) Volume Rate Rate/
Volume Total Volume Rate Rate/
Volume Total
Interest income
Loans $ 9,012 (2,786 ) (560 ) 5,666 $ 3,557 (5,230 ) (373 ) (2,046 )
Investment securities 120 191 41 352 254 (351 ) (113 ) (210 )
Federal funds sold and interest-bearing deposits with banks (18 ) 195 (37 ) 140 67 (86 ) (37 ) (56 )
Total interest income 9,114 (2,400 ) (556 ) 6,158 3,878 (5,667 ) (523 ) (2,312 )
Interest expense
Deposits 400 232 45 677 1,016 (7,005 ) (808 ) (6,797 )
FHLB advances and other borrowings 70 2 40 112 (327 ) 3,096 (3,025 ) (256 )
Subordinated debentures 2 22 - 24 3 (94 ) (1 ) (92 )
Total interest expense 472 256 85 813 692 (4,003 ) (3,834 ) (7,145 )
Net interest income $ 8,642 (2,656 ) (641 ) 5,345 $ 3,186 (1,664 ) 3,311 4,833

Net interest income for the first half of 2022 was $48.0 million compared to $42.7 million for 2021, a $5.3 million, or 12.5%, increase. The increase in net interest income during 2022 was driven by a $6.2 million increase in interest income, related primarily to loan growth.

Provision for Credit Losses

The provision for credit losses, which includes a provision for losses on unfunded commitments, is a charge to earnings to maintain the allowance for credit losses and reserve for unfunded commitments at ~~a level~~levels consistent with management’s assessment of expected losses in the loan portfolio at the balance sheet date. On January 1, 2022, we adopted the Current Expected Credit Loss (CECL) methodology for estimating credit losses, which resulted in an increase of $1.5 million in our allowance for credit losses and an increase of $2.0 million in our reserve for unfunded commitments. The tax-effected impact of these two items amounted to $2.8 million and was recorded as an adjustment to our retained earnings as of January 1, 2022. We review the adequacy of the allowance for credit losses on a quarterly basis. Please see the discussion included in ~~Note 1 – Summary of Significant Accounting Policies and~~ Note 4 – Loans and Allowance for Credit Losses for a description of the factors we consider in determining the amount of the provision we expense each period to maintain this allowance.

We recorded a $1.8 million provision for credit losses in the ~~second~~first quarter of ~~2022,~~2023, compared to a ~~$1.9~~$1.1 million ~~reversal of~~ provision ~~expense~~for credit losses in the ~~second~~first quarter of ~~2021. We recorded a provision expense of $2.9 million and a provision reversal of $2.2 million for the six months ended June 30, 2022 and June 30, 2021, respectively.~~2022. The $1.8 million provision in ~~2022,~~2023, which included a ~~$250,000~~$1.9 million provision for credit losses and a $30,000 reversal for unfunded commitments, was driven by ~~$184.5~~$144.6 million in loan growth during the ~~second quarter, combined with a $52.2 million increase in unfunded commitments. The $2.9 million provision expense for the~~ first ~~half of 2022 included a $330,000 provision for unfunded commitments.~~quarter.

36Noninterest Income

~~Table of Contents~~

~~Noninterest Income~~

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

Three months ended
June 30, Six months ended
June 30,
(dollars in thousands) 2022 2021 2022 2021
Mortgage banking income $ 1,184 1,983 2,678 6,616
Service fees on deposit accounts 209 173 400 358
ATM and debit card income 563 521 1,092 991
Income from bank owned life insurance 315 331 630 598
Net lender and referral fees on PPP loans - 268 - 268
Loss on disposal of fixed assets (394 ) - (394 ) -
Other income 388 346 788 695
Total noninterest income $ 2,265 3,622 5,194 9,526


	Three months ended March 31,
(dollars in thousands)	2023		2022
Mortgage banking income	$	622		1,494
Service fees on deposit accounts		325		303
ATM and debit card income		555		514
Income from bank owned life insurance		332		315
Other income		210		301
Total noninterest income	$	2,044		2,927

Noninterest income decreased ~~$1.4 million,~~$883,000, or ~~37.5%~~30.2%, for the ~~second~~first quarter of ~~2022~~2023 as compared to the same period in ~~2021.~~2022. The decrease in total noninterest income resulted primarily from the following:

●

Mortgage banking income has typically been the largest component of our noninterest income; however, lower mortgage origination volume during the past 12 months, combined with our strategy to keep a larger percentage of these loans in our portfolio, has impacted our profitability. Consequently, mortgage banking income decreased by $872,000, or 58.4%, from the first quarter of 2022.

●

~~Mortgage banking~~Other income decreased ~~by $799,000,~~$91,000, or ~~40.3%, driven by low inventory in the housing market, lower refinance volumes, and~~30.2% primarily due to a decrease in ~~margin on~~ loan sales. We do not expect mortgage origination volume to continue at levels seen in the prior year which will reduce the amount of mortgage banking income recorded in future periods in comparison to prior periods.

●

~~Net lender and referral fees on PPP loans were $268,000 during the second quarter of 2021, while there were no fees received during the current period.~~

●

~~Loss on disposal of assets of $394,000 was recorded during the second quarter of 2022 as we completed construction and relocated our headquarters in Greenville, South Carolina.~~fee income.

Noninterest income decreased $4.3 million, or 45.5%, during the first half of 2022 as compared to 2021. The decrease in total noninterest income resulted primarily from decreases in mortgage banking income and the disposal of fixed assets from our prior headquarters building.expenses

~~Noninterest expenses~~

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


	Three months ended June 30,				Six months ended June 30,				Three months ended March 31,
(dollars in thousands)	2022		2021		2022		2021		2023		2022
Compensation and benefits	$	9,915		8,724		19,371		17,834	$	10,356		9,455
Occupancy		2,219		1,552		3,997		3,190		2,457		1,779
Real estate owned expenses		-		1		-		388
Outside service and data processing costs		1,528		1,391		3,062		2,704		1,629		1,534
Insurance		367		262		628		563		689		261
Professional fees		693		615		1,292		1,210		660		599
Marketing		329		208		596		398		366		266
Other		737		742		1,528		1,370		947		791
Total noninterest expense	$	15,788		13,495		30,474		27,657	$	17,104		14,685

Table of Contents

Noninterest expense was ~~$15.8~~$17.1 million for the ~~second~~first quarter of ~~2022,~~2023, a ~~$2.3~~$2.4 million, or ~~17.0%~~16.5%, increase from noninterest expense of ~~$13.5~~$14.7 million for the ~~second~~first quarter of ~~2021.~~2022. The increase in noninterest expense was driven primarily by the following:

●

Compensation and benefits expense increased ~~$1.2 million,~~$901,000, or ~~13.7%~~9.5%, relating primarily to annual salary increases, ~~and compensation and benefits expense related to the~~ hiring of new team ~~members.~~members, and higher benefits expense.

●

Occupancy costs increased ~~$667,000,~~$678,000, or ~~43.0%~~38.1%, driven by ~~increased rent expense and depreciation on our new office in Charlotte, North Carolina, as well as additional~~ costs associated with ~~the relocation~~higher depreciation, property taxes and maintenance costs of our new headquarters.

●

Insurance costs increased ~~$105,000,~~$428,000, or ~~40.1%~~164.0%, ~~during the second quarter of 2022 related to~~driven by higher FDIC insurance premiums.

●

Outside service and data processing costs increased $137,000, or 9.8%, during the second quarter of 2022 related to increased item processing and electronic banking costs due to increased transactions.

