UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the Quarterly Period Ended March 31, ~~2021~~2022
OR

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

For the Transition Period from to

Commission file number 000-27719

Southern First Bancshares, Inc.

(Exact name of registrant as specified in its charter)

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

100 Verdae Boulevard, Suite 100 ~~Greenville,~~ ~~S.C.~~	~~29607~~
Greenville, S.C.	29607
(Address of principal executive offices)	(Zip Code)

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

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

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

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

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

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

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

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

Large accelerated filer	☐	Accelerated filer	☒
Non-accelerated filer	☐	Smaller Reporting Company	☒ ☐
		Emerging growth company	☐

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: ~~7,853,096~~

7,983,269 shares of common stock, par value $0.01 per share, were issued and outstanding as of April ~~27, 2021.~~28, 2022.

Table of Contents

SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARY

March 31, ~~2021~~2022 Form 10-Q

~~INDEX~~

INDEX

		Page

PART I – CONSOLIDATED FINANCIAL INFORMATION		~~Page~~ 1

Item 1.	Consolidated Financial Statements	1

	Consolidated Balance Sheets	3 1

	Consolidated Statements of Income	4 2

	Consolidated Statements of Comprehensive Income	5 3

	Consolidated Statements of Shareholders’ Equity	6 4

	Consolidated Statements of Cash Flows	7 5

	Notes to Unaudited Consolidated Financial Statements	8 6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26 27

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	40 41

Item 4.	Controls and Procedures	41 42

PART II – OTHER INFORMATION		43
~~Item 1.Legal Proceedings~~	41
Item ~~1A.~~1.~~Risk Factors~~	41 Legal Proceedings	43

Item 1A.	Risk Factors	43

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	41 43

Item 3.	Defaults upon Senior Securities	42 43

Item 4.	Mine Safety Disclosures	42 43
~~Item 5.Other Information~~	42
Item 5.	Other Information	43

Item 6.~~Exhibits~~	42 Exhibits	44

Table of Contents

PART I. CONSOLIDATED FINANCIAL INFORMATION

Item 1. CONSOLIDATED FINANCIAL STATEMENTS

SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

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


	March 31,			December 31,
(dollars in thousands, except share data)	2022			2021
	(Unaudited)			(Audited)
ASSETS
Cash and cash equivalents:
Cash and due from banks	$	20,992			21,770
Federal funds sold		95,093			86,882
Interest-bearing deposits with banks		33,131			58,557
Total cash and cash equivalents		149,216			167,209
Investment securities:
Investment securities available for sale		106,978			120,281
Other investments		4,104			4,021
Total investment securities		111,082			124,302
Mortgage loans held for sale		17,840			13,556
Loans		2,660,675			2,489,877
Less allowance for credit losses		(32,944	)		(30,408	)
Loans, net		2,627,731			2,459,469
Bank owned life insurance		50,148			49,833
Property and equipment, net		95,129			92,370
Deferred income taxes, net		10,635			8,397
Accrued interest receivable		7,627			7,624
Other assets		3,232			2,788
Total assets	$	3,072,640			2,925,548
LIABILITIES
Deposits	$	2,708,174			2,563,826
Subordinated debentures		36,133			36,106
Other liabilities		49,809			47,715
Total liabilities		2,794,116			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, 7,980,519 and 7,925,819 shares issued and outstanding at March 31, 2022 and December 31, 2021, respectively		80			79
Nonvested restricted stock		(3,425	)		(1,435	)
Additional paid-in capital		117,286			114,226
Accumulated other comprehensive loss		(6,393	)		(740	)
Retained earnings		170,976			165,771
Total shareholders’ equity		278,524			277,901
Total liabilities and shareholders’ equity	$	3,072,640			2,925,548

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

3Table of Contents

SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

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

	For the three months
	ended March 31,
(dollars in thousands, except share data)	2022		2021
Interest income
Loans	$	23,931		22,465
Investment securities		474		301
Federal funds sold and interest-bearing deposits with banks		59		47
Total interest income		24,464		22,813
Interest expense
Deposits		908		1,155
Borrowings		392		385
Total interest expense		1,300		1,540
Net interest income		23,164		21,273
Provision for (reversal of) credit losses		1,105		(300	)
Net interest income after provision for credit losses		22,059		21,573
Noninterest income
Mortgage banking income		1,494		4,633
Service fees on deposit accounts		191		185
ATM and debit card income		528		470
Income from bank owned life insurance		315		267
Other income		399		349
Total noninterest income		2,927		5,904
Noninterest expenses
Compensation and benefits		8,144		6,683
Mortgage production costs		1,649		2,867
Occupancy		1,777		1,637
Other real estate owned expenses		-		387
Outside service and data processing costs		1,411		1,142
Insurance		261		301
Professional fees		496		421
Marketing		256		182
Other		691		542
Total noninterest expenses		14,685		14,162
Income before income tax expense		10,301		13,315
Income tax expense		2,331		2,949
Net income	$	7,970		10,366
Earnings per common share
Basic	$	1.00		1.33
Diluted		0.98		1.31
Weighted average common shares outstanding
Basic		7,931,855		7,774,515
Diluted		8,096,310		7,908,537

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

4Table of Contents

SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

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

	For the three months ended March 31,
(dollars in thousands)	2022			2021
Net income	$	7,970			10,366
Other comprehensive income:
Unrealized gain (loss) on securities available for sale:
Unrealized holding loss arising during the period, pretax		(7,141	)		(1,409	)
Tax benefit		1,500			296
Reclassification of realized gain		(15	)		-
Tax benefit		3			-
Other comprehensive loss		(5,653	)		(1,113	)
Comprehensive income	$	2,317			9,253

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

5Table of Contents

SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

~~FOR THE THREE MONTHS ENDED MARCH 31, 2021 AND 2020~~

~~(Unaudited)~~

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

March 31, 2020
7,717,582
$
77
0-
$
0-
$
(1,105
)
$
107,529
$
410
$
103,564
$
210,475
December 31, 2020
7,772,748
78
0-
0-
(698
)
108,831
1,023

119,060
228,294
Net income
-
-
-
-
-
-
-
10,366
10,366
Proceeds from exercise of stock options
69,598
1
-
-
-
1,577
-
-
1,578
Issuance of restricted stock
10,750
-
-
-
(477
)
477
-
-
-
Compensation expense related to restricted stock, net of tax
-
-
-
-
100
-
-
-
100
Compensation expense related to stock options, net of tax
-
-
-
-
-
296
-
-
296
Other comprehensive loss
-
-
-
-
-
-
(1,113
)
-
(1,113
)
March 31, 2021
7,853,096
$
79
0-
$
0-
$
(1,075
)
$
111,181
$
(90
)
$
129,426
$
239,521

(Unaudited)

	For the three months ended March 31,
	Common stock				Preferred stock				Nonvested restricted			Additional paid-in		Accumulated other comprehensive			Retained
(dollars in thousands, except share data)	Shares		Amount		Shares		Amount		stock			capital		income (loss)			earnings			Total
December 31, 2020		7,772,748	$	78		-	$	-	$	(698	)	$	108,831	$	1,023		$	119,060		$	228,294
Net income		-		-		-		-		-			-		-			10,366			10,366
Proceeds from exercise of stock options		69,598		1		-		-		-			1,577		-			-			1,578
Issuance of restricted stock		10,750		-		-		-		(477	)		477		-			-			-
Compensation expense related to restricted stock, net of tax		-		-		-		-		100			-		-			-			100
Compensation expense related to stock options, net of tax		-		-		-		-		-			296		-			-			296
Other comprehensive loss		-		-		-		-		-			-		(1,113	)		-			(1,113	)

March 31, 2021		7,853,096	$	79		-	$	-	$	(1,075	)	$	111,181	$	(90	)	$	129,426		$	239,521
December 31, 2021		7,925,819	$	79		-	$	-	$	(1,435	)	$	114,226	$	(740	)	$	165,771		$	277,901
Net income		-		-		-		-		-			-		-			7,970			7,970
Proceeds from exercise of stock options		18,125		-		-		-		-			579		-			-			579
Issuance of restricted stock		36,575		1		-		-		(2,235	)		2,234		-			-			-
Adoption of ASU 2016-13		-		-		-		-		-			-		-			(2,765	)		(2,765	)
Compensation expense related to restricted stock, net of tax		-		-		-		-		245			-		-			-			245
Compensation expense related to stock options, net of tax		-		-		-		-		-			247		-			-			247
Other comprehensive loss		-		-		-		-		-			-		(5,653	)		-			(5,653	)

March 31, 2022		7,980,519	$	80		-	$	-	$	(3,425	)	$	117,286	$	(6,393	)	$	170,976		$	278,524

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

~~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 three months ended
March 31,
(dollars in thousands)
2021
2020
Operating activities
Net income
$
10,366
2,832
Adjustments to reconcile net income to cash provided by (used for) operating activities:
Provision for loan losses
(300
)
6,000
Depreciation and other amortization
551
549
Accretion and amortization of securities discounts and premium, net
232
116
Loss on sale of real estate owned
380
0-
Gain on sale of fixed assets
(10
)
0-
Net change in operating leases
121
55
Compensation expense related to stock options and restricted stock grants
396
334
Gain on sale of loans held for sale
(4,813
)
(2,778
)
Loans originated and held for sale
(173,380
)
(95,423
)
Proceeds from sale of loans held for sale
181,377
90,299
Increase in cash surrender value of bank owned life insurance
(267
)
(270
)
Decrease in deferred tax asset
1
0-
Decrease (increase) in other assets
376

(1,490
)
Decrease in other liabilities
(4,461
)
(3,782
)
Net cash provided by (used for) operating activities
10,569

(3,558
)
Investing activities
Increase (decrease) in cash realized from:
Increase in loans, net
(41,165
)
(86,916
)
Purchase of property and equipment
(2,609
)
(1,119
)
Purchase of investment securities:
Available for sale
(5,366
)
(6,302
)
Payments and maturities, calls and repayments of investment securities:
Available for sale
5,458
4,269
Other investments
1,862
1,607
Purchase of bank owned life insurance
(7,500
)
0-
Proceeds from sale of fixed assets
50
0-
Proceeds from sale of other real estate owned
788
0-
Net cash used for investing activities
(48,482
)
(88,461
)
Financing activities
Increase (decrease) in cash realized from:
Increase in deposits, net
115,993
149,574
Decrease in Federal Home Loan Bank advances and other borrowings, net
(25,000
)
(45,000
)
Proceeds from the exercise of stock options
1,578
741
Net cash provided by financing activities
92,571
105,315
Net increase in cash and cash equivalents
54,658
13,296
Cash and cash equivalents at beginning of the period
100,687
127,816
Cash and cash equivalents at end of the period
$
155,345
141,112
Supplemental information
Cash paid for
Interest
$
2,767
7,103
Income taxes
0-
0-
Schedule of non-cash transactions
Unrealized gain (loss) on securities, net of income taxes
(1,113
)
708

(Unaudited)


	For the three months ended March 31,
(dollars in thousands)	2022			2021
Operating activities
Net income	$	7,970			10,366
Adjustments to reconcile net income to cash provided by operating activities:
Provision for (reversal of) credit losses		1,105			(300	)
Depreciation and other amortization		583			551
Accretion and amortization of securities discounts and premium, net		210			232
Loss on sale of real estate owned		-			380
Gain on sale of fixed assets		-			(10	)
Gain on sale of securities		(15	)		-
Net change in operating leases		108			121
Compensation expense related to stock options and restricted stock grants		492			396
Gain on sale of loans held for sale		(899	)		(4,813	)
Loans originated and held for sale		(75,729	)		(173,380	)
Proceeds from sale of loans held for sale		72,344			181,377
Increase in cash surrender value of bank owned life insurance		(315	)		(267	)
Decrease in deferred tax asset		-			1
Decrease (increase) in accrued interest receivable		(3	)		499
Decrease (increase) in other assets		(444	)		(123	)
Increase (decrease) in other liabilities		2,460			(4,461	)
Net cash provided by operating activities		7,867			10,569
Investing activities
Increase (decrease) in cash realized from:
Increase in loans, net		(170,787	)		(41,165	)
Purchase of property and equipment		(5,869	)		(2,609	)
Purchase of investment securities:
Available for sale		(10,094	)		(5,366	)
Other investments		(2,265	)		-
Payments and maturities, calls and repayments of investment securities:
Available for sale		16,046			5,458
Other investments		2,182			1,862
Purchase of bank owned life insurance		-			(7,500	)
Proceeds from sale of fixed assets		-			50
Proceeds from sale of other real estate owned		-			788
Net cash used for investing activities		(170,787	)		(48,482	)
Financing activities
Increase (decrease) in cash realized from:
Increase in deposits, net		144,348			115,993
Decrease in Federal Home Loan Bank advances and other borrowings, net		-			(25,000	)
Proceeds from the exercise of stock options		579			1,578
Net cash provided by financing activities		144,927			92,571
Net increase (decrease) in cash and cash equivalents		(17,993	)		54,658
Cash and cash equivalents at beginning of the period		167,209			100,687
Cash and cash equivalents at end of the period	$	149,216			155,345
Supplemental information
Cash paid for
Interest	$	1,789			2,767
Income taxes		-			-
Schedule of non-cash transactions
Unrealized loss on securities, net of income taxes		(5,653	)		(1,113	)

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

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

Table of Contents

SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – Summary of Significant Accounting Policies

Nature of Business ~~and Basis of Presentation~~

~~Business Activity~~

Southern First Bancshares, Inc.~~(the~~ (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-month period ended March 31, ~~2021~~2022 are not necessarily indicative of the results that may be expected for the year ending December 31, ~~2021.~~2022. 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, ~~2020~~2021 as filed with the U.S. Securities and Exchange Commission (“SEC”) on March ~~2, 2021.~~4, 2022. The consolidated financial statements include the accounts of the Company and the Bank. In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810, “Consolidation,” the financial statements related to the Trusts have not been consolidated.

Business Segments

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

Use of Estimates

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

Risks and Uncertainties

The ~~unprecedented~~impact of the coronavirus (COVID-19) pandemic is fluid and ~~rapid spread~~continues to evolve, adversely affecting many of ~~COVID-19~~the Bank’s clients. While vaccine availability and ~~its associated impacts~~uptake has increased, the longer-term macro-economic effects on ~~trade (including~~global supply chains, inflation, labor shortages and export levels), travel, employee productivity, unemployment, consumer spending, and other economic activities has resulted in less economic activity, lower equity market valuations and significant volatility and disruption in financial markets, and has had an adverse effect on the Company’s business, financial condition and results of operations.wage increases continue to impact many industries. The ultimate extent of the impact of the COVID-19 pandemic on ~~the Company’s~~our business, financial condition and results of operations is currently uncertain and ~~the timing and pace of recovery~~ will depend on various developments and other factors, including ~~among others,~~increases in new COVID-19 cases, hospitalizations and deaths leading to additional government imposed restrictions; refusals to receive the ~~duration and scope~~vaccines along with concerns related to new strains of the ~~pandemic, as well as governmental, regulatory~~virus; supply chain issues remaining unresolved longer than anticipated; labor shortages; decreases in consumer confidence and ~~private sector responses to the pandemic,~~spending; and ~~the associated impacts on the economy, financial markets and our clients, employees and vendors.~~rising geopolitical tensions.

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

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

As of March 31, ~~2021,~~2022, the Company’s and the Bank’s capital ratios were in excess of all regulatory requirements. While management believes that we have sufficient capital to withstand an extended economic recession brought about by the COVID-19 pandemic, our reported and regulatory capital ratios could be adversely impacted by further credit losses.

The Company maintains access to multiple sources of liquidity, including a $15.0 million holding company line of credit with another bank which could be used to support capital ratios at the subsidiary bank. As of March 31, ~~2021,~~2022, the $15.0 million line was unused.

Reclassifications

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

Subsequent Events

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

Adoption of New Accounting Standard

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

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

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

Significant Accounting Policy Changes

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

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Allowance for Credit Losses - Securities Available for Sale

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

Changes in the allowance for credit losses under CECL are recorded as provision for (or reversal of) credit loss expense. Losses are charged against the allowance when management believes the uncollectibility of an available-for-sale security is confirmed or when either of the criteria regarding intent or requirement to sell is met. At March 31, 2022, there was no allowance for credit losses related to the available-for-sale portfolio.

Accrued interest receivable on available for sale debt securities totaled $436,000 at March 31, 2022 and was excluded from the estimate of credit losses.

Allowance for Credit Losses - Loans

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

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

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

Commercial loans

●

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

●

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

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●

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

●

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

Consumer loans

●

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

●

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

●

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

●

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

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

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

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

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

Accrued Interest Receivable

Accrued interest receivable related to loans totaled $7.2 million at March 31, 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 ~~June 2016,~~March 2022, the FASB ~~issued ASU 2016-13, “Financial Instruments –~~ amended the Receivables–Troubled Debt Restructuring by Creditors subtopic and Financial Instruments–Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”. Among other things, ASU 2016-13 requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking informationsubtopic to form their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, ASU 2016-13 amends the accounting for credit losses on debt securities and purchased financial assets with credit deterioration. ASU 2016-13 was originally effective for all annual and interim periods beginning after December 31, 2019, with early adoption permitted for fiscal years beginning after December 15, 2018. Adoption will be applied through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. The Company has established a team of individuals from credit, finance and risk management to evaluate the requirements of the new standard and the impact it will have on its processes.

In November 2019, the FASB issued guidance that addresses issues raised by stakeholders during the implementation of ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”. The amendments affect a variety of Topics in the Accounting Standards Codification. ~~For~~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, ~~that meet~~ the ~~definition~~amendments require disclosure of ~~a smaller reporting company, such as~~current-period gross write-offs by year of origination for financing receivables and net investments in leases within the ~~Company, 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 ~~any~~an interim ~~period as long as the~~period. The Company ~~has adopted to amendments in ASU 2016-13. Currently, the Company is evaluating the impact of adoption on its financial statements and~~ does not expect ~~to adopt the ASU before the effective period.~~

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

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NOTE 2 – Investment Securities

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

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


	March 31, 2022
	Amortized		Gross Unrealized				Fair
(dollars in thousands)	Cost		Gains		Losses		Value
Available for sale
Corporate bonds	$	2,191		-		125		2,066
US treasuries		999		-		65		934
US government agencies		13,005		-		1,187		11,818
State and political subdivisions		23,202		26		1,587		21,641
Asset-backed securities		8,423		4		76		8,351
Mortgage-backed securities
FHLMC		22,138		-		1,846		20,292
FNMA		37,907		-		2,816		35,091
GNMA		7,206		-		421		6,785
Total mortgage-backed securities		67,251		-		5,083		62,168
Total investment securities available for sale	$	115,071		30		8,123		106,978

December 31, 2020
Amortized
Gross Unrealized
Fair

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

	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 March 31, ~~2021~~2022 and December 31, ~~2020~~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.

March 31, 2021
Less than one year
One to five years
Five to ten years
Over ten years
Total
(dollars in thousands)
Amount
Yield
Amount
Yield
Amount
Yield
Amount
Yield
Amount
Yield
Available for sale
US government agencies
$
0-
0-
2,497
0.36
%
3,832
1.12
%
934
1.48
%
7,263
0.91
%
SBA securities
0-
0-
0-
0-
0-
0-
480
0.99
%
480
0.99
%
State and political subdivisions
0-
0-
470
2.13
%
2,756
1.90
%
16,585
2.18
%
19,811
2.14
%
Asset-backed securities
0-
0-
0-
0-
1,888
1.15
%
9,395
0.97
%
11,283
1.00
%
Mortgage-backed securities
0-
0-
1,743
1.78
%
8,867
1.78
%
43,550
1.15
%
54,160
1.28
%
Total
$
0-
0-
4,710
1.06
%
17,343
1.59
%
70,944
1.37
%
92,997
1.40
%

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	March 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	$	-		-	$	-		-		$	2,066		1.99	%	$	-		-		$	2,066		1.99	%
US treasuries		-		-		-		-			934		1.27	%		-		-			934		1.27	%
US government agencies		-		-		954		0.45	%		8,176		1.31	%		2,688		1.79	%		11,818		1.35	%
State and political subdivisions		-		-		470		2.13	%		4,859		1.62	%		16,312		2.19	%		21,641		2.06	%
Asset-backed securities		-		-		-		-			1,412		2.22	%		6,939		1.08	%		8,351		1.27	%
Mortgage-backed securities		-		-		3,422		1.22	%		5,196		1.43	%		53,550		1.50	%		62,168		1.47	%
Total	$	-		-	$	4,846		1.16	%	$	22,643		1.52	%	$	79,489		1.61	%	$	106,978		1.57	%

	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	$	387		2.10	%	$	7,363		1.03	%	$	26,953		1.53	%	$	85,578		1.55	%	$	120,281		1.52	%

December 31, 2020
Less than one year
One to five years
Five to ten years
Over ten years
Total
(dollars in thousands)
Amount
Yield
Amount
Yield
Amount
Yield
Amount
Yield
Amount
Yield
Available for sale
US government agencies
$
0-
0-
2,501
0.37
%
2,995
1.07
%
997
1.48
%
6,493
0.86
%
SBA securities
0-
0-
0-
0-
0-
0-
485
0.98
%
485
0.98
%
State and political subdivisions
0-
0-
470
2.13
%
3,053
1.98
%
15,865
2.23
%
19,388
2.18
%
Asset-backed securities
0-
0-
0-
0-
1,983
1.17
%
9,546
1.00
%
11,529
1.03
%
Mortgage-backed securities
0-
0-
2,044
1.77
%
9,544
1.74
%
45,246
1.36
%
56,834
1.44
%
Total
$
0-
0-
5,015
1.10
%
17,575
1.60
%
72,139
1.50
%
94,729
1.50
%

The tables below summarize gross unrealized losses on investment securities and the fair market value of the related securities at March 31, ~~2021~~2022 and December 31, ~~2020,~~2021, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position.

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


	March 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	$	2,066	$	125		-	$	-	$	-		1	$	2,066	$	125
US treasures		1		934		65		-		-		-		1		934		65
US government agencies		4		6,399		612		6		5,420		575		10		11,819		1,187
State and political subdivisions		20		15,206		1,033		8		4,461		554		28		19,667		1,587
Asset-backed		6		5,861		55		2		1,612		21		8		7,473		76
Mortgage-backed securities
FHLMC		14		15,318		1,286		5		4,974		560		19		20,292		1,846
FNMA		26		23,751		1,692		10		11,329		1,124		36		35,080		2,816
GNMA		4		4,107		212		3		2,678		209		7		6,785		421
Total		76	$	73,642	$	5,080		34	$	30,474	$	3,043		110	$	104,116	$	8,123

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

Table of Contents


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

At March 31, ~~2021~~2022 the Company had 3976 individual investments with a fair market value of ~~$41.1~~$73.6 million that were in an unrealized loss position for less than 12 months and 534 individual investments with a fair market value of ~~$3.7~~$30.5 million that were in an unrealized loss position for 12 months or longer. The unrealized losses were primarily attributable to changes in interest rates, rather than deterioration in credit quality. The individual securities are each investment grade securities. The Company considers the length of time and extent to which the fair value of available-for-sale debt securities have been less than cost to conclude that such securities are not other-than-temporarily impaired. The Company also considers other factors such as the financial condition of the issuer including credit ratings and specific events affecting the operations of the issuer, volatility of the security, underlying assets that collateralize the debt security, and other industry and macroeconomic conditions.

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

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

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


(dollars in thousands)	March 31, 2022		December 31, 2021
Federal Home Loan Bank stock	$	1,256		1,241
Other nonmarketable investments		2,445		2,377
Investment in Trust Preferred subsidiaries		403		403
Total other investments	$	4,104		4,021

The Company has evaluated ~~the Federal Home Loan Bank (“FHLB”) stock~~other investments for impairment and determined that the ~~investment in the FHLB stock is~~other investments are not ~~other than temporarily~~ impaired as of March 31, ~~2021~~2022 and that ultimate recoverability of the par value of ~~this investment~~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 March 31, ~~2021,~~2022, mortgage loans held for sale totaled ~~$57.1~~$17.8 million compared to ~~$60.2~~$13.6 million at December 31, ~~2020.~~2021.

Mortgage loans held for sale are considered de-recognized, or sold, when the Company surrenders control over the financial assets. Control is considered to have been surrendered when the transferred assets have been isolated from the Company, beyond the reach

Table of the Company and its creditors; the purchaser obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets; and the Company does not maintain effective control over the transferred assets through an agreement that both entitles and obligates the Company to repurchase or redeem the transferred assets before their maturity or the ability to unilaterally cause the holder to return specific assets.Contents

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

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

NOTE 4 – Loans and Allowance for ~~Loan~~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 ~~$3.9~~$5.5 million as of March 31, ~~2021~~2022 and $5.0 million as of December 31, ~~2020.~~2021.

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


	March 31, 2022						December 31, 2021
(dollars in thousands)	Amount			% of Total			Amount			% of Total
Commercial
Owner occupied RE	$	527,776			19.8	%	$	488,965			19.6	%
Non-owner occupied RE		705,811			26.5	%		666,833			26.8	%
Construction		75,015			2.8	%		64,425			2.6	%
Business		352,932			13.3	%		333,049			13.4	%
Total commercial loans		1,661,534			62.4	%		1,553,272			62.4	%
Consumer
Real estate		745,667			28.0	%		694,401			27.9	%
Home equity		155,678			5.9	%		154,839			6.2	%
Construction		72,627			2.7	%		59,846			2.4	%
Other		25,169			1.0	%		27,519			1.1	%
Total consumer loans		999,141			37.6	%		936,605			37.6	%
Total gross loans, net of deferred fees		2,660,675			100.0	%		2,489,877			100.0	%
Less—allowance for credit losses		(32,944	)					(30,408	)
Total loans, net	$	2,627,731					$	2,459,469

Maturities and Sensitivity of Loans to Changes in Interest Rates

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

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


	March 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	$	15,677		116,156		353,233		42,710		527,776
Non-owner occupied RE		48,491		338,553		290,547		28,220		705,811
Construction		4,668		24,360		36,711		9,276		75,015
Business		71,844		155,045		122,820		3,223		352,932
Total commercial loans		140,680		634,114		803,311		83,429		1,661,534
Consumer
Real estate		9,839		45,057		182,195		508,576		745,667
Home equity		2,309		20,411		127,604		5,354		155,678
Construction		932		1,651		8,858		61,186		72,627
Other		5,160		16,368		3,219		422		25,169
Total consumer loans		18,240		83,487		321,876		575,538		999,141
Total gross loans, net of deferred fees	$	158,920		717,601		1,125,187		658,967		2,660,675

Table of Contents


	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 loans, net of deferred fees	$	161,868		701,494		1,018,275		608,240		2,489,877

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

~~Paycheck Protection Program (“PPP”)~~

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

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

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

~~Portfolio Segment Methodology~~2022.

~~Commercial~~


	Interest Rate

(dollars in thousands)	Fixed		Floating or Adjustable
Commercial
Owner occupied RE	$	507,622		4,477
Non-owner occupied RE		578,786		78,534
Construction		66,873		3,474
Business		212,419		68,669
Total commercial loans		1,365,700		155,154
Consumer
Real estate		735,758		70
Home equity		11,634		141,735
Construction		71,695		-
Other		13,208		6,801
Total consumer loans		832,295		148,606
Total gross loans, net of deferred fees	$	2,197,995		303,760

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

~~Consumer~~

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

Credit Quality Indicators

~~Commercial~~

~~We manage a consistent process for assessing commercial loan~~The Company tracks credit quality ~~by monitoring~~based on its internal risk ratings. Upon origination, a loan ~~grading trends and past due statistics. All~~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 ~~subject to individual risk assessment. Our risk categories include Pass, Special Mention, Substandard, and Doubtful, each of which is defined by our banking regulatory agencies. Delinquency statistics~~initially graded, they are ~~also an important indicator of~~monitored regularly for credit quality ~~in the establishment of our allowance for loan losses.~~

~~We categorize our loans into risk categories~~ based on ~~relevant information about the ability of the borrower to service their debt~~many factors, such as ~~current~~payment history, the borrower’s financial ~~information, historical payment experience, credit documentation, public information,~~status, and ~~current economic trends, among other~~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 credit risk to average credit risk; however, still have acceptable credit risk.~~

●

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

●

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

●

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

●

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

14Table of Contents

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

~~Special mention—A special mention~~


	March 31, 2022
(dollars in thousands)	2022		2021		2020		2019		2018		Prior		Revolving		Total
Commercial
Owner occupied RE
Pass	$	48,943		136,043		91,485		76,409		42,537		130,973		-		526,390
Special Mention		-		163		-		-		-		159		-		322
Substandard		-		-		653		-		298		113		-		1,064
Total Owner occupied RE		48,943		136,206		92,138		76,409		42,835		131,245		-		527,776

Non-owner occupied RE
Pass		61,668		186,526		118,651		82,442		84,310		145,200		-		678,797
Special Mention		-		205		-		313		5,544		5,614		-		11,676
Substandard		-		141		-		13,237		309		1,651		-		15,338
Total Non-owner occupied RE		61,668		186,872		118,651		95,992		90,163		152,465		-		705,811

Construction
Pass		6,472		53,371		9,073		4,498		1,601		-		-		75,015
Special Mention		-		-		-		-		-		-		-		-
Substandard		-		-		-		-		-		-		-		-
Total Construction		6,472		53,371		9,073		4,498		1,601		-		-		75,015

Business
Pass		30,305		62,583		36,345		27,908		38,361		36,286		117,232		349,020
Special Mention		224		53		398		-		-		168		101		944
Substandard		-		-		1,294		204		362		1,083		25		2,968
Total Business		30,529		62,636		38,037		28,112		38,723		37,537		117,358		352,932
Total Commercial loans		147,612		439,085		257,899		205,011		173,322		321,247		117,358		1,661,534

Consumer
Real estate
Pass		69,226		255,662		197,008		80,005		42,490		91,948		-		736,339
Special Mention				1,113		1,387		1,068		568		848		-		4,984
Substandard		-		902		230		419		963		1,830		-		4,344
Total Real estate		69,226		257,677		198,625		81,492		44,021		94,626		-		745,667

Home equity
Pass		-		-		-		-		-		-		150,767		150,767
Special Mention		-		-		-		-		-		-		2,186		2,186
Substandard		-		-		-		-		-		-		2,725		2,725
Total Home equity		-		-		-		-		-		-		155,678		155,678

Construction
Pass		10,078		42,845		19,420		-		-		-		-		72,343
Special Mention		-		-		-		284		-		-		-		284
Substandard		-		-		-		-		-		-		-		-
Total Construction		10,078		42,845		19,420		284		-		-		-		72,627

Other
Pass		1,177		2,700		1,250		2,001		711		3,916		13,227		24,982
Special Mention		-		-		8		38		76		10		33		165
Substandard		-		-		-		12		-		-		10		22
Total Other		1,177		2,700		1,258		2,051		787		3,926		13,270		25,169
Total Consumer loans		80,481		303,222		219,303		83,827		44,808		98,552		168,948		999,141
Total loans	$	228,093		742,307		477,202		288,838		218,130		419,799		286,306		2,660,675

Table of Contents

The following table presents loan ~~has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration~~balances classified by credit quality indicators and loan categories as of ~~the repayment prospects for the loan or the institution’s credit position at some future date.~~ 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	$	488,965		666,833		64,425		333,049		694,401		154,839		59,846		27,519		2,489,877

•

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

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


	March 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	$	-		-		-		-		527,776		527,776
Non-owner occupied RE		75		-		-		1,026		704,710		705,811
Construction		-		-		-		-		75,015		75,015
Business		124		-		-		-		352,808		352,932
Consumer
Real estate		757		695		-		1,482		742,733		745,667
Home equity		-		1		-		2,024		153,653		155,678
Construction		-		-		-		-		72,627		72,627
Other		3		-		-		-		25,166		25,169
Total	$	959		696		-		4,532		2,654,488		2,660,675

	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	$	558		174		-		4,864		2,484,281		2,489,877

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

As of March 31, ~~2021~~2022 and December 31, ~~2020,~~2021, loans 30 days or more past due represented ~~0.12%~~0.13% and ~~0.17%~~0.09% of the Company’s total loan portfolio, respectively. Commercial loans 30 days or more past due were ~~0.05%~~0.01% and ~~0.08%~~0.00% of the Company’s total loan portfolio as of March 31, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively.

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

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

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

~~Consumer~~

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

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

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

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

Consumer loans 30 days or more past due were ~~0.07%~~0.12% and 0.09% of total loans as of March 31, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively.

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

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

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

Table of Contents

Nonperforming assets

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

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

~~Following is a summary of our~~ The following table shows the nonperforming assets ~~including nonaccruing TDRs.~~and the related percentage of nonperforming assets to total assets and gross loans.

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


(dollars in thousands)	March 31, 2022			December 31, 2021
Nonaccrual loans	$	1,819			-
Nonaccruing TDRs		2,713			2,952
Total nonaccrual loans, including nonaccruing TDRs		4,532			4,864
Other real estate owned		-			-
Total nonperforming assets	$	4,532			4,864
Nonperforming assets as a percentage of:
Total assets		0.15	%		0.17	%
Gross loans		0.17	%		0.20	%
Total loans over 90 days past due	$	554			554
Loans over 90 days past due and still accruing		-			-
Accruing troubled debt restructurings		3,241			3,299

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


	CECL						Incurred loss
	March 31, 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		265		761		1,026		1,070
Construction		-		-		-		-
Business		-		-		-		-
Total commercial		265		761		1,026		1,070
Consumer
Real estate		987		495		1,482		1,750
Home equity		1,971		53		2,024		2,044
Construction		-		-		-		-
Other		-		-		-		-
Total consumer		2,958		548		3,506		3,794
Total	$	3,224		1,309		4,532		4,864

Table of Contents

The table below summarizes key information for ~~impaired loans. The Company’s impaired~~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 ~~impaired~~ loans may have estimated impairment which is included in the allowance for ~~loan losses. The Company’s commercial and consumer impaired loans are evaluated individually to determine the related allowance for loan~~credit losses.

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


					December 31, 2021
					Recorded investment
					Impaired loans		Impaired loans
	Unpaid				with no related		with related		Related
(dollars in thousands)	Principal Balance		Impaired loans		allowance for credit losses		allowance for credit losses		allowance for 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	$	9,344		8,163		5,263		2,900		836

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

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

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


	Three months ended March 31, 2021				Year ended December 31, 2021
(dollars in thousands)	Average recorded investment		Recognized interest income		Average recorded investment		Recognized interest income
Commercial
Owner occupied RE	$	1,569		16		1,387		65
Non-owner occupied RE		2,161		62		3,128		182
Construction		137		2		55		-
Business		2,329		34		2,218		62
Total commercial		6,196		114		6,788		309
Consumer
Real estate		4,212		43		3,641		98
Home equity		2,030		16		1,964		85
Construction		-		-		-		-
Other		134		1		129		4
Total consumer		6,376		60		5,734		187
Total	$	12,572		174		12,522		496

Table of Contents

Allowance for ~~Loan~~Credit Losses

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

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

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


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

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

Three months ended March 31, 2021
Commercial
Consumer
Owner
Non-owner
occupied
occupied
Real
Home
(dollars in thousands)
RE
RE
Construction
Business
Estate
equity
Construction
Other
Total
Balance, beginning of period
$
8,145
12,049
1,154
7,845
10,453
3,249
747
507
44,149
Provision for loan losses
(991
)
3,146
(327
)
(785
)
(787
)
(423
)
(62
)
(71
)
(300
)
Loan charge-offs
0-
0-

0-
(267
)
0-
(139
)
0-
0-

(406
)
Loan recoveries
0-
0-
0-
55
0-
1
0-
0-
56
Net loan charge-offs
0-
0-

0-
(212
)
0-
(138
)
0-
0-

(350
)
Balance, end of period
$
7,154
15,195
827
6,848
9,666
2,688
685
436
43,499
Net charge-offs to average loans (annualized)
0.07
%
Allowance for loan losses to gross loans
1.99
%
Allowance for loan losses to nonperforming loans
557.47
%


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

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

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

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

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

Table of Contents

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

The following table presents an analysis of collateral-dependent loans of the Company as of March 31, 2022.


	March 31, 2022
	Real		Business
(dollars in thousands)	estate		assets		Other		Total
Commercial
Owner occupied RE	$	1,250		-		-		1,250
Non-owner occupied RE		265		-		-		265
Construction		-		-		-		-
Business		-		-		-		-
Total commercial		1,515		-		-		1,515
Consumer
Real estate		1,484		-		-		1,484
Home equity		2,024		-		-		2,024
Construction		-		-		-		-
Other		-		-		-		-
Total consumer		3,508		-		-		3,508
Total	$	5,023		-		-		5,023

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

Allowance for Credit Losses - Unfunded Loan Commitments

The allowance for credit losses for unfunded loan commitments was $2.1 million at March 31, 2022 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 three months ended March 31, 2022.


	Three months ended
(dollars in thousands)	March 31, 2022
Balance, beginning of period		-
Adjustment for adoption of CECL	$	2,000
Provision for (reversal of) loan losses		80
Loan charge-offs		-
Loan recoveries		-
Net loan (charge-offs) recoveries		-
Balance, end of period	$	2,080

NOTE 5 – Troubled Debt Restructurings

At March 31, ~~2021,~~2022, the Company had 1713 loans totaling ~~$7.5~~$6.0 million compared to 2014 loans totaling ~~$8.4~~$6.3 million at December 31, ~~2020,~~2021, which were considered as TDRs. The Company considers a loan to be a TDR when the debtor experiences financial difficulties and the Company grants a concession to the debtor that it would not normally consider. Concessions can relate to the contractual interest rate, maturity date, or payment structure of the note. As part of the workout plan for individual loan relationships, the Company may restructure loan terms to assist borrowers facing financial challenges in the current economic environment.

A restructuring that results in only a delay in payments that is insignificant is not considered an economic concession. In accordance with the CARES Act, the Company implemented loan modification programs in response to the COVID-19 pandemic, and the Company elected the accounting policy in the CARES Act to not apply TDR accounting to loans modified for borrowers impacted by the COVID-19 pandemic.

20Table of Contents

The ~~following table summarizes~~were no renewals or modifications to any loans considered TDRs during the ~~concession at the time of modification and the recorded investment in the Company’s TDRs before and after their modification for~~three months ended March 31, 2022. For the three months ended March 31, 2021, renewals and ~~2020.~~modifications were not material.

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

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

As of March 31, ~~2021~~2022 and ~~2020,~~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.

NOTE 6 – Derivative Financial Instruments

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

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

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

The following table summarizes the Company’s outstanding financial derivative instruments at March 31, ~~2021~~2022 and December 31, ~~2020.~~2021.

March 31, 2021
Fair Value
(dollars in thousands)
Notional
Balance Sheet Location
Asset/(Liability)
Mortgage loan interest rate lock commitments
$
95,689
Other assets
$
794

MBS forward sales commitments
63,000
Other assets
497

Total derivative financial instruments
$
158,689
$
1,291


	March 31, 2022
				Fair Value
(dollars in thousands)	Notional		Balance Sheet Location	Asset/(Liability)
Mortgage loan interest rate lock commitments	$	33,011	Other assets	$	77
MBS forward sales commitments		24,500	Other assets		436
Total derivative financial instruments	$	57,511		$	513

	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

December 31, 2020
Fair Value
(dollars in thousands)
Notional
Balance Sheet Location
Asset/(Liability)
Mortgage loan interest rate lock commitments
$
107,569
Other assets
$
2,385

MBS forward sales commitments
75,500
Other liabilities
(501
)
Total derivative financial instruments
$
183,069
$
1,884

Table of Contents

NOTE 7 – Fair Value Accounting

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

~~Level 1 – Quoted market price in active markets~~

	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.

~~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 3 – Significant unobservable inputs

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

~~Level 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 ~~2020~~2021 Annual Report on Form 10-K. The Company’s loan portfolio is initially fair valued using a segmented approach, using the eight categories of loans as disclosed in Note 4 – Loans and Allowance for ~~Loan~~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 March 31, ~~2021~~2022 and December 31, ~~2020.~~2021.


	March 31, 2022
(dollars in thousands)	Level 1		Level 2		Level 3		Total
Assets
Securities available for sale
Corporate bonds	$	-		2,066		-		2,066
US treasuries		-		934		-		934
US government agencies		-		11,818		-		11,818
State and political subdivisions		-		21,641		-		21,641
Asset-backed securities		-		8,351		-		8,351
Mortgage-backed securities		-		62,168		-		62,168
Mortgage loans held for sale		-		17,840		-		17,840
Mortgage loan interest rate lock commitments		-		77		-		77
MBS forward sales commitments		-		436		-		436
Total assets measured at fair value on a recurring basis	$	-		125,331		-		125,331

22Table of Contents


	March 31, 2021					December 31, 2021
(dollars in thousands)	Level 1		Level 2	Level 3	Total	Level 1		Level 2		Level 3		Total
Assets
Securities available for sale
Securities available for sale:
Corporate bonds						$	-		2,188		-		2,188
US treasuries							-		992		-		992
US government agencies	$	0-	7,263	0-	7,263		-		14,169		-		14,169
SBA securities		0-	480	0-	480		-		438		-		438
State and political subdivisions		0-	19,811	0-	19,811		-		25,176		-		25,176
Asset-backed securities		0-	11,283	0-	11,283		-		10,164		-		10,164
Mortgage-backed securities		0-	54,160	0-	54,160		-		67,154		-		67,154
Mortgage loans held for sale		0-	57,073	0-	57,073		-		13,556		-		13,556
Mortgage loan interest rate lock commitments		0-	794	0-	794		-		425		-		425
Total assets measured at fair value on a recurring basis						$	-		134,262		-		134,262

Liabilities
MBS forward sales commitments		0-	497	0-	497	$	-		41		-		41
Total assets measured at fair value on a recurring basis	$	0-	151,361	0-	151,361
Total liabilities measured at fair value on a recurring basis						$	-		41		-		41

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

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

Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis

The tables below present the recorded amount of assets and liabilities measured at fair value on a nonrecurring basis as of March 31, ~~2021~~2022 and December 31, ~~2020.~~2021.

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


	As of March 31, 2022
(dollars in thousands)	Level 1		Level 2		Level 3		Total
Assets
Impaired loans	$	-		4,970		1,984		6,954
Total assets measured at fair value on a nonrecurring basis	$	-		4,970		1,984		6,954

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

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

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

Fair Value of Financial Instruments

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

23Table of Contents

The estimated fair values of the Company’s financial instruments at March 31, ~~2021~~2022 and December 31, ~~2020~~2021 are as follows:

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


	March 31, 2022
(dollars in thousands)	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
Financial Assets:
Other investments, at cost	$	4,104		4,104		-		-		4,104
Loans¹		2,619,957		2,531,268		-		-		2,531,268
Financial Liabilities:
Deposits		2,623,174		2,273,251		-		2,273,251		-
Subordinated debentures		36,133		34,978		-		34,978		-

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

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

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

NOTE 8 – Leases

Effective January 1, 2019, the Company adopted ASU 2016-02, “Leases (Topic 842)”. As of March 31, ~~2021,~~2022, we leased ~~six~~seven of our offices under various operating lease agreements. The lease agreements have maturity dates ranging from August 2028 to February ~~2022 to October 2029,~~2032, some of which include options for multiple five-year extensions. The weighted average remaining life of the lease term for these leases was ~~6.90~~7.63 years as of March 31, ~~2021.~~2022.

The discount rate used in determining the lease liability for each individual lease was the FHLB fixed advance rate which corresponded with the remaining lease term as of January 1, 2019 for leases that existed at adoption and as of the lease commencement date for leases subsequently entered into. The weighted average discount rate for leases was ~~2.70%~~2.28% as of March 31, ~~2021.~~2022.

The total operating lease costs were ~~$714,000~~$778,000 and ~~$596,000~~$714,000 for the three months ended March 31, ~~2021~~2022 and ~~2020,~~2021, respectively. The right-of-use (ROU) asset, included in property and equipment, and lease ~~liabilities,~~liability, included in other liabilities, ~~were $18.2~~was $24.1 million and ~~$19.1~~$25.6 million as of March 31, ~~2021,~~2022, respectively, compared to ~~$18.8~~$26.6 million and ~~$19.5~~$28.0 million as of December 31, ~~2020,~~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.

Maturities of lease liabilities as of March 31, ~~2021~~2022 were as follows:

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


	Operating
(dollars in thousands)	Leases
2022	$	848
2023		1,938
2024		1,990
2025		2,045
2026		2,096
Thereafter		24,093
Total undiscounted lease payments		33,010
Discount effect of cash flows		7,443
Total lease liability	$	25,567

Table of Contents

NOTE 9 – Earnings Per Common Share

The following schedule reconciles the numerators and denominators of the basic and diluted earnings per share computations for the ~~three month~~three-month periods ended March 31, ~~2021~~2022 and ~~2020.~~2021. Dilutive common shares arise from the potentially dilutive effect of the Company’s stock options that were outstanding at March 31, ~~2021.~~2022. The assumed conversion of stock options can create a difference between basic and dilutive net income per common share. At March 31, ~~2021~~2022 and ~~2020,~~2021, there were ~~210,899~~9,000 and ~~288,053~~210,899 options, respectively, that were not considered in computing diluted earnings per common share because they were anti-dilutive.

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


	Three months ended March 31,
(dollars in thousands, except share data)	2022		2021
Numerator:
Net income available to common shareholders	$	7,970	$	10,366
Denominator:
Weighted-average common shares outstanding – basic		7,931,855		7,774,515
Common stock equivalents		164,455		134,022
Weighted-average common shares outstanding – diluted		8,096,310		7,908,537
Earnings per common share:
Basic	$	1.00	$	1.33
Diluted	$	0.98	$	1.31

NOTE 10 – Reportable Segments

The Company’s reportable segments represent the distinct product lines the Company offers and are viewed separately for strategic planning purposes by management. The 3 segments include Commercial and Retail Banking, Mortgage Banking, and Corporate. The following schedule presents financial information for each reportable segment.

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


	Three months ended March 31, 2022													Three months ended March 31, 2021
(dollars in thousands)	Commercial and Retail Banking		Mortgage Banking			Corporate			Elimin- ations			Consol- idated		Commercial and Retail Banking			Mortgage Banking		Corporate			Elimin- ation			Consol- idated
Interest income	$	24,234		230			5			(5	)		24,464		22,414			399		3			(3	)		22,813
Interest expense		925		-			380			(5	)		1,300		1,161			-		382			(3	)		1,540
Net interest income (loss)		23,309		230			(375	)		-			23,164		21,253			399		(379	)		-			21,273
Provision (benefit) for credit losses		905		200			-			-			1,105		(300	)		-		-			-			(300	)
Noninterest income		1,433		1,494			-			-			2,927		1,271			4,633		-			-			5,904
Noninterest expense		12,976		1,649			60			-			14,685		11,233			2,867		62			-			14,162
Net income (loss) before taxes		10,861		(125	)		(435	)		-			10,301		11,591			2,165		(441	)		-			13,315
Income tax provision (benefit)		2,450		(28	)		(91	)		-			2,331		2,564			478		(93	)		-			2,949
Net income (loss)	$	8,411		(97	)		(344	)		-			7,970		9,027			1,687		(348	)		-			10,366
Total assets	$	3,033,122		39,003			314,658			(314,143	)		3,072,640		2,516,869			62,530		275,941			(275,418	)		2,579,922

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

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

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

Table of Contents

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 month period ended March 31, ~~2021~~2022 as compared to the three month period ended March 31, ~~2020~~2021 and assesses our financial condition as of March 31, ~~2021~~2022 as compared to December 31, ~~2020.~~2021. 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, ~~2020~~2021 included in our Annual Report on Form 10-K for that period. Results for the three month period ended March 31, ~~2021~~2022 are not necessarily indicative of the results for the year ending December 31, ~~2021~~2022 or any future period.

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

Cautionary Warning Regarding forward-looking statements

This report contains statements which constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”). Forward-looking statements may relate to our financial condition, results of operations, plans, objectives, or future performance. These statements are based on many assumptions and estimates and are not guarantees of future performance. Our actual results may differ materially from those anticipated in any forward-looking statements, as they will depend on many factors about which we are unsure, including many factors which are beyond our control. The words “may,” “would,” “could,” “should,” “will,” “seek to,” “strive,” “focus,” “expect,” “anticipate,” “predict,” “project,” “potential,” “believe,” “continue,” “assume,” “intend,” “plan,” and “estimate,” as well as similar expressions, are meant to identify such forward-looking statements. Potential risks and uncertainties that could cause our actual results to differ from those anticipated in any forward-looking statements include, but are not limited to:

•

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

•

~~Restrictions or conditions imposed by our regulators on our operations;~~

•

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

•

~~Changes in access to funding or increased regulatory requirements with regard to funding;~~

•

~~Changes in deposit flows;~~

•

~~Credit losses as a result of declining real estate values, increasing interest rates, increasing unemployment, changes in payment behavior or other factors;~~

•

~~Credit losses due to loan concentration;~~

•

~~Changes in the amount of our loan portfolio collateralized by real estate and weaknesses in the real estate market;~~

•

~~Our ability to successfully execute our business strategy;~~

•

~~Our ability to attract and retain key personnel;~~

●

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

•

●

Restrictions or conditions imposed by our regulators on our operations;

●

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

●

Changes in access to funding or increased regulatory requirements with regard to funding;

●

Changes in deposit flows;

●

Credit losses as a result of declining real estate values, increasing interest rates, increasing unemployment, changes in payment behavior or other factors;

●

Credit losses due to loan concentration;

●

Changes in the amount of our loan portfolio collateralized by real estate and weaknesses in the real estate market;

●

Our ability to successfully execute our business strategy;

●

Our ability to attract and retain key personnel;

●

The success and costs of our expansion into the Charlotte, North Carolina, Greensboro, North Carolina and Atlanta, Georgia markets and into potential new markets;

●

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

●

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

Table of ~~our expansion into the Charlotte, North Carolina, Greensboro, North Carolina and Atlanta, Georgia markets and into potential new markets;~~ Contents

•

●

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

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

●

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

•

●

Changes occurring in business conditions and inflation;

Changes in political conditions or the legislative or regulatory environment, including governmental initiatives affecting the financial services industry, including as a result of the new presidential administration and Democratic control of Congress;

●

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

•

●

Changes in technology;

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

●

The adequacy of the level of our allowance for credit losses and the amount of loan loss provisions required in future periods;

•

●

Examinations by our regulatory authorities, including the possibility that the regulatory authorities may, among other things, require us to increase our allowance for credit losses or write-down assets;

~~Changes occurring in business conditions and inflation;~~

●

Changes in monetary and tax policies;

•

●

The rate of delinquencies and amounts of loans charged-off;

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

●

The rate of loan growth in recent years and the lack of seasoning of a portion of our loan portfolio;

•

●

Our ability to maintain appropriate levels of capital and to comply with our capital ratio requirements;

~~Changes in technology;~~

●

Adverse changes in asset quality and resulting credit risk-related losses and expenses;

•

●

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

~~The adequacy of the level of our allowance for loan losses and the amount of loan loss provisions required in future periods;~~

●

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

•

●

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

Examinations by our regulatory authorities, including the possibility that the regulatory authorities may, among other things, require us to increase our allowance for loan losses or write-down assets;

●

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

•

●

Other risks and uncertainties detailed in Part I, Item 1A, “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2021, in Part II, Item 1A, “Risk Factors” of our Quarterly Reports on Form 10-Q, and in our other filings with the SEC.

~~Changes in monetary and tax policies;~~

•

~~The rate of delinquencies and amounts of loans charged-off;~~

•

~~The rate of loan growth in recent years and the lack of seasoning of a portion of our loan portfolio;~~

•

~~Our ability to maintain appropriate levels of capital and to comply with our capital ratio requirements;~~

•

~~Adverse changes in asset quality and resulting credit risk-related losses and expenses;~~

•

~~Changes in accounting policies and practices;~~

•

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

•

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

•

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

If any of these risks or uncertainties materialize, or if any of the assumptions underlying such forward-looking statements proves to be incorrect, our results could differ materially from those expressed in, implied or projected by, such forward-looking statements. We urge investors to consider all of these factors carefully in evaluating the forward-looking statements contained in this Quarterly Report on Form 10-Q. We make these forward-looking statements as of the date of this document and we do not intend, and assume no obligation, to update the forward-looking statements or to update the reasons why actual results could differ from those expressed in, or implied or projected by, the forward-looking statements, except as required by law.

~~OVERVIEW~~

OVERVIEW

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

At March 31, ~~2021,~~2022, we had total assets of ~~$2.58~~$3.07 billion, a ~~3.9%~~5.0% increase from total assets of ~~$2.48~~$2.93 billion at December 31, ~~2020.~~2021. The largest ~~components~~component of our total assets ~~are~~is loans which were ~~$2.18~~$2.66 billion and ~~$2.14~~$2.49 billion at March 31, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively. Our liabilities and shareholders’ equity at March 31, ~~2021~~2022 totaled ~~$2.34~~$2.79 billion and ~~$239.5~~$278.5 million, respectively, compared to liabilities of ~~$2.25~~$2.65 billion and shareholders’ equity of ~~$228.3~~$277.9 million at December 31, ~~2020.~~2021. The principal component of our liabilities is deposits which were ~~$2.26~~$2.71 billion and ~~$2.14~~$2.56 billion at March 31, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively.

Table of Contents

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 ~~$10.4~~$8.0 million and ~~$2.8~~$10.4 million for the three months ended March 31, ~~2021~~2022 and ~~2020,~~2021, respectively. Diluted earnings per share (“EPS”) was ~~$1.31~~$0.98 for the first quarter of ~~2021 as~~2022, compared to ~~$0.36~~$1.31 for the same period in ~~2020.~~2021. The ~~increase~~decrease in net income ~~resulted~~was driven primarily ~~from a $6.3 million decrease in loan loss~~by an increased provision recorded in the first quarter of 2021 compared to the same period in 2020, a $3.2 million increase in net interest income, a $2.0 million increase in noninterest income and partially offset by a $1.8 million increase in noninterest expense.

~~recent events – covid-19 pandemic~~

The COVID-19 pandemic has had significant impact on our business, industry and clients. Twelve months ago, unemployment rates were at historical highs, our bank lobbies were closed to guests, and the majority of our team was working remotely. As of March 31, 2021, normalcy has begun to return as unemployment rates have decreased to near pre-COVID levels, our bank lobbies have re-opened, and our team members have returned to the office. Our digital technology channels are also stronger and better utilized as a result of the pandemic.

Beginning in March 2020, we began granting loan modifications or deferrals to certain borrowers affected by the pandemic on a short-term basis of three to six months. As of March 31, 2021, all but two of these loans are under a normal payment structure.

We continue to monitor credit risk and our exposure to increased loan losses resulting from the impact of COVID-19 on our commercial clients. In doing so, we believe that the hospitality and tourism industry is still at risk for credit loss due to reduced business and recreational travel in our regions. We will not know the depth of the impact of the pandemic on the hospitality and tourism industry until a significant portion of the population has received the vaccine and travel restrictions have been lifted.

~~Hotel portfolio as of March 31, 2021:~~

•

~~21 loans totaled $109.7 million~~

•

~~2 loans totaled $13.5 million remained under a deferral arrangement~~

•

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

•

~~0% of hotel loans were on nonaccrual~~

•

~~4 hotel loans totaling $48.8 million were downgraded to special mention~~losses during the first quarter of ~~2021~~ 2022 as compared to 2021.

•

~~7 hotel~~Our mortgage banking segment reported a pre-tax loss of $125,000 for the three-month period ended March 31, 2022, compared to pre-tax net income of $2.2 million for the three-month period ended March 31, 2021. Noninterest income for our mortgage banking segment, which consists mainly of realized and unrealized gains associated with the fair value of commitments and loans ~~totaling $26.2~~held for sale, was $1.5 million ~~were downgraded~~for the first quarter of 2022, compared to ~~substandard~~$4.6 million for the first quarter of 2021. The $3.1 million decrease during the period was driven by a decline in sales activity combined with a decrease in the fair value of derivatives associated with mortgage loan commitments. Noninterest expense for our mortgage banking segment consists mainly of salaries, commissions and benefits of mortgage employees, professional fees and outside services and data processing costs. Noninterest expense was $1.6 million for the first quarter of 2022, compared to $2.9 million for the first quarter of 2021. The $1.2 million decrease during the first quarter of ~~2021~~ 2022 was driven by a decrease in salaries and benefits expense primarily related to commissions paid on sales activity.

~~During~~

We are currently constructing a new bank headquarters on a piece of property that we own in Greenville, South Carolina. The new headquarters which includes a retail office will open in the ~~first~~second quarter of ~~2021, our classified asset ratio rose to 14.42% as a result~~2022.

results of ~~$26.2 million of hotel loans we downgraded to substandard. Downgrading these loans reflects our commitment to closely monitor our most at-risk clients.~~

As of March 31, 2021, all of our capital ratios, and the Bank’s capital ratios, were in excess of all regulatory requirements. While we believe that we have sufficient capital to withstand an extended economic recession brought about by the COVID-19 pandemic, our regulatory capital ratios could be adversely impacted by further credit losses. We maintain access to multiple sources of liquidity, including a $15.0 million holding company line of credit with another bank which could be used to support capital ratios at the Bank.

operations

~~RESULTS OF OPERATIONS~~

Net Interest Income and Margin

Our level of net interest income is determined by the level of earning assets and the management of our net interest margin. Our net interest income was $23.2 million for the first quarter of 2022, an 8.9% increase over net interest income of $21.3 million for the first quarter of 2021, ~~a 17.5% increase over net interest income of $18.1 million for the prior year~~ resulting primarily from ~~lower deposit costs, partially offset by lower yields on interest-earning assets.~~a $364.4 million increase in average loan balances. In addition, our net interest margin, on a tax-equivalent basis (TE), was ~~3.60%~~3.37% for the first quarter of ~~2021~~2022 compared to ~~3.43%~~3.60% for the same period in ~~2020.~~2021.

We have included a number of tables to assist in our description of various measures of our financial performance. For example, the “Average Balances, Income and Expenses, Yields and Rates” table reflects the average balance of each category of our assets and liabilities as well as the yield we earned or the rate we paid with respect to each category during the ~~three month~~three-month periods ended March 31, ~~2021~~2022 and ~~2020.~~2021. A review of this table shows that our loans typically provide higher interest yields than do other types of interest-earning assets, which is why we direct a substantial percentage of our earning assets into our loan portfolio. Similarly, the “Rate/Volume Analysis” table demonstrates the effect of changing interest rates and changing volume of assets and liabilities on our financial condition during the periods shown. We also track the sensitivity of our various categories of assets and liabilities to changes in interest rates, and we have included tables to illustrate our interest rate sensitivity with respect to interest-earning accounts and interest-bearing accounts.

Table of Contents

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

Average Balances, Income and Expenses, Yields and Rates

Average Balances, Income and Expenses, Yields and Rates
	For the Three Months Ended March 31,
	2021						2020						For the Three Months Ended March 31,
	Average		Income/		Yield/		Average		Income/		Yield/		2022							2021
(dollars in thousands)	Balance		Expense		Rate⁽¹⁾		Balance		Expense		Rate⁽¹⁾		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	$	89,522	$	47	0.21	%	$	46,101	$	103	0.90	%
Federal funds sold and interest-bearing deposits with banks													$	89,096	$	59		0.27	%	$	89,522	$	47		0.21	%
Investment securities, taxable		85,136		245	1.17	%		66,640		381	2.30	%		113,101		425		1.52	%		85,136		245		1.17	%
Investment securities, nontaxable⁽²⁾		11,000		73	2.68	%		3,815		19	2.05	%		11,899		64		2.17	%		11,000		73		2.68	%
Loans⁽³⁾		2,209,569		22,465	4.12	%		2,003,554		23,367	4.69	%		2,573,978		23,931		3.77	%		2,209,569		22,465		4.12	%
Total interest-earning assets		2,395,227		22,830	3.87	%		2,120,110		23,870	4.53	%		2,788,074		24,479		3.56	%		2,395,227		22,830		3.87	%
Noninterest-earning assets		101,932						111,338						152,565							101,932
Total assets	$	2,497,159					$	2,231,448					$	2,940,639						$	2,497,159
Interest-bearing liabilities
NOW accounts	$	280,737		46	0.07	%	$	227,688		168	0.30	%	$	406,054		115		0.11	%	$	280,737		46		0.07	%
Savings & money market		1,084,467		586	0.22	%		956,588		3,369	1.42	%		1,242,225		618		0.20	%		1,084,467		586		0.22	%
Time deposits		213,378		523	0.99	%		329,664		1,637	2.00	%		158,720		175		0.45	%		213,378		523		0.99	%
Total interest-bearing deposits		1,578,582		1,155	0.30	%		1,513,940		5,174	1.37	%		1,806,999		908		0.20	%		1,578,582		1,155		0.30	%
FHLB advances and other borrowings		2,809		5	0.72	%		43,470		158	1.46	%		16,626		12		0.29	%		2,809		5		0.72	%
Subordinated debentures		36,008		380	4.28	%		35,900		436	4.88	%		36,116		380		4.27	%		36,008		380		4.28	%
Total interest-bearing liabilities		1,617,399		1,540	0.39	%		1,593,310		5,768	1.46	%		1,859,741		1,300		0.28	%		1,617,399		1,540		0.39	%
Noninterest-bearing liabilities		648,969						427,992						802,298							648,969
Shareholders’ equity		230,791						210,146						278,600							230,791
Total liabilities and shareholders’ equity	$	2,497,159					$	2,231,448					$	2,940,639						$	2,497,159
Net interest spread					3.48	%					3.07	%						3.28	%						3.48	%
Net interest income (tax equivalent) / margin			$	21,290	3.60	%			$	18,102	3.43	%			$	23,179		3.37	%			$	21,290		3.60	%
Less: tax-equivalent adjustment⁽²⁾				17						4						15							17
Net interest income			$	21,273					$	18,098					$	23,164						$	21,273

(1)

~~(1)~~

Annualized for the three month period.

(2)

~~(2)~~

The tax-equivalent adjustment to net interest income adjusts the yield for assets earning tax-exempt income to a comparable yield on a taxable basis.

(3)

~~(3)~~

Includes mortgage loans held for sale.

Our net interest margin (TE) ~~increased 17~~decreased 23 basis points to ~~3.60%~~3.37% during the first quarter of 2022, compared to the first quarter of 2021, primarily due to a reduction in ~~cost~~yield on our ~~interest-bearing liabilities,~~interest-earning assets, partially offset by the decreased ~~yield on~~cost of our ~~interest-earning assets.~~interest-bearing liabilities. Our average interest-earning assets grew by ~~$275.1~~$392.8 million during the first quarter of ~~2020,~~2022, while the average yield on these assets decreased by 6631 basis points to ~~3.87%.~~3.56% during the same period. In addition, our average interest-bearing liabilities grew by ~~$24.1~~$242.3 million during the ~~2021 period~~first quarter of 2022, while the rate on these liabilities decreased ~~107~~11 basis points to ~~0.39%~~0.28%.

The increase in average interest-earning assets for the first quarter of ~~2021~~2022 related primarily to an increase of ~~$206.0~~$364.4 million in our average loan balances ~~combined with~~and a ~~$43.4~~$28.9 million increase in ~~federal funds sold and interest-bearing deposits with banks.~~investment securities. The decrease in yield on our interest earning assets was driven by a 5735 basis point decrease in loan yield as our loan portfolio continues to ~~show~~reprice at rates lower than those in the ~~impact of~~past following the Federal Reserve’s ~~aggregate 225 basis point~~ interest rate ~~reduction since August~~reductions beginning in 2019. ~~These rate reductions resulted in the decreased loan yield, a decrease in yield on our federal funds sold and interest bearing-deposits with banks and a decrease in yield on our investment securities.~~

The increase in our average interest-bearing liabilities during the first quarter of 2022 resulted primarily from a ~~$64.6~~$228.4 million increase in our interest-bearing deposits, ~~at an average rate of 0.30%, a 107~~while the 11 basis point decrease in rate on our interest-bearing liabilities resulted primarily from ~~the first quarter of 2020, partially offset by~~ a ~~$40.7 million~~ten basis point decrease in ~~our FHLB advances and other borrowings.~~deposit rates.

Table of Contents

Our net interest spread was ~~3.48%~~3.28% for the first quarter of ~~2021~~2022 compared to ~~3.07%~~3.48% for the same period in ~~2020.~~2021. The net interest spread is the difference between the yield we earn on our interest-earning assets and the rate we pay on our interest-bearing liabilities. The decrease in both the yield on our interest-earning assets and the rate on our interest-bearing liabilities resulted in a 41twenty basis point ~~increase~~decrease in our net interest spread for the ~~2021~~2022 period. We anticipate continued pressure on our net interest spread and net interest margin in future periods as our loan yield continues to decline due to new and renewed loans pricing at rates lower than our current portfolio rate.

Rate/Volume Analysis

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


	Three Months Ended
	March 31, 2021 vs. 2020									March 31, 2020 vs. 2019									Three Months Ended
	Increase (Decrease) Due to									Increase (Decrease) Due to									March 31, 2022 vs. 2021											March 31, 2021 vs. 2020
						Rate/									Rate/				Increase (Decrease) Due to											Increase (Decrease) Due to
(dollars in thousands)	Volume			Rate		Volume		Total		Volume			Rate		Volume		Total		Volume		Rate			Rate/ Volume			Total			Volume			Rate			Rate/ Volume			Total
Interest income
Loans	$	2,403		(2,996	)	(309	)	(902	)	$	3,507		(881	)	(148	)	2,478		$	3,571		(1,816	)		(289	)		1,466		$	2,403			(2,996	)		(309	)		(902	)
Investment securities		144		(175	)	(64	)	(95	)		(49	)	(114	)	10		(153	)		90		64			19			173			144			(175	)		(64	)		(95	)
Federal funds sold and interest-bearing deposits with banks		97		(79	)	(74	)	(56	)		88		(106	)	(53	)	(71	)		-		12			-			12			97			(79	)		(74	)		(56	)
Total interest income		2,644		(3,250	)	(447	)	(1,053	)		3,546		(1,101	)	(191	)	2,254			3,661		(1,740	)		(270	)		1,651			2,644			(3,250	)		(447	)		(1,053	)
Interest expense
Deposits		(889	)	(3,778	)	648		(4,019	)		790		(864	)	(127	)	(201	)		721		(596	)		(372	)		(247	)		(889	)		(4,778	)		648			(4,019	)
FHLB advances and other borrowings		(148	)	(112	)	105		(155	)		100		(142	)	(56	)	(98	)		14		(1	)		(4	)		9			(148	)		(112	)		105			(155	)
Subordinated debentures		1		(55	)	-		(54	)		273		-		-		273			1		(3	)		-			(2	)		1			(55	)		-			(54	)
Total interest expense		(1,036	)	(3,945	)	753		(4,228	)		1,163		(1,006	)	(183	)	(26	)		736		(600	)		(376	)		(240	)		(1,036	)		(3,945	)		753			(4,228	)
Net interest income	$	3,680		695		(1,200	)	3,175		$	2,383		(95	)	(8	)	2,280		$	2,925		(1,140	)		(106	)		1,891		$	3,680			695			(1,200	)		3,175

Net interest income, the largest component of our income, was $23.2 million for the first quarter of 2022 and $21.3 million for the first quarter of 2021, ~~and $18.1 million for the first quarter of 2020,~~ a ~~$3.2~~$1.9 million, or ~~17.5%~~8.9%, increase. The increase during ~~2021~~2022 was driven by a ~~$4.2~~$3.6 million ~~decrease in interest expense primarily~~increase due to ~~lower rates on our interest-bearing liabilities. In addition, interest income decreased by $1.1 million due to a decrease in rates across all interest earning assets,~~higher loan volume, partially offset by ~~an increase~~higher volume in ~~volume of loans, investment securities and federal funds sold and~~our interest-bearing ~~deposits with banks.~~

liabilities.

Provision for ~~Loan~~Credit Losses

~~We have established an allowance~~

The provision for ~~loan~~credit losses, ~~through~~which includes a provision for losses on unfunded commitments, is a charge to earnings to maintain the allowance for credit losses at a level 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, ~~charged~~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 ~~expense on~~adjustment to our ~~consolidated statements~~retained earnings as of ~~income.~~January 1, 2022. We review ~~our loan portfolio periodically to evaluate our outstanding loans and to measure both the performance of the portfolio and~~ the adequacy of the allowance for ~~loan losses.~~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 ~~Loan~~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.

~~For the three months ended March 31, 2021, we~~

We recorded a ~~negative~~$1.0 million provision for ~~loan~~credit losses ~~of $300,000 which resulted~~ in an allowance for loan losses of $43.5 million, or 1.99% of gross loans. