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Table of ContentsUNITED STATES

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the Quarterly Period Ended September 30, 2022
ORMarch 31, 2023

OR

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

For the Transition Period from         ��         to
Commission file number 000-27719

 

Commission file number 000-27719

Southern First Bancshares, Inc.

(Exact name of registrant as specified in its charter)

South Carolina58-2459561
(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
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 classTrading Symbol(s)Name of each exchange on which registered
Common StockSFSTThe 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:

7,997,3448,047,975 shares of common stock, par value $0.01 per share, were issued and outstanding as of November 1, 2022.April 27, 2023.

 

 

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SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARY
September 30, 2022

March 31, 2023 Form 10-Q

INDEX

Page
PART I – CONSOLIDATED FINANCIAL INFORMATIONPage1
Item 1.Consolidated Financial Statements1
Consolidated Balance Sheets1
Consolidated Statements of Income2
Consolidated Statements of Comprehensive Income3
Consolidated Statements of Shareholders’ Equity4
Consolidated Statements of Cash Flows5
Notes to Unaudited Consolidated Financial Statements6
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations2923
Item 3.Quantitative and Qualitative Disclosures about Market Risk4537
Item 4.Controls and Procedures4637
PART II – OTHER INFORMATION38
Item 1.Legal Proceedings4738
Item 1A.Risk Factors4738
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds4739
Item 3.Defaults upon Senior Securities4739
Item 4.Mine Safety Disclosures4739
Item 5.Other Information4739
Item 6.Exhibits4740

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PART I. CONSOLIDATED FINANCIAL INFORMATION

Item 1. CONSOLIDATED FINANCIAL STATEMENTS

SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

  September 30,  December 31, 
(dollars in thousands, except share data) 2022  2021 
  (Unaudited)  (Audited) 
ASSETS        
Cash and cash equivalents:        
Cash and due from banks $16,530   21,770 
Federal funds sold  139,544   86,882 
Interest-bearing deposits with banks  4,532   58,557 
Total cash and cash equivalents  160,606   167,209 
Investment securities:        
Investment securities available for sale  91,521   120,281 
Other investments  5,449   4,021 
Total investment securities  96,970   124,302 
Mortgage loans held for sale  9,243   13,556 
Loans  3,030,027   2,489,877 
Less allowance for credit losses  (36,317)  (30,408)
Loans, net  2,993,710   2,459,469 
Bank owned life insurance  50,778   49,833 
Property and equipment, net  99,530   92,370 
Deferred income taxes, net  18,425   8,397 
Accrued interest receivable  7,949   7,624 
Other assets  2,458   2,788 
Total assets $3,439,669   2,925,548 
LIABILITIES        
Deposits $3,001,452   2,563,826 
FHLB advances and related debt  60,000   - 
Subordinated debentures  36,187   36,106 
Other liabilities  54,245   47,715 
Total liabilities  3,151,884   2,647,647 
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, 7,997,344 and 7,925,819 shares issued and outstanding at September 30, 2022 and December 31, 2021, respectively  80   79 
Nonvested restricted stock  (3,348)  (1,435)
Additional paid-in capital  118,433   114,226 
Accumulated other comprehensive loss  (14,009)  (740)
Retained earnings  186,629   165,771 
Total shareholders’ equity  287,785   277,901 
Total liabilities and shareholders’ equity $3,439,669   2,925,548 

 

  March 31,  December 31, 
(dollars in thousands, except share data) 2023  2022 
  (Unaudited)  (Audited) 
ASSETS      
Cash and cash equivalents:        
Cash and due from banks $22,213   18,788 
Federal funds sold  242,642   101,277 
Interest-bearing deposits with banks  7,350   50,809 
Total cash and cash equivalents  272,205   170,874 
Investment securities:        
Investment securities available for sale  94,036   93,347 
Other investments  10,097   10,833 
Total investment securities  104,133   104,180 
Mortgage loans held for sale  6,979   3,917 
Loans  3,417,945   3,273,363 
Less allowance for credit losses  (40,435)  (38,639)
Loans, net  3,377,510   3,234,724 
Bank owned life insurance  51,453   51,122 
Property and equipment, net  97,806   99,183 
Deferred income taxes, net  12,087   12,522 
Other assets  15,967   15,459 
Total assets $3,938,140   3,691,981 
LIABILITIES        
Deposits $3,426,774   3,133,864 
FHLB advances and related debt  125,000   175,000 
Subordinated debentures  36,241   36,214 
Other liabilities  50,775   52,391 
Total liabilities  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, 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  (4,462)  (3,306)
Additional paid-in capital  120,683   119,027 
Accumulated other comprehensive loss  (11,775)  (13,410)
Retained earnings  194,824   192,121 
Total shareholders’ equity  299,350   294,512 
Total liabilities and shareholders’ equity $3,938,140   3,691,981 

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


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SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

  For the three months 
  ended March 31, 
(dollars in thousands, except share data) 2023  2022 
Interest income      
Loans $36,748   23,931 
Investment securities  613   474 
Federal funds sold and interest-bearing deposits with banks  969   59 
Total interest income  38,330   24,464 
Interest expense        
Deposits  17,179   908 
Borrowings  727   392 
Total interest expense  17,906   1,300 
Net interest income  20,424   23,164 
Provision for credit losses  1,825   1,105 
Net interest income after provision for credit losses  18,599   22,059 
Noninterest income        
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 expenses        
Compensation and benefits  10,356   9,455 
Occupancy  2,457   1,779 
Outside service and data processing costs  1,629   1,534 
Insurance  689   261 
Professional fees  660   599 
Marketing  366   266 
Other  947   791 
Total noninterest expenses  17,104   14,685 
Income before income tax expense  3,539   10,301 
Income tax expense  836   2,331 
Net income $2,703   7,970 
Earnings per common share        
Basic $0.34   1.00 
Diluted  0.33   0.98 
Weighted average common shares outstanding        
Basic  8,025,876   7,931,855 
Diluted  8,092,270   8,096,310 

 

  For the three months  For the nine months 
  ended September 30,  ended September 30, 
(dollars in thousands, except share data) 2022  2021  2022  2021 
Interest income                
Loans $29,752   23,063   80,294   67,938 
Investment securities  506   355   1,428   926 
Federal funds sold and interest-bearing deposits with banks  676   68   915   167 
Total interest income  30,934   23,486   82,637   69,031 
Interest expense                
Deposits  5,021   934   7,773   3,009 
Borrowings  459   380   1,362   1,147 
Total interest expense  5,480   1,314   9,135   4,156 
Net interest income  25,454   22,172   73,502   64,875 
Provision for (reversal of) credit losses  950   (6,000)  3,830   (8,200)
Net interest income after provision for credit losses  24,504   28,172   69,672   73,075 
Noninterest income                
Mortgage banking income  1,230   2,829   3,907   9,445 
Service fees on deposit accounts  194   199   594   557 
ATM and debit card income  559   542   1,651   1,532 
Income from bank owned life insurance  315   321   945   919 
Net lender and referral fees on PPP loans  -   -   -   268 
Loss on disposal of fixed assets  -   -   (394)  - 
Other income  382   348   1,170   1,043 
Total noninterest income  2,680   4,239   7,873   13,764 
Noninterest expenses                
Compensation and benefits  9,843   9,064   29,214   26,897 
Occupancy  2,442   1,685   6,439   4,875 
Other real estate owned (income) expenses  -   (3)  -   385 
Outside service and data processing costs  1,529   1,368   4,591   4,072 
Insurance  507   244   1,134   807 
Professional fees  555   694   1,848   1,905 
Marketing  338   247   934   645 
Other  832   740   2,360   2,109 
Total noninterest expenses  16,046   14,039   46,520   41,695 
Income before income tax expense  11,138   18,372   31,025   45,144 
Income tax expense  2,725   4,355   7,402   10,438 
Net income $8,413   14,017   23,623   34,706 
Earnings per common share                
Basic $1.06   1.78   2.97   4.43 
Diluted  1.04   1.75   2.93   4.36 
Weighted average common shares outstanding                
Basic  7,972,146   7,873,868   7,954,025   7,832,330 
Diluted  8,065,087   8,001,028   8,071,988   7,966,065 

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


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SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

  For the three months
ended March 31,		 
(dollars in thousands) 2023  2022 
Net income $2,703   7,970 
Other comprehensive income (loss):        
Unrealized gain (loss) on securities available for sale:        
Unrealized holding gain (loss) arising during the period, pretax  2,070   (7,141)
Tax benefit (expense)  (435)  1,500 
Reclassification of realized gain  -   (15)
Tax expense  -   3 
Other comprehensive income (loss)  1,635   (5,653)
Comprehensive income $4,338   2,317 

 

  For the three months
ended September 30,		  For the nine months
ended September 30,		 
(dollars in thousands) 2022  2021  2022  2021 
Net income $8,413   14,017   23,623   34,706 
Other comprehensive loss:                
Unrealized gain (loss) on securities available for sale:                
Unrealized holding gain (loss) arising during the period, pretax  (4,894)  (819)  (16,783)  (1,609)
Tax benefit (expense)  1,028   171   3,524   338 
Reclassification of realized gain (loss)  -   -   (12)  - 
Tax benefit (expense)  -   -   2   - 
Other comprehensive loss  (3,866)  (648)  (13,269)  (1,271)
Comprehensive income $4,547   13,369   10,354   33,435 

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


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SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(Unaudited)

 

 

 For the three months ended September 30,  For the three months ended March 31, 
 Common stock  Preferred stock Nonvested
restricted		 Additional
paid-in		 Accumulated
other
comprehensive		 Retained    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  Shares Amount Shares Amount stock capital income (loss) earnings Total 
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 
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  -   -   -   -   -   -   -   14,017   14,017   -   -   -   -   -   -   -   2,703   2,703 
Proceeds from exercise of stock options  4,950   -   -   -   -   175   -   -   175   1,000   -   -   -   -   17   -   -   17 
Issuance of restricted stock  8,500   -   -   -   (431)  431   -   -   -   35,930   -   -   -   (1,521)  1,521   -   -   - 
Compensation expense related to restricted stock, net of tax  -   -   -   -   135   -   -   -   135   -   -   -   -   365   -   -   -   365 
Compensation expense related to stock options, net of tax  -   -   -   -   -   291   -   -   291   -   -   -   -   -   118   -   -   118 
Other comprehensive loss  -   -   -   -   -   -   (648)  -   (648)
                                    
September 30, 2021  7,913,381  $79   -  $-  $(1,469) $113,501  $(248) $153,766  $265,629 
June 30, 2022  7,985,644   80   -   -   (3,230)  117,714   (10,143)  178,216   282,637 
Net income  -   -   -   -   -   -   -   8,413   8,413 
Proceeds from exercise of stock options  3,000   -   -   -   -   87   -   -   87 
Issuance of restricted stock  8,700   -   -   -   (405)  405   -   -   - 
Compensation expense related to restricted stock, net of tax  -   -   -   -   287   -   -   -   287 
Compensation expense related to stock options, net of tax  -   -   -   -   -   227   -   -   227 
Other comprehensive loss  -   -   -   -   -   -   (3,866)  -   (3,866)
                                    