●

~~Marketing expenses increased $121,000, or 58.2%, due to an increase in community outreach and sponsorships.~~

Noninterest expense was $30.5 million for the first half of 2022, a $2.8 million, or 10.2%, increase from noninterest expense of $27.7 million for the first half of 2021. The increase in noninterest expense was driven primarily by increases in compensation and benefits, occupancy, outside services and data processing costs and marketing expenses as discussed above. Partially offsetting these increases was a decrease in real estate owned expenses during the 2022 period.

Our efficiency ratio was ~~58.2% for the second quarter of 2022, compared to 53.9% for the second quarter of 2021 and 57.2%~~76.1% for the first ~~half~~quarter of ~~2022~~2023, compared to ~~53.0%~~56.3% for the first ~~half~~quarter of ~~2021.~~2022. 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 higher ratio during the ~~second~~first quarter of ~~2022,~~2023, compared to the ~~second~~first quarter of ~~2021,~~2022, relates primarily to the decrease in net interest income and mortgage banking ~~income.~~income, combined with higher noninterest expenses.

We incurred income tax expense of ~~$2.3 million~~$836,000 and ~~$3.1~~$2.3 million for the three months ended ~~June 30,~~March 31, 2023 and 2022, ~~and 2021, respectively, and $4.7 million and $6.1 million for the six months ended June 30, 2022 and 2021,~~ respectively. Our effective tax rate was ~~23.5%~~23.6% and ~~22.7%~~22.6% for the ~~six~~three months ended ~~June 30,~~March 31, 2023 and 2022, ~~and 2021,~~ respectively. The higher tax rate during the first ~~six~~three months of ~~2022~~2023 relates to the lesser impact of equity compensation transactions during the period.

Balance Sheet Review

Investment Securities

At ~~June 30, 2022,~~March 31, 2023, the $104.1 million in our investment securities portfolio represented approximately ~~3.2%~~2.6% of our total assets. Our available for sale investment portfolio included corporate bonds, US treasuries, US government agency securities, state and political subdivisions, asset-backed securities and mortgage-backed securities with a fair value of ~~$99.0~~$94.0 million and an amortized cost of ~~$111.8~~$108.9 million, resulting in an unrealized loss of ~~$12.8~~$14.9 million. At December 31, ~~2021,~~2022, the ~~$124.3~~$104.2 million in our investment securities portfolio represented approximately ~~4.2%~~2.8% of our total assets, including investment securities with a fair value of ~~$120.3~~$93.3 million and an amortized cost of ~~$121.2~~$110.3 million for an unrealized loss of ~~$937,000.~~$17.0 million.

Loans

~~Table of Contents~~

~~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 ~~six~~three months ended ~~June 30,~~March 31, 2023 and 2022 ~~and 2021~~ were ~~$2.67~~$3.33 billion and ~~$2.21~~$2.56 billion, respectively. Before the allowance for credit losses, total loans outstanding at ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021~~2022 were ~~$2.85~~$3.42 billion and ~~$2.49~~$3.27 billion, respectively.

The principal component of our loan portfolio is loans secured by real estate mortgages. As of ~~June 30, 2022,~~March 31, 2023, our loan portfolio included ~~$2.43~~$2.88 billion, or ~~85.3%~~84.4%, of real estate loans, compared to ~~$2.13~~$2.78 billion, or ~~85.5%~~84.8%, at December 31, ~~2021.~~2022. 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, 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. Home equity lines of credit totaled ~~$161.5~~$181.0 million as of ~~June 30, 2022,~~March 31, 2023, of which approximately ~~50%~~49% were in a first lien position, while the remaining balance was second liens. At December 31, ~~2021,~~2022, our home equity lines of credit totaled ~~$154.8~~$179.3 million, of which approximately ~~49%~~48% were in first lien positions, while the remaining balance was in second liens. The average home equity loan had a balance of approximately ~~$80,000~~$83,000 and a loan to value of ~~71%~~74% as of ~~June 30, 2022,~~March 31, 2023, compared to an average loan balance of ~~$81,000~~$84,000 and a loan to value of approximately ~~62%~~73% as of December 31, ~~2021.~~2022. Further, ~~0.87%~~0.7% and ~~1.0%~~0.6% of our total home equity lines of credit were over 30 days past due as of ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, respectively.

Table of Contents

Following is a summary of our loan composition at ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021.~~2022. During the first ~~six~~three months of ~~2022,~~2023, our loan portfolio increased by ~~$355.3~~$144.6 million, or ~~14.3%~~4.4%, with a ~~13.8%~~3.9% increase in commercial loans while consumer loans increased by ~~15.1%~~5.3% during the period. The majority of the increase was in loans secured by real estate. Our consumer real estate portfolio grew by ~~$117.7~~$62.0 million and includes high quality 1-4 family consumer real estate loans. Our average consumer real estate loan currently has a principal balance of $470,000, a term of 22 years, and an average rate of 3.84% as of March 31, 2023, compared to a principal balance of $468,000, a term of 22 years, and an average rate of ~~3.48% as of June 30, 2022, compared to a principal balance of $454,000, a term of 21 years, and an average rate of 3.47%~~3.71% as of December 31, ~~2021.~~2022.


	June 30, 2022						December 31, 2021						March 31, 2023						December 31, 2022
(dollars in thousands)	Amount			% of Total			Amount			% of Total			Amount			% of Total			Amount			% of Total
Commercial
Owner occupied RE	$	551,544			19.39	%	$	488,965			19.6	%	$	615,094			18.0	%	$	612,901			18.7	%
Non-owner occupied RE		741,263			26.05	%		666,833			26.8	%		928,059			27.2	%		862,579			26.3	%
Construction		84,612			2.97	%		64,425			2.6	%		94,641			2.8	%		109,726			3.4	%
Business		389,790			13.70	%		333,049			13.4	%		495,161			14.5	%		468,112			14.3	%
Total commercial loans		1,767,209			62.11	%		1,553,272			62.4	%		2,132,955			62.5	%		2,053,318			62.7	%
Consumer
Real estate		812,130			28.54	%		694,401			27.9	%		993,258			29.1	%		931,278			28.4	%
Home equity		161,512			5.68	%		154,839			6.2	%		180,974			5.3	%		179,300			5.5	%
Construction		76,878			2.70	%		59,846			2.4	%		71,137			2.1	%		80,415			2.5	%
Other		27,476			0.97	%		27,519			1.1	%		39,621			1.0	%		29,052			0.9	%
Total consumer loans		1,077,996			37.89	%		936,605			37.6	%		1,284,990			37.5	%		1,220,045			37.3	%
Total gross loans, net of deferred fees		2,845,205			100.0	%		2,489,877			100.0	%		3,417,945			100.0	%		3,273,363			100.0	%
Less—allowance for credit losses		(34,192	)					(30,408	)					(40,435	)					(38,639	)
Total loans, net	$	2,811,013					$	2,459,469					$	3,377,510					$	3,234,724

~~Table of Contents~~

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 ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, we had no loans 90 days past due and still accruing.

