0001090009 2022-01-01 2022-12-31

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the Quarterly Period Ended ~~September~~June 30, 2022
OR2023

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

For the Transition Period from �� to

Commission file number 000-27719

Southern First Bancshares, Inc.

(Exact name of registrant as specified in its charter)

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

6 Verdae Boulevard
Greenville, S.C.		29607
(Address of principal executive offices)		(Zip Code)

864-679-9000
(Registrant’s telephone number, including area code)

Not Applicable
(Former name, former address, and former fiscal year, if changed since last report)

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

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ xNo ☐¨

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 ☒ xNo ☐¨

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	☒x
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 ☒x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

~~7,997,344~~8,076,438 shares of common stock, par value $0.01 per share, were issued and outstanding as of ~~November 1, 2022.~~July 28, 2023.

Table of Contents

SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARY
~~September~~

June 30, ~~2022~~2023 Form 10-Q

INDEX

		Page
PART I – CONSOLIDATED FINANCIAL INFORMATION		~~Page~~

Item 1.	Consolidated Financial Statements	1

	Consolidated Balance Sheets	13

	Consolidated Statements of Income	24

	Consolidated Statements of Comprehensive Income	35

	Consolidated Statements of Shareholders’ Equity	46

	Consolidated Statements of Cash Flows	57

	Notes to Unaudited Consolidated Financial Statements	68

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2928

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	4544

Item 4.	Controls and Procedures	4644

PART II – OTHER INFORMATION

Item 1.	Legal Proceedings	4745

Item 1A.	Risk Factors	4745

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	4745

Item 3.	Defaults upon Senior Securities	4746

Item 4.	Mine Safety Disclosures	4746

Item 5.	Other Information	4746

Item 6.	Exhibits	4746

Table of Contents

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




	June 30,			December 31,
(dollars in thousands, except share data)	2023			2022
	(Unaudited)			(Audited)
ASSETS
Cash and cash equivalents:
Cash and due from banks	$	24,742			18,788
Federal funds sold		170,145			101,277
Interest-bearing deposits with banks		10,183			50,809
Total cash and cash equivalents		205,070			170,874
Investment securities:
Investment securities available for sale		91,548			93,347
Other investments		12,550			10,833
Total investment securities		104,098			104,180
Mortgage loans held for sale		15,781			3,917
Loans		3,537,616			3,273,363
Less allowance for credit losses		(41,105	)		(38,639	)
Loans, net		3,496,511			3,234,724
Bank owned life insurance		51,792			51,122
Property and equipment, net		96,964			99,183
Deferred income taxes, net		12,356			12,522
Other assets		19,535			15,459
Total assets	$	4,002,107			3,691,981
LIABILITIES
Deposits	$	3,433,018			3,133,864
FHLB advances and related debt		180,000			175,000
Subordinated debentures		36,268			36,214
Other liabilities		51,307			52,391
Total liabilities		3,700,593			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, 8,058,438 and 8,011,045 shares issued and outstanding at June 30, 2023 and December 31, 2022, respectively		81			80
Nonvested restricted stock		(4,051	)		(3,306	)
Additional paid-in capital		120,912			119,027
Accumulated other comprehensive loss		(12,710	)		(13,410	)
Retained earnings		197,282			192,121
Total shareholders’ equity		301,514			294,512
Total liabilities and shareholders’ equity	$	4,002,107			3,691,981

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

Table of Contents

SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

For the three months For the 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



	For the three months					For the six months
	ended June 30,					ended June 30,
(dollars in thousands, except share data)	2023		2022			2023		2022
Interest income
Loans	$	41,089		26,610			77,837		50,541
Investment securities		706		448			1,318		922
Federal funds sold and interest-bearing deposits with banks		891		180			1,860		239
Total interest income		42,686		27,238			81,015		51,702
Interest expense
Deposits		21,937		1,844			39,115		2,752
Borrowings		1,924		510			2,651		902
Total interest expense		23,861		2,354			41,766		3,654
Net interest income		18,825		24,884			39,249		48,048
Provision for credit losses		910		1,775			2,735		2,880
Net interest income after provision for credit losses		17,915		23,109			36,514		45,168
Noninterest income
Mortgage banking income		1,337		1,184			1,959		2,678
Service fees on deposit accounts		331		327			656		631
ATM and debit card income		536		548			1,091		1,062
Income from bank owned life insurance		338		315			670		630
Loss on disposal of fixed assets		-		(394	)		-		(394	)
Other income		194		285			404		587
Total noninterest income		2,736		2,265			4,780		5,194
Noninterest expenses
Compensation and benefits		10,287		9,915			20,643		19,371
Occupancy		2,518		2,219			4,975		3,997
Outside service and data processing costs		1,705		1,528			3,334		3,062
Insurance		897		367			1,586		628
Professional fees		751		693			1,410		1,292
Marketing		335		329			701		596
Other		900		737			1,848		1,528
Total noninterest expenses		17,393		15,788			34,497		30,474
Income before income tax expense		3,258		9,586			6,797		19,888
Income tax expense		800		2,346			1,636		4,678
Net income	$	2,458		7,240			5,161		15,210
Earnings per common share
Basic	$	0.31		0.91			0.64		1.91
Diluted		0.31		0.90			0.64		1.88
Weighted average common shares outstanding
Basic		8,051,131		7,957,631			8,038,642		7,944,814
Diluted		8,069,028		8,054,910			8,080,521		8,075,496

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

Table of Contents

SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

For the three months
ended 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



	For the three months ended June 30,						For the six months ended June 30,
(dollars in thousands)	2023			2022			2023			2022
Net income	$	2,458			7,240			5,161			15,210
Other comprehensive income (loss):
Unrealized gain (loss) on securities available for sale:
Unrealized holding gain (loss) arising during the period, pretax		(1,183	)		(4,749	)		888			(11,890	)
Tax benefit (expense)		248			997			(188	)		2,497
Reclassification of realized gain (loss)		-			3			-			(12	)
Tax (expense) benefit		-			(1	)		-			2
Other comprehensive income (loss)		(935	)		(3,750	)		700			(9,403	)
Comprehensive income	$	1,523			3,490			5,861			5,807

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

Table of Contents

SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(Unaudited)

For the three 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
June 30, 2021 7,899,931 $ 79 - $ - $ (1,173 ) $ 112,604 $ 400 $ 139,749 $ 251,659
Net income - - - - - - - 14,017 14,017
Proceeds from exercise of stock options 4,950 - - - - 175 - - 175
Issuance of restricted stock 8,500 - - - (431 ) 431 - - -
Compensation expense related to restricted stock, net of tax - - - - 135 - - - 135
Compensation expense related to stock options, net of tax - - - - - 291 - - 291
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

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



	For the three months ended June 30,
	Common stock				Preferred stock				Nonvested restricted			Additional paid-in			Accumulated other comprehensive			Retained
(dollars in thousands, except share data)	Shares		Amount		Shares		Amount		stock			capital			income (loss)			earnings		Total
March 31, 2022		7,980,519	$	80		-		-	$	(3,425	)	$	117,286		$	(6,393	)	$	170,976	$	278,524
Net income Retained earnings		-		-		-		-		-			-			-			7,240		7,240
Proceeds from exercise of stock options		3,625		-		-		-		-			128			-			-		128
Issuance of restricted stock		1,500		-		-		-		(71	)		71			-			-		-
Compensation expense related to restricted stock, net of tax		-		-		-		-		266			-			-			-		266
Compensation expense related to stock options, net of tax		-		-		-		-		-			229			-			-		229
Other comprehensive loss		-		-		-		-		-			-			(3,750	)		-		(3,750	)

June 30, 2022		7,985,644	$	80		-	$	-	$	(3,230	)	$	117,714		$	(10,143	)	$	178,216	$	282,637
March 31, 2023		8,047,975	$	80		-	$	-	$	(4,462	)	$	120,683		$	(11,775	)	$	194,824	$	299,350
Net income		-		-		-		-		-			-			-			2,458		2,458
Proceeds from exercise of stock options		10,000		1		-		-		-			168			-			-		169
Issuance of restricted stock, net of forfeitures		463		-		-		-		85			(85	)		-			-		-
Compensation expense related to restricted stock, net of tax		-		-		-		-		326			-			-			-		326
Compensation expense related to stock options, net of tax		-		-		-		-		-			146			-			-		146
Other comprehensive loss		-		-		-		-		-			-			(935	)		-		(935	)

June 30, 2023		8,058,438	$	81		-	$	-	$	(4,051	)	$	120,912		$	(12,710	)	$	197,282	$	301,514

	For the six months ended June 30,
	Common stock				Preferred stock				Nonvested restricted			Additional paid-in		Accumulated other comprehensive			Retained
(dollars in thousands, except share data)	Shares		Amount		Shares		Amount		stock			capital		income (loss)			earnings			Total
December 31, 2021		7,925,819	$	79		-		-	$	(1,435	)	$	114,226	$	(740	)	$	165,771		$	277,901
Net income Common stock		-		-		-		-		-			-		-			15,210			15,210
Proceeds from exercise of stock options		21,750		1		-		-		-			706		-			-			707
Issuance of restricted stock		38,075		-		-		-		(2,305	)		2,305		-			-			-
Adoption of ASU 2016-13		-		-		-		-		-			-		-			(2,765	)		(2,765	)
Compensation expense related to restricted stock, net of tax		-		-		-		-		510			-		-			-			510
Compensation expense related to stock options, net of tax		-		-		-		-		-			477		-			-			477
Other comprehensive loss		-		-		-		-		-			-		(9,403	)		-			(9,403	)

June 30, 2022 Preferred stock		7,985,644	$	80		-	$	-	$	(3,230	)	$	117,714	$	(10,143	)	$	178,216		$	282,637
December 31, 2022		8,011,045	$	80		-	$	-	$	(3,306	)	$	119,027	$	(13,410	)	$	192,121		$	294,512
Net income		-		-		-		-		-			-		-			5,161			5,161
Proceeds from exercise of stock options		11,000		1		-		-		-			184		-			-			185
Issuance of restricted stock		36,393		-		-		-		(1,436	)		1,436		-			-			-
Compensation expense related to restricted stock, net of tax		-		-		-		-		691			-		-			-			691
Compensation expense related to stock options, net of tax		-		-		-		-		-			265		-			-			265
Other comprehensive income		-		-		-		-		-			-		700			-			700
Accumulated other comprehensive income (loss)Additional paid-in capital
June 30, 2023		8,058,438	$	81		-	$	-	$	(4,051	)	$	120,912	$	(12,710	)	$	197,282		$	301,514

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

Table of Contents

SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

For the nine months ended
September 30,
(dollars in thousands) 2022 2021
Operating activities
Net income $ 23,623 34,706
Adjustments to reconcile net income to cash provided by operating activities:
Provision for (reversal of) credit losses 3,830 (8,200 )
Depreciation and other amortization 2,521 1,621
Accretion and amortization of securities discounts and premium, net 554 713
Loss on sale of real estate owned - 376
(Gain) Loss on sale of fixed assets 394 (10 )
Gain on sale of securities (12 ) -
Net change in operating leases 814 266
Compensation expense related to stock options and restricted stock grants 1,501 1,204
Gain on sale of loans held for sale (2,700 ) (11,187 )
Loans originated and held for sale (191,448 ) (406,451 )
Proceeds from sale of loans held for sale 198,461 446,254
Increase in cash surrender value of bank owned life insurance (945 ) (919 )
Increase in deferred tax asset (5,766 ) (6,736 )
Decrease in other assets 5 2,698
Increase in other liabilities 6,006 (4,531 )
Net cash provided by operating activities 36,838 49,804
Investing activities
Increase (decrease) in cash realized from:
Increase in loans, net (538,816 ) (246,421 )
Purchase of property and equipment (13,134 ) (16,620 )
Purchase of investment securities:
Available for sale (10,094 ) (37,908 )
Other investments (15,235 ) (1,000 )
Payments and maturities, calls and repayments of investment securities:
Available for sale 21,517 16,514
Other investments 13,806 1,812
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 )
Financing activities
Increase (decrease) in cash realized from:
Increase in deposits, net 437,626 290,260
Increase (decrease) in Federal Home Loan Bank advances and other borrowings, net 60,000 (25,000 )
Proceeds from the exercise of stock options 794 2,696
Net cash provided by financing activities 498,420 267,956
Net decrease in cash and cash equivalents (6,603 ) 27,846
Cash and cash equivalents at beginning of the period 167,209 100,687
Cash and cash equivalents at end of the period $ 160,606 128,533
Supplemental information
Cash paid for
Interest $ 9,155 5,404
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



	For the six months ended June 30,
(dollars in thousands)	2023			2022
Operating activities
Net income	$	5,161			15,210
Adjustments to reconcile net income to cash provided by operating activities:
Provision for credit losses		2,735			2,880
Depreciation and other amortization		2,397			1,341
Accretion and amortization of securities discounts and premium, net		259			399
Loss on sale of fixed assets		-			394
Gain on sale of securities		-			(12	)
Net change in operating leases		133			172
Compensation expense related to stock options and restricted stock grants		956			987
Gain on sale of loans held for sale		(1,636	)		(1,446	)
Loans originated and held for sale		(70,422	)		(145,513	)
Proceeds from sale of loans held for sale		60,194			142,185
Increase in cash surrender value of bank owned life insurance		(670	)		(630	)
Decrease in deferred tax asset		(21	)		(3,446	)
(Increase) decrease in other assets		(4,076	)		452
Increase (decrease) in other liabilities		(359	)		1,400
Net cash (used for) provided by operating activities		(5,349	)		14,373
Investing activities
Increase (decrease) in cash realized from:
Increase in loans, net		(264,737	)		(355,594	)
Purchase of property and equipment		(767	)		(8,989	)
Purchase of investment securities:		-
Available for sale		-			(10,094	)
Other investments		(42,518	)		(11,078	)
Payments and maturities, calls and repayments of investment securities:
Available for sale		2,427			19,095
Other investments		40,801			10,034
Proceeds from sale of fixed assets		-			95
Net cash used for investing activities		(264,794	)		(356,531	)
Financing activities
Increase in cash realized from:
Increase in deposits, net		299,154			306,332
Increase in Federal Home Loan Bank advances and other borrowings, net		5,000			50,000
Proceeds from the exercise of stock options		185			707
Net cash provided by financing activities		304,339			357,039
Net increase in cash and cash equivalents		34,196			14,881
Cash and cash equivalents at beginning of the period		170,874			167,209
Cash and cash equivalents at end of the period	$	205,070			182,090
Supplemental information Nonvested restricted stock
Cash paid for
Interest	$	38,612			3,745
Income taxes		541			5,950
Schedule of non-cash transactions
Unrealized gain (loss) on securities, net of income taxes		700			(9,393	)

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

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~~Bank's primary federal regulator is the Federal Deposit Insurance Corporation (the “FDIC”). The Bank is also regulated and examined by the South Carolina Board of Financial Institutions. The Bank is primarily engaged in the business of accepting demand deposits and savings deposits insured by the FDIC, and providing commercial, consumer and mortgage loans to the general public.