September 30, 2022  7,997,344  $80   -  $-  $(3,348) $118,433  $(14,009) $186,629  $287,785 
Other comprehensive income  -   -   -   -   -   -   1,635   -   1,635 
March 31, 2023  8,047,975  $ 80         -  $       -  $(4,462) $120,683  $(11,775) $194,824  $299,350 

  

For the nine months ended September 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  -   -   -   -   -   -   -   34,706   34,706 
Proceeds from exercise of stock options  117,383   1   -   -   -   2,695   -   -   2,696 
Issuance of restricted stock  23,250   -   -   -   (1,120)  1,120   -   -   - 
Compensation expense related to restricted stock, net of tax  -   -   -   -   349   -   -   -   349 
Compensation expense related to stock options, net of tax  -   -   -   -   -   855   -   -   855 
Other comprehensive loss  -   -   -   -   -   -   (1,271)  -   (1,271)
                                     
September 30, 2021  7,913,381  $79   -  $-  $(1,469) $113,501  $(248) $153,766  $265,629 
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  -   -   -   -   -   -   -   23,623   23,623 
Proceeds from exercise of stock options  24,750   1   -   -   -   793   -   -   794 
Issuance of restricted stock  46,775   -   -   -   (2,710)  2,710   -   -   - 
Compensation expense related to restricted stock, net of tax  -   -   -   -   797   -   -   -   797 
Compensation expense related to stock options, net of tax  -   -   -   -   -   704   -   -   704 
Other comprehensive loss  -   -   -   -   -   -   (13,269)  -   (13,269)
                                     
September 30, 2022  7,997,344  $80   -  $-  $(3,348) $118,433  $(14,009) $186,629  $287,785 

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


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SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 For the nine months ended
September 30,		  For the three months ended
March 31,		 
(dollars in thousands) 2022  2021  2023  2022 
Operating activities                
Net income $23,623   34,706  $2,703   7,970 
Adjustments to reconcile net income to cash provided by operating activities:                
Provision for (reversal of) credit losses  3,830   (8,200)
Provision for credit losses  1,825   1,105 
Depreciation and other amortization  2,521   1,621   1,203   583 
Accretion and amortization of securities discounts and premium, net  554   713   129   210 
Loss on sale of real estate owned  -   376 
(Gain) Loss on sale of fixed assets  394   (10)
Gain on sale of securities  (12)  -   -   (15)
Net change in operating leases  814   266   53   108 
Compensation expense related to stock options and restricted stock grants  1,501   1,204   483   492 
Gain on sale of loans held for sale  (2,700)  (11,187)  (530)  (899)
Loans originated and held for sale  (191,448)  (406,451)  (17,892)  (75,729)
Proceeds from sale of loans held for sale  198,461   446,254   15,360   72,344 
Increase in cash surrender value of bank owned life insurance  (945)  (919)  (331)  (315)
Increase in deferred tax asset  (5,766)  (6,736)
Decrease in other assets  5   2,698 
Increase in other liabilities  6,006   (4,531)
Increase in other assets  (508)  (447)
Increase (decrease) in other liabilities  (1,258)  2,460 
Net cash provided by operating activities  36,838   49,804   1,237   7,867 
Investing activities                
Increase (decrease) in cash realized from:                
Increase in loans, net  (538,816)  (246,421)  (144,641)  (170,787)
Purchase of property and equipment  (13,134)  (16,620)  (180)  (5,869)
Purchase of investment securities:                
Available for sale  (10,094)  (37,908)  -   (10,094)
Other investments  (15,235)  (1,000)  (18,264)  (2,265)
Payments and maturities, calls and repayments of investment securities:                
Available for sale  21,517   16,514   1,252   16,046 
Other investments  13,806   1,812   19,000   2,182 
Purchase of bank owned life insurance  -   (7,500)
Proceeds from sale of fixed assets  95   50 
Proceeds from sale of other real estate owned  -   1,159 
Net cash used for investing activities  (541,861)  (289,914)  (142,833)  (170,787)
Financing activities                
Increase (decrease) in cash realized from:                
Increase in deposits, net  437,626   290,260   292,910   144,348 
Increase (decrease) in Federal Home Loan Bank advances and other borrowings, net  60,000   (25,000)
Decrease in Federal Home Loan Bank advances and other borrowings, net  (50,000)  - 
Proceeds from the exercise of stock options  794   2,696   17   579 
Net cash provided by financing activities  498,420   267,956   242,927   144,927 
Net decrease in cash and cash equivalents  (6,603)  27,846 
Net increase (decrease) in cash and cash equivalents  101,331   (17,993)
Cash and cash equivalents at beginning of the period  167,209   100,687   170,874   167,209 
Cash and cash equivalents at end of the period $160,606   128,533  $272,205   149,216 
Supplemental information                
Cash paid for                
Interest $9,155   5,404  $16,801   1,789 
Income taxes  8,270   18,357   -   - 
Schedule of non-cash transactions                
Foreclosure of other real estate  -   367 
Unrealized loss on securities, net of income taxes  (13,259)  (1,271)
Right-of-use assets obtained in exchange for lease obligations:        
Operating leases  237   4,803 
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.


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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 nine- monththree-month period ended September 30, 2022March 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, 20212022 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.


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Reclassifications

 

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.

 


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Adoption of New Accounting Standard

In June 2016,January 2023, the FASB issued Company adopted ASU 2016-13, Financial2022-02, “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. 

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 September 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 $477,000 at September 30, 2022 and was excluded from the estimate of credit losses.


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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 are collateralized by real property in an effort to mitigate risk, it is possible the liquidation of collateral will not fully satisfy the obligation.

●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.

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.


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●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.

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.


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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 $7.5 million at September 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.

Newly Issued, But Not Yet Effective Accounting Standards

In March 2022, the FASB amended the Receivables–: Troubled Debt Restructuring by Creditors subtopicRestructurings and Financial Instruments–Credit Losses subtopic to the Accounting Standards Codification. The amendments eliminateVintage Disclosures” (“ASU 2022-02”), which eliminated the accounting guidance for TDRs by creditorstroubled debt restructurings (“TDRs”) while enhancing disclosure requirements for certain loan refinancingsrefinancing and restructurings by creditors when a borrower is experiencing financial difficulty. In addition, for public business entities, the amendments requireguidance 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. EarlyCompany 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 adoptionto 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.


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NOTE 2 – Investment Securities

 

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

 
  March 31, 2023 
  Amortized  Gross Unrealized  Fair 
(dollars in thousands) Cost  Gains  Losses  Value 
Available for sale                
Corporate bonds $2,166   -   250   1,916 
US treasuries  999   -   107   892 
US government agencies  13,008   -   2,024   10,984 
State and political subdivisions  22,844   8   3,203   19,649 
Asset-backed securities  5,966   -   147   5,819 
Mortgage-backed securities                
FHLMC  23,876   1   3,467   20,410 
FNMA  34,612   -   5,029   29,583 
GNMA  5,471   -   688   4,783 
Total mortgage-backed securities  63,959   1   9,184   54,776 
Total investment securities available for sale $108,942   9   14,915   94,036 

 


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 September 30, 2022    
 Amortized Gross Unrealized Fair  December 31, 2022 
(dollars in thousands) Cost Gains Losses Value 
 Amortized  Gross Unrealized  Fair 
 Cost  Gains  Losses  Value 
Available for sale                                
Corporate bonds $2,179   -   302   1,877  $2,172   -   289   1,883 
US treasuries  999   -   136   863   999   -   128   871 
US government agencies  13,006   -   2,371   10,635   13,007   -   2,390   10,617 
State and political subdivisions  22,996   -   4,350   18,646   22,910   -   4,004   18,906 
Asset-backed securities  6,992   -   147   6,845   6,435   -   206   6,229 
Mortgage-backed securities                                
FHLMC  21,378   -   3,853   17,525   24,086   -   3,745   20,341 
FNMA  35,929   -   5,860   30,069   35,141   -   5,520   29,621 
GNMA  5,774   -   713   5,061   5,573   -   694   4,879 
Total mortgage-backed securities  63,081   -   10,426   52,655   64,800   -   9,959   54,841 
Total investment securities available for sale $109,253   -   17,732   91,521  $110,323   -   16,976   93,347 
                
 December 31, 2021 
  Amortized  Gross Unrealized  Fair 
 Cost  Gains   Losses  Value 
Available for sale                
Corporate bonds $2,198   -   10   2,188 
US treasuries  999   -   7   992 
US government agencies  14,504   1   336   14,169 
SBA securities  429   9   -   438 
State and political subdivisions  24,887   549   260   25,176 
Asset-backed securities  10,136   45   17   10,164 
Mortgage-backed securities                
FHLMC  23,057   102   494   22,665 
FNMA  40,924   235   660   40,499 
GNMA  4,084   3   97   3,990 
Total mortgage-backed securities  68,065   340   1,251   67,154 
Total investment securities available for sale $121,218   944   1,881   120,281 

 

Contractual maturities and yields on the Company’s investment securities at September 30, 2022March 31, 2023 and December 31, 20212022 are shown in the following table. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.


    
  March 31, 2023 
  Less than one year  One to five years  Five to ten years  Over ten years  Total 
(dollars in thousands) Amount  Yield  Amount  Yield  Amount  Yield  Amount  Yield  Amount  Yield 
Available for sale                                        
Corporate bonds $-   -  $-   -  $1,916   2.00% $-   -  $1,916   2.00%
US treasuries  -   -   -   -   892   1.27%  -   -   892   1.27%
US government agencies  -   -   3,291   0.85%  7,693   1.55%  -   -   10,984   1.34%
State and political subdivisions  -   -   465   2.13%  5,598   1.80%  13,586   2.16%  19,649   2.06%
Asset-backed securities  -   -   -   -   452   4.43%  5,367   5.62%  5,819   5.53%
Mortgage-backed securities  -   -   4,902   1.17%  3,712   1.57%  46,162   1.95%  54,776   1.85%
Total investment securities $        -        -  $8,658   1.10% $20,263   1.72% $65,115   2.30% $94,036   2.06%

 

  December 31, 2022
  Less than one year  One to five years  Five to ten years  Over ten years  Total 
(dollars in thousands) Amount  Yield  Amount  Yield  Amount  Yield  Amount  Yield  Amount  Yield 
Available for sale                                        
Corporate bonds $     -   -  $-   -  $1,883   2.00% $-   -  $1,883   2.00%
US treasuries  -   -   -   -   871   1.27%  -   -   871   1.27%
US government agencies  -   -   3,223   0.85%  7,394   1.55%  -   -   10,617   1.34%
State and political subdivisions  -   -   460   2.13%  5,382   1.80%  13,064   2.16%  18,906   2.05%
Asset-backed securities  -   -   -   -   554   4.77%  5,675   5.14%  6,229   5.10%
Mortgage-backed securities  -   -   4,594   1.13%  3,959   1.60%  46,288   1.90%  54,841   1.82%
Total investment securities $       -   -  $8,277   1.08% $20,043   1.75% $65,027   2.24% $93,347   2.03%