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


(dollars in thousands)	June 30, 2022		December 31, 2021		March 31, 2023		December 31, 2022
Commercial	$	259		270	$	2,580		429
Consumer		383		1,642		2,153		2,198
Nonaccruing troubled debt restructurings		2,289		2,952
Total nonaccrual loans		2,931		4,864		4,733		2,627
Other real estate owned		-		-		-		-
Total nonperforming assets	$	2,931		4,864	$	4,733		2,627

At ~~June 30, 2022,~~March 31, 2023, nonperforming assets were ~~$2.9~~$4.7 million, or ~~0.09%~~0.12% of total assets and ~~0.10%~~0.14% of gross loans. Comparatively, nonperforming assets were ~~$4.9~~$2.6 million, or ~~0.17%~~0.07% of total assets and ~~0.20%~~0.08% of gross loans at December 31, ~~2021.~~2022. Nonaccrual loans ~~decreased $1.9~~increased $2.1 million during the first ~~six~~three months of ~~2022~~2023 due primarily to ~~$724,000~~three commercial relationships totaling $2.4 million that were added to nonaccrual status, all of ~~loans paid~~which are secured by real estate or ~~charged off and $1.1 million of loans returning to accruing status.~~liquid assets.

Table of Contents

The amount of foregone interest income on nonaccrual loans in the first ~~six~~three months of ~~2022~~2023 and ~~2021~~2022 was not material. At ~~June 30,~~March 31, 2023 and December 31, 2022, ~~and 2021,~~ the allowance for credit losses represented ~~1,166.70%~~854.3% and ~~619.47%~~1470.7% of the total amount of nonperforming loans, respectively. ~~A significant portion, or approximately 92%,~~The majority of the nonperforming loans at ~~June 30, 2022,~~March 31, 2023 were secured by real estate, while one nonperforming loan was secured by ~~real estate.~~a brokerage account. We have evaluated the underlying collateral on these loans and believe that the collateral on these loans is sufficient to minimize future losses.

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 ~~June 30, 2022, 85.3%~~March 31, 2023, 84.4% of our loans were collateralized by real estate and ~~92.2%~~83.1% of our ~~impaired~~individually evaluated 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~~Individually evaluated loans are ~~individually~~ reviewed on a quarterly basis to determine the level of impairment. As of ~~June 30, 2022,~~March 31, 2023, we did not have any ~~impaired~~individually evaluated 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.

~~Table of Contents~~

At ~~June 30, 2022, impaired~~March 31, 2023, individually evaluated loans totaled ~~$5.0~~$6.6 million, for which ~~$4.7~~$5.5 million of these loans had a reserve of approximately ~~$1.0 million~~$959,000 allocated in the ~~allowance.~~allowance for credit losses. During the first ~~six~~three months of ~~2022,~~2023, the average recorded investment in ~~impaired~~individually evaluated loans was approximately ~~$7.0~~$7.5 million. Comparatively, ~~impaired~~individually evaluated loans totaled ~~$8.2~~$7.1 million at December 31, ~~2021~~2022 for which ~~$2.9~~$6.8 million of these loans had a reserve of approximately ~~$836,000~~$1.3 million allocated in the ~~allowance.~~allowance for credit losses. During ~~2021,~~2022, the average recorded investment in ~~impaired~~individually evaluated loans was approximately ~~$12.5~~$7.6 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 June 30, 2022, we determined that we had loans totaling $5.8 million that we considered TDRs compared to $6.3 million as of December 31, 2021.

Allowance for Credit Losses

On January 1, 2022, we adopted CECL for estimating credit losses, which resulted in an increase of $1.5 million in our allowance for credit losses and an increase of $2.0 million in our reserve for unfunded commitments, which is recorded within other liabilities. The tax-effected impact of those two items amounted to $2.8 million and was recorded as an adjustment to our retained earnings as of January 1, 2022. The allowance for loan loss accounting in effect at December 31, 2021 and all prior periods was based on our estimate of probable incurred loan losses as of the reporting date.

The allowance for credit losses was ~~$34.2~~$40.4 million, representing ~~1.20%~~1.18% of outstanding loans and providing coverage of ~~1,166.7%~~854.33%, of nonperforming loans at ~~June 30, 2022~~March 31, 2023 compared to ~~$30.4~~$38.6 million, or ~~1.22%~~1.18% of outstanding loans and ~~625.22%~~1470.84% of nonperforming loans at December 31, ~~2021.~~2022. At ~~June 30, 2021, the allowance for loan losses was $41.9 million, or 1.86% of outstanding loans and 619.47% of nonperforming loans. The adoption of CECL on January 1,~~March 31, 2022, ~~increased~~ the allowance for credit losses ~~by $1.5 million. In addition, we recorded a provision for credit losses~~was $32.9 million, or 1.24% of ~~$1.5 million during the second quarter~~outstanding loans and 726.88% of ~~2022 driven by the growth in our loan portfolio.~~nonperforming loans.

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

Six months ended
June 30, Year ended
December 31,
(dollars in thousands) 2022 2021 2021
Balance, beginning of period $ 30,408 44,149 44,149
Adjustment for adoption of CECL 1,500 - -
Provision for (reversal of) credit losses 2,550 (2,200 ) (12,400 )
Loan charge-offs (485 ) (414 ) (2,166 )
Loan recoveries 219 377 825
Net loan (charge-offs) (266 ) (37 ) (1,341 )
Balance, end of period $ 34,192 41,912 30,408

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~~which allows us to take advantage of the attractive terms that wholesale funding can offer while mitigating the related inherent risk.

~~Table of Contents~~

Our retail deposits represented ~~$2.68~~$3.08 billion, or ~~93.5%~~89.9% of total deposits, while our wholesale deposits represented ~~$187.5~~$347.7 million, or ~~6.5%~~10.1%, of total deposits at ~~June 30, 2022.~~March 31, 2023. At December 31, ~~2021,~~2022, retail deposits represented ~~$2.56~~$2.90 billion, or ~~100%~~92.5%, of our total deposits. Wholesale deposits were $236.2 million, representing 7.5% of our total deposits, at December 31, 2022. Our loan-to-deposit ratio was ~~99%~~100% at ~~June 30, 2022~~March 31, 2023 and ~~97%~~104% at December 31, ~~2021.~~2022.

Table of Contents

The following is a detail of our deposit accounts:


	June 30,		December 31,		March 31,		December 31,
(dollars in thousands)	2022		2021		2023		2022
Non-interest bearing	$	799,169		768,650	$	740,534		804,115
Interest bearing:
NOW accounts		364,189		401,788		303,743		318,030
Money market accounts		1,320,329		1,201,099		1,748,562		1,506,418
Savings		41,944		39,696		39,706		40,673
Time, less than $250,000		62,340		68,179		106,679		89,876
Time and out-of-market deposits, $250,000 and over		282,187		84,414		487,550		374,752
Total deposits	$	2,870,158		2,563,826	$	3,426,774		3,133,864

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 ~~$2.59~~$2.95 billion and ~~$2.48~~$2.76 billion at ~~June 30, 2022,~~March 31, 2023, and December 31, ~~2021,~~2022, respectively. In addition, at March 31, 2023 and December 31, 2022, we estimate that we have approximately $1.1 billion, or 32.1% and 36.6% of total deposits, respectively, in uninsured deposits including related interest accrued and unpaid. Since it is not reasonably practicable to provide a precise measure of uninsured deposits, the amounts above are estimates and are based on the same methodologies and assumptions used by the FDIC for the Bank’s regulatory reporting requirements.