Basis of Presentation

The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the ~~three-~~three and ~~nine- month~~six-month period ended ~~September~~June 30, ~~2022~~2023 are not necessarily indicative of the results that may be expected for the year ending December 31, ~~2022.~~2023. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2021~~2022 as filed with the U.S. Securities and Exchange Commission (“SEC”) on ~~March 4, 2022.~~February 13, 2023. The consolidated financial statements include the accounts of the Company and the Bank. In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810, “Consolidation,” the financial statements related to the Trusts have not been consolidated.

Business Segments

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 three significant bank failures in the first five months of 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 has and could continue to 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

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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.

Reclassifications

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

Subsequent Events

Subsequent events are events or transactions that occur after the balance sheet date but before financial statements are issued. Recognized subsequent events are events or transactions that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements. Non-recognized subsequent events are events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after that date.

~~Table of Contents~~

Adoption of New Accounting Standard

In ~~June 2016,~~January 2023, the ~~FASB issued~~ Company adopted ASU ~~2016-13, Financial~~2022-02, “Financial Instruments – Credit Losses (Topic 326).: Troubled Debt Restructurings and Vintage Disclosures” (“ASU 2022-02”), which eliminated the accounting guidance for troubled debt restructurings (“TDRs”) while enhancing disclosure requirements for certain loan refinancing and restructurings by creditors when a borrower is experiencing financial difficulty. In addition, for public business entities, the guidance requires disclosure of current-period gross write-offs by year of origination for financing receivables and net investments in leases within the scope of Subtopic 326-20. The 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 withusing the ~~previously applicable incurred loss accounting methodology. The transition adjustment for the~~modified retrospective method. Upon adoption of ~~CECL~~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.

In January 2023, the Company adopted ASU 2022-01, “Derivatives and Hedging (Topic 815): Fair Value Hedging – Portfolio Layer Method”, which intended to better align hedge accounting with an ~~increase~~organization’s risk management strategies. The ASU became applicable to the Company in the ~~allowance for credit losses~~second quarter of 2023 when we entered into a fair value hedge using the portfolio layer method.

Newly Issued, But Not Yet Effective Accounting Standards

In December 2022, the FASB issued amendments to defer the sunset date of the Reference Rate Reform Topic of the Accounting Standards Codification from December 31, 2022 to December 31, 2024, because the current relief in 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 ~~loans~~its financial statements.

Table of ~~$1.5 million~~Contents

NOTE 2 – Investment Securities

The amortized costs and ~~an increase in the reserve for unfunded loan commitments~~fair value of ~~$2.0 million, which is recorded within other liabilities. The adoption of CECL had an insignificant impact~~investment securities are as follows:

Schedule of amortized costs and fair value of investment securities

	June 30, 2023
	Amortized		Gross Unrealized				Fair
(dollars in thousands)	Cost		Gains		Losses		Value
Available for sale
Corporate bonds	$	2,160		-		286		1,874
US treasuries US treasuries [Member]		999		-		124		875
US government agencies		13,009		-		2,199		10,810
State and political subdivisions		22,774		-		3,435		19,339
Asset-backed securities		5,697		-		129		5,568
Mortgage-backed securities
FHLMC FHLMC [Member]		23,628		-		3,730		19,898
FNMA FNMA [Member]		34,028		-		5,417		28,611
GNMA GNMA [Member]		5,341		-		768		4,573
Total mortgage-backed securities		62,997		-		9,915		53,082
Total investment securities available for sale	$	107,636		-		16,088		91,548

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

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

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Schedule of maturities and yields on the Company’s investment securities

															June 30, 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 Corporate bonds [Member]	$	-		-	$	-		-		$	1,874		2.00	%	$	-		-		$	1,874		2.00	%
US treasuries US treasuries [Member]		-		-		875		1.27	%		-		-			-		-			875		1.27	%
US government agencies US government agencies [Member]		-		-		3,253		0.85	%		7,557		1.55	%		-		-			10,810		1.34	%
State and political subdivisions State and political subdivisions [Member]		-		-		885		1.95	%		5,079		1.81	%		13,375		2.17	%		19,339		2.06	%
Asset-backed securities Asset-backed securities [Member]		-		-		-		-			392		5.74	%		5,176		6.23	%		5,568		6.20	%
Mortgage-backed securities Mortgage-backed securities [Member]		-		-		4,780		1.17	%		5,320		1.59	%		42,982		1.97	%		53,082		1.86	%
Total investment securities Total investment securities [Member]	$	-		-	$	9,793		1.14	%	$	20,222		1.75	%	$	61,533		2.37	%	$	91,548		2.10	%

															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 Corporate bonds [Member]	$	-		-	$	-		-		$	1,883		2.00	%	$	-		-		$	1,883		2.00	%
US treasuries US treasuries [Member]		-		-		-		-			871		1.27	%		-		-			871		1.27	%
US government agencies US government agencies [Member]		-		-		3,223		0.85	%		7,394		1.55	%		-		-			10,617		1.34	%
State and political subdivisions State and political subdivisions [Member]		-		-		460		2.13	%		5,382		1.80	%		13,064		2.16	%		18,906		2.05	%
Asset-backed securities Asset-backed securities [Member]		-		-		-		-			554		4.77	%		5,675		5.14	%		6,229		5.10	%
Mortgage-backed securities Asset-backed securities [Member]		-		-		4,594		1.13	%		3,959		1.60	%		46,288		1.90	%		54,841		1.82	%
Total investment securities Total investment securities [Member]	$	-		-	$	8,277		1.08	%	$	20,043		1.75	%	$	65,027		2.24	%	$	93,347		2.03	%

The ~~Company recorded a net decrease to retained earnings of $2.8 million as of January 1, 2022 for~~tables below summarize gross unrealized losses on investment securities and the ~~cumulative effect of adopting CECL, which reflects the transition adjustments noted above, net~~fair market value of the ~~applicable deferred tax assets recorded. Federal banking regulatory agencies provided optional relief to delay the adverse regulatory capital impact~~related securities at June 30, 2023 and December 31, 2022, aggregated by investment category and length of ~~CECL at adoption. The Company did not elect to use this optional relief.~~time that individual securities have been in a continuous unrealized loss position.

Schedule of gross unrealized losses on investment securities and fair market value of related securities

													June 30, 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	$	1,874	$	286		1	$	1,874	$	286
US treasuries		-		-		-		1		875		124		1		875		124
US government agencies		-		-		-		10		10,810		2,199		10		10,810		2,199
State and political subdivisions		3		1,216		24		29		18,123		3,411		32		19,339		3,435
Asset-backed		1		393		1		7		5,175		128		8		5,568		129
Mortgage-backed securities Mortgage-backed securities [Member]
FHLMC FHLMC [Member]		2		2,863		62		26		17,035		3,668		28		19,898		3,730
FNMA FNMA [Member]		1		5		1		29		28,606		5,416		30		28,611		5,417
GNMA GNMA [Member]		-		-		-		7		4,573		768		7		4,573		768
Total investment securities		7	$	4,477	$	88		110	$	87,071	$	16,000		117	$	91,548	$	16,088

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													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

~~Significant Accounting Policy Changes~~

~~Upon adoption of ASC 326,~~At June 30, 2023 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~~had 117 individual investments that were in an unrealized loss ~~position,~~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 ~~first assesses whether it intends~~does not intend to sell ~~or if~~these securities, and it is more likely than not that itthe Company will not be required to sell ~~the security~~these securities before recovery of the amortized ~~cost basis. If either~~cost. The issuers of these securities continue to make timely principal and interest payments under the contractual terms of the ~~criteria regarding intent or requirement to sell~~securities. As such, there is ~~met, the security’s amortized cost basis is written down to fair value through income with the establishment of an~~no allowance ~~under CECL compared to a direct write down of the security under Incurred Loss. For debt securities~~for credit losses on available for sale securities recognized as of June 30, 2023.

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

Schedule of other investments

(dollars in thousands)	June 30, 2023		December 31, 2022
Federal Home Loan Bank stock	$	9,890		9,250
Other nonmarketable investments		2,257		1,180
Investment in Trust Preferred subsidiaries		403		403
Total other investments	$	12,550		10,833

The Company has evaluated other investments for impairment and determined that dothe other investments are not ~~meet~~impaired as of June 30, 2023 and that ultimate recoverability of the ~~aforementioned criteria,~~par value of the ~~Company evaluates whether any decline~~investments is probable. All of the FHLB stock is used to collateralize advances with the FHLB.

NOTE 3 – Mortgage Loans Held for Sale

Mortgage loans originated and intended for sale in the secondary market are reported as loans held for sale and carried at fair value under the fair value option with changes in fair value ~~is due to credit loss factors. In making this assessment, management considers any changes to~~recognized in current period earnings. At the ~~rating~~date of funding of the ~~security by a rating agency and adverse conditions specifically related to~~mortgage loan held for sale, 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 basisfunded amount of the ~~security. If~~loan, the ~~present~~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 ~~cash flows expected~~loan. At June 30 2023, mortgage loans held for sale totaled $15.8 million compared to $3.9 million at December 31, 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 $7.4 million as of June 30, 2023 and $7.3 million as of December 31, 2022.

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Schedule of composition of our loan portfolio

	June 30, 2023						December 31, 2022
(dollars in thousands) Commercial [Member]	Amount			% of Total			Amount			% of Total
Commercial
Owner occupied RE Owner occupied RE [Member]	$	613,874			17.4	%	$	612,901			18.7	%
Non-owner occupied RE Non-owner occupied RE [Member]		951,536			26.9	%		862,579			26.3	%
Construction Construction [Member]		115,798			3.3	%		109,726			3.4	%
Business Business [Member]		511,719			14.5	%		468,112			14.3	%
Total commercial loans Consumer [Member]		2,192,927			62.1	%		2,053,318			62.7	%
Consumer
Real estate Real estate [Member]		1,047,904			29.6	%		931,278			28.4	%
Home equity Home equity [Member]		185,584			5.2	%		179,300			5.5	%
Construction Construction [Member]		61,044			1.7	%		80,415			2.5	%
Other Other [Member]		50,157			1.4	%		29,052			0.9	%
Total consumer loans		1,344,689			37.9	%		1,220,045			37.3	%
Total gross loans, net of deferred fees		3,537,616			100.0	%		3,273,363			100.0	%
Less—allowance for credit losses		(41,105	)					(38,639	)
Total loans, net	$	3,496,511					$	3,234,724

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 ~~collected~~subject to renewal at their contractual maturity. Renewal of such loans is ~~less than~~subject to review and credit approval, as well as modification of terms upon maturity. Actual repayments of loans may differ from the ~~amortized cost basis,~~maturities reflected below, because borrowers have the right to prepay obligations with or without prepayment penalties.


Schedule of loan maturity distribution by type and related interest rate	June 30, 2023
(dollars in thousands)	One year or less		After one but within five years		After five but within fifteen years		After fifteen years		Total
Commercial
Owner occupied RE	$	9,511		155,585		406,974		41,804		613,874
Non-owner occupied RE		61,846		487,268		377,281		25,141		951,536
Construction		10,643		35,648		68,916		591		115,798
Business		103,829		211,107		192,332		4,451		511,719
Total commercial loans		185,829		889,608		1,045,503		71,987		2,192,927
Consumer
Real estate		7,672		48,115		299,705		692,412		1,047,904
Home equity		620		21,841		157,853		5,270		185,584
Construction		244		314		36,816		23,670		61,044
Other		9,347		21,779		18,266		765		50,157
Total consumer loans		17,883		92,049		512,640		722,117		1,344,689
Total gross loans, net of deferred fees	$	203,712		981,657		1,558,143		794,104		3,537,616

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					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.