 

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  September 30, 2022 
  Less than one year  One to five years  Five to ten years  Over ten years  Total 
(dollars in thousands) Amount  Yield  Amount  Yield  Amount  Yield  Amount  Yield  Amount  Yield 
Available for sale                                        
Corporate bonds $-   -   -   -   1,877   1.99%  -   -   1,877   1.99%
US treasuries  -   -   -   -   863   1.27%  -   -   863   1.27%
US government agencies  -   -   3,225   0.85%  6,661   1.56%  749   1.48%  10,635   1.34%
State and political subdivisions  -   -   447   2.13%  4,721   1.69%  13,478   2.18%  18,646   2.05%
Asset-backed securities  -   -   -   -   658   3.22%  6,187   3.50%  6,845   3.47%
Mortgage-backed securities  -   -   3,118   1.20%  4,662   1.44%  44,875   1.65%  52,655   1.61%
Total investment securities $-   -   6,790   1.09%  19,442   1.65%  65,289   1.93%  91,521   1.81%
    
  

December 31, 2021

 
  Less than one year   One to five years   Five to ten years   Over ten years   Total 
(dollars in thousands) Amount  Yield  Amount  Yield  Amount  Yield  Amount  Yield   Amount  Yield 
Available for sale                                        
Corporate bonds $-   -   -   -   2,188   1.98%  -   -   2,188   1.98%
US treasuries  -   -   -   -   992   1.27%  -   -   992   1.27%
US government agencies  -   -   2,481   0.36%  8,756   1.31%  2,932   1.79%  14,169   1.24%
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%
Asset-backed securities  -   -   -   -   1,614   1.79%  8,550   0.97%  10,164   1.10%
Mortgage-backed securities  387   2.10%  4,411   1.29%  9,121   1.59%  53,235   1.38%  67,154   1.40%
Total investment securities $387   2.10%  7,363   1.03%  26,953   1.53%  85,578   1.55%  120,281   1.52%


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The tables below summarize gross unrealized losses on investment securities and the fair market value of the related securities at September 30, 2022March 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.


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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 

 

          
     September 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  $1,877  $302   -  $-  $-   1  $1,877  $302 
US treasuries  -   -   -   1   863   136   1   863   136 
US government agencies  -   -   -   10   10,635   2,371   10   10,635   2,371 
State and political subdivisions  19   12,013   2,604   13   6,633   1,746   32   18,646   4,350 
Asset-backed  6   5,432   108   2   1,413   39   8   6,845   147 
Mortgage-backed securities                                    
FHLMC  7   5,586   740   12   11,939   3,113   19   17,525   3,853 
FNMA  19   9,985   1,528   18   20,084   4,332   37   30,069   5,860 
GNMA  4   3,566   461   3   1,495   252   7   5,061   713 
Total investment securities  56  $38,459  $5,743   59  $53,062  $11,989   115  $91,521  $17,732 
                                     
  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 treasuries  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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At September 30, 2022March 31, 2023 the Company had 115114 individual investments that were in an unrealized loss 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) September 30, 2022  December 31, 2021  March 31, 2023  December 31, 2022 
Federal Home Loan Bank stock $4,036   1,241  $7,534   9,250 
Other nonmarketable investments  1,010   2,377   2,160   1,180 
Investment in Trust Preferred subsidiaries  403   403   403   403 
Total other investments $5,449   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 September 30, 2022March 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.


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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 September 30, 2022,March 31 2023, mortgage loans held for sale totaled $9.2$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 $6.7$7.4 million as of September 30, 2022March 31, 2023 and $5.0$7.3 million as of December 31, 2021.2022.

 

 September 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 $572,972   18.9% $488,965   19.6% $615,094   18.0% $612,901   18.7%
Non-owner occupied RE  799,569   26.4%  666,833   26.8%  928,059   27.2%  862,579   26.3%
Construction  85,850   2.8%  64,425   2.6%  94,641   2.8%  109,726   3.4%
Business  419,312   13.8%  333,049   13.4%  495,161   14.5%  468,112   14.3%
Total commercial loans  1,877,703   61.9%  1,553,272   62.4%  2,132,955   62.5%  2,053,318   62.7%
Consumer                                
Real estate  873,471   28.8%  694,401   27.9%  993,258   29.1%  931,278   28.4%
Home equity  171,904   5.7%  154,839   6.2%  180,974   5.3%  179,300   5.5%
Construction  77,798   2.6%  59,846   2.4%  71,137   2.1%  80,415   2.5%
Other  29,151   1.0%  27,519   1.1%  39,621   1.0%  29,052   0.9%
Total consumer loans  1,152,324   38.1%  936,605   37.6%  1,284,990   37.5%  1,220,045   37.3%
Total gross loans, net of deferred fees  3,030,027   100.0%  2,489,877   100.0%  3,417,945   100.0%  3,273,363   100.0%
Less—allowance for credit losses  (36,317)      (30,408)      (40,435)      (38,639)    
Total loans, net $2,993,710      $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.

 

                    
 September 30, 2022        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  One year
or less		  After one
but within
five years		  After five
but within
fifteen
years		  After
fifteen
years		  Total 
Commercial                               
Owner occupied RE $11,625   117,787   394,256   49,304   572,972  $9,295   144,602   418,450   42,747   615,094 
Non-owner occupied RE  44,182   383,518   344,874   26,995   799,569   57,909   449,859   394,421   25,870   928,059 
Construction  5,413   26,336   48,891   5,210   85,850   2,742   30,409   59,103   2,387   94,641 
Business  75,690   181,097   158,292   4,233   419,312   92,502   211,145   187,033   4,481   495,161 
Total commercial loans  136,910   708,738   946,313   85,742   1,877,703   162,448   836,015   1,059,007   75,485   2,132,955 
Consumer                                        
Real estate $11,605   41,365   233,316   587,185   873,471   9,871   46,324   280,204   656,859   993,258 
Home equity  1,377   20,822   144,336   5,369   171,904   1,028   20,452   154,189   5,305   180,974 
Construction  241   589   20,129   56,839   77,798   1,014   227   32,358   37,538   71,137 
Other  3,525   22,742   2,098   786   29,151   3,569   21,975   13,272   805   39,621 
Total consumer loans  16,748   85,518   399,879   650,179   1,152,324   15,482   88,978   480,023   700,507   1,284,990 
Total gross loans, net of deferred fees $153,658   794,256   1,346,192   735,921   3,030,027  $177,930   924,993   1,539,030   775,992   3,417,945 
   
 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 
                    


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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.

 

              
 September 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 $558,592   2,755   463,589   8,518  $602,302   3,497   598,513   3,814 
Non-owner occupied RE  683,796   71,591   533,565   85,815   784,868   85,282   742,763   75,246 
Construction  71,957   8,480   57,139   2,404   75,041   16,858   90,246   13,971 
Business  270,224   73,398   191,522   74,694   310,976   91,683   298,866   73,089 
Total commercial loans  1,584,569   156,224   1,245,815   171,431   1,773,187   197,320   1,730,388   166,120 
Consumer                                
Real estate  861,854   12   679,756   13   983,376   11   919,130   11 
Home equity  13,684   156,843   12,850   139,811   13,508   166,438   14,173   163,791 
Construction  77,557   -   58,884   -   70,123   -   79,750   - 
Other  17,816   7,810   13,220   6,228   19,173   16,879   19,113   6,013 
Total consumer loans  970,911   164,665   764,710   146,052   1,086,180   183,328   1,032,166   169,815 
Total gross loans, net of deferred fees $2,555,480   320,889   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 riskrisk; however, still havehas acceptable credit risk. Watch loans also fall into this category, representing loans with

●Watch—A watch loan exhibits above average credit risk due to minor weaknesses and warrantwarrants 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 September 30, 2022.March 31, 2023.

 

                      
              September 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 $119,148   130,792   96,397   70,219   37,121   103,847   -   -   557,524  $19,874   160,403  143,384   76,171   65,408   121,520   -   169   586,929 
Watch  1,375   484   -   2,460   -   7,005   -   -   11,324   -   3,548  475   9,281   3,628   6,716   -   -   23,648 
Special Mention  205   -   -   -   -   2,981   -   -   3,186   -   196  -   -   -   3,133   -   -   3,329 
Substandard  -   -   646   -   292   -   -   -   938   -   -  -   -   -   1,188   -   -   1,188 
Total Owner occupied RE  120,728   131,276   97,043   72,679   37,413   113,833   -   -   572,972   19,874   164,147  143,859   85,452   69,036   132,557   -   169   615,094 
                                                                       
Non-owner occupied RE                                                                       
Pass  208,206   171,640   115,680   58,927   75,772   109,884   604   -   740,713   47,280   298,161  177,421   112,850   59,025   181,699   623   -   877,059 
Watch  1,399   9,494   -   12,220   6,538   12,089   -   -   41,740   200   972  9,496   -   7,555   13,070   -   -   31,293 
Special Mention  -   203   -   6,145   173   1,286   -   -   7,807   -   -  201   -   8,893   906   -   -   10,000 
Substandard  -   135   -   7,995   304   875   -   -   9,309   -   615  -   -   7,996   1,096   -   -   9,707 
Total Non-owner occupied RE  209,605   181,472   115,680   85,287   82,787   124,134   604   -   799,569   47,480   299,748  187,118   112,850   83,469   196,771   623   -   928,059 
                                                                       
Construction                                                                       
Pass  26,521   54,253   3,394   1,682   -   -   -   -   85,850   942   62,604  22,778   6,737   246   -   -   -   93,307 
Watch  -   -   -   -   -   -   -   -   -   -   1,334  -   -   -   -   -   -   1,334 
Special Mention  -   -   -   -   -   -   -   -   -   -   -  -   -   -   -   -   -   - 
Substandard  -   -   -   -   -   -   -   -   -   -   -  -   -   -   -   -   -   - 
Total Construction  26,521   54,253   3,394   1,682   -   -   -   -   85,850   942   63,938  22,778   6,737   246   -   -   -   94,641 
                                                                       
Business                                                                       
Pass  91,796   59,303   30,860   23,015   36,217   30,292   121,475   590   393,548   17,705   140,684  54,235   21,675   20,611   58,086   147,734   442   461,172 
Watch  6,844   2,399   1,375   1,370   157   3,070   5,433   477   21,125   145   14,571  2,031   1,627   1,061   3,607   5,420   -   28,462 
Special Mention  903   -   390   240   -   162   115   182   1,992   -   1,259  236   463   279   424   15   99   2,775 
Substandard  500   -   191   130   329   932   565   -   2,647   -   495  -   28   202   1,344   683   -   2,752 
Total Business  100,043   61,702   32,816   24,755   36,703   34,456   127,588   1,249   419,312   17,850   157,009  56,502   23,793   22,153   63,461   153,852   541   495,161 
                                   