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


	Six months ended June 30,										Three months ended March 31,
	2022					2021					2023					2022
(dollars in thousands)	Amount		Rate			Amount		Rate			Amount		Rate			Amount		Rate
Noninterest-bearing demand deposits	$	769,844		0.00	%	$	621,934		0.00	%	$	766,916		0.00	%	$	753,546		0.00	%
Interest-bearing demand deposits		397,763		0.13	%		289,640		0.06	%		303,176		0.59	%		406,054		0.12	%
Money market accounts		1,214,062		0.30	%		1,077,309		0.22	%		1,621,885		3.00	%		1,201,816		0.21	%
Savings accounts		40,707		0.05	%		30,750		0.05	%		39,993		0.06	%		40,409		0.05	%
Time deposits less than $100,000		23,406		0.30	%		32,393		0.52	%
Time deposits greater than $100,000		195,334		0.39	%		161,997		0.91	%
Time deposits less than $250,000												59,469		4.55	%		56,648		0.32	%
Time deposits greater than $250,000												483,956		0.94	%		102,073		0.50	%
Total deposits	$	2,641,116		0.19	%	$	2,214,023		0.19	%	$	3,275,395		1.76	%	$	2,560,546		0.14	%

During the first ~~six~~three months of ~~2022,~~2023, our average transaction account balances increased by ~~$427.1~~$330.1 million, or ~~19.3%~~13.7%, from the prior year, while our average time deposit balances increased by ~~$24,000,~~$385,000, or ~~12.5%~~242.4%. We have experienced record growth in new account openings throughout our footprint during the first quarter of 2023. In addition, we have added $245.9 million in wholesale time deposits.

All of our time deposits are certificates of deposits. The maturity distribution of our time deposits $250,000 or more at ~~June 30, 2022~~March 31, 2023 was as follows:


(dollars in thousands)	June 30, 2022		March 31, 2023
Three months or less	$	125,510	$	180,209
Over three through six months		69,975		155,187
Over six through twelve months		74,329		137,563
Over twelve months		12,373		14,591
Total	$	282,187	$	487,550

Time deposits that meet or exceed the FDIC insurance limit of $250,000 at ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021~~2022 were ~~$282.2~~$487.6 million and ~~$84.4~~$374.8 million, respectively.

Table of Contents

Liquidity and Capital Resources

Liquidity ~~represents the ability of a company to convert assets into cash or cash equivalents without significant loss, and the~~is our ability to ~~raise additional funds~~fund operations, to meet depositor withdrawals, to provide for customers’ credit needs, and to meet maturing obligations and existing commitments. Our liquidity principally depends on our cash flows from operating activities, investment in and maturity of assets, changes in balances of deposits and borrowings, and our ability to borrow funds. The bank failures in March 2023 exemplify the potential serious results of the unexpected inability of insured depository institutions to obtain needed liquidity to satisfy deposit withdrawal requests, including how quickly such requests can accelerate once uninsured depositors lose confidence in an institutions ability to satisfy its obligations to depositors. We seek to ensure our funding needs are met by ~~increasing liabilities.~~maintaining a level of liquidity through asset and liability management. Liquidity management involves monitoring our sources and uses of funds in order to meet our day-to-day cash flow requirements while maximizing profits. Liquidity management is made more complicated because different balance sheet components are subject to varying degrees of management control. For example, the timing of maturities of our investment portfolio is fairly predictable and subject to a high degree of control at the time investment decisions are made. However, net deposit inflows and outflows are far less predictable and are not subject to the same degree of control.

At ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021~~2022 our cash and cash equivalents totaled ~~$182.1~~$272.2 million and ~~$167.2~~$170.9 million, respectively, or ~~5.5%~~6.9% and ~~5.7%~~4.6% of total assets, respectively. Our investment securities at ~~June 30 2022~~March 31, 2023 and December 31, ~~2021~~2022 amounted to $104.1 million and ~~$124.3~~$104.2 million, respectively, or ~~3.2%~~2.6% and ~~4.2%~~2.8% of total assets, 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 five federal funds purchased lines of credit with correspondent banks totaling $118.5 million for which there were no borrowings against the lines of credit at ~~June 30, 2022.~~March 31, 2023.

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 ~~June 30, 2022~~March 31, 2023 was ~~$556.6~~$609.9 million, based primarily on the Bank’s 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 ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021~~2022 we had ~~$315.2~~$373.3 million and ~~$254.5~~$341.5 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 ~~June 30, 2022.~~March 31, 2023. The line of credit was renewed on December 21, 2021 at an interest rate of One Month CME Term SOFR plus 3.5% and a maturity date of December 20, 2023.

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 ~~$282.6~~$299.4 million at ~~June 30, 2022~~March 31, 2023 and ~~$277.9~~$294.5 million at December 31, ~~2021.~~2022. The ~~$4.7~~$4.9 million increase from December 31, ~~2021~~2022 is primarily related to net income of ~~$15.2~~$2.7 million during the first ~~six~~three months of ~~2022~~2023 and ~~stock option exercises and equity compensation expenses of $1.7 million, partially offset by~~ a ~~$9.4 million~~ decrease in ~~other comprehensive~~the unrealized loss ~~and the tax-effected impact~~on securities available for sale of ~~$2.8 million of expense related to the adoption of CECL recorded as an adjustment to retained earnings.~~$1.6 million.

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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 ~~six~~three months ended ~~June 30, 2022~~March 31, 2023 and the year ended December 31, ~~2021.~~2022. Since our inception, we have not paid cash dividends.


	June 30, 2022			December 31, 2021			March 31, 2023			December 31, 2022
Return on average assets		1.01	%		1.75	%		0.30	%		0.90	%
Return on average equity		10.95	%		18.64	%		3.67	%		10.20	%
Return on average common equity		10.95	%		18.64	%		3.67	%		10.20	%
Average equity to average assets ratio		9.21	%		9.39	%		8.11	%		8.85	%
Tangible common equity to assets ratio		8.60	%		9.50	%		7.60	%		7.98	%

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~~credit 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, 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). Although we had over $3 billion in assets at June 30, 2022, under Federal Reserve guidance, the Company will maintain its status as a “small bank holding company” until March 2023.billion. 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 ~~June 30, 2022,~~March 31, 2023, our capital ratios exceed these ratios and we remain “well capitalized.”

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


	June 30, 2022																				March 31, 2023
	Actual					For capital adequacy purposes minimum plus the capital conservation buffer					To be well capitalized under prompt corrective action provisions minimum					Actual					For capital adequacy purposes minimum plus the capital conservation buffer					To be well capitalized under prompt corrective action provisions minimum
(dollars in thousands)	Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio
Total Capital (to risk weighted assets)	$	347,708		13.45	%	$	271,451		10.50	%	$	258,525		10.00	%	$	376,311		12.38	%	$	243,212		8.00	%	$	304,016		10.00	%
Tier 1 Capital (to risk weighted assets)		315,369		12.20	%		219,746		8.50	%		206,820		8.00	%		338,279		11.13	%		182,409		6.00	%		243,212		8.00	%
Common Equity Tier 1 Capital (to risk weighted assets)		315,369		12.20	%		180,967		7.00	%		168,041		6.50	%		338,279		11.13	%		136,807		4.50	%		197,610		6.50	%
Tier 1 Capital (to average assets)		315,369		10.01	%		125,964		4.00	%		157,455		5.00	%		338,279		9.16	%		147,775		4.00	%		184,719		5.00	%

	December 31, 2021																				December 31, 2022
	Actual					For capital adequacy purposes minimum plus the capital conservation buffer					To be well capitalized under prompt corrective action provisions minimum					Actual					For capital adequacy purposes minimum plus the capital conservation buffer					To be well capitalized under prompt corrective action provisions minimum
(dollars in thousands)	Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio
Total Capital (to risk weighted assets)	$	331,052		14.36	%	$	242,048		10.50	%	$	230,522		10.00	%	$	366,988		12.45	%	$	235,892		8.00	%	$	294,865		10.00	%
Tier 1 Capital (to risk weighted assets)		302,217		13.11	%		195,944		8.50	%		184,418		8.00	%		330,108		11.20	%		176,919		6.00	%		235,892		8.00	%
Common Equity Tier 1 Capital (to risk weighted assets)		302,217		13.11	%		161,365		7.00	%		149,839		6.50	%		330,108		11.20	%		132,689		4.50	%		191,662		6.50	%
Tier 1 Capital (to average assets)		302,217		10.55	%		114,537		4.00	%		143,172		5.00	%		330,108		9.43	%		140,040		4.00	%		175,050		5.00	%