Schedule of composition of gross loans by rate type	June 30, 2023				December 31, 2022
	Interest Rate						Interest Rate
(dollars in thousands)	Fixed		Floating or Adjustable		Fixed		Floating or Adjustable
Commercial Commercial [Member]
Owner occupied RE Owner occupied RE [Member]	$	600,648		3,715		598,513		3,814
Non-owner occupied RE Non-owner occupied RE [Member]		792,099		97,591		742,763		75,246
Construction Construction [Member]		90,403		14,752		90,246		13,971
Business Business [Member]		313,001		94,889		298,866		73,089
Total commercial loans		1,796,151		210,947		1,730,388		166,120
Consumer Consumer [Member]
Real estate Real estate [Member]		1,040,232		-		919,130		11
Home equity Home equity [Member]		13,525		171,439		14,173		163,791
Construction Construction [Member]		60,800		-		79,750		-
Other Other [Member]		16,830		23,980		19,113		6,013
Total consumer loans		1,131,387		195,419		1,032,166		169,815
Total gross loans, net of deferred fees	$	2,927,538		406,366		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 ~~loss exists~~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— A pass loan ranges from minimal to average credit risk; however, still has acceptable credit risk.

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

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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, which may jeopardize the liquidation of the debt. A substandard loan is characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.

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

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

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Schedule of breakdown of outstanding loans by risk category

																June 30, 2023
(dollars in thousands)	2023		2022			2021		2020			2019		Prior			Revolving			Revolving Converted to Term		Total
Commercial
Owner occupied RE
Pass	$	32,634		157,619			139,472		68,570			62,877		118,738			-			168		580,078
Watch		-		3,510			469		16,170			3,585		6,489			-			-		30,223
Special Mention		-		191			-		-			-		3,100			-			-		3,291
Substandard		-		-			-		-			-		282			-			-		282
Total Owner occupied RE		32,634		161,320			139,941		84,740			66,462		128,609			-			168		613,874

Non-owner occupied RE
Pass		75,513		305,006			174,325		110,120			54,654		182,840			222			-		902,680
Watch		775		966			9,468		-			10,737		6,396			-			-		28,342
Special Mention		-		-			200		-			9,028		965			-			-		10,193
Substandard		-		-			-		-			7,974		2,347			-			-		10,321
Total Non-owner occupied RE		76,288		305,972			183,993		110,120			82,393		192,548			222			-		951,536

Construction
Pass		9,046		71,909			24,939		8,397			242		-			-			-		114,533
Watch		-		1,265			-		-			-		-			-			-		1,265
Special Mention		-		-			-		-			-		-			-			-		-
Substandard		-		-			-		-			-		-			-			-		-
Total Construction		9,046		73,174			24,939		8,397			242		-			-			-		115,798

Business
Pass		34,799		142,869			52,202		20,565			19,229		55,100			151,640			1,162		477,566
Watch		139		14,342			1,998		1,511			987		4,178			5,751			-		28,906
Special Mention		102		1,232			226		459			245		416			-			98		2,778
Substandard		-		492			-		27			174		1,314			462			-		2,469
Total Business		35,040		158,935			54,426		22,562			20,635		61,008			157,853			1,260		511,719
Total Commercial loans		153,008		699,401			403,299		225,819			169,732		382,165			158,075			1,428		2,192,927

Consumer
Real estate
Pass		103,913		263,435			282,239		181,201			68,138		110,151			-			-		1,009,077
Watch		491		5,715			7,936		3,974			2,069		4,156			-			-		24,341
Special Mention		-		2,329			1,673		2,133			2,422		2,921			-			-		11,478
Substandard		-		187			640		-			327		1,854			-			-		3,008
Total Real estate		104,404		271,666			292,488		187,308			72,956		119,082			-			-		1,047,904

Home equity
Pass		-		-			-		-			-		-			172,802			-		172,802
Watch		-		-			-		-			-		-			7,052			-		7,052
Special Mention		-		-			-		-			-		-			3,967			-		3,967
Substandard		-		-			-		-			-		-			1,763			-		1,763
Total Home equity		-		-			-		-			-		-			185,584			-		185,584

Construction
Pass		6,231		40,707			14,106		-			-		-			-			-		61,044
Watch		-		-			-		-			-		-			-			-		-
Special Mention		-		-			-		-			-		-			-			-		-
Substandard		-		-			-		-			-		-			-			-		-
Total Construction		6,231		40,707			14,106		-			-		-			-			-		61,044

Other
Pass		4,535		3,140			2,707		1,586			1,359		3,016			32,462			-		48,805
Watch		44		37			356		7			3		177			95			-		719
Special Mention		-		336			-		-			33		87			83			-		539
Substandard		-		-			84		-			2		-			8			-		94
Total Other		4,579		3,513			3,147		1,593			1,397		3,280			32,648			-		50,157

Total Consumer loans		115,214		315,886			309,741		188,901			74,353		122,362			218,232			-		1,344,689
Total loans	$	268,222		1,015,287			713,040		414,720			244,085		504,527			376,307			1,428		3,537,616
Current period gross write-offs				(200	)				(1	)				(9	)		(391	)				(601	)

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


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

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

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

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

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

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

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

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

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


Schedule of loan balances by payment status	June 30, 2023
(dollars in thousands)	Accruing 30- 59 days past due		Accruing 60-89 days past due		Accruing 90 days or more past due		Nonaccrual loans		Accruing current		Total
Commercial
Owner occupied RE	$	6		-		-		-		613,868		613,874
Non-owner occupied RE		83		104		-		754		950,595		951,536
Construction		-		-		-		-		115,798		115,798
Business		184		5		-		137		511,393		511,719
Consumer
Real estate		132		583		-		1,053		1,046,136		1,047,904
Home equity		29		-		-		1,072		184,483		185,584
Construction		-		-		-		-		61,044		61,044
Other		6		-		-		-		50,151		50,157
Total loans	$	440		692		-		3,016		3,533,468		3,537,616
Total loans over 90 days past due		-		-		-		-		-		1,072

	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 June 30, 2023 and December 31, 2022, loans 30 days or more past due represented 0.07% and 0.11% of the Company’s total loan portfolio, respectively. Commercial loans 30 days or more past due were 0.01% and 0.03% of the Company’s total loan portfolio as of June 30, 2023 and December 31, 2022, respectively. Consumer loans 30 days or more past due were 0.05% and 0.08% of total loans as of June 30, 2023 and December 31, 2022, respectively.

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

Schedule nonaccrual loans by major categories

	June 30, 2023								December 31, 2022
	Nonaccrual		Nonaccrual				Nonaccrual		Nonaccrual
	loans		loans		Total		loans		loans		Total
	with no		with an		nonaccrual		with no		with an		nonaccrual
(dollars in thousands)	allowance		allowance		loans		allowance		allowance		loans
Commercial
Owner occupied RE		-		-		-		-		-		-
Non-owner occupied RE		-		754		754		114		133		247
Construction		-		-		-		-		-		-
Business		-		137		137		-		182		182
Total commercial		-		891		891		114		315		429
Consumer
Real estate		-		1,053		1,053		-		1,099		1,099
Home equity		185		887		1,072		194		905		1,099
Construction		-		-		-		-		-		-
Other		-		-		-		-		-		-
Total consumer		185		1,940		2,125		194		2,004		2,198
Total nonaccrual loans		185		2,831		3,016		308		2,319		2,627

We did not recognize interest income on nonaccrual loans for the three months ended June 30, 2023 and June 30, 2022. The accrued interest reversed during the three months ended June 30, 2023 and June 30, 2022 was not material.

We did not recognize interest income on nonaccrual loans for the six months ended June 30, 2023 and June 30, 2022. Accrued interest of $23,000 was reversed during the six months ended June 30, 2023 and $3,000 was reversed during the six months ended June 30, 2022.

The table below summarizes information regarding nonperforming assets.

Schedule of nonperforming assets, including nonaccruing TDRs

(dollars in thousands)	June 30, 2023			December 31, 2022
Nonaccrual loans	$	3,016			2,627
Other real estate owned		-			-
Total nonperforming assets	$	3,016			2,627
Nonperforming assets as a percentage of:
Total assets		0.08	%		0.07	%
Gross loans		0.09	%		0.08	%
Total loans over 90 days past due	$	1,072			402
Loans over 90 days past due and still accruing		-			-
Accruing troubled debt restructurings		-			4,503

Modifications to Borrowers Experiencing Financial Difficulty

The Company adopted Accounting Standards Update (“ASU”) 2022-02, Financial Instruments - Credit Losses (Topic 326) Troubled Debt Restructurings and Vintage Disclosures (“ASU 2022-02”) effective January 1, 2023. The amendments in ASU 2022-02 eliminated the recognition and measure of troubled debt restructurings and enhanced disclosures for loan modifications to borrowers experiencing financial difficulty. There were no loan modifications to borrowers experiencing financial difficulty during the three months and six months ended June 30, 2023.

Allowance for Credit Losses

The Company maintains an allowance for credit losses ~~is recorded~~to provide for ~~the~~expected 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. Losses are charged against the allowance when management believes that the ~~uncollectibility of an available-for-sale security~~principal is ~~confirmed or when either~~uncollectable. Subsequent recoveries, if any, are credited to the allowance. Allocations of the ~~criteria regarding intent or requirement to sell~~allowance are made for specific loans and for pools of similar types of loans, although the entire allowance is ~~met. At September 30, 2022, there was no allowance~~available for any loan that, in management’s judgment, should be charged against the allowance. A provision for credit losses ~~related to~~is taken based on management’s ongoing evaluation of the ~~available-for-sale portfolio.~~

appropriate allowance balance.

~~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.~~19

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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~~A formal evaluation of the adequacy of the credit loss allowance ~~on a quarterly basis.~~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~~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’~~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.

~~Table of Contents~~

●

~~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. 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.

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.

~~Table of Contents~~

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 subtopic and Financial Instruments–Credit Losses subtopic to the Accounting Standards Codification. The amendments eliminate the accounting guidance for TDRs by creditors while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. In addition, for public business entities, the amendments require disclosure of current-period gross write-offs by year of origination for financing receivables and net investments in leases within the scope of Subtopic 326-20. The amendments are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption of the amendments is permitted if ASU 2016-13 has been adopted, including adoption in an interim period. The Company does not expect these amendments to have a material effect on its financial statements.

~~Table of Contents~~

~~NOTE 2 – Investment Securities~~

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

September 30, 2022
Amortized Gross Unrealized Fair
(dollars in thousands) Cost Gains Losses Value
Available for sale
Corporate bonds $ 2,179 - 302 1,877
US treasuries 999 - 136 863
US government agencies 13,006 - 2,371 10,635
State and political subdivisions 22,996 - 4,350 18,646
Asset-backed securities 6,992 - 147 6,845
Mortgage-backed securities
FHLMC 21,378 - 3,853 17,525
FNMA 35,929 - 5,860 30,069
GNMA 5,774 - 713 5,061
Total mortgage-backed securities 63,081 - 10,426 52,655
Total investment securities available for sale $ 109,253 - 17,732 91,521

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, 2022 and December 31, 2021 are shown in the following table. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

~~Table of Contents~~

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 %

~~Table of Contents~~

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

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

~~Table of Contents~~

At September 30, 2022 the Company had 115 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.

~~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
Federal Home Loan Bank stock $ 4,036 1,241
Other nonmarketable investments 1,010 2,377
Investment in Trust Preferred subsidiaries 403 403
Total other investments $ 5,449 4,021

The Company has evaluated other investments for impairment and determined that the other investments are not impaired as of September 30, 2022 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.

~~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, mortgage loans held for sale totaled $9.2 million compared to $13.6 million at December 31, 2021.

~~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 million as of September 30, 2022 and $5.0 million as of December 31, 2021.