Total Commercial loans  456,897   428,703   248,933   184,403   156,903   272,423   128,192   1,249   1,877,703   86,146   684,842  410,257   228,832   174,904   392,789   154,475   710   2,132,955 
                                                                       
Consumer                                                                       
Real estate                                                                       
Pass  198,590   263,113   189,049   74,324   39,731   77,887   -   -   842,694   49,330   253,611  284,238   183,939   69,806   112,705   -   -   953,629 
Watch  1,707   8,554   2,991   3,002   896   4,737   -   -   21,887   494   5,765  8,023   4,016   2,086   4,582   -   -   24,966 
Special Mention  116   1,341   1,373   1,057   562   1,085   -   -   5,534   -   2,346  1,687   2,152   2,444   3,127   -   -   11,756 
Substandard  -   652   228   548   403   1,525   -   -   3,356   -   -  646   224   330   1,707   -   -   2,907 
Total Real estate  200,413   273,660   193,641   78,931   41,592   85,234   -   -   873,471   49,824   261,722  294,594   190,331   74,666   122,121   -   -   993,258 
                                                                       
Home equity                                                                       
Pass  -   -   -   -   -   -   160,975   -   160,975   -   -  -   -   -   -   167,694   -   167,694 
Watch  -   -   -   -   -   -   6,187   -   6,187   -   -  -   -   -   -   6,701   -   6,701 
Special Mention  -   -   -   -   -   -   2,283   -   2,283   -   -  -   -   -   -   3,861   -   3,861 
Substandard  -   -   -   -   -   -   2,459   -   2,459   -   -  -   -   -   -   2,718   -   2,718 
Total Home equity  -   -   -   -   -   -   171,904   -   171,904   -   -  -   -   -   -   180,974   -   180,974 
                                                                       
Construction                                                                       
Pass  29,666   37,281   9,947   -   -   -   -   -   76,894   2,656   47,570  20,066   845   -   -   -   -   71,137 
Watch  -   -   588   -   -   -   -   -   588   -   -  -   -   -   -   -   -   - 
Special Mention  -   -   -   316   -   -   -   -   316   -   -  -   -   -   -   -   -   - 
Substandard  -   -   -   -   -   -   -   -   -   -   -  -   -   -   -   -   -   - 
Total Construction  29,666   37,281   10,535   316   -   -   -   -   77,798   2,656   47,570  20,066   845   -   -   -   -   71,137 
                                                                       
Other                                                                       
Pass  3,690   2,123   1,815   1,643   410   3,298   15,297   -   28,276   390   3,375  2,829   1,645   1,433   3,205   25,359   -   38,236 
Watch  -   368   17   20   25   181   90   -   701   10   42  363   11   4   183   118   -   731 
Special Mention  4   -   -   30   53   4   34   -   125   -   11  -   -   37   90   93   -   231 
Substandard  -   36   -   6   -   -   7   -   49   -   327  88   -   3   -   5   -   423 
Total Other  3,694   2,527   1,832   1,699   488   3,483   15,428   -   29,151   400   3,755  3,280   1,656   1,477   3,478   25,575   -   39,621 
                                   
Total Consumer loans  233,773   313,468   206,008   80,946   42,080   88,717   187,332   -   1,152,324   52,880   313,047  317,940   192,832   76,143   125,599   206,549   -   1,284,990 
Total loans $690,670   742,171   454,941   265,349   198,983   361,140   315,524   1,249   3,030,027  $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 categoriesby year of origination as of December 31, 2021.2022.

 

       
     December 31, 2021                    
 Commercial  Consumer     December 31, 2022 
(dollars in thousands) Owner
occupied
RE		  Non-owner
occupied
RE		  Construction  Business  Real
Estate		  Home
Equity		  Construction  Other  Total  2022  2021  2020  2019  2018  Prior  Revolving  Revolving Converted to Term  Total 
Commercial                                    
Owner occupied RE                                    
Pass $487,422   589,280   64,425   328,371   684,923   148,933   59,846   27,365   2,390,565  $169,083   122,654   85,867   66,299   36,718   93,915   -   -   574,536 
Special mention  327   48,310   -   1,530   4,294   2,986   -   129   57,576 
Watch  14,648   479   9,339   3,658   -   6,792   -   -   34,916 
Special Mention  200   -   -   -   -   2,960   -   -   3,160 
Substandard  1,216   29,243   -   3,148   5,184   2,920   -   25   41,736   -   -   -   -   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 $488,965   666,833   64,425   333,049   694,401   154,839   59,846   27,519   2,489,877  $955,802   735,661   447,470   257,328   195,538   344,363   335,274   1,927   3,273,363 

 


Table of Contents

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

 

               
 September 30, 2022  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  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 $                    -                    -                    -                   -   572,972   572,972  $-   -   -   -   615,094   615,094 
Non-owner occupied RE  57   -   -   253   799,259   799,569   151   -   -   1,384   926,524   928,059 
Construction  -   -   -   -   85,850   85,850   -   -   -   -   94,641   94,641 
Business  123   -   -   79   419,110   419,312   135   235   -   1,196   493,595   495,161 
Consumer                                                
Real estate  77   131   -   904   872,359   873,471   886   -   -   1,075   991,297   993,258 
Home equity  129   -   -   1,379   170,396   171,904   587   -   -   1,078   179,309   180,974 
Construction  -   -   -   -   77,798   77,798   -   -   -   -   71,137   71,137 
Other  -   -   -   -   29,151   29,151   1   88   -   -   39,532   39,621 
Total loans $386   131   -   2,615   3,026,895   3,030,027  $1,760   323   -   4,733   3,411,129   3,417,945 
                        
 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 
                        
Total loans over 90 days past due  -   -   -   -   -   192 

  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 
Commercial                        
Owner occupied RE $-   -   -   -   612,901   612,901 
Non-owner occupied RE  119   757   -   247   861,456   862,579 
Construction  -   -   -   -   109,726   109,726 
Business  24   1   -   182   467,905   468,112 
Consumer                        
Real estate  330   -   -   1,099   929,849   931,278 
Home equity  50   -   -   1,099   178,151   179,300 
Construction  -   -   -   -   80,415   80,415 
Other  88   -   -   -   28,964   29,052 
Total loans $611   758   -   2,627   3,269,367   3,273,363 
Total loans over 90 days past due  -   -   -   -   -   402 

 

As of September 30, 2022March 31, 2023 and December 31, 2021,2022, loans 30 days or more past due represented 0.07% 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 September 30, 2022March 31, 2023 and December 31, 2021, respectively.2022. Consumer loans 30 days or more past due were 0.06%0.08% of total loans as of September 30, 2022March 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.


Table of Contents

 

Table of Contents

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

       
(dollars in thousands)  September 30, 2022   December 31, 2021 
Nonaccrual loans $529   - 
Nonaccruing TDRs  2,086   2,952 
Total nonaccrual loans, including nonaccruing TDRs  2,615   4,864 
Other real estate owned  -   - 
Total nonperforming assets $2,615   4,864 
Nonperforming assets as a percentage of:        
Total assets  0.08%  0.17%
Gross loans  0.09%  0.20%
Total loans over 90 days past due $49   554 
Loans over 90 days past due and still accruing  -   - 
Accruing troubled debt restructurings  4,683   3,299 

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

 

         
 CECL  Incurred loss        
 September 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 $117   136   253   1,070  $615   769   1,384   114   133   247 
Construction  -   -   -   -   -   -   -   -   -   - 
Business  79   -   79   -   1,045   151   1,196   -   182   182 
Total commercial  196   136   332   1,070   1,660   920   2,580   114   315   429 
Consumer                                        
Real estate  -   904   904   1,750   -   1,075   1,075   -   1,099   1,099 
Home equity  197   1,182   1,379   2,044   192   886   1,078   194   905   1,099 
Construction  -   -   -   -   -   -   -   -   -   - 
Other  -   -   -   -   -   -   -   -   -   - 
Total consumer  197   2,086   2,283   3,794   192   1,961   2,153   194   2,004   2,198 
Total $393   2,222   2,615   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 loansWe did not recognize interest income on nonaccrual statusloans 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 inMarch 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 individually assessed loans and the amount of interest income recognized on individually assessed loans after impairment by portfolio segment and class.below summarizes information regarding nonperforming assets.

 

       
  Three months ended
September 30, 2022		  Three months ended
September 30, 2021		 
(dollars in thousands)  Average
recorded
investment		   Recognized
interest
income		   Average
recorded
investment		   Recognized
interest
income		 
Commercial                
Owner occupied RE $1,240   16   1,269   17 
Non-owner occupied RE  361   -   5,125   227 
Construction  -   -   -   - 
Business  1,539   47   2,665   61 
Total commercial  3,140   63   9,059   305 
Consumer                
Real estate  1,862   48   3,609   - 
Home equity  1,190   15   1,859   30 
Construction  -   -   -   - 
Other  115   1   127   1 
Total consumer  3,167   64   5,595   31 
Total gross loans $6,307   127   14,654   336 


       
(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 

 

Table of Contents

Modifications to Borrowers Experiencing Financial Difficulty

          
  Nine months ended
September 30, 2022		  Nine months ended
September 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 $1,248   48   1,419   49   1,387   65 
Non-owner occupied RE  535   78   3,643   321   3,128   182 
Construction  -   -   69   -   55   - 
Business  1,573   76   2,497   115   2,218   62 
Total commercial  3,356   202   7,628   485   6,788   309 
Consumer                        
Real estate  2,378   86   3,911   102   3,641   98 
Home equity  1,613   36   1,944   64   1,964   85 
Construction  -   -   -   -   -   - 
Other  118   3   130   3   129   4 
Total consumer  4,109   125   5,985   169   5,734   187 
Total gross loans $7,465   327   13,613   654   12,522   496 

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.


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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 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 ninethree months ended September 30, 2022March 31, 2023 under the CECL methodology.