~~Table of Contents~~

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


	June 30, 2022																			March 31, 2023
	Actual					For capital adequacy purposes minimum plus the capital conservation buffer ⁽¹⁾					To be well capitalized under prompt corrective action provisions minimum				Actual					For capital adequacy purposes minimum plus the capital conservation buffer ⁽¹⁾					To be well capitalized under prompt corrective action provisions minimum
(dollars in thousands)	Amount		Ratio			Amount		Ratio			Amount		Ratio		Amount		Ratio			Amount		Ratio			Amount		Ratio
Total Capital (to risk weighted assets)	$	361,119		13.97	%	$	271,451		10.50	%		N/A		N/A	$	385,157		12.67	%	$	243,211		8.00	%		N/A		N/A
Tier 1 Capital (to risk weighted assets)		305,780		11.83	%		219,746		8.50	%		N/A		N/A		324,125		10.66	%		182,409		6.00	%		N/A		N/A
Common Equity Tier 1 Capital (to risk weighted assets)		292,780		11.33	%		180,967		7.00	%		N/A		N/A		311,125		10.23	%		136,806		4.50	%		N/A		N/A
Tier 1 Capital (to average assets)		305,780		9.71	%		125,980		4.00	%		N/A		N/A		324,125		8.80	%		147,285		4.00	%		N/A		N/A

	December 31, 2021																			December 31, 2022
	Actual					For capital adequacy purposes minimum plus the capital conservation buffer ⁽¹⁾					To be well capitalized under prompt corrective action provisions minimum				Actual					For capital adequacy purposes minimum plus the capital conservation buffer ⁽¹⁾					To be well capitalized under prompt corrective action provisions minimum
(dollars in thousands)	Amount		Ratio			Amount		Ratio			Amount		Ratio		Amount		Ratio			Amount		Ratio			Amount		Ratio
Total Capital (to risk weighted assets)	$	343,476		14.90	%	$	242,048		10.50	%		N/A		N/A	$	380,802		12.91	%	$	235,892		8.00	%		N/A		N/A
Tier 1 Capital (to risk weighted assets)		291,641		12.65	%		195,944		8.50	%		N/A		N/A		320,922		10.88	%		176,919		6.00	%		N/A		N/A
Common Equity Tier 1 Capital (to risk weighted assets)		278,641		12.09	%		161,365		7.00	%		N/A		N/A		307,922		10.44	%		132,689		4.50	%		N/A		N/A
Tier 1 Capital (to average assets)		291,641		10.18	%		114,555		4.00	%		N/A		N/A		320,922		9.17	%		140,057		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 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 to shareholders 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.~~dividends to shareholders.

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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 ~~June 30, 2022,~~March 31, 2023 unfunded commitments to extend credit were ~~$738.6~~$882.5 million, of which ~~$273.8~~$286.3 million were at fixed rates and ~~$465.0~~$596.2 million were at variable rates. At December 31, ~~2021,~~2022, unfunded commitments to extend credit were ~~$618.7~~$878.3 million, of which approximately ~~$205.4~~$318.9 million were at fixed rates and ~~$413.3~~$559.4 million were at variable rates. A significant portion of the unfunded commitments related to commercial business loans and 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. ~~Following~~As of March 31, 2023, the ~~adoption of CECL on January 1, 2022, we recorded a~~ reserve for unfunded commitments ~~of $2.0~~was $2.8 million or 0.31% of total unfunded commitments. As of ~~June 30,~~December 31, 2022, the reserve for unfunded commitments was ~~$2.3~~$2.8 million or 0.32% of total unfunded commitments.

At ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, there were commitments under letters of credit for ~~$12.3~~$15.6 million and ~~$10.2~~$14.3 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.

Critical Accounting Estimates

We have adopted various accounting policies that govern the application of accounting principles generally accepted in the United States and with general practices within the banking industry in the preparation of our financial statements.

Certain accounting policies inherently involve a greater reliance on the use of estimates, assumptions and judgments and, as such, have a greater possibility of producing results that could be materially different than originally reported, which could have a material impact on the carrying values of our assets and liabilities and our results of operations. Of the significant accounting policies used in the preparation of our consolidated financial statements, we have identified certain items as critical accounting policies based on the associated estimates, assumptions, judgments and complexity. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Estimates” in our Annual Report on Form 10-K for the year ended December 31, ~~2021,~~2022, for a description our significant accounting policies that use critical accounting estimates.

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We have historically identified the determination of the allowance for loan losses as a significant accounting policy that uses critical accounting estimates. On January 1, 2022, we adopted the new CECL accounting methodology that requires entities to estimate and recognize an allowance for lifetime expected credit losses for loans and other financial assets measured at amortized cost. In prior periods, our allowance was based on the incurred loss methodology where we recognized an allowance for loan losses based on probable incurred losses. We believe that the accounting estimates relating to the allowance for credit losses is also a “critical accounting policy” as:

●

~~changes in the provision for credit losses can materially affect our financial results;~~

●

estimates relating to the allowance for credit losses require us to project future borrower performance, including cash flows, delinquencies and charge-offs, along with, when applicable, collateral values, based on a reasonable and supportable forecast period utilizing forward-looking economic scenarios in order to estimate lifetime probability of default and loss given default;

●

the allowance for credit losses is influenced by factors outside of our control such as changes in projected economic conditions, real estate markets or particular industry conditions which may materially impact asset quality and the adequacy of the allowance for credit losses; and

●

considerable judgment is required to determine whether the models used to generate the allowance for credit losses produce an estimate that is sufficient to encompass the current view of lifetime expected credit losses.

Because our estimates of the allowance for credit losses involve judgment and are influenced by factors outside our control, there is uncertainty inherent in these estimates. Our estimate of lifetime expected credit losses is inherently uncertain because it is highly sensitive to changes in economic conditions and other factors outside of our control. Changes in such estimates could significantly impact our allowance and provision for credit losses. See Note 1 – Summary of Significant Accounting Policies in the accompanying notes to the consolidated financial statements included elsewhere in this report for a discussion of our Allowance for Credit Losses.

Accounting, Reporting, and Regulatory Matters

See Note 1 – Summary of Significant Accounting Policies in the accompanying 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.

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.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

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 seek 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.

~~Table of Contents~~

As of ~~June 30, 2022,~~March 31, 2023, 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 income from base
Up 300 basis points		(~~0.25~~16.34	)%
Up 200 basis points		~~0.17~~(10.86	)%
Up 100 basis points		~~0.49~~(5.43	)%
Base		-—
Down 100 basis points		~~(4.85~~10.80	)%
Down 200 basis points		~~(7.09~~21.01	)%
Down 300 basis points		~~(8.01~~30.48	)%

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 ~~six~~three months ended ~~June 30, 2022,~~March 31, 2023, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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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, ~~2021,~~2022, 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 Form 10-Q, risks and matters described elsewhere in this Form 10-Q, and in our other filings with the SEC.

~~There have been no material changes~~We are providing these additional risk factors to supplement the risk factors ~~disclosed~~contained in Item 1A. of ~~Part I in~~ our Annual Report on Form 10-K for the year ended December 31, ~~2021.~~2022.