September 30, 2022 December 31, 2021
(dollars in thousands) Amount % of Total Amount % of Total
Commercial
Owner occupied RE $ 572,972 18.9 % $ 488,965 19.6 %
Non-owner occupied RE 799,569 26.4 % 666,833 26.8 %
Construction 85,850 2.8 % 64,425 2.6 %
Business 419,312 13.8 % 333,049 13.4 %
Total commercial loans 1,877,703 61.9 % 1,553,272 62.4 %
Consumer
Real estate 873,471 28.8 % 694,401 27.9 %
Home equity 171,904 5.7 % 154,839 6.2 %
Construction 77,798 2.6 % 59,846 2.4 %
Other 29,151 1.0 % 27,519 1.1 %
Total consumer loans 1,152,324 38.1 % 936,605 37.6 %
Total gross loans, net of deferred fees 3,030,027 100.0 % 2,489,877 100.0 %
Less—allowance for credit losses (36,317 ) (30,408 )
Total loans, net $ 2,993,710 $ 2,459,469

~~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
(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 $ 11,625 117,787 394,256 49,304 572,972
Non-owner occupied RE 44,182 383,518 344,874 26,995 799,569
Construction 5,413 26,336 48,891 5,210 85,850
Business 75,690 181,097 158,292 4,233 419,312
Total commercial loans 136,910 708,738 946,313 85,742 1,877,703
Consumer
Real estate $ 11,605 41,365 233,316 587,185 873,471
Home equity 1,377 20,822 144,336 5,369 171,904
Construction 241 589 20,129 56,839 77,798
Other 3,525 22,742 2,098 786 29,151
Total consumer loans 16,748 85,518 399,879 650,179 1,152,324
Total gross loans, net of deferred fees $ 153,658 794,256 1,346,192 735,921 3,030,027

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

~~Table of Contents~~

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

September 30, 2022 December 31, 2021
Interest Rate Interest Rate
(dollars in thousands) Fixed Floating or
Adjustable Fixed Floating or
Adjustable
Commercial
   Owner occupied RE $ 558,592 2,755 463,589 8,518
   Non-owner occupied RE 683,796 71,591 533,565 85,815
   Construction 71,957 8,480 57,139 2,404
   Business 270,224 73,398 191,522 74,694
     Total commercial loans 1,584,569 156,224 1,245,815 171,431
Consumer
   Real estate 861,854 12 679,756 13
   Home equity 13,684 156,843 12,850 139,811
   Construction 77,557 - 58,884 -
   Other 17,816 7,810 13,220 6,228
     Total consumer loans 970,911 164,665 764,710 146,052
Total gross loans, net of deferred fees $ 2,555,480 320,889 2,010,525 317,483

~~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 from minimal to average credit risk however still have acceptable credit risk. Watch loans also fall into this category, representing loans with above average risk due to minor weaknesses and warrant closer scrutiny by management.

●

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.

●

~~Table of Contents~~

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

September 30, 2022
(dollars in thousands) 2022 2021 2020 2019 2018 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
Watch 1,375 484 - 2,460 - 7,005 - - 11,324
Special Mention 205 - - - - 2,981 - - 3,186
Substandard - - 646 - 292 - - - 938
Total Owner occupied RE 120,728 131,276 97,043 72,679 37,413 113,833 - - 572,972

Non-owner occupied RE
Pass 208,206 171,640 115,680 58,927 75,772 109,884 604 - 740,713
Watch 1,399 9,494 - 12,220 6,538 12,089 - - 41,740
Special Mention - 203 - 6,145 173 1,286 - - 7,807
Substandard - 135 - 7,995 304 875 - - 9,309
Total Non-owner occupied RE 209,605 181,472 115,680 85,287 82,787 124,134 604 - 799,569

Construction
Pass 26,521 54,253 3,394 1,682 - - - - 85,850
Watch - - - - - - - - -
Special Mention - - - - - - - - -
Substandard - - - - - - - - -
Total Construction 26,521 54,253 3,394 1,682 - - - - 85,850

Business
Pass 91,796 59,303 30,860 23,015 36,217 30,292 121,475 590 393,548
Watch 6,844 2,399 1,375 1,370 157 3,070 5,433 477 21,125
Special Mention 903 - 390 240 - 162 115 182 1,992
Substandard 500 - 191 130 329 932 565 - 2,647
Total Business 100,043 61,702 32,816 24,755 36,703 34,456 127,588 1,249 419,312
Total Commercial loans 456,897 428,703 248,933 184,403 156,903 272,423 128,192 1,249 1,877,703

Consumer
Real estate
Pass 198,590 263,113 189,049 74,324 39,731 77,887 - - 842,694
Watch 1,707 8,554 2,991 3,002 896 4,737 - - 21,887
Special Mention 116 1,341 1,373 1,057 562 1,085 - - 5,534
Substandard - 652 228 548 403 1,525 - - 3,356
Total Real estate 200,413 273,660 193,641 78,931 41,592 85,234 - - 873,471

Home equity
Pass - - - - - - 160,975 - 160,975
Watch - - - - - - 6,187 - 6,187
Special Mention - - - - - - 2,283 - 2,283
Substandard - - - - - - 2,459 - 2,459
Total Home equity - - - - - - 171,904 - 171,904

Construction
Pass 29,666 37,281 9,947 - - - - - 76,894
Watch - - 588 - - - - - 588
Special Mention - - - 316 - - - - 316
Substandard - - - - - - - - -
Total Construction 29,666 37,281 10,535 316 - - - - 77,798

Other
Pass 3,690 2,123 1,815 1,643 410 3,298 15,297 - 28,276
Watch - 368 17 20 25 181 90 - 701
Special Mention 4 - - 30 53 4 34 - 125
Substandard - 36 - 6 - - 7 - 49
Total Other 3,694 2,527 1,832 1,699 488 3,483 15,428 - 29,151
Total Consumer loans 233,773 313,468 206,008 80,946 42,080 88,717 187,332 - 1,152,324
Total loans $ 690,670 742,171 454,941 265,349 198,983 361,140 315,524 1,249 3,030,027

~~Table of Contents~~

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

December 31, 2021
Commercial Consumer
(dollars in thousands) Owner
occupied
RE Non-owner
occupied
RE Construction Business Real
Estate Home
Equity Construction Other Total
Pass $ 487,422 589,280 64,425 328,371 684,923 148,933 59,846 27,365 2,390,565
Special mention 327 48,310 - 1,530 4,294 2,986 - 129 57,576
Substandard 1,216 29,243 - 3,148 5,184 2,920 - 25 41,736
Total loans $ 488,965 666,833 64,425 333,049 694,401 154,839 59,846 27,519 2,489,877

The following tables ~~present loan balances by payment status.~~

September 30, 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 $ - - - - 572,972 572,972
Non-owner occupied RE 57 - - 253 799,259 799,569
Construction - - - - 85,850 85,850
Business 123 - - 79 419,110 419,312
Consumer
Real estate 77 131 - 904 872,359 873,471
Home equity 129 - - 1,379 170,396 171,904
Construction - - - - 77,798 77,798
Other - - - - 29,151 29,151
Total loans $ 386 131 - 2,615 3,026,895 3,030,027

December 31, 2021
(dollars in thousands) Accruing 30-59 days past due Accruing 60-89 days past due Accruing 90 days or more past due Nonaccrual loans Accruing current Total
Commercial
Owner occupied RE $ - - - - 488,965 488,965
Non-owner occupied RE - - - 1,069 665,764 666,833
Construction - - - - 64,425 64,425
Business - - - - 333,049 333,049
Consumer
Real estate 136 - - 1,750 692,515 694,401
Home equity 417 174 - 2,045 152,203 154,839
Construction - - - - 59,846 59,846
Other 5 - - - 27,514 27,519
Total loans $ 558 174 - 4,864 2,484,281 2,489,877

As of September 30, 2022 and December 31, 2021, loans 30 days or more past due represented 0.07% and 0.09% of the Company’s total loan portfolio, respectively. Commercial loans 30 days or more past due were 0.01% and 0.00% of the Company’s total loan portfolio as of September 30, 2022 and December 31, 2021, respectively. Consumer loans 30 days or more past due were 0.06% of total loans as of September 30, 2022 and December 31, 2021.

~~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~~

~~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
Nonaccrual Nonaccrual
loans loans Total Total
with no with an nonaccrual nonaccrual
(dollars in thousands) allowance allowance loans loans
Commercial
Owner occupied RE - - - -
Non-owner occupied RE $ 117 136 253 1,070
Construction - - - -
Business 79 - 79 -
Total commercial 196 136 332 1,070
Consumer
Real estate - 904 904 1,750
Home equity 197 1,182 1,379 2,044
Construction - - - -
Other - - - -
Total consumer 197 2,086 2,283 3,794
Total $ 393 2,222 2,615 4,864

~~Table of Contents~~

The table below summarizes key information for loans individually evaluated for impairment loans under the incurred loss methodology. These loans include loans on nonaccrual status and loans modified in a TDR, whether on accrual or nonaccrual status. These loans may have estimated impairment which is included in the allowance for credit losses.

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.

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

~~Table of Contents~~

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

~~Allowance for Credit Losses~~

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

Three 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 $ 4,829 10,010 1,060 6,717 7,992 2,442 851 291 34,192
Provision for credit losses 476 (1,595 ) (82 ) 875 782 3 41 25 525
Loan charge-offs - - - - - - - - -
Loan recoveries - 1,540 - 51 - 8 - 1 1,600
Net loan recoveries (charge-offs) - 1,540 - 51 - 8 - 1 1,600
Balance, end of period $ 5,305 9,955 978 7,643 8,774 2,453 892 317 36,317
Net charge-offs to average loans (annualized) (0.22 %)
Allowance for credit losses to gross loans 1.20 %
Allowance for credit losses to nonperforming loans 1388.87 %

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 %

Schedule of activity related to the allowance for credit losses

									Three months ended June 30, 2023
	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	$	5,984			11,285			1,110		8,022		10,079		2,663			810			482			40,435
Provision for credit losses		(88	)		347			221		118		316		245			(126	)		62			1,095
Loan charge-offs		-			(48	)		-		-		-		(389	)		-			(2	)		(439	)
Loan recoveries		-			-			-		12		-		2			-			-			14
Net loan recoveries (charge-offs)		-			(48	)		-		12		-		(387	)		-			(2	)		(425	)
Balance, end of period	$	5,896			11,584			1,331		8,152		10,395		2,521			684			542			41,105
Net charge-offs to average loans (annualized)																							0.05	%
Allowance for credit losses to gross loans																							1.16	%
Allowance for credit losses to nonperforming loans																							1,363.11	%

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									Three months ended June 30, 2022
	Commercial											Consumer
(dollars in thousands)	Owner occupied RE			Non- owner occupied RE			Construction		Business			Real Estate			Home Equity			Construction			Other			Total
Balance, beginning of period	$	4,898			9,973			929		6,217			7,602			2,197			844			284			32,944
Provision for credit losses		(69	)		37			131		524			390			407			7			98			1,525
Loan charge-offs		-			-			-		(55	)		-			(170	)		-			(91	)		(316	)
Loan recoveries		-			-			-		31			-			8			-			-			39
Net loan recoveries (charge-offs)		-			-			-		(24	)		-			(162	)		-			(91	)		(277	)
Balance, end of period	$	4,829			10,010			1,060		6,717			7,992			2,442			851			291			34,192
Net charge-offs to average loans (annualized)																									0.04	%
Allowance for credit losses to gross loans																									1.20	%
Allowance for credit losses to nonperforming loans																									1,166.70	%


									Six months ended June 30, 2023
	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	$	5,867			10,376			1,292		7,861			9,487			2,551			893			312			38,639
Provision for credit losses		29			1,385			39		268			908			298			(209	)		232			2,950
Loan charge-offs		-			(209	)		-		(1	)		-			(389	)		-			(2	)		(601	)
Loan recoveries		-			32			-		24			-			61			-			-			117
Net loan recoveries (charge-offs)		-			(177	)		-		23			-			(328	)		-			(2	)		(484	)
Balance, end of period	$	5,896			11,584			1,331		8,152			10,395			2,521			684			542			41,105
Net charge-offs to average loans (annualized)																									0.03	%
Allowance for credit losses to gross loans																									1.16	%
Allowance for credit losses to nonperforming loans																									1,363.11	%

												Six months ended June 30, 2022
	Commercial											Consumer
(dollars in thousands)	Owner occupied RE			Non- owner occupied RE			Construction		Business			Real Estate			Home Equity			Construction			Other			Total
Balance, beginning of period	$	4,700			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		442			(841	)		281		683			1,203			572			143			67			2,550
Loan charge-offs		-			-			-		(55	)		-			(339	)		-			(91	)		(485	)
Loan recoveries		-			-			-		145			-			74			-			-			219
Net loan recoveries (charge-offs)		-			-			-		90			-			(265	)		-			(91	)		(266	)
Balance, end of period	$	4,829			10,010			1,060		6,717			7,992			2,442			851			291			34,192
Net charge-offs to average loans (annualized)																									0.02	%
Allowance for credit losses to gross loans																									1.20	%
Allowance for credit losses to nonperforming loans																									1,166.70	%

The $1.1

~~Prior~~ million provision for credit losses for the three months ended June 30, 2023 was driven by $119.7 million in loan growth combined with net charge-offs of $425,000 for the quarter. The $3.0 million provision for credit losses for the six months ended June 30, 2023 was driven by $264.3 million in loan growth for the period. In addition to loan growth, the ~~adoption~~provision for credit losses was impacted by slightly lower expected loss rates due to continued low charge-offs during the first half of ~~ASC 326 on January 1, 2022,~~2023, while minor adjustments to an internal qualitative factor increased the ~~Company calculated~~qualitative component of the allowance ~~for loan losses under the incurred loss methodology. The following two tables are disclosures~~and related ~~to the allowance for loan losses in prior periods under this methodology.~~provision expense.

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 the allowance for loan losses and recorded investment in loans by impairment methodology under the incurred loss methodology.~~

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

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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 presents~~tables present an analysis of collateral-dependent loans of the ~~Company as of September 30, 2022.~~Company.