 

            
          Three months ended September 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 $4,829   10,010   1,060   6,717   7,992   2,442   851   291   34,192  $5,867   10,376   1,292   7,861   9,487   2,551   893   312   38,639 
Provision for credit losses  476   (1,595)  (82)  875   782   3   41   25   525   117   1,038   (182)  150   592   53   (83)  170   1,855 
Loan charge-offs  -   -   -   -   -   -   -   -   -   -   (160)  -   (1)  -   -   -   -   (161)
Loan recoveries  -   1,540   -   51   -   8   -   1   1,600   -   31   -   12   -   59   -   -   102 
Net loan recoveries (charge-offs)  -   1,540   -   51   -   8   -   1   1,600   -   (129)  -   11   -   59   -   -   (59)
Balance, end of period $5,305   9,955   978   7,643   8,774   2,453   892   317   36,317  $5,984   11,285   1,110   8,022   10,079   2,663   810   482   40,435 
Net charge-offs to average loans (annualized)Net charge-offs to average loans (annualized)                       (0.22%)Net charge-offs to average loans (annualized)               0.01%
Allowance for credit losses to gross loansAllowance for credit losses to gross loans                       1.20%Allowance for credit losses to gross loans               1.18%
Allowance for credit losses to nonperforming loansAllowance for credit losses to nonperforming loans                       1388.87%Allowance for credit losses to nonperforming loans               854.33%

             
           Nine months ended September 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 $4,700   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  918   (2,436)  199   1,558   1,985   575   184   92   3,075 
Loan charge-offs  -   -   -   (55)  -   (339)  -   (91)  (485)
Loan recoveries  -   1,540   -   196   -   82   -   1   1,819 
Net loan recoveries (charge-offs)  -   1,540   -   141   -   (257)  -   (90)  1,334 
Balance, end of period $5,305   9,955   978   7,643   8,774   2,453   892   317   36,317 
Net charge-offs (recoveries) to average loans (annualized)                       (0.06%)
Allowance for credit losses to gross loans                       1.20%
Allowance for credit losses to nonperforming loans                       1388.87%


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  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 September 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		 $7,099   13,223   951   6,722   10,028   2,562   753   574   41,912 
Provision for loan losses  (1,159)  (1,558)  149   (1,246)  (1,469)  (598)  (28)  (91)  (6,000)
Loan charge-offs  -   (159)  -   (84)  -   -   -   -   (243)
Loan recoveries  -   129   -   58   18   193   -   8   406 
Net loan recoveries
(charge-offs)		  -   (30)  -   (26)  18   193   -   8   163 
Balance, end of period $5,940   11,635   1,100   5,450   8,577   2,157   725   491   36,075 
Net charge-offs (recoveries) to average loans (annualized)                      (0.03%)
Allowance for loan losses to gross loans                      1.51%
Allowance for loan losses to nonperforming loans                      259.95%

              Nine months ended September 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  (2,299)  (509)  (54)  (2,256)  (1,894)  (1,149)  (22)  (17)  (8,200)
Loan charge-offs  -   (158)  -   (353)  -   (139)  -   (8)  (658)
Loan recoveries  94   253   -   214   18   196   -   9   784 
Net loan recoveries
(charge-offs)		  94   95   -   (139)  18   57   -   1   126 
Balance, end of period $5,940   11,635   1,100   5,450   8,577   2,157   725   491   36,075 
Net charge-offs to average loans (annualized)                                  0.01%

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 

              September 30, 2021 
  Allowance for loan losses  Recorded investment in loans 
(dollars in thousands) Commercial  Consumer  Total  Commercial  Consumer  Total 
Individually evaluated $955   210   1,165   12,810   5,111   17,921 
Collectively evaluated  23,170   11,740   34,910   1,482,186   888,940   2,371,126 
Total $24,125   11,950   36,075   1,494,996   894,051   2,389,047 

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.


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The following table presentstables present an analysis of collateral-dependent loans of the Company as of September 30, 2022.Company.

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


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       September 30, 2022        December 31, 2022 
 Real Business      Real Business     
(dollars in thousands) estate  assets  Other  Total  estate  assets  Other  Total 
Commercial                                
Owner occupied RE $-   -   -   -  $-   -   -   - 
Non-owner occupied RE  117   -   -   117   114   -   -   114 
Construction  -   -   -   -   -   -   -   - 
Business  80   -   -   80   30   -   -   30 
Total commercial  197   -   -   197   144   -   -   144 
Consumer                                
Real estate  -   -   -   -   207   -   -   207 
Home equity  197   -   -   197   194   -   -   194 
Construction  -   -   -   -   -   -   -   - 
Other  -   -   -   -   -   -   -   - 
Total consumer  197   -   -   197   401   -   -   401 
Total $394   -   -   394  $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 $2.8 million at September 30, 2022March 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 ninethree months ended September 30,March 31, 2023 and for the twelve months ended December 31, 2022.

  Three months ended  Nine months ended 
(dollars in thousands) September 30, 2022  September 30, 2022 
Balance, beginning of period $2,330   - 
Adjustment for adoption of CECL  -   2,000 
Provision for loan losses  425   755 
Balance, end of period $2,755   2,755 
Unfunded Loan Commitments      840,912 
Reserve for Unfunded Commitments to Unfunded Loan Commitments      0.33%

NOTE 5 – Troubled Debt Restructurings

At September 30, 2022, the Company had 15 loans totaling $6.8 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.

There were three loans considered new TDRs during the three and nine months ended September 30, 2022. There was one consumer real estate loan with a pre-modification and post-modification balance of $885,000, and there were two commercial business loans with a pre-modification balance totaling $1.1 million and a post-modification balance totaling $1.1 million. For the three and nine months ended September 30, 2021, renewals and modifications were not material.

As of September 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.


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

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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 September 30, 2022March 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 

 

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

       September 30, 2022 
       Fair Value 
(dollars in thousands) Notional  Balance Sheet Location Asset/(Liability) 
Mortgage loan interest rate lock commitments $9,432  Other liabilities $(7)
MBS forward sales commitments  5,500  Other assets  162 
Total derivative financial instruments $14,932    $155 

       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

Level 1 – Quoted market price in active markets

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

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

 


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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.  

 

Level 3 – Significant unobservable inputs


Unobservable inputs that are supported by little or no market activity and that are significant to the fair valueTable 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.Contents

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 20212022 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 September 30, 2022March 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.

 

        September 30, 2022 
(dollars in thousands) Level 1  Level 2  Level 3  Total 
Assets            
Securities available for sale                
Corporate bonds $-   1,877   -   1,877 
US treasuries  -   863   -   863 
US government agencies  -   10,635   -   10,635 
State and political subdivisions  -   18,646   -   18,646 
Asset-backed securities  -   6,845   -   6,845 
Mortgage-backed securities  -   52,655   -   52,655 
Mortgage loans held for sale  -   9,243   -   9,243 
MBS forward sales commitments  -   162   -   162 
Total assets measured at fair value on a recurring basis $-   100,926   -   100,926 
                 
Liabilities                
Mortgage loan interest rate lock commitments $-   7   -   7 
Total liabilities measured at fair value on a recurring basis $-   7   -   7 


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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 September 30, 2022March 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 December 31, 2022 
(dollars in thousands) Level 1  Level 2  Level 3  Total 
Assets                
Individually evaluated $-   429   4,071   4,500 
Total assets measured at fair value on a nonrecurring basis $        -   429   4,071   4,500 

        As of September 30, 2022 
(dollars in thousands) Level 1  Level 2  Level 3  Total 
Assets                
Individually assessed loans $-   314   4,275   4,589 
Total assets measured at fair value on a nonrecurring basis $-   314   4,275   4,589 

        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 TechniqueSignificant Unobservable InputsRange of Inputs
Individually evaluated loansAppraised Value/ Discounted Cash FlowsDiscounts to appraisals or cash flows for estimated holding and/or selling costs or age of appraisal0-25%

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 September 30, 2022March 31, 2023 and December 31, 20212022 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   - 

 

  December 31, 2022 
(dollars in thousands) Carrying
Amount		  Fair
Value		  Level 1  Level 2  Level 3 
Financial Assets:                    
Other investments, at cost $10,833   10,833   -   -   10,833 
Loans1  3,227,455   3,057,891   -   -   3,057,891 
Financial Liabilities:                    
Deposits  3,133,864   2,717,900   -   2,717,900   - 
Subordinated debentures  36,214   39,885   -   39,885   - 

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


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     September 30, 2022 
(dollars in thousands) Carrying
Amount		  Fair
Value		  Level 1  Level 2  Level 3 
Financial Assets:                    
Other investments, at cost $5,449   5,449   -   -   5,449 
Loans1  2,986,412   2,825,209   -   -   2,825,209 
Financial Liabilities:                    
Deposits  3,001,452   2,563,398   -   2,563,398   - 
Subordinated debentures  36,187   38,639   -   38,639   - 

        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 or loan losses, as applicable, and previously presented individually assessed or impaired loans.

NOTE 87 – Leases

The Company enters into leaseshad operating right-of-use assets, included in the normal courseproperty and equipment, of business. As$23.2 million and $23.6 million as of September 30,March 31, 2023 and December 31, 2022, we leased sixrespectively.  The Company had lease liabilities, included in other liabilities, of our offices under various operating lease agreements. All$25.5 million and $25.8 million as of our leases areMarch 31, 2023 and December 31, 2022, respectively. We maintain operating leases under applicable accounting standardson land and thebuildings for various office spaces. The lease agreements have maturity dates ranging from August 2028April 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 7.196.74 years as of September 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 at implementation of the accounting standard and as of the lease commencement date for leases subsequently entered into. The weighted average discount rate for leases was 2.27%2.32% as of September 30, 2022.March 31, 2023.

The total operating lease costs were $582,000$595,000 and $711,000$778,000 for the three months ended September 30,March 31, 2023 and 2022, and 2021, respectively, and $2.1 million for the nine months ended September 30, 2022 and 2021. The right-of-use (ROU) asset, included in property and equipment, and lease liability, included in other liabilities, was $23.6 million and $25.8 million as of September 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.


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

    
  Operating 
(dollars in thousands) Leases 
2023 $1,513  
2024  2,067 
2025  2,124 
2026  2,176 
2027  2,232 
Thereafter  22,200 
Total undiscounted lease payments  32,312 
Discount effect of cash flows  6,813 
Total lease liability $25,499 

  Operating 
(dollars in thousands) Leases 
2022 $485 
2023  1,971 
2024  2,024 
2025  2,078 
2026  2,130 
Thereafter  24,193 
Total undiscounted lease payments  32,881 
Discount effect of cash flows  7,099 
Total lease liability $25,782 

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 nine- monththree-month periods ended September 30, 2022March 31, 2023 and 2021.2022. Dilutive common shares arise from the potentially dilutive effect of the Company’s stock options that were outstanding at September 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 September 30,March 31, 2023 and 2022, and 2021, there were 162,060205,689 and 159,0299,000 options, respectively, that were not considered in computing diluted earnings per common share because they were anti-dilutive.