Our deposit insurance premiums could be higher in the future, which could have an adverse effect on our future earnings.

The FDIC insures deposits at FDIC-insured depository institutions, such as Southern First Bank, up to the maximum federal deposit insurance level per account. Our regular assessments are based on its average consolidated total assets minus average tangible equity as well as by risk classification, which includes regulatory capital levels and the level of supervisory concern. In addition to ordinary assessments described above, the FDIC has the ability to impose special assessments in certain instances.

We are generally unable to control the amount of premiums that we are required to pay for FDIC insurance. If there are additional bank or financial institution failures, we may be required to pay even higher FDIC premiums. For example, in response to March 2023 bank closures and in an effort to strengthen public confidence in the banking system and protect depositors, regulators announced that any losses to the Deposit Insurance Fund to support uninsured depositors will be recovered by a special assessment on banks, as required by law, which could increase the cost of our FDIC insurance assessments and affect our profitability. If our financial condition deteriorates or if the bank regulators otherwise have supervisory concerns about us, then our assessments could rise. Any future additional assessments, increases or required prepayments in FDIC insurance premiums could reduce our profitability, may limit our ability to pursue certain business opportunities, or otherwise negatively impact our operations.

The Federal Reserve has implemented significant economic strategies that have affected interest rates, inflation, asset values, and the shape of the yield curve.

In 2020, in response to economic disruption associated with the COVID-19 pandemic, the Federal Reserve quickly reduced short-term rates to extremely low levels and acted to influence the markets to reduce long-term rates as well. During 2021, the Federal Reserve significantly reduced such “easing” actions that held down long-term rates. During 2022, the Federal Reserve switched to a tightening policy. It raised short term rates significantly and rapidly throughout the year. Those actions triggered a significant decline in the values of most categories of U.S. stocks and bonds; significantly raised recessionary expectations for the U.S.; and inverted the yield curve in the U.S. for much of the last two quarters of 2022.

Effects on the yield curve often are most pronounced at the short end of the curve, which is of particular importance to us and other banks. Among other things, easing strategies are intended to lower interest rates, expand the money supply, and stimulate economic activity, while tightening strategies are intended to increase interest rates, discourage borrowing, tighten the money supply, and restrain economic activity. However, in 2022, short term rates rose faster than long term rates to the point that the yield curve inverted for much of the final two quarters of 2022. This sort of phenomenon—where short term rates rise more strongly and rapidly than long-term rates can follow—is relatively uncommon.

It is unclear when long term rates are likely to catch up. Many external factors may interfere with the effects of these plans or cause them to be changed, sometimes quickly. Such factors include significant economic trends or events as well as significant international monetary policies and events. For 2023, the Federal Reserve has not yet indicated when it will stop, or at least pause, raising short term rates, although the rate of increases has slowed.

These economic strategies have had, and will continue to have, a significant impact on our business and on many of our clients. As exemplified by the March 2023 bank failures in the U.S., such strategies also can affect the U.S. and world-wide financial systems in ways that may be difficult to predict.

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Adverse developments affecting the financial services industry, such as recent bank failures or concerns involving liquidity, may have a material adverse effect on the Company’s operations.

The recent high-profile bank failures involving Silicon Valley Bank and Signature Bank have caused general uncertainty and concern regarding the liquidity adequacy of the banking sector. Although we were not directly affected by these bank failures, the resulting speed and ease in which news, including social media commentary, led depositors to withdraw or attempt to withdraw their funds from these and other financial institutions caused the stock prices of many financial institutions to become volatile. Additional bank failures could have an adverse effect on our financial condition and results of operations, either directly or through an adverse impact on certain of our customers.

In response to these bank failures and the resulting market reaction, the Secretary of the Treasury approved actions enabling the FDIC to complete its resolutions of the failed banks in a manner that fully protects depositors by utilizing the Deposit Insurance Fund, including the use of Bridge Banks to assume all of the deposit obligations of the failed banks, while leaving unsecured lenders and equity holders of such institutions exposed to losses. In addition, the Federal Reserve announced it would make available additional funding to eligible depository institutions under a Bank Term Funding Program to help assure banks have the ability to meet the needs of all their depositors. In an effort to strengthen public confidence in the banking system and protect depositors, regulators announced that any losses to the Deposit Insurance Fund to support uninsured depositors will be recovered by a special assessment on banks, as required by law, which will increase our FDIC insurance assessment and will increase our costs of doing business. However, it is uncertain whether these steps by the government will be sufficient to calm the financial markets, reduce the risk of significant depositor withdrawals at other institutions and thereby reduce the risk of additional bank failures. As a result of this uncertainty, we face the potential for reputational risk, deposit outflows, increased costs and competition for liquidity, and increased credit risk which, individually or in the aggregate, could have a material adverse effect on our business, financial condition and results of operations.

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

~~(a)~~

~~Not applicable.~~

~~(b)~~

~~Not applicable.~~

~~(c)~~

~~Issuer Purchases of Registered Equity Securities~~

~~The following table reflects share repurchase activity during the second quarter of 2022:~~

(a)

Not applicable.

(b)

Not applicable.

(c)

~~(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~~

~~April 1, 2022 – April 30, 2022~~

~~May 1, 2022 – May 31, 2022~~

~~June 1, 2022 – June 30, 2022~~

399,026*

~~Total~~

399,026*

Not applicable.

*On June 21, 2022, the Company announced a share repurchase plan allowing us to repurchase up to 399,026 shares of our common stock (the “Repurchase Plan”). As of June 30, 2022, 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, 2022 would require additional approval of our Board of Directors and the Federal Reserve.

Item 3. DEFAULTS UPON SENIOR SECURITIES.

~~None.~~

None.

Item 4. MINE SAFETY DISCLOSURES.

~~Not applicable.~~

Not applicable.

Item 5. OTHER INFORMATION.

~~None.~~

None.

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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
10.1		Employment Agreement by and between Southern First Bank and William M. Aiken, III, dated December 1, 2021.

10.2		Employment Agreement by and between Southern First Bank and D. Andrew Borrmann, dated March 29, 2023 (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed April 3, 2023).*

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 ~~June 30, 2022,~~March 31, 2023, formatted in iXBRL (Inline eXtensible Business Reporting 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)
______		________________________________________________
*		Management contract or compensatory plan or arrangement.

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SIGNATURES

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


	SOUTHERN FIRST BANCSHARES, INC.
	Registrant

Date: ~~August~~May 2, ~~2022~~2023	/s/ R. Arthur Seaver, Jr.
	R. Arthur Seaver, Jr.
	Chief Executive Officer ~~(Principal~~ (Principal Executive Officer)

Date: ~~August~~May 2, ~~2022~~2023	/s/ ~~Michael~~ D. ~~Dowling~~Andrew Borrmann
	~~Michael~~ D. ~~Dowling~~Andrew Borrmann
	Chief Financial Officer ~~(Principal~~ (Principal Financial and Accounting Officer)

0001090009 ~~sfst:HomeEquitysMember sfst:RecognizedInterestIncomeMember 2021-01-01 2021-12-31~~us-gaap:ResidentialRealEstateMember us-gaap:CommercialLoanMember us-gaap:SpecialMentionMember 2022-12-31 iso4217:USD xbrli:shares