					June 30, 2023
Schedule of analysis of collateral-dependent loans of the company	Real		Business
(dollars in thousands)	estate		assets		Other		Total
Commercial
Owner occupied RE	$	-		-		-		-
Non-owner occupied RE		31		-		-		31
Construction		-		-		-		-
Business		42		-		-		42
Total commercial		73		-		-		73
Consumer
Real estate		195		-		-		195
Home equity		185		-		-		185
Construction		-		-		-		-
Other		-		-		-		-
Total consumer		380		-		-		380
Total	$	453		-		-		453

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

September 30, 2022
Real Business
(dollars in thousands) estate assets Other Total
Commercial
Owner occupied RE $ - - - -
Non-owner occupied RE 117 - - 117
Construction - - - -
Business 80 - - 80
Total commercial 197 - - 197
Consumer
Real estate - - - -
Home equity 197 - - 197
Construction - - - -
Other - - - -
Total consumer 197 - - 197
Total $ 394 - - 394

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~~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~~$2.6 million at ~~September~~June 30, ~~2022~~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 ~~nine~~three and six months ended ~~September~~June 30, ~~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 difficulties2023 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~~June 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.~~22

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Schedule of allowance for credit losses for unfunded loan commitments

	Three months ended			Three months ended
(dollars in thousands)	June 30, 2023			June 30, 2022
Balance, beginning of period	$	2,750			2,080
Adjustment for adoption of CECL		-			-
Provision for (reversal of) credit losses		(185	)		250
Balance, end of period	$	2,565			2,330
Unfunded Loan Commitments	$	849,977			738,791
Reserve for Unfunded Commitments to Unfunded Loan Commitments		0.30	%		0.32	%

		Six months ended			Six months ended
(dollars in thousands)		June 30, 2023			June 30, 2022
Balance, beginning of period	$	2,780			-
Adjustment for adoption of CECL		-			2,000
Provision for (reversal of) credit losses		(215	)		330
Balance, end of period	$	2,565			2,330
Unfunded Loan Commitments	$	849,977			738,791
Reserve for Unfunded Commitments to Unfunded Loan Commitments		0.30	%		0.32	%

NOTE 65 – Derivative Financial Instruments

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

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

The Company manages the interest rate and price risk associated with its outstanding IRLCs and mortgage loans held for sale by entering into derivative instruments such as forward sales of MBS. These derivatives are free- standing derivatives and are not designated as instruments for hedge accounting. 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 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 entered into a pay-fixed portfolio layer method fair value swap, designated as a hedging instrument, with a total notional amount of $200.0 million in the second quarter of 2023. The Company is designating the fair value swap under the portfolio layer method (“PLM”). Under this method, the hedged item is designated as a hedged layer of a closed portfolio of financial loans that is anticipated to remain outstanding for the designated hedged period. Adjustments will be made to record the swap at fair value on the consolidated balance sheets, with changes in fair value recognized in interest income. The carrying value of the fair value swap on the consolidated balance sheets will also be adjusted through interest income, based on changes in fair value attributable to changes in the hedged risk.

The following table represents the carrying value of the portfolio layer method hedged asset and the cumulative fair value hedging adjustment included in the carrying value of the hedged asset as of June 30, 2023 and December 31, 2022.

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Schedule of carrying value of hedged asset and cumulative fair value hedging adjustment

June 30, 2023

December 31, 2022

(dollars in thousands)

Carrying
Amount

Hedged Asset

Carrying
Amount

Hedged Asset

Fixed Rate Asset¹

202,750

2,750

These amounts included the amortized cost basis of closed portfolios of fixed rate loans used to designate hedging relationships in which the hedged item is the stated amount of the assets in the closed portfolio anticipated to be outstanding for the designated hedged period. As of June 30, 2023, the amortized cost basis of the closed portfolio used in this hedging relationship was $741.4 million, the cumulative basis adjustment associated with this hedging relationship was $2.8 million, and the amount of the designated hedged item was $200.0 million.

The following table summarizes the Company’s outstanding financial derivative instruments at ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021.~~2022.

Schedule of outstanding financial derivative instruments
				June 30, 2023
				Fair Value
(dollars in thousands)	Notional		Balance Sheet Location	Asset/(Liability)
Derivatives designated as hedging instruments:
Fair value swap Fair value swap [Member]	$	200,000	Other assets	$	2,750

Derivatives not designated as hedging instruments:
Mortgage loan interest rate lock commitments		24,630	Other assets		177
MBS forward sales commitments		17,500	Other assets		59
Total derivative financial instruments	$	242,130		$	2,986
Total derivative financial instruments [Member]
Mortgage loan interest rate lock commitments [Member]					December 31, 2022
MBS forward sales commitments [Member]					Fair Value
(dollars in thousands)		Notional	Balance Sheet Location		Asset/(Liability)
Derivatives not designated as hedging instruments:
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

Accrued interest receivable related to the interest rate swap as of June 30, 2023 totaled $248,000 and is excluded from the fair value presented in the table above.

The Company assesses the effectiveness of the fair value swap hedge with a regression analysis that compares the changes in forward curves to determine the value. The effective portion of changes in fair value of derivatives designated as fair value hedges is recorded through interest income. The Company does not offset derivative assets and derivative liabilities for financial statement presentation purposes.

The following table summarizes the effect of the fair value hedging relationship recognized in the consolidated statements of income for the three and six months ended June 30, 2023 and June 30, 2022.


Schedule of summarize the effect of fair value hedging relationship recognized in consolidated statement of income	Three months ended June 30,					Six months ended June 30,
(dollars in thousands)	2023			2022		2023			2022
Gain (loss) on fair value hedging relationship:
Hedged asset	$	2,750			-		2,750			-
Fair value derivative designated as hedging instrument		(2,784	)		-		(2,784	)		-
Total gain (loss) recognized in interest income on loans	$	(34	)		-		(34	)		-

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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~~

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

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

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

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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.

The methods of determining the fair value of assets and liabilities presented in this note are consistent with our methodologies disclosed in Note 14 of the Company’s ~~2021~~2022 Annual Report on Form 10-K. See Note 5 for how the derivative asset fair value is determined. 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~~June 30, ~~2022~~2023 and December 31, ~~2021.~~2022.

Schedule of assets and liabilities measured at fair value on a recurring basis

					June 30, 2023
(dollars in thousands)	Level 1		Level 2		Level 3		Total
Assets
Securities available for sale Level 1 [Member]
Corporate bonds Level 2 [Member]	$	-		1,874		-		1,874
US treasuries Level 3 [Member]		-		875		-		875
US government agencies		-		10,810		-		10,810
State and political subdivisions		-		19,339		-		19,339
Asset-backed securities		-		5,568		-		5,568
Mortgage-backed securities		-		53,082		-		53,082
Mortgage loans held for sale		-		15,781		-		15,781
Mortgage loan interest rate lock commitments		-		177		-		177
MBS forward sales commitments		-		59		-		59
Derivative asset		-		2,750		-		2,750
Total assets measured at fair value on a recurring basis	$	-		110,315		-		110,315

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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The Company had no liabilities recorded at fair value on a recurring basis as of June 30, 2023 and December 31, 2022.

The tables below present the recorded amount of assets and liabilities measured at fair value on a nonrecurring basis as of ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021.~~2022.

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 June 30, 2023 and December 31, 2022, the significant unobservable inputs used in the fair value measurements were as follows:

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

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

The Company ~~enters into leases~~had operating right-of-use assets, included in ~~the normal course~~property and equipment, of ~~business. As~~$22.9 million and $23.6 million as of ~~September~~June 30, 2023 and December 31, 2022, ~~we leased six~~respectively. The Company had lease liabilities, included in other liabilities, of ~~our offices under various operating lease agreements. All~~$25.3 million and $25.8 million as of ~~our leases are~~June 30, 2023 and December 31, 2022, respectively. We maintain operating leases ~~under applicable accounting standards~~on land and ~~the~~buildings for various office spaces. The lease agreements have maturity dates ranging from ~~August 2028~~April 2025 to February 2032, some of which include options for multiple five-year extensions. The weighted average remaining life of the lease term for these leases was ~~7.19~~6.40 years as of ~~September~~June 30, ~~2022.~~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%~~2.29% as of ~~September~~June 30, ~~2022.~~2023.

The total operating lease costs were ~~$582,000~~$604,000 and ~~$711,000~~$768,000 for the three months ended ~~September~~June 30, ~~2022~~2023 and ~~2021,~~2022, respectively, and ~~$2.1~~$1.2 million and $1.5 million for the ~~nine~~six months ended ~~September~~June 30, 2023 and 2022, ~~and 2021. The right-of-use (ROU) asset, included in property and equipment, and~~respectively.

Operating lease ~~liability, included in other liabilities, was $23.6 million and $25.8 million~~payments due as of ~~September~~June 30, ~~2022, respectively, compared to $26.6 million and $28.0 million~~2023 were 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.~~

The following schedule reconciles the numerators and denominators of the basic and diluted earnings per share computations for the ~~three- and nine- month~~three-month periods ended ~~September~~June 30, ~~2022~~2023 and ~~2021.~~2022. Dilutive common shares arise from the potentially dilutive effect of the Company’s stock options that were outstanding at ~~September~~June 30, ~~2022.~~2023. The assumed conversion of stock options can create a difference between basic and dilutive net income per common share. At ~~September~~June 30, ~~2022~~2023 and ~~2021,~~2022, there were ~~162,060~~386,003 and ~~159,029~~162,366 options, respectively, that were not considered in computing diluted earnings per common share because they were anti-dilutive.

Item 2. MANAGEMENT’S DISCUSSION AND ~~Analysis of Financial Condition and Results of Operations.~~ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following discussion reviews our results of operations for the three and ~~nine~~six month periods ended ~~September~~June 30, ~~2022~~2023 as compared to the three and ~~nine~~six month periods ended ~~September~~June 30, ~~2021~~2022 and assesses our financial condition as of ~~September~~June 30, ~~2022~~2023 as compared to December 31, ~~2021.~~2022. You should read the following discussion and analysis in conjunction with the accompanying consolidated financial statements and the related notes and the consolidated financial statements and the related notes for the year ended December 31, ~~2021~~2022 included in our Annual Report on Form 10-K for that period. Results for the three and ~~nine~~six month periods ended ~~September~~June 30, ~~2022~~2023 are not necessarily indicative of the results for the year ending December 31, ~~2022~~2023 or any future period.

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

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:

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.

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~~June 30, ~~2022,~~2023, we had total assets of ~~$3.44~~$4.00 billion, ~~a 17.6%~~an 8.4% 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~~$3.54 billion and ~~$2.49~~$3.27 billion at ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, respectively. Our liabilities and shareholders’ equity at ~~September~~June 30, ~~2022~~2023 totaled ~~$3.15~~$3.70 billion and ~~$287.8~~$301.5 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~~June 30, ~~2022~~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~~$2.5 million and ~~$14.0~~$7.2 million for the three months ended ~~September~~June 30, ~~2022~~2023 and ~~2021,~~2022, respectively. Diluted earnings per share (“EPS”) was ~~$1.04~~$0.31 for the ~~third~~second quarter of ~~2022~~2023 as compared to ~~$1.75~~$0.90 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 500 basis point interest rate increase during the past 16 months, combined with an increase in ~~the provision for credit losses and a decrease in mortgage banking income, as well as an increase in noninterest~~non-interest expenses.

Our net income to common shareholders was ~~$23.6~~$5.2 million and ~~$34.7~~$15.2 million for the ~~nine~~six months ended ~~September~~June 30, 2023 and 2022, ~~and 2021.~~respectively. Diluted EPS was ~~$2.93~~$0.64 for the ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 as compared to ~~$4.36~~$1.88 for the same period in ~~2021.~~2022. The decrease in net income was primarily driven by anthe increase in ~~the provision for credit losses and a decrease in mortgage banking income, as well as an increase in noninterest expenses.~~interest expense on our deposit accounts.

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~~$18.8 million for the ~~third~~second quarter of ~~2022,~~2023, a ~~14.8% increase~~24.3% decrease over net interest income of ~~$22.2~~$24.9 million for the ~~third~~second 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%~~2.05% for the ~~third~~second quarter of ~~2022~~2023 compared to ~~3.38%~~3.35% 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~~six month periods ended ~~September~~June 30, ~~2022~~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.

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.

Our net interest margin (TE) decreased 19130 basis points to ~~3.19%~~2.05% during the ~~third~~second quarter of ~~2022,~~2023, compared to the ~~third~~second 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~~$745.4 million during the ~~third~~second quarter of ~~2022,~~2023, while the rate on these liabilities increased 70299 basis points to ~~1.00%~~3.46%. In contrast, our average interest-earning assets grew by ~~$563.3~~$701.3 million during the ~~third~~second quarter of ~~2022, however,~~2023 while the average yield on these assets increased by 3099 basis points to ~~3.88%~~4.65% during the same period.

The increase in our average interest-bearing liabilities during the second quarter of 2023 resulted primarily from a $662.5 million increase in our interest-bearing deposits, while the 299-basis point increase in rate on our interest-bearing liabilities was driven by a 301 basis point increase in deposit rates.