    
  Three months ended
March 31,		 
(dollars in thousands, except share data) 2023  2022 
Numerator:      
Net income available to common shareholders $2,703   7,970 
Denominator:        
Weighted-average common shares outstanding – basic  8,025,876   7,931,855 
Common stock equivalents  66,394   164,455 
Weighted-average common shares outstanding – diluted  8,092,270   8,096,310 
Earnings per common share:        
Basic $0.34   1.00 
Diluted  0.33   0.98 

  Three months ended
September 30,		  Nine months ended
September 30,		 
(dollars in thousands, except share data) 2022  2021  2022  2021 
Numerator:                
Net income available to common shareholders $8,413   14,017   23,623   34,706 
Denominator:                
Weighted-average common shares outstanding – basic  7,972,146   7,873,868   7,954,025   7,832,330 
Common stock equivalents  92,941   127,160   117,963   133,735 
Weighted-average common shares outstanding – diluted  8,065,087   8,001,028   8,071,988   7,966,065 
Earnings per common share:                
Basic $1.06   1.78   2.97   4.43 
Diluted $1.04   1.75   2.93   4.46 


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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 nine month periodsperiod ended September 30, 2022March 31, 2023 as compared to the three and nine month periodsperiod ended September 30, 2021March 31, 2022 and assesses our financial condition as of September 30, 2022March 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, 20212022 included in our Annual Report on Form 10-K for that period. Results for the three and nine month periodsperiod ended September 30, 2022March 31, 2023 are not necessarily indicative of the results for the year ending December 31, 20222023 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:

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

●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, which could impair our liquidity;

●Changes in deposit 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;
●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;


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●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 September 30, 2022,March 31, 2023, we had total assets of $3.44$3.94 billion, a 17.6%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 $3.03$3.42 billion and $2.49$3.27 billion at September 30, 2022March 31, 2023 and December 31, 2021,2022, respectively. Our liabilities and shareholders’ equity at September 30, 2022March 31, 2023 totaled $3.15$3.64 billion and $287.8$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 $3.00$3.43 billion and $2.56$3.13 billion at September 30, 2022March 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 $8.4$2.7 million and $14.0$8.0 million for the three months ended September 30,March 31, 2023 and 2022, and 2021, respectively. Diluted earnings per share (“EPS”) was $1.04$0.33 for the thirdfirst quarter of 20222023 as compared to $1.75$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 and a decrease in mortgage banking income, as well as an increase in noninterestnon-interest expenses.


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Our net income to common shareholders was $23.6 million and $34.7 million for the nine months ended September 30, 2022 and 2021. Diluted EPS was $2.93 for the nine months ended September 30, 2022 as compared to $4.36 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.

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 $25.5$20.4 million for the thirdfirst quarter of 2022, a 14.8% increase2023, an 11.8% decrease over net interest income of $22.2$23.2 million for the thirdfirst quarter of 2021,2022, driven primarily by anthe increase in interest income primarily as a result of loan growth during the past 12 months.expense on our deposit accounts. In addition, our net interest margin, on a tax-equivalent basis (TE), was 3.19%2.36% for the thirdfirst quarter of 20222023 compared to 3.38%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 nine month periods ended September 30, 2022March 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.


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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.


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Average Balances, Income and Expenses, Yields and Rates

    
  For the Three Months Ended September 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		 $122,071  $676   2.20% $145,899  $68   0.18%
Investment securities, taxable  91,462   449   1.95%  93,428   301   1.28%
Investment securities, nontaxable(2)  10,160   74   2.89%  10,974   70   2.54%
Loans(3)  2,941,350   29,752   4.01%  2,351,467   23,063   3.89%
Total interest-earning assets  3,165,043   30,951   3.88%  2,601,768   23,502   3.58%
Noninterest-earning assets  159,233           132,929         
Total assets $3,324,726          $2,734,697         
Interest-bearing liabilities                        
NOW accounts $361,500   178   0.20% $316,775   48   0.06%
Savings & money market  1,417,181   3,663   1.03%  1,209,991   651   0.21%
Time deposits  361,325   1,180   1.30%  161,300   235   0.58%
Total interest-bearing deposits  2,140,006   5,021   0.93%  1,688,066   934   0.22%
FHLB advances and other
borrowings		  1,357   10   2.92%  -   -   0.00%
Subordinated debentures  36,169   449   4.93%  36,062   380   4.18%
Total interest-bearing liabilities  2,177,532   5,480   1.00%  1,724,128   1,314   0.30%
Noninterest-bearing liabilities  858,202           753,901         
Shareholders’ equity  288,542           256,668         
Total liabilities and shareholders’
equity		 $3,324,276          $2,734,697         
Net interest spread          2.88%          3.28%
Net interest income (tax equivalent) / margin     $25,471   3.19%     $22,188   3.38%
Less:  tax-equivalent adjustment(2)      17           (16)    
Net interest income     $25,454          $22,172     

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

 


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Our net interest margin (TE) decreased 19101 basis points to 3.19%2.36% during the thirdfirst quarter of 2022,2023, compared to the thirdfirst quarter of 2021,2022, primarily due to higher costs on our interest-bearing liabilities, partially offset by an increase in yield on our interest-earning assets.liabilities. Our average interest-bearing liabilities grew by $453.4$703.2 million during the thirdfirst quarter of 2022,2023, while the rate on these liabilities increased 70255 basis points to 1.00%2.83%. In contrast, our average interest-earning assets grew by $563.3$730.2 million during the thirdfirst quarter of 2022, however,2023 while the average yield on these assets increased by 3086 basis points to 3.88%4.42% during the same period.

 

The increase in average interest-earning assets for the thirdfirst quarter of 20222023 related primarily to an increase of $589.9$760.6 million in our average loan balances. The 30-basis86 basis point increase in yield on our interest-earning assets was driven by a 1270 basis point increase in loan yield as our loan portfolio has repriced at rates higher than 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 19-basis point gain from 3.82% in the second quarter of 2022.

 

The increase in our average interest-bearing liabilities during the thirdfirst quarter of 20222023 resulted primarily from a $451.9$701.5 million increase in our interest-bearing deposits, while the 70-basis255-basis point increase in rate on our interest-bearing liabilities resulted primarily from a 71-basis258 basis point increase in deposit rates.

 

Our net interest spread was 2.88%1.59% for the thirdfirst quarter of 20222023 compared to 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 70-basis255 basis point increase in the rate on our interest-bearing liabilities was partially offset by a 30an 86 basis point increase in yield on our interest-bearing assets, resulting in a 40169 basis point decrease in our net interest spread for the 20222023 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.


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Average Balances, Income and Expenses, Yields and Rates

    
  For the Nine Months Ended September 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 $97,479  $915   1.25% $118,417  $167   0.19%
Investment securities, taxable  100,947   1,278   1.69%  87,981   759   1.15%
Investment securities, nontaxable(2)  10,811   195   2.41%  11,197   217   2.59%
Loans(3)  2,771,546   80,294   3.87%  2,267,611   67,938   4.01%
Total interest-earning assets  2,980,783   82,682   3.71%  2,485,206   69,081   3.72%
Noninterest-earning assets  155,511           117,679         
Total assets $3,136,294          $2,602,885         
Interest-bearing liabilities                        
NOW accounts $385,543   437   0.15% $298,785   141   0.06%
Savings & money market  1,309,502   5,481   0.56%  1,142,409   1,817   0.21%
Time deposits  266,791   1,855   0.93%  183,239   1,051   0.77%
Total interest-bearing deposits  1,961,836   7,773   0.53%  1,624,433   3,009   0.25%
FHLB advances and other borrowings  23,665   129   0.73%  941   4   0.57%
Subordinated debentures  36,143   1,233   4.56%  36,035   1,143   4.24%
Total interest-bearing liabilities  2,021,644   9,135   0.60%  1,661,409   4,156   0.33%
Noninterest-bearing liabilities  831,684           697,533         
Shareholders’ equity  282,966           243,943         
Total liabilities and shareholders’ equity $3,136,294          $2,602,885         
Net interest spread          3.11%          3.39%
Net interest income (tax equivalent) / margin     $73,547   3.30%     $64,925   3.49%
Less:  tax-equivalent adjustment(2)      (45)          (50)    
Net interest income     $73,502          $64,875     

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

During the first nine months of 2022, our net interest margin (TE) decreased by 19 basis points to 3.30%, compared to 3.49% for the first nine months of 2021, driven by the increase in yield on our interest-bearing liabilities. Our average interest-bearing liabilities grew by $360.2 million, while the rate on these liabilities increased 27 basis points to 0.60%. In addition, our average interest-earning assets grew by $495.6 million from the prior year, with the average yield decreasing by one basis point to 3.71%.

The increase in average interest-earning assets for the first nine months of 2022 related primarily to a $503.9 million increase in our average loan balances. The decrease in yield on our interest-earning assets was driven by a 14-basis point decrease in our loan yield as new and renewed loans were repriced at lower rates 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 300 basis points during the first nine months of 2022.

The increase in average interest-bearing liabilities for the first nine months of 2022 was driven by an increase in interest-bearing deposits of $337.4 million and a $22.7 million increase in FHLB advances and other borrowings, while the increase in cost was driven by a 28-basis point increase on our interest-bearing deposits.

Our net interest spread was 3.11% for the first nine months of 2022 compared to 3.39% for the same period in 2021. The 28-basis point decrease in our net interest spread was driven by the 27-basis point increase in yield on our interest-bearing liabilities.


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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 
  September 30, 2022 vs. 2021  September 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 $5,674   815   200   6,689  $2,898   (2,556)  (321)  21 
Investment securities  (9)  164   (4)  151   73   (23)  (5)  45 
Federal funds sold and interest-bearing deposits with banks  (11)  740   (121)  608   (6)  13   (2)  5 
Total interest income  5,654   1,719   75   7,448   2,965   (2,566)  (328)  71 
Interest expense                                
Deposits  217   3,142   728   4,087   276   (1,556)  (179)  (1,459)
FHLB advances and other borrowings  -   -   10   10   -   -   -   - 
Subordinated debentures  1   68   -   69   1   (6)  -   (5)
Total interest expense  218   3,210   738   4,166   277   (1,562)  (179)  (1,464)
Net interest income $5,436   (1,491)  (663)  3,282  $2,688   (1,004)  (149)  1,535 

    
  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 $25.5$20.4 million for the thirdfirst quarter of 2023 and $23.2 million for the first quarter of 2022, and $22.2 million for the third quarter of 2021, a $3.3$2.7 million, or 14.8%11.8%, increasedecrease year over year. The increasedecrease during 20222023 was driven by a $7.4$16.6 million increase in interest incomeexpense primarily due to higher volume of loans.rates on our interest-bearing deposits. In addition, interest expenseincome increased by $4.2$13.9 million primarily due to an increase in volume of loans and the rates on our interest-bearing deposits.loans.

 

  Nine Months Ended 
  September 30, 2022 vs. 2021  September 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 $16,300   (3,180)  (764)  12,356  $4,994   (6,565)  (454)  (2,025)
Investment securities  146   307   49   502   281   (354)  (91)  (164)
Federal funds sold and interest-bearing deposits with banks  (11)  813   (54)  748   3   (53)  (1)  (51)
Total interest income  16,435   (2,060)  (769)  13,606   5,278   (6,972)  (546)  (2,240)
Interest expense                                
Deposits  719   3,265   780   4,764   966   (8,425)  (727)  (8,186)
FHLB advances and other borrowings  63   3   59   125   (324)  (220)  212   (332)
Subordinated debentures  4   86   -   90   3   (93)  -   (90)
Total interest expense  786   3,354   839   4,979   645   (8,738)  (515)  (8,608)
Net interest income $15,649   (5,414)  (1,608)  8,627  $4,633   1,766   (31)  6,368 

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Net interest income for the first nine months of 2022 was $73.5 million compared to $64.9 million for 2021, an $8.6 million, or 13.3%, increase. The increase in net interest income during 2022 was driven by a $13.6 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 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.