	For the three months ended June 30,
	Common stock				Preferred stock				Nonvested restricted			Additional paid-in		Accumulated other comprehensive			Retained
(dollars in thousands, except share data)	Shares		Amount		Shares		Amount		stock			capital		income (loss)			earnings		Total
March 31, 2021		7,853,096	$	79		-	$	-	$	(1,075	)	$	111,181	$	(90	)	$	129,426	$	239,521
Net income		-		-		-		-		-			-		-			10,323		10,323
Proceeds from exercise of stock options		42,835		-		-		-		-			943		-			-		943
Issuance of restricted stock		4,000		-		-		-		(212	)		212		-			-		-
Compensation expense related to restricted stock, net of tax		-		-		-		-		114			-		-			-		114
Compensation expense related to stock options, net of tax		-		-		-		-		-			268		-			-		268
Other comprehensive income		-		-		-		-		-			-		490			-		490

June 30, 2021		7,899,931	$	79		-	$	-	$	(1,173	)	$	112,604	$	400		$	139,749	$	251,659
March 31, 2022		7,980,519		80		-		-		(3,425	)		117,286		(6,393	)		170,976		278,524
Net income		-		-		-		-		-			-		-			7,240		7,240
Proceeds from exercise of stock options		3,625		-		-		-		-			128		-			-		128
Issuance of restricted stock		1,500		-		-		-		(71	)		71		-			-		-
Compensation expense related to restricted stock, net of tax		-		-		-		-		266			-		-			-		266
Compensation expense related to stock options, net of tax		-		-		-		-		-			229		-			-		229
Other comprehensive loss		-		-		-		-		-			-		(3,750	)		-		(3,750	)

June 30, 2022		7,985,644	$	80		-	$	-	$	(3,230	)	$	117,714	$	(10,143	)	$	178,216	$	282,637

	For the six months ended June 30,
	Common stock				Preferred stock				Nonvested restricted			Additional paid-in		Accumulated other comprehensive			Retained
(dollars in thousands, except share data)	Shares		Amount		Shares		Amount		stock			capital		income (loss)			earnings			Total
December 31, 2020		7,772,748	$	78		-	$	-	$	(698	)	$	108,831	$	1,023		$	119,060		$	228,294
Net income		-		-		-		-		-			-		-			20,689			20,689
Proceeds from exercise of stock options		112,433		1		-		-		-			2,520		-			-			2,521
Issuance of restricted stock		14,750		-		-		-		(689	)		689		-			-			-
Compensation expense related to restricted stock, net of tax		-		-		-		-		214			-		-			-			214
Compensation expense related to stock options, net of tax		-		-		-		-		-			564		-			-			564
Other comprehensive loss		-		-		-		-		-			-		(623	)		-			(623	)

June 30, 2021		7,899,931	$	79		-	$	-	$	(1,173	)	$	112,604	$	400		$	139,749		$	251,659
December 31, 2021		7,925,819		79		-		-		(1,435	)		114,226		(740	)		165,771			277,901
Adoption of ASU 2016-13		-		-		-		-		-			-		-			(2,765	)		(2,765	)
Net income		-		-		-		-		-			-		-			15,210			15,210
Proceeds from exercise of stock options		21,750		1		-		-		-			706		-			-			707
Issuance of restricted stock		38,075		-		-		-		(2,305	)		2,305		-			-			-
Compensation expense related to restricted stock, net of tax		-		-		-		-		510			-		-			-			510
Compensation expense related to stock options, net of tax		-		-		-		-		-			477		-			-			477
Other comprehensive loss		-		-		-		-		-			-		(9,403	)		-			(9,403	)
June 30, 2022		7,985,644	$	80		-	$	-	$	(3,230	)	$	117,714	$	(10,143	)	$	178,216		$	282,637


	For the six months ended June 30,
(dollars in thousands)	2022			2021
Operating activities
Net income	$	15,210			20,689
Adjustments to reconcile net income to cash provided by operating activities:
Provision for (reversal of) credit losses		2,880			(2,200	)
Depreciation and other amortization		1,341			1,092
Accretion and amortization of securities discounts and premium, net		399			518
Loss on sale of real estate owned		-			380
(Gain) Loss on sale of fixed assets		394			(10	)
Gain on sale of securities		(12	)		-
Net change in operating leases		172			165
Compensation expense related to stock options and restricted stock grants		987			778
Gain on sale of loans held for sale		(1,446	)		(8,153	)
Loans originated and held for sale		(145,513	)		(303,889	)
Proceeds from sale of loans held for sale		142,185			335,872
Increase in cash surrender value of bank owned life insurance		(630	)		(598	)
Decrease in deferred tax asset		(3,446	)		(15,341	)
Increase in other assets		452			2,589
Increase in other liabilities		1,400			1,949
Net cash provided by operating activities		14,373			33,841
Investing activities
Increase (decrease) in cash realized from:
Increase in loans, net		(355,594	)		(111,672	)
Purchase of property and equipment		(8,989	)		(11,105	)
Purchase of investment securities:
Available for sale		(10,094	)		(10,338	)
Other investments		(11,078	)		(1,000	)
Payments and maturities, calls and repayments of investment securities:
Available for sale		19,095			12,526
Other investments		10,034			1,865
Purchase of bank owned life insurance		-			(7,500	)
Proceeds from sale of fixed assets		95			50
Proceeds from sale of other real estate owned		-			788
Net cash used for investing activities		(356,531	)		(126,386	)
Financing activities
Increase (decrease) in cash realized from:
Increase in deposits, net		306,332			168,134
Increase (decrease) in Federal Home Loan Bank advances and other borrowings, net		50,000			(25,000	)
Proceeds from the exercise of stock options		707			2,521
Net cash provided by financing activities		357,039			145,655
Net increase in cash and cash equivalents		14,881			53,110
Cash and cash equivalents at beginning of the period		167,209			100,687
Cash and cash equivalents at end of the period	$	182,090			153,797
Supplemental information
Cash paid for
Interest	$	3,745			3,843
Income taxes		5,950			15,342
Schedule of non-cash transactions
Foreclosure of other real estate		-			366
Unrealized loss on securities, net of income taxes		(11,902	)		(623	)

					December 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		credit losses		credit losses		credit losses
Commercial
Owner occupied RE	$	1,261		1,261		1,261		-		-
Non-owner occupied RE		2,012		1,070		270		800		171
Construction		-		-		-		-		-
Business		1,104		1,104		-		1,104		452
Total commercial		4,377		3,435		1,531		1,904		623
Consumer
Real estate		2,638		2,561		1,743		818		144
Home equity		2,206		2,044		1,989		55		55
Construction		-		-		-		-		-
Other		123		123		-		123		14
Total consumer		4,967		4,728		3,732		996		213
Total gross loans	$	9,344		8,163		5,263		2,900		836


	Three months ended June 30, 2022					Three months ended June 30, 2021
(dollars in thousands)	Average recorded investment		Recognized interest income			Average recorded investment		Recognized interest income
Commercial
Owner occupied RE	$	1,247		11			1,379		16
Non-owner occupied RE		874		36			2,073		32
Construction		-		-			68		-
Business		1,051		10			2,118		20
Total commercial		3,172		57			5,638		68
Consumer
Real estate		1,908		17			4,337		60
Home equity		1,611		(3	)		1,679		18
Construction		-		-			-		-
Other		118		1			131		1
Total consumer		3,637		15			6,147		79
Total gross loans	$	6,809		72			11,785		147