The increase in average interest-earning assets for the ~~third~~second quarter of ~~2022~~2023 related primarily to an increase of ~~$589.9~~$716.0 million in our average loan balances. The ~~30-basis~~99 basis point increase in yield on our interest-earning assets was driven by ~~a 12~~an 87 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 third quarter of 2022 resulted primarily from a $451.9 million increase in our interest-bearing deposits, while the 70-basis point increase in rate on our interest-bearing liabilities resulted primarily from a 71-basis point increase in deposit rates.

Our net interest spread was ~~2.88%~~1.19% for the ~~third~~second quarter of ~~2022~~2023 compared to ~~3.28%~~3.19% 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-basis~~299 basis point increase in the rate on our interest-bearing liabilities was partially offset by a 3099 basis point increase in yield on our interest-bearing assets, resulting in a 40200 basis point decrease in our net interest spread for the ~~2022~~2023 period. We anticipate continued pressure on our net interest spread and net interest margin in future periods as a significant portion of our loan portfolio is at fixed rates which do not move with the Federal Reserve’s interest rate increases, while our deposit accounts reprice much more quickly. To

partially address this continued pressure, we entered into a pay-fixed portfolio layer method fair value swap, designated as a hedging instrument, with a total notional amount of $200.0 million in the second quarter of 2023. The financial implication of this swap is described in further detail in “NOTE 5 – Derivative Financial Instruments” above.

During the first ~~nine~~six months of ~~2022,~~2023, our net interest margin (TE) decreased by 19116 basis points to ~~3.30%~~2.20%, compared to ~~3.49%~~3.36% for the first ~~nine~~six months of ~~2021,~~2022, 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~~$724.4 million from the prior year, with the average yield ~~decreasing~~increasing by ~~one~~278 basis ~~point~~points to ~~3.71%~~3.16%.

~~The increase in~~ In contrast, our average interest-earning assets ~~for~~grew by $715.7 million, while the ~~first nine months of 2022 related primarily to a $503.9 million increase in our average loan balances. The decrease in yield~~rate on ~~our interest-earning~~these 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 300increased 93 basis points ~~during the first nine months of 2022.~~to 4.54%.

The increase in average interest-bearing liabilities for the first ~~nine months~~half of ~~2022~~2023 was driven by an increase in interest-bearing deposits of ~~$337.4~~$681.9 million and a ~~$22.7~~$42.4 million increase in FHLB advances and other borrowings, while the increase in cost was driven by a ~~28-basis~~279 basis point increase on our interest-bearing deposits.

The increase in average interest-earning assets for the first half of 2023 related primarily to a $738.1 million increase in our average loan balances. The increase in yield on our interest-earning assets was driven by a 79 basis point increase in our loan yield.

Our net interest spread was ~~3.11%~~1.38% for the first ~~nine months~~half of ~~2022~~2023 compared to ~~3.39%~~3.23% for the same period in ~~2021.~~2022. The ~~28-basis~~185 basis point decrease in our net interest spread was driven by the ~~27-basis~~278 basis point increase in yield on our interest-bearing liabilities.

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.

Net interest income, the largest component of our income, was ~~$25.5~~$18.8 million for the ~~third~~second quarter of 2023 and $24.9 million for the second quarter of 2022, ~~and $22.2 million for the third quarter of 2021,~~ a ~~$3.3~~$6.1 million, or ~~14.8%~~24.3%, ~~increase~~decrease year over year. The ~~increase~~decrease during ~~2022~~2023 was driven by a ~~$7.4~~$21.5 million increase in interest expense primarily due to higher rates on our interest-bearing deposits. Partially offsetting the increase in interest expense was a $15.4 million increase in interest income primarily due to ~~higher volume of loans. In addition, interest expense increased by $4.2 million primarily due to~~ an increase in volume of loans and the rates on ~~our interest-bearing deposits.~~loans.

Net interest income for the first ~~nine months~~half of ~~2022~~2023 was ~~$73.5~~$39.2 million compared to ~~$64.9~~$48.0 million for ~~2021, an $8.6~~2022, a $8.8 million, or ~~13.3%~~18.3%, ~~increase.~~decrease. The ~~increase~~decrease in net interest income during ~~2022~~2023 was driven by a ~~$13.6~~$38.1 million increase in interest ~~income,~~expense, related primarily to ~~loan growth.~~higher rates on our interest-bearing deposits.

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.

We recorded a ~~$950,000~~$910,000 provision for credit losses in the ~~third~~second quarter of ~~2022,~~2023, compared to a ~~$6.0~~$1.8 million ~~reversal of~~ provision ~~expense~~for credit losses in the ~~third~~second quarter of ~~2021.~~2022. We recorded a provision expense of ~~$3.8~~$2.7 million and ~~a provision reversal of $8.2~~$2.9 million for the ~~nine~~six months ended ~~September~~June 30, 2023 and June 30, 2022, ~~and September 30, 2021,~~ respectively. The ~~$950,000~~$910,000 provision in ~~2022,~~2023, which included a ~~$425,000~~$1.1 million provision for credit losses and a $185,000 reversal for unfunded commitments, was driven by ~~$184.8~~$119.7 million in loan growth during the ~~third quarter, combined with a $102.3 million increase in unfunded commitments.~~second quarter. The ~~$3.8~~$2.7 million provision expense for the first ~~nine months~~half of ~~2022~~2023 included a ~~$755,000~~$3.0 million provision for credit losses and a $215,000 reversal 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.

Noninterest income ~~decreased $1.6 million,~~increased $471,000, or ~~36.8%~~20.8%, for the ~~third~~second quarter of ~~2022~~2023 as compared to the same period in ~~2021.~~2022. The increase in total noninterest income resulted primarily from the following:

Noninterest income decreased $414,000, or 8.0%, during the first half of 2023 as compared to 2022. The decrease in total noninterest income resulted primarily from the following:

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.

Noninterest expense was ~~$16.0~~$17.4 million for the ~~third~~second quarter of ~~2022,~~2023, a ~~$2.0~~$1.6 million, or ~~14.3%~~10.2%, increase from noninterest expense of ~~$14.0~~$15.8 million for the ~~third~~second quarter of ~~2021.~~2022. The increase in noninterest expense was driven primarily by the following:

~~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~~$34.5 million for the first ~~nine months~~half of ~~2022,~~2023, a ~~$4.8~~$4.0 million, or ~~11.6%~~13.2%, increase from noninterest expense of ~~$41.7~~$30.5 million for the first ~~nine months~~half of ~~2021.~~2022. The increase in noninterest expense was driven primarily by increases in compensation and benefits, occupancy, ~~outside services~~ and ~~data processing costs and marketing expenses~~insurance expense 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%~~80.7% for the ~~third~~second quarter of ~~2022,~~2023, compared to ~~53.2%~~58.2% for the ~~third~~second quarter of ~~2021 and 57.2% for the first nine months of 2022 compared to 53.0% for the first nine months 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 ~~third~~second quarter of ~~2022,~~2023, compared to the ~~third~~second quarter of ~~2021,~~2022, relates primarily to the decrease in ~~mortgage banking~~net interest income and noninterest income, combined with higher noninterest expenses.

We incurred income tax expense of ~~$2.7 million~~$800,000 and ~~$4.4~~$2.3 million for the three months ended ~~September~~June 30, ~~2022~~2023 and ~~2021,~~2022, respectively, and ~~$7.4~~$1.6 million and ~~$10.4~~$4.7 million for the ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 and ~~2021,~~2022, respectively. Our effective tax rate was ~~23.9%~~24.1% and ~~23.1%~~23.5% for the ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 and ~~2021,~~2022, respectively. The higher tax rate during the first ~~nine~~six months of ~~2022~~2023 relates to the lesser impact of equity compensation transactions during the period.

At ~~September~~June 30, ~~2022,~~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 million and an amortized cost of ~~$109.3~~$107.6 million, resulting in an unrealized loss of ~~$17.7~~$16.1 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.

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 ~~nine~~six months ended ~~September~~June 30, 2023 and 2022 ~~and 2021~~ were ~~$2.76~~$3.42 billion and ~~$2.23~~$2.67 billion, respectively. Before the allowance for credit losses, total loans outstanding at ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021~~2022 were ~~$3.03~~$3.54 billion and ~~$2.49~~$3.27 billion, respectively.

The principal component of our loan portfolio is loans secured by real estate mortgages. As of ~~September~~June 30, ~~2022,~~2023, our loan portfolio included ~~$2.58~~$3.0 billion, or ~~85.2%~~84.1%, 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~~$185.6 million as of ~~September~~June 30, ~~2022,~~2023, of which approximately ~~50%~~47% 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~~$85,000 and a loan to value of ~~72%~~75% as of ~~September~~June 30, ~~2022,~~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% and 1.0%~~0.6% of our total home equity lines of credit were over 30 days past due as of ~~September~~both June 30, ~~2022~~2023 and December 31, ~~2021, respectively.~~2022.

Following is a summary of our loan composition at ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021.~~2022. During the first ~~nine~~six months of ~~2022,~~2023, our loan portfolio increased by ~~$540.2~~$264.2 million, or ~~21.7%~~8.1%, with a ~~20.9%~~7.0% increase in commercial loans while consumer loans increased by ~~23.0%~~10.2% during the period. The majority of the increase was in loans secured by real estate. Our level of non-owner occupied commercial real estate and multi-family loans represents 273.2% of the Bank’s total risk-based capital at June 30, 2023. Our consumer real estate portfolio grew by ~~$179.1~~$116.6 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 25 years, and an average rate of 3.98% as of June 30, 2023, compared to a principal balance of $468,000, a term of 22 years, and an average rate of ~~3.53% as of September 30, 2022, compared to a principal balance of $454,000, a term of 21 years, and an average rate of 3.47%~~3.71% as of December 31, ~~2021.~~2022.

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

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

At ~~September~~June 30, ~~2022,~~2023, nonperforming assets were ~~$2.6~~$3.0 million, or 0.08% of total assets and 0.09% 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 $2.2 million~~increased $389,000 during the first ~~nine~~six months of ~~2022~~2023 due primarily to ~~$1.5 million~~one commercial relationship totaling $733,000, which is secured by real estate, that was added to nonaccrual status offset by $360,000 of ~~loans paid or charged off and $1.4 million of loans returned to accruing status.~~paydowns on the nonaccrual loans.

The amount of foregone interest income on nonaccrual loans in the first ~~nine~~six months of ~~2022~~2023 and ~~2021~~2022 was not material. At ~~September~~June 30, ~~2022~~2023 and ~~2021,~~December 31, 2022, the allowance for credit losses represented ~~1,388.87%~~1,363.11% and ~~259.95%~~1,1470.70% of the total amount of nonperforming loans, respectively. A significant portion ~~or approximately 97%,~~ of the nonperforming loans at ~~September~~June 30, ~~2022, was~~2023 were secured by real estate. We have evaluated the underlying collateral on these loans and believe that the collateral on these loans is sufficient to minimize future losses.

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~~June 30, ~~2022, 85.2%~~2023, 84.1% of our loans were collateralized by real estate and ~~97.0%~~78.6% of our ~~impaired~~individually evaluated loans were secured by real estate. We utilize third party appraisers to determine the fair value of collateral dependent loans. Our current loan and appraisal policies require us to obtain updated appraisals on an annual basis, either through a new external appraisal or an appraisal evaluation. ~~Impaired~~Individually evaluated loans are ~~individually~~ reviewed on a quarterly basis to determine the level of impairment. As of ~~September~~June 30, ~~2022,~~2023, we did not have any ~~impaired~~individually evaluated real estate loans carried at a value in excess of the appraised value. We typically charge-off a portion or create a specific reserve for impaired loans when we do not expect repayment to occur as agreed upon under the original terms of the loan agreement.

At ~~September~~June 30, ~~2022, impaired~~2023, individually evaluated loans totaled ~~$7.2~~$4.8 million with a reserve of approximately $905,000 allocated in the allowance for credit losses. During the first six months of 2023, the average recorded investment in individually evaluated loans was approximately $6.0 million. Comparatively, individually evaluated loans totaled $7.1 million at December 31, 2022 for which ~~$5.5~~$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 ~~impaired~~individually 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.

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~~$41.1 million, representing ~~1.20%~~1.16% of outstanding loans and providing coverage of ~~1,388.87%~~1,363.11%, of nonperforming loans at ~~September~~June 30, ~~2022~~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~~June 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,~~ 2022, ~~increased~~ the allowance for credit losses ~~by $1.5 million. In addition, we recorded a provision for credit losses~~was $34.2 million, or 1.20% of ~~$525,000 during the third quarter~~outstanding loans and 1,166.70% of ~~2022 driven by the growth in our loan portfolio.~~nonperforming loans.

Our primary source of funds for loans and investments is our deposits and advances from the FHLB. In the past, we have chosen to obtain a portion of our certificates of deposits from areas outside of our market in order to obtain longer term deposits than are readily available in our local market. Our internal guidelines regarding the use of brokered CDs limit our brokered CDs to 20% of total ~~deposits. In addition, we do not obtain time~~ deposits, ~~of $100,000 or more through the Internet. These guidelines allow~~which allows us to take advantage of the attractive terms that wholesale funding can offer while mitigating the related inherent risk.