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We recorded a $950,000$1.8 million provision for credit losses in the thirdfirst quarter of 2022,2023, compared to a $6.0$1.1 million reversal of provision expensefor credit losses in the thirdfirst quarter of 2021. We recorded a provision expense of $3.82022. The $1.8 million and a provision reversal of $8.2 million for the nine months ended September 30, 2022 and September 30, 2021, respectively. The $950,000 provision in 2022,2023, which included a $425,000$1.9 million provision for credit losses and a $30,000 reversal for unfunded commitments, was driven by $184.8$144.6 million in loan growth during the third quarter, combined with a $102.3 million increase in unfunded commitments. The $3.8 million provision expense for the first nine months of 2022 included a $755,000 provision for unfunded commitments. The prior year reversals of provision expense related to a reduction in qualitative adjustment factors driven by the overall improvement in economic conditions as well as improvement in the credit quality of our portfolio following the pandemic.quarter.

Noninterest Income

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

        
 Three months ended
September 30,		  Nine months ended
September 30,		  

Three months ended

March 31,

 
(dollars in thousands) 2022  2021  2022  2021  2023  2022 
Mortgage banking income $1,230   2,829   3,907   9,445  $622   1,494 
Service fees on deposit accounts  194   199   594   557   325   303 
ATM and debit card income  559   542   1,651   1,532   555   514 
Income from bank owned life insurance  315   321   945   919   332   315 
Net lender and referral fees on PPP loans  -   -   -   268 
Loss on disposal of fixed assets  -   -   (394)  - 
Other income  382   348   1,170   1,043   210   301 
Total noninterest income $2,680   4,239   7,873   13,764  $2,044   2,927 

 

Noninterest income decreased $1.6 million,$883,000, or 36.8%30.2%, for the thirdfirst quarter of 20222023 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 $1.6 million,$872,000, or 56.5%58.4%, driven by low inventory infrom the housing market, lower refinance volumes, andfirst quarter of 2022.

●Other income decreased $91,000, or 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.fee income.

 

Noninterest income decreased $5.9 million, or 42.8%, during the first nine months 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
September 30,		  Nine months ended
September 30,		  

Three months ended

March 31,

 
(dollars in thousands) 2022  2021  2022  2021  2023  2022 
Compensation and benefits $9,843   9,064   29,214   26,897  $10,356   9,455 
Occupancy  2,442   1,685   6,439   4,875   2,457   1,779 
Real estate owned (income) expenses  -   (3)  -   385 
Outside service and data processing costs  1,529   1,368   4,591   4,072   1,629   1,534 
Insurance  507   244   1,134   807   689   261 
Professional fees  555   694   1,848   1,905   660   599 
Marketing  338   247   934   645   366   266 
Other  832   740   2,360   2,109   947   791 
Total noninterest expense $16,046   14,039   46,520   41,695  $17,104   14,685 

 


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Noninterest expense was $16.0$17.1 million for the thirdfirst quarter of 2022,2023, a $2.0$2.4 million, or 14.3%16.5%, increase from noninterest expense of $14.0$14.7 million for the thirdfirst quarter of 2021.2022. The increase in noninterest expense was driven primarily by the following:

 

●Compensation and benefits expense increased $779,000,$901,000, or 8.6%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 $757,000,$678,000, or 44.9%38.1%, driven by costs associated with the relocationhigher depreciation, property taxes and maintenance costs of our headquarters, as well as increased rent expense and depreciation on our new office in Charlotte, North Carolina, and the expansion of our Summerville office.headquarters.

●Insurance costs increased $263,000,$428,000, or 107.8%164.0%, during the third quarter of 2022 driven by higher FDIC insurance premiums.
●Outside service and data processing costs increased $161,000, or 11.8%, during the third quarter of 2022 related to increased item processing, electronic banking costs, and ATM card related expenses which are primarily driven by transaction volume.
●Marketing expenses increased $91,000, or 36.8%, due to an increase in community outreach and sponsorships.

Offsetting these increases was a decrease in professional fees of $139,000, or 20.0%, primarily from a decrease in loan appraisal fees and other consulting fees.

Noninterest expense was $46.5 million for the first nine months of 2022, a $4.8 million, or 11.6%, increase from noninterest expense of $41.7 million for the first nine months 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 57.0% for the third quarter of 2022, compared to 53.2% for the third quarter of 2021 and 57.2%76.1% for the first nine monthsquarter of 20222023, compared to 53.0%56.3% for the first nine monthsquarter 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 thirdfirst quarter of 2022,2023, compared to the thirdfirst quarter of 2021,2022, relates primarily to the decrease in net interest income and mortgage banking income, combined with higher noninterest expenses.

 

We incurred income tax expense of $2.7 million$836,000 and $4.4$2.3 million for the three months ended September 30,March 31, 2023 and 2022, and 2021, respectively, and $7.4 million and $10.4 million for the nine months ended September 30, 2022 and 2021, respectively. Our effective tax rate was 23.9%23.6% and 23.1%22.6% for the ninethree months ended September 30,March 31, 2023 and 2022, and 2021, respectively. The higher tax rate during the first ninethree months of 20222023 relates to the lesser impact of equity compensation transactions during the period.

 

Balance Sheet Review

 

Investment Securities

At September 30, 2022,March 31, 2023, the $97.0$104.1 million in our investment securities portfolio represented approximately 2.8%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 $91.5$94.0 million and an amortized cost of $109.3$108.9 million, resulting in an unrealized loss of $17.7$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

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 ninethree months ended September 30,March 31, 2023 and 2022 and 2021 were $2.76$3.33 billion and $2.23$2.56 billion, respectively. Before the allowance for credit losses, total loans outstanding at September 30, 2022March 31, 2023 and December 31, 20212022 were $3.03$3.42 billion and $2.49$3.27 billion, respectively.


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The principal component of our loan portfolio is loans secured by real estate mortgages. As of September 30, 2022,March 31, 2023, our loan portfolio included $2.58$2.88 billion, or 85.2%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 $171.9$181.0 million as of September 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 $83,000 and a loan to value of 72%74% as of September 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, 0.72%0.7% and 1.0%0.6% of our total home equity lines of credit were over 30 days past due as of September 30, 2022March 31, 2023 and December 31, 2021,2022, respectively.

 


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Following is a summary of our loan composition at September 30, 2022March 31, 2023 and December 31, 2021.2022. During the first ninethree months of 2022,2023, our loan portfolio increased by $540.2$144.6 million, or 21.7%4.4%, with a 20.9%3.9% increase in commercial loans while consumer loans increased by 23.0%5.3% during the period. The majority of the increase was in loans secured by real estate. Our consumer real estate portfolio grew by $179.1$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 $471,000,$470,000, a term of 22 years, and an average rate of 3.53%3.84% as of September 30, 2022,March 31, 2023, compared to a principal balance of $454,000,$468,000, a term of 2122 years, and an average rate of 3.47%3.71% as of December 31, 2021.2022.

          
 September 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 $572,972   18.9% $488,965   19.6% $615,094   18.0% $612,901   18.7%
Non-owner occupied RE  799,569   26.4%  666,833   26.8%  928,059   27.2%  862,579   26.3%
Construction  85,850   2.8%  64,425   2.6%  94,641   2.8%  109,726   3.4%
Business  419,312   13.8%  333,049   13.4%  495,161   14.5%  468,112   14.3%
Total commercial loans  1,877,703   61.9%  1,553,272   62.4%  2,132,955   62.5%  2,053,318   62.7%
Consumer                                
Real estate  873,471   28.8%  694,401   27.9%  993,258   29.1%  931,278   28.4%
Home equity  171,904   5.7%  154,839   6.2%  180,974   5.3%  179,300   5.5%
Construction  77,798   2.6%  59,846   2.4%  71,137   2.1%  80,415   2.5%
Other  29,151   1.0%  27,519   1.1%  39,621   1.0%  29,052   0.9%
Total consumer loans  1,152,324   38.1%  936,605   37.6%  1,284,990   37.5%  1,220,045   37.3%
Total gross loans, net of deferred fees  3,030,027   100.0%  2,489,877   100.0%  3,417,945   100.0%  3,273,363   100.0%
Less—allowance for credit losses  (36,317)      (30,408)      (40,435)      (38,639)    
Total loans, net $2,993,710      $2,459,469      $3,377,510      $3,234,724     

 

Nonperforming assets

 

Nonperforming assets include real estate acquired through foreclosure or deed taken in lieu of foreclosure and loans on nonaccrual status. Generally, a loan is placed on nonaccrual status when it becomes 90 days past due as to principal or interest, or when we believe, after considering economic and business conditions and collection efforts, that the borrower’s financial condition is such that collection of the contractual principal or interest on the loan is doubtful. A payment of interest on a loan that is classified as nonaccrual is recognized as a reduction in principal when received. Our policy with respect to nonperforming loans requires the borrower to make a minimum of six consecutive payments in accordance with the loan terms and to show capacity to continue performing into the future before that loan can be placed back on accrual status. As of September 30, 2022March 31, 2023 and December 31, 2021,2022, we had no loans 90 days past due and still accruing.


Table of Contents

 

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

 

          
(dollars in thousands) September 30, 2022  December 31, 2021  March 31, 2023  December 31, 2022 
Commercial $332   270  $2,580   429 
Consumer  197   1,642   2,153   2,198 
Nonaccruing troubled debt restructurings  2,086   2,952 
Total nonaccrual loans  2,615   4,864   4,733   2,627 
Other real estate owned  -   -   -   - 
Total nonperforming assets $2,615   4,864  $4,733   2,627 

 

At September 30, 2022,March 31, 2023, nonperforming assets were $2.6$4.7 million, or 0.08%0.12% of total assets and 0.09%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 $2.2increased $2.1 million during the first ninethree months of 20222023 due primarily to $1.5three commercial relationships totaling $2.4 million that were added to nonaccrual status, all of loans paidwhich are secured by real estate or charged off and $1.4 millionliquid assets.


Table of loans returned to accruing status.Contents

 

The amount of foregone interest income on nonaccrual loans in the first ninethree months of 20222023 and 20212022 was not material. At September 30,March 31, 2023 and December 31, 2022, and 2021, the allowance for credit losses represented 1,388.87%854.3% and 259.95%1470.7% of the total amount of nonperforming loans, respectively. A significant portion, or approximately 97%,The majority of the nonperforming loans at September 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 September 30, 2022, 85.2%March 31, 2023, 84.4% of our loans were collateralized by real estate and 97.0%83.1% of our impairedindividually 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. ImpairedIndividually evaluated loans are individually reviewed on a quarterly basis to determine the level of impairment. As of September 30, 2022,March 31, 2023, we did not have any impairedindividually 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.