	Six months ended June 30, 2022				Six months ended June 30, 2021				Year ended December 31, 2021
(dollars in thousands)	Average recorded investment		Recognized interest income		Average recorded investment		Recognized interest income		Average recorded investment		Recognized interest income
Commercial
Owner occupied RE	$	1,253		32		1,469		32		1,387		65
Non-owner occupied RE		896		78		2,111		94		3,128		182
Construction		-		-		91		2		55		-
Business		1,070		28		2,229		54		2,218		62
Total commercial		3,219		138		5,900		182		6,788		309
Consumer
Real estate		2,045		39		4,235		103		3,641		98
Home equity		1,621		21		1,910		34		1,964		85
Construction		-		-		-		-		-		-
Other		120		2		132		2		129		4
Total consumer		3,786		62		6,277		139		5,734		187
Total gross loans	$	7,005		200		12,177		321		12,522		496


								Three months ended June 30, 2022
	Commercial										Consumer
(dollars in thousands)	Owner occupied RE			Non- owner occupied RE		Construction		Business			Real Estate		Home Equity			Construction		Other			Total
Balance, beginning of period	$	4,898			9,973		929		6,217			7,602		2,197			844		284			32,944
Provision for credit losses		(69	)		37		131		524			390		407			7		98			1,525
Loan charge-offs		-			-		-		(55	)		-		(170	)		-		(91	)		(316	)
Loan recoveries		-			-		-		31			-		8			-		-			39
Net loan recoveries (charge-offs)		-			-		-		(24	)		-		(162	)		-		(91	)		(277	)
Balance, end of period	$	4,829			10,010		1,060		6,717			7,992		2,442			851		291			34,192
Net charge-offs to average loans (annualized)																						0.04	%
Allowance for credit losses to gross loans																						1.20	%
Allowance for credit losses to nonperforming loans																						1166.70	%


														Three months ended June 30, 2021
	Commercial											Consumer
(dollars in thousands)	Owner occupied RE			Non-owner occupied RE			Construction		Business			Real Estate		Home equity			Construction		Other			Total
Balance, beginning of period	$	7,154			15,195			827		6,848			9,666		2,688			685		436			43,499
Provision for loan losses		(149	)		(2,096	)		124		(226	)		362		(129	)		68		146			(1,900	)
Loan charge-offs		-			-			-		-			-		-			-		(8	)		(8	)
Loan recoveries		94			124			-		100			-		3			-		-			321
Net loan recoveries (charge-offs)		94			124			-		100			-		3			-		(8	)		313
Balance, end of period	$	7,099			13,223			951		6,722			10,028		2,562			753		574			41,912
Net charge-offs (recoveries) to average loans (annualized)																							(0.06	%)
Allowance for loan losses to gross loans																							1.86	%
Allowance for loan losses to nonperforming loans																							619.47	%

												Six months ended June 30, 2021
	Commercial																	Consumer
(dollars in thousands)	Owner occupied RE			Non-owner occupied RE		Construction			Business			Real Estate			Home 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		(1,140	)		1,050		(203	)		(1,011	)		(425	)		(552	)		6		75			(2,200	)
Loan charge-offs		-			-		-			(268	)		-			(139	)		-		(8	)		(415	)
Loan recoveries		94			124		-			156			-			4			-		-			378
Net loan recoveries (charge-offs)		94			124		-			(112	)		-			(135	)		-		(8	)		(37	)
Balance, end of period	$	7,099			13,223		951			6,722			10,028			2,562			753		574			41,912
Net charge-offs to average loans (annualized)																								0.00	%


									December 31, 2021
	Allowance for loan losses						Recorded investment in loans
(dollars in thousands)	Commercial		Consumer		Total		Commercial		Consumer		Total
Individually evaluated	$	623		213		836		3,435		4,728		8,163
Collectively evaluated		20,107		9,465		29,572		1,549,837		931,877		2,481,714
Total	$	20,730		9,678		30,408		1,553,272		936,605		2,489,877

	As of December 31, 2021
(dollars in thousands)	Level 1		Level 2		Level 3		Total
Assets
Impaired loans	$	-		5,262		2,065		7,327
Total assets measured at fair value on a nonrecurring basis	$	-		5,262		2,065		7,327


	For the Three Months Ended June 30,
	2022								2021
(dollars in thousands)	Average Balance		Income/ Expense			Yield/ Rate⁽¹⁾			Average Balance		Income/ Expense		Yield/ Rate⁽¹⁾
Interest-earning assets
Federal funds sold and interest-bearing deposits with banks	$	80,909	$	180			0.89	%	$	119,211	$	53		0.18	%
Investment securities, taxable		98,527		404			1.64	%		85,306		212		1.00	%
Investment securities, nontaxable⁽²⁾		10,382		56			2.16	%		11,599		74		2.56	%
Loans⁽³⁾		2,795,274		26,610			3.82	%		2,240,236		22,409		4.01	%
Total interest-earning assets		2,985,092		27,250			3.66	%		2,456,352		22,748		3.71	%
Noninterest-earning assets		154,659								117,836
Total assets	$	3,139,751							$	2,574,188
Interest-bearing liabilities
NOW accounts	$	389,563		144			0.15	%	$	298,446		46		0.06	%
Savings & money market		1,267,174		1,200			0.38	%		1,131,391		580		0.21	%
Time deposits		278,101		500			0.72	%		175,612		294		0.67	%
Total interest-bearing deposits		1,934,838		1,844			0.38	%		1,605,449		920		0.23	%
FHLB advances and other borrowings		53,179		105			0.79	%		44		2		18.23	%
Subordinated debentures		36,143		405			4.49	%		36,035		379		4.22	%
Total interest-bearing liabilities		2,024,160		2,354			0.47	%		1,641,528		1,301		0.32	%
Noninterest-bearing liabilities		833,943								688,576
Shareholders’ equity		281,648								244,084
Total liabilities and shareholders’ equity	$	3,139,751							$	2,574,188
Net interest spread							3.19	%						3.39	%
Net interest income (tax equivalent) / margin			$	24,896			3.35	%			$	21,447		3.50	%
Less: tax-equivalent adjustment⁽²⁾				(12	)							17
Net interest income			$	24,884							$	21,430


	Three Months Ended
	June 30, 2022 vs. 2021											June 30, 2021 vs. 2020
	Increase (Decrease) Due to											Increase (Decrease) Due to
(dollars in thousands)	Volume			Rate			Rate/ Volume			Total		Volume			Rate			Rate/ Volume			Total
Interest income
Loans	$	5,417			(979	)		(237	)		4,201	$	980			(2,040	)		(85	)		(1,145	)
Investment securities		33			130			16			179		110			(175	)		(50	)		(115	)
Federal funds sold and interest-bearing deposits with banks		(17	)		212			(68	)		127		10			(9	)		(1	)		-
Total interest income		5,433			(637	)		(289	)		4,507		1,100			(2,224	)		(136	)		(1,260	)
Interest expense
Deposits		195			602			127			924		318			(2,781	)		(244	)		(2,707	)
FHLB advances and other borrowings		2,415			(2	)		(2,309	)		104		(175	)		3,501			(3,500	)		(174	)
Subordinated debentures		1			24			-			25		1			(36	)		-			(35	)
Total interest expense		2,611			624			(2,182	)		1,053		144			684			(3,744	)		(2,916	)
Net interest income	$	2,822			(1,261	)		1,893			3,454	$	956			(2,908	)		3,608			1,656


	Six months ended June 30,						Year ended December 31,
(dollars in thousands)	2022			2021			2021
Balance, beginning of period	$	30,408			44,149			44,149
Adjustment for adoption of CECL		1,500			-			-
Provision for (reversal of) credit losses		2,550			(2,200	)		(12,400	)
Loan charge-offs		(485	)		(414	)		(2,166	)
Loan recoveries		219			377			825
Net loan (charge-offs)		(266	)		(37	)		(1,341	)
Balance, end of period	$	34,192			41,912			30,408