Our retail deposits represented ~~$2.83~~$3.01 billion, or ~~94.2%~~87.7% of total deposits, while our wholesale deposits represented ~~$175.1~~$421.6 million, or ~~5.8%~~12.3%, of total deposits at ~~September~~June 30, ~~2022.~~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%~~103% at ~~September~~June 30, ~~2022~~2023 and ~~97%~~104% at December 31, ~~2021.~~2022.

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September 30, December 31,
(dollars in thousands) 2022 2021
Non-interest bearing $ 791,050 768,650
Interest bearing:
   NOW accounts 357,863 401,788
   Money market accounts 1,452,958 1,201,099
   Savings 42,335 39,696
   Time, less than $250,000 79,386 68,179
Time and out-of-market deposits, $250,000 and over 277,860 84,414
   Total deposits $ 3,001,452 2,563,826


	June 30,		December 31,
(dollars in thousands)	2023		2022
Non-interest bearing	$	698,084		804,115
Interest bearing:
NOW accounts		308,762		318,030
Money market accounts		1,692,900		1,506,418
Savings		36,243		40,673
Time, less than $250,000		114,691		89,876
Time and out-of-market deposits, $250,000 and over		582,338		374,752
Total deposits	$	3,433,018		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~~$2.88 billion and ~~$2.48~~$2.76 billion at ~~September~~June 30, ~~2022,~~2023, and December 31, ~~2021,~~2022, respectively. In addition, at June 30, 2023 and December 31, 2022, we estimate that we have approximately $968.1 million and $1.1 billion, or 28.2% and 36.6% of total deposits, respectively, in uninsured and uncollateralized deposits, including related interest accrued and unpaid. Uninsured deposits alone represented $1.4 billion and $1.5 billion at June 30, 2023 and December 31, 2022, respectively. 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,
2022 2021
(dollars in thousands) Amount Rate Amount Rate
Noninterest-bearing demand deposits $ 781,303 0.00 % $ 648,930 0.00 %
Interest-bearing demand deposits 385,543 0.15 % 298,785 0.06 %
Money market accounts 1,268,039 0.58 % 1,110,579 0.22 %
Savings accounts 41,463 0.05 % 31,830 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 %
Total deposits $ 2,743,139 0.33 % $ 2,273,363 0.18 %


	Six months ended June 30,
	2023					2022
(dollars in thousands)	Amount		Rate			Amount		Rate
Noninterest-bearing demand deposits	$	742,274		0.00	%	$	769,844		0.00	%
Interest-bearing demand deposits		300,189		0.66	%		397,763		0.13	%
Money market accounts		1,655,878		3.32	%		1,214,062		0.30	%
Savings accounts		38,746		0.08	%		40,707		0.05	%
Time deposits less than $250,000		85,325		3.75	%		23,406		0.30	%
Time deposits greater than $250,000		473,017		1.12	%		195,334		0.66	%
Total deposits	$	3,295,429		1.99	%	$	2,641,116		0.21	%

During the first ~~nine~~six months of ~~2022,~~2023, our average transaction account balances increased by ~~$386.2~~$314.7 million, or ~~18.5%~~13.0%, from the prior year, while our average time deposit balances increased by ~~$84,000,~~$340,000, or ~~45.6%~~155.3%. We have experienced record growth in new account openings throughout our footprint during the first half of 2023. In addition, we have added $234.1 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~~June 30, ~~2022~~2023 was as follows:

(dollars in thousands) September 30, 2022
Three months or less $ 130,449
Over three through six months 104,180
Over six through twelve months 29,773
Over twelve months 13,458
Total $ 277,860


(dollars in thousands)	June 30, 2023
Three months or less	$	154,755
Over three through six months		145,315
Over six through twelve months		194,951
Over twelve months		87,317
Total	$	582,338

Time deposits that meet or exceed the FDIC insurance limit of $250,000 at ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021~~2022 were ~~$283.4~~$582.3 million and ~~$84.4~~$374.8 million, respectively. We have a relationship with IntraFi Promontory Network, allowing us to provide deposit customers with access to aggregate FDIC insurance in amounts exceeding $250,000. This gives us the ability, as and when needed, to attract and retain large deposits from insurance conscious

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customers. With IntraFi, we have the option to keep deposits on balance sheet or sell them to other members of the network.

Liquidity and Capital Resources

Liquidity ~~represents the ability of a company to convert assets into cash or cash equivalents without significant loss, and the~~is our ability to ~~raise additional funds~~fund operations, to meet depositor withdrawals, to provide for customers’ credit needs, and to meet maturing obligations and existing commitments. Our liquidity principally depends on our cash flows from operating activities, investment in and maturity of assets, changes in balances of deposits and borrowings, and our ability to borrow funds. The bank failures in the first five months of 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~~June 30, ~~2022~~2023 and December 31, ~~2021~~2022 our cash and cash equivalents totaled ~~$160.6~~$205.1 million and ~~$167.2~~$170.9 million, respectively, or ~~4.7%~~5.1% and ~~5.7%~~4.6% of total assets, respectively. Our investment securities at ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021~~2022 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~~June 30, ~~2022.~~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~~June 30, ~~2022~~2023 was ~~$618.9~~$609.0 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~~June 30, ~~2022~~2023 and December 31, ~~2021~~2022 we had ~~$307.5~~$392.9 million and ~~$254.5~~$341.5 million, respectively, of letters of credit outstanding with the FHLB to secure client deposits. Further, in July 2023, we enrolled in the Federal Reserve’s Bank Term Funding Program which offer loans of up to one year in length if we pledge collateral eligible for purchase by the Federal Reserve Banks in open market operations, such as U.S. Treasuries, U.S. agency securities, and U.S. agency mortgage-backed securities.

We have a relationship with IntraFi Promontory Network, allowing us to provide deposit customers with access to aggregate FDIC insurance in amounts exceeding $250,000. This gives us the ability, as and when needed, to attract and retain large deposits from insurance conscious customers. With IntraFi, we have the option to keep deposits on balance sheet or sell them to other members of the network. Additionally, subject to certain limits, the Bank can use IntraFi to purchase cost-effective funding without collateralization and in lieu of generating funds through traditional brokered CDs or the FHLB. In this manner, IntraFi can provide us with another funding option. Thus, it serves as a deposit-gathering tool and an additional liquidity management tool. Under the Economic Growth, Regulatory Relief, and Consumer Protection Act, a well capitalized bank with a CAMELS rating of 1 or 2 may hold reciprocal deposits up to the lesser of 20% of its total liabilities or $5 billion without those deposits being treated as brokered 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~~June 30, ~~2022.~~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. As of June 30, 2023, we were in violation of one particular loan covenant and have subsequently received a waiver from the lender regarding this violation.

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~~$301.5 million at ~~September~~June 30, ~~2022~~2023 and ~~$277.9~~$294.5 million at December 31, ~~2021.~~2022. The ~~$9.9~~$7.0 million increase from December 31, ~~2021~~2022 is primarily related to net income of ~~$23.6~~$5.2 million during the first ~~nine~~six months of ~~2022 and~~2023, stock option exercises and equity compensation expenses of ~~$2.3 million, partially offset by~~$956,000, and a ~~$13.3 million~~ decrease in ~~other comprehensive~~the unrealized loss ~~and the tax-effected impact~~on securities available for sale of ~~$2.8 million of expense related to the adoption of CECL recorded as an adjustment to retained earnings.~~$700,000.

The following table shows the return on average assets (net income divided by average total assets), return on average equity (net income divided by average equity), equity to assets ratio (average equity divided by average assets), and tangible common equity ratio (total equity less preferred stock divided by total assets) annualized for the ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 and the year ended December 31, ~~2021.~~2022. Since our inception, we have not paid cash dividends.

September 30, 2022 December 31, 2021
Return on average assets 1.01 % 1.75 %
Return on average equity 11.16 % 18.64 %
Return on average common equity 11.16 % 18.64 %
Average equity to average assets ratio 9.02 % 9.39 %
Tangible common equity to assets ratio 8.37 % 9.50 %


	June 30, 2023			December 31, 2022
Return on average assets		0.26	%		0.90	%
Return on average equity		3.27	%		10.20	%
Return on average common equity		3.27	%		10.20	%
Average equity to average assets ratio		7.97	%		8.85	%
Tangible common equity to assets ratio		7.53	%		7.98	%

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

Regulatory capital rules, which we refer to Basel III, impose minimum capital requirements for bank holding companies and banks. The Basel III rules apply to all national and state banks and savings associations regardless of size and bank holding companies and savings and loan holding companies other than “small bank holding companies,” generally holding companies with consolidated assets of less than $3 billion (such as the Company). Although we had over $3 billion in assets at 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~~June 30, ~~2022,~~2023, our capital ratios exceed these ratios and we remain “well capitalized.”

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

September 30, 2022
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
Total Capital (to risk weighted assets) $ 358,442 13.09 % $ 287,578 10.50 % $ 273,884 10.00 %
Tier 1 Capital (to risk weighted assets) 324,181 11.84 % 232,802 8.50 % 219,107 8.00 %
Common Equity Tier 1 Capital (to risk weighted assets) 324,181 11.84 % 191,719 7.00 % 178,025 6.50 %
Tier 1 Capital (to average assets) 324,181 9.72 % 133,432 4.00 % 166,790 5.00 %

December 31, 2021
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
Total Capital (to risk weighted assets) $ 331,052 14.36 % $ 242,048 10.50 % $ 230,522 10.00 %
Tier 1 Capital (to risk weighted assets) 302,217 13.11 % 195,944 8.50 % 184,418 8.00 %
Common Equity Tier 1 Capital (to risk weighted assets) 302,217 13.11 % 161,365 7.00 % 149,839 6.50 %
Tier 1 Capital (to average assets) 302,217 10.55 % 114,537 4.00 % 143,172 5.00 %

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						June 30, 2023
	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
Total Capital (to risk weighted assets)	$	380,560		12.10	%	$	251,669		8.00	%	$	314,586		10.00	%
Tier 1 Capital (to risk weighted assets)		341,215		10.85	%		188,751		6.00	%		251,669		8.00	%
Common Equity Tier 1 Capital (to risk weighted assets)		341,215		10.85	%		141,564		4.50	%		204,481		6.50	%
Tier 1 Capital (to average assets)		341,215		8.85	%		154,264		4.00	%		192,830		5.00	%

		December 31, 2022
		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
Total Capital (to risk weighted assets)	$	366,988		12.45	%	$	235,892		8.00	%	$	294,865		10.00	%
Tier 1 Capital (to risk weighted assets)		330,108		11.20	%		176,919		6.00	%		235,892		8.00	%
Common Equity Tier 1 Capital (to risk weighted assets)		330,108		11.20	%		132,689		4.50	%		191,662		6.50	%
Tier 1 Capital (to average assets)		330,108		9.43	%		140,040		4.00	%		175,050		5.00	%

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

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


	June 30, 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)	$	389,514		12.40	%	$	251,322		8.00	%		N/A		N/A
Tier 1 Capital (to risk weighted assets)		327,224		10.42	%		188,491		6.00	%		N/A		N/A
Common Equity Tier 1 Capital (to risk weighted assets)		314,224		10.00	%		141,369		4.50	%		N/A		N/A
Tier 1 Capital (to average assets)		327,224		8.48	%		154,286		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 requirementsThe prompt corrective action provisions are only applicable ~~only~~ at the Bank ~~level). Although~~level. The Bank exceeded the general minimum regulatory ~~capital~~ requirements ~~are not applicable~~ to ~~the Company, we calculate these ratios for our own planning and monitoring purposes.~~be considered “well capitalized.”

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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~~June 30, ~~2022,~~2023 unfunded commitments to extend credit were ~~$840.9~~$850.0 million, of which ~~$315.1~~$238.5 million were at fixed rates and ~~$525.8~~$611.5 million were at variable rates. At December 31, ~~2021,~~2022, unfunded commitments to extend credit were ~~$618.7~~$878.3 million, of which approximately ~~$205.4~~$318.9 million were at fixed rates and ~~$413.3~~$559.4 million were at variable rates. A significant portion of the unfunded commitments related to commercial business loans and consumer home equity lines of credit. We evaluate each client’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by us upon extension of credit, is based on our credit evaluation of the borrower. The type of collateral varies but may include accounts receivable, inventory, property, plant and equipment, and commercial and residential real estate. ~~Following~~As of June 30, 2023, the ~~adoption of CECL on January 1, 2022, we recorded a~~ reserve for unfunded commitments ~~of $2.0~~was $2.6 million or ~~0.31%~~0.30% 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~~June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, there were commitments under letters of credit for ~~$12.6~~$14.8 million and ~~$10.2~~$14.3 million, respectively. The credit risk and collateral involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Since most of the letters of credit are expected to expire without being drawn upon, they do not necessarily represent future cash requirements.

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

Critical Accounting Estimates

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

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

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

●

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

●

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

●

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

●

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

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

Accounting, Reporting, and Regulatory Matters

See Note 1 – Summary of Significant Accounting Policies in the accompanying notes to consolidated financial statements included elsewhere in this report for details of recently issued accounting pronouncements and their expected impact on our consolidated financial statements.

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

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

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

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

~~Table of Contents~~

As of ~~September~~June 30, ~~2022,~~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		(~~9.97~~17.55	)%
Up 200 basis points		(~~6.47~~11.67	)%
Up 100 basis points		(~~3.17~~5.86	)%
Base		-
Down 100 basis points		~~7.17~~7.60	%
Down 200 basis points		~~11.16~~14.60	%
Down 300 basis points		~~7.15~~21.12	%

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

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

~~Table of Contents~~

PART II. OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS.

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

Item 1A. RISK FACTORS.

Investing in shares of our common stock involves certain risks, including those identified and described in Item 1A. of our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2021,~~2022, as well as cautionary statements contained in this Quarterly Report on Form 10-Q, including those under the caption “Cautionary Warning Regarding Forward-Looking Statements” set forth in Part I, Item 2 of this Form 10-Q, risks and matters described elsewhere in this Form 10-Q, and in our other filings with the SEC.

~~There have been no material changes~~We are providing these additional risk factors to supplement the risk factors ~~disclosed~~contained in Item 1A. of ~~Part I in~~ our (i) Annual Report on Form 10-K for the year ended December 31, ~~2021.~~2022 and (ii) Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2023.

Our enterprise risk management framework may not be effective in mitigating risk and reducing the potential for losses.

Our enterprise risk management framework seeks to mitigate risk and loss to us. We have established comprehensive policies and procedures and an internal control framework designed to provide a sound operational environment for the types of risk to which we are subject, including credit risk, market risk (interest rate and price risks), liquidity risk, operational risk, compliance risk, legal risk, strategic risk, and reputational risk. However, as with any risk management framework, there are inherent limitations to our current and future risk management strategies, including risks that we have not appropriately anticipated or identified. In addition, our businesses and the markets in which we operate are continuously evolving. We may fail to adequately or timely enhance our enterprise risk framework to address those changes. If our enterprise risk framework is ineffective, either because it fails to keep pace with changes in the financial markets, regulatory requirements, our businesses, our counterparties, clients or service providers or for other reasons, we could incur losses, suffer reputational damage or find ourselves out of compliance with applicable regulatory or contractual mandates. In addition to our executive committee, the Risk Committee of the Board, the Audit Committee of the Board, as well as the Company’s Chief Risk Officer are all responsible for the “risk management framework” of the Company. These committees each meet regularly, with the authority to convene additional meetings, as circumstances require.

Our interest rate risk is overseen by the Risk Committee which monitors our compliance with regulatory guidance in the formulation and implementation of our interest rate risk program. The Risk Committee reviews the results of our interest rate risk modeling quarterly to assess whether we have appropriately measured our interest rate risk, mitigated our exposures appropriately and any residual risk is acceptable. In addition to our annual review of this policy, our Board of Directors reviews the interest rate risk policy limits at least annually.

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

(a)

Not applicable.

(b)

Not applicable.

(c)

~~Issuer Purchases of Registered Equity Securities~~Not applicable.

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

~~(d) Maximum~~

~~(c) Total~~

~~Number (or~~

~~Number of~~

~~Approximate~~

~~Shares (or~~

~~Dollar Value) of~~

~~Units)~~

~~Shares (or~~

~~(a) Total~~

~~Purchased as~~

~~Units) that May~~

~~Number of~~

~~Part of Publicly~~

~~Yet Be~~

~~Shares (or~~

~~(b) Average~~

~~Announced~~

~~Purchased~~

~~Units)~~

~~Price Paid per~~

~~Plans or~~

~~Under the Plans~~

~~Period~~

~~Purchased~~

~~Share (or Unit)~~

~~Programs~~

~~or Programs~~

~~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.

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
3.1		Amended and Restated Articles, as amended, of Southern First Bancshares, Inc. (effective May 19, 2023)

3.1.1		Amended and Restated Articles, as amended, of Southern First Bancshares, Inc. (effective May 19, 2023) (redline version of amended sections)

10.1		Employment Agreement by and between Southern First Bank and Calvin C. Hurst, dated March 21, 2019.*

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

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

32		Section 1350 Certifications.

101		The following materials from the Quarterly Report on Form 10-Q of Southern First Bancshares, Inc. for the quarter ended ~~September~~June 30, ~~2022,~~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~~August 1, ~~2022~~2023		/s/R. Arthur Seaver, Jr.
		R. Arthur Seaver, Jr.
		Chief Executive Officer ~~(Principal~~ (Principal Executive Officer)

~~Date: November 1, 2022~~	~~/s/ Michael D. Dowling~~
	~~Michael D. Dowling~~
Date: August 1, 2023		/s/D. Andrew Borrmann
		D. Andrew Borrmann
		Chief Financial Officer ~~(Principal~~ (Principal Financial and Accounting Officer)

~~0001090009 sfst:Construction3Member sfst:Accruing6089DaysPastDueMember 2022-09-30 iso4217:USD xbrli:shares~~

	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

	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

	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

	For the nine months ended September 30,
(dollars in thousands)	2022			2021
Operating activities
Net income	$	23,623			34,706
Adjustments to reconcile net income to cash provided by operating activities:
Provision for (reversal of) credit losses		3,830			(8,200	)
Depreciation and other amortization		2,521			1,621
Accretion and amortization of securities discounts and premium, net		554			713
Loss on sale of real estate owned		-			376
(Gain) Loss on sale of fixed assets		394			(10	)
Gain on sale of securities		(12	)		-
Net change in operating leases		814			266
Compensation expense related to stock options and restricted stock grants		1,501			1,204
Gain on sale of loans held for sale		(2,700	)		(11,187	)
Loans originated and held for sale		(191,448	)		(406,451	)
Proceeds from sale of loans held for sale		198,461			446,254
Increase in cash surrender value of bank owned life insurance		(945	)		(919	)
Increase in deferred tax asset		(5,766	)		(6,736	)
Decrease in other assets		5			2,698
Increase in other liabilities		6,006			(4,531	)
Net cash provided by operating activities		36,838			49,804
Investing activities
Increase (decrease) in cash realized from:
Increase in loans, net		(538,816	)		(246,421	)
Purchase of property and equipment		(13,134	)		(16,620	)
Purchase of investment securities:
Available for sale		(10,094	)		(37,908	)
Other investments		(15,235	)		(1,000	)
Payments and maturities, calls and repayments of investment securities:
Available for sale		21,517			16,514
Other investments		13,806			1,812
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	)
Financing activities
Increase (decrease) in cash realized from:
Increase in deposits, net		437,626			290,260
Increase (decrease) in Federal Home Loan Bank advances and other borrowings, net		60,000			(25,000	)
Proceeds from the exercise of stock options		794			2,696
Net cash provided by financing activities		498,420			267,956
Net decrease in cash and cash equivalents		(6,603	)		27,846
Cash and cash equivalents at beginning of the period		167,209			100,687
Cash and cash equivalents at end of the period	$	160,606			128,533
Supplemental information
Cash paid for
Interest	$	9,155			5,404
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

	September 30, 2022
	Amortized		Gross Unrealized				Fair
(dollars in thousands)	Cost		Gains		Losses		Value
Available for sale
Corporate bonds	$	2,179		-		302		1,877
US treasuries		999		-		136		863
US government agencies		13,006		-		2,371		10,635
State and political subdivisions		22,996		-		4,350		18,646
Asset-backed securities		6,992		-		147		6,845
Mortgage-backed securities
FHLMC		21,378		-		3,853		17,525
FNMA		35,929		-		5,860		30,069
GNMA		5,774		-		713		5,061
Total mortgage-backed securities		63,081		-		10,426		52,655
Total investment securities available for sale	$	109,253		-		17,732		91,521

	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


	September 30, 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	$	-		-		-		-		572,972		572,972
Non-owner occupied RE		57		-		-		253		799,259		799,569
Construction		-		-		-		-		85,850		85,850
Business		123		-		-		79		419,110		419,312
Consumer
Real estate		77		131		-		904		872,359		873,471
Home equity		129		-		-		1,379		170,396		171,904
Construction		-		-		-		-		77,798		77,798
Other		-		-		-		-		29,151		29,151
Total loans	$	386		131		-		2,615		3,026,895		3,030,027

	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


	CECL						Incurred loss
	September 30, 2022						December 31, 2021
	Nonaccrual		Nonaccrual
	loans		loans		Total		Total
	with no		with an		nonaccrual		nonaccrual
(dollars in thousands)		allowance		allowance		loans		loans
Commercial
Owner occupied RE		-		-		-		-
Non-owner occupied RE	$	117		136		253		1,070
Construction		-		-		-		-
Business		79		-		79		-
Total commercial		196		136		332		1,070
Consumer
Real estate		-		904		904		1,750
Home equity		197		1,182		1,379		2,044
Construction		-		-		-		-
Other		-		-		-		-
Total consumer		197		2,086		2,283		3,794
Total	$	393		2,222		2,615		4,864

			December 31, 2021
			Recorded investment
						Impaired loans		Impaired loans
	Unpaid					with no related		with related		Related
	Principal			Impaired		allowance for		allowance for		allowance for
(dollars in thousands)		Balance			loans		credit losses		credit losses		credit losses
Commercial
Owner occupied RE	$	1,261			1,261		1,261		-		-
Non-owner occupied RE		2,012			1,070		270		800		171
Construction		-			-		-		-		-
Business		1,104			1,104		-		1,104		452
Total commercial		4,377			3,435		1,531		1,904		623
Consumer
Real estate		2,638			2,561		1,743		818		144
Home equity		2,206			2,044		1,989		55		55
Construction		-			-		-		-		-
Other		123			123		-		123		14
Total consumer		4,967			4,728		3,732		996		213
Total gross loans	$	9,344			8,163		5,263		2,900		836


	Three months ended 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


	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


									Three 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	$	4,829		10,010			1,060			6,717		7,992		2,442		851		291		34,192
Provision for credit losses		476		(1,595	)		(82	)		875		782		3		41		25		525
Loan charge-offs		-		-			-			-		-		-		-		-		-
Loan recoveries		-		1,540			-			51		-		8		-		1		1,600
Net loan recoveries (charge-offs)		-		1,540			-			51		-		8		-		1		1,600
Balance, end of period	$	5,305		9,955			978			7,643		8,774		2,453		892		317		36,317
Net charge-offs to average loans (annualized)																				(0.22	%)
Allowance for credit losses to gross loans																				1.20	%
Allowance for credit losses to nonperforming loans																				1388.87	%


									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	%

	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	%

									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

	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	%

Schedule of assets and liabilities measured at fair value on a nonrecurring basis

					As of June 30, 2023
(dollars in thousands)	Level 1		Level 2		Level 3		Total
Assets
Individually evaluated	$	-		306		3,636		3,942
Total assets measured at fair value on a nonrecurring basis	$	-		306		3,636		3,942

						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

Schedule of unobservable inputs used in the fair value measurements
	Valuation Technique	Significant Unobservable Inputs	Range of Inputs
Individually evaluated loans	Appraised Value/ Discounted Cash Flows	Discounts to appraisals or cash flows for estimated holding and/or selling costs or age of appraisal	0-25%

Schedule of estimated fair values of the company's financial instruments

					June 30, 2023
(dollars in thousands)	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
Financial Assets:
Other investments, at cost	$	12,550		12,550		-		-		12,550
Loans¹		3,491,664		3,231,892		-		-		3,231,892
Financial Liabilities:
Deposits		3,433,018		3,013,696		-		3,013,696		-
Subordinated debentures		36,268		40,767		-		40,767		-

	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		-

Schedule of maturities of lease liabilities
	Operating
(dollars in thousands)	Leases
2023	$	1,027
2024		2,099
2025		2,157
2026		2,210
2027		2,268
Thereafter		22,202
Total undiscounted lease payments		31,963
Discount effect of cash flows		6,646
Total lease liability	$	25,317

Schedule of earnings per share computations

	Three months ended June 30,				Six months ended June 30,
(dollars in thousands, except share data)	2023		2022		2023		2022
Numerator:
Net income available to common shareholders	$	2,458		7,240		5,161		15,210
Denominator:
Weighted-average common shares outstanding – basic		8,051,131		7,957,631		8,038,642		7,944,814
Common stock equivalents		17,897		97,279		41,879		130,682
Weighted-average common shares outstanding – diluted		8,069,028		8,054,910		8,080,521		8,075,496
Earnings per common share:
Basic	$	0.31		0.91		0.64		1.91
Diluted	$	0.31		0.90		0.64		1.88

	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


	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


	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
	June 30, 2023 vs. 2022												June 30, 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	$	6,888			6,030			1,561			14,479		$	5,417			(979	)		(237	)		4,201
Investment securities		(20	)		291			(13	)		258			33			130			16			179
Federal funds sold and interest-bearing deposits with banks		(22	)		835			(102	)		711			(17	)		212			(68	)		127
Total interest income		6,846			7,156			1,446			15,448			5,433			(637	)		(289	)		4,507
Interest expense
Deposits		403			16,159			3,531			20,093			195			602			127			924
FHLB advances and other borrowings		165			435			676			1,276			2,415			(2	)		(2,309	)		104
Subordinated debentures		4			133			1			138			1			24			-			25
Total interest expense		572			16,727			4,208			21,507			2,611			624			(2,182	)		1,053
Net interest income	$	6,274			(9,571	)		(2,762	)		(6,059	)	$	2,822			(1,261	)		1,893			3,454