 

At September 30, 2022, impairedMarch 31, 2023, individually evaluated loans totaled $7.2$6.6 million, for which $5.5 million of these loans had a reserve of approximately $959,000 allocated in the allowance for credit losses. During the first three months of 2023, the average recorded investment in individually evaluated loans was approximately $7.5 million. Comparatively, individually evaluated loans totaled $7.1 million at December 31, 2022 for which $6.8 million of these loans had a reserve of approximately $1.3 million allocated in the allowance.allowance for credit losses. During the first nine months of 2022, the average recorded investment in impairedindividually evaluated loans was approximately $7.5 million. Comparatively, impaired loans totaled $8.2 million at December 31, 2021 for which $2.9 million of these loans had a reserve of approximately $836,000 allocated in the allowance. During 2021, the average recorded investment in impaired 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 September 30, 2022, we determined that we had loans totaling $6.8 million that we considered TDRs compared to $6.3 million as of December 31, 2021.


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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 $36.3$40.4 million, representing 1.20%1.18% of outstanding loans and providing coverage of 1,388.87%854.33%, of nonperforming loans at September 30, 2022March 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 September 30, 2021, the allowance for loan losses was $36.1 million, or 1.51% of outstanding loans and 259.95% 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 losseswas $32.9 million, or 1.24% of $525,000 during the third quarteroutstanding loans and 726.88% of 2022 driven by the growth in our loan portfolio.nonperforming loans.

 

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

 

Our retail deposits represented $2.83$3.08 billion, or 94.2%89.9% of total deposits, while our wholesale deposits represented $175.1$347.7 million, or 5.8%10.1%, of total deposits at September 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 101%100% at September 30, 2022March 31, 2023 and 97%104% at December 31, 2021.2022.


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The following is a detail of our deposit accounts:

 

          
 September 30, December 31,  March 31, December 31, 
(dollars in thousands) 2022  2021  2023  2022 
Non-interest bearing $791,050   768,650  $740,534   804,115 
Interest bearing:                
NOW accounts  357,863   401,788   303,743   318,030 
Money market accounts  1,452,958   1,201,099   1,748,562   1,506,418 
Savings  42,335   39,696   39,706   40,673 
Time, less than $250,000  79,386   68,179   106,679   89,876 
Time and out-of-market deposits, $250,000 and over  277,860   84,414   487,550   374,752 
Total deposits $3,001,452   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 $2.72$2.95 billion and $2.48$2.76 billion at September 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.

 


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

 

          
 Nine months ended
September 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 $781,303   0.00% $648,930   0.00% $766,916   0.00% $753,546   0.00%
Interest-bearing demand deposits  385,543   0.15%  298,785   0.06%  303,176   0.59%  406,054   0.12%
Money market accounts  1,268,039   0.58%  1,110,579   0.22%  1,621,885   3.00%  1,201,816   0.21%
Savings accounts  41,463   0.05%  31,830   0.05%  39,993   0.06%  40,409   0.05%
Time deposits less than $100,000  24,519   0.45%  39,136   0.48%
Time deposits greater than $100,000  242,272   0.40%  144,103   0.87%
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 $2,743,139   0.33% $2,273,363   0.18% $3,275,395   1.76% $2,560,546   0.14%

 

During the first ninethree months of 2022,2023, our average transaction account balances increased by $386.2$330.1 million, or 18.5%13.7%, from the prior year, while our average time deposit balances increased by $84,000,$385,000, or 45.6%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 September 30, 2022March 31, 2023 was as follows:

 

      
(dollars in thousands) September 30, 2022  March 31,
2023		 
Three months or less $130,449  $180,209 
Over three through six months  104,180   155,187 
Over six through twelve months  29,773   137,563 
Over twelve months  13,458   14,591 
Total $277,860  $487,550 

 

Time deposits that meet or exceed the FDIC insurance limit of $250,000 at September 30, 2022March 31, 2023 and December 31, 20212022 were $283.4$487.6 million and $84.4$374.8 million, respectively.


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Liquidity and Capital Resources

 

Liquidity represents the ability of a company to convert assets into cash or cash equivalents without significant loss, and theis our ability to raise additional fundsfund 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 September 30, 2022March 31, 2023 and December 31, 20212022 our cash and cash equivalents totaled $160.6$272.2 million and $167.2$170.9 million, respectively, or 4.7%6.9% and 5.7%4.6% of total assets, respectively. Our investment securities at September 30 2022March 31, 2023 and December 31, 20212022 amounted to $97.0$104.1 million and $124.3$104.2 million, respectively, or 2.8%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 September 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 September 30, 2022March 31, 2023 was $618.9$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 September 30, 2022March 31, 2023 and December 31, 20212022 we had $307.5$373.3 million and $254.5$341.5 million, respectively, of letters of credit outstanding with the FHLB to secure client deposits.

 


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We also have a line of credit with another financial institution for $15.0 million, which was unused at September 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 $287.8$299.4 million at September 30, 2022March 31, 2023 and $277.9$294.5 million at December 31, 2021.2022. The $9.9$4.9 million increase from December 31, 20212022 is primarily related to net income of $23.6$2.7 million during the first ninethree months of 20222023 and stock option exercises and equity compensation expenses of $2.3 million, partially offset by a $13.3 million decrease in other comprehensivethe unrealized loss and the tax-effected impacton securities available for sale of $2.8 million$1.6 million.


Table of expense related to the adoption of CECL recorded as an adjustment to retained earnings.Contents

 

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 ninethree months ended September 30, 2022March 31, 2023 and the year ended December 31, 2021.2022. Since our inception, we have not paid cash dividends.

 

          
 September 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  11.16%  18.64%  3.67%  10.20%
Return on average common equity  11.16%  18.64%  3.67%  10.20%
Average equity to average assets ratio  9.02%  9.39%  8.11%  8.85%
Tangible common equity to assets ratio  8.37%  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 loancredit 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 September 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.


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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 September 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.

 

          
    September 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) $358,442   13.09% $287,578   10.50% $273,884   10.00% $376,311   12.38% $243,212   8.00% $304,016   10.00%
Tier 1 Capital (to risk weighted assets)  324,181   11.84%  232,802   8.50%  219,107   8.00%  338,279   11.13%  182,409   6.00%  243,212   8.00%
Common Equity Tier 1 Capital (to risk weighted assets)  324,181   11.84%  191,719   7.00%  178,025   6.50%  338,279   11.13%  136,807   4.50%  197,610   6.50%
Tier 1 Capital (to average assets)  324,181   9.72%  133,432   4.00%  166,790   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%


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

       
     September 30, 2022 
  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 
Total Capital (to risk weighted
assets)		 $372,055   13.58% $287,578   10.50%  N/A   N/A 
Tier 1 Capital (to risk weighted
assets)		  314,794   11.49%  232,802   8.50%  N/A   N/A 
Common Equity Tier 1 Capital (to risk weighted assets)  301,794   11.02%  191,719   7.00%  N/A   N/A 
Tier 1 Capital (to average assets)  314,794   9.44%  133,450   4.00%  N/A   N/A 
     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		 
(dollars in thousands) Amount  Ratio  Amount  Ratio  Amount  Ratio 
Total Capital (to risk weighted assets) $385,157   12.67% $243,211   8.00%  N/A   N/A 
Tier 1 Capital (to risk weighted assets)  324,125   10.66%  182,409   6.00%  N/A   N/A 
Common Equity Tier 1 Capital (to risk weighted assets)  311,125   10.23%  136,806   4.50%  N/A   N/A 
Tier 1 Capital (to average assets)  324,125   8.80%  147,285   4.00%  N/A   N/A 

 

       
     December 31, 2021 
  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 
Total Capital (to risk weighted
assets)		 $343,476   14.90% $242,048   10.50%  N/A   N/A 
Tier 1 Capital (to risk weighted
assets)		  291,641   12.65%  195,944   8.50%  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 
Tier 1 Capital (to average assets)  291,641   10.18%  114,555   4.00%  N/A   N/A 
     

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		 
(dollars in thousands) Amount  Ratio  Amount  Ratio  Amount  Ratio 
Total Capital (to risk weighted assets) $380,802   12.91% $235,892   8.00%  N/A   N/A 
Tier 1 Capital (to risk weighted assets)  320,922   10.88%  176,919   6.00%  N/A   N/A 
Common Equity Tier 1 Capital (to risk weighted assets)  307,922   10.44%  132,689   4.50%  N/A   N/A 
Tier 1 Capital (to average assets)  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.

 


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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 September 30, 2022,March 31, 2023 unfunded commitments to extend credit were $840.9$882.5 million, of which $315.1$286.3 million were at fixed rates and $525.8$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. FollowingAs of March 31, 2023, the adoption of CECL on January 1, 2022, we recorded a reserve for unfunded commitments of $2.0was $2.8 million or 0.31% of total unfunded commitments. As of September 30,December 31, 2022, the reserve for unfunded commitments was $2.8 million or 0.33%0.32% of total unfunded commitments.

 

At September 30, 2022March 31, 2023 and December 31, 2021,2022, there were commitments under letters of credit for $12.6$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.


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As of September 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  (9.9716.34)%
Up 200 basis points  (6.4710.86)%
Up 100 basis points  (3.175.43)%
Base  -—   
Down 100 basis points  7.1710.80%
Down 200 basis points  11.1621.01%
Down 300 basis points  7.1530.48%

 

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 ninethree months ended September 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 changesWe are providing these additional risk factors to supplement the risk factors disclosedcontained 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 SecuritiesNot applicable.

 

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

(d) Maximum
(c) TotalNumber (or
Number ofApproximate
Shares (orDollar Value) of
Units)Shares (or
(a) TotalPurchased asUnits) that May
Number ofPart of PubliclyYet Be
Shares (or(b) AverageAnnouncedPurchased
Units)Price Paid perPlans orUnder the Plans
PeriodPurchasedShare (or Unit)Programsor Programs
July 1, 2022 – July 31, 2022      -      -      -399,026*
August 1, 2022 – August 31, 2022---399,026*
September 1, 2022 – September 30, 2022---399,026*
Total---399,026*

*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 September 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.

 

Item 4. MINE SAFETY DISCLOSURES.

Not applicable.

 

Item 5. OTHER INFORMATION.

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.

 


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INDEX TO EXHIBITS

 

Exhibit
Number		 Description
10.1Employment Agreement by and between Southern First Bank and William M. Aiken, III, dated December 1, 2021.
10.2Employment 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 September 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: November 1, 2022May 2, 2023/s/ R. Arthur Seaver, Jr.
 R. Arthur Seaver, Jr.
 Chief Executive Officer
(Principal (Principal Executive Officer)
  
Date: November 1, 2022May 2, 2023/s/ Michael D. DowlingAndrew Borrmann
 Michael D. DowlingAndrew Borrmann
 Chief Financial Officer
(Principal (Principal Financial and Accounting Officer)

 

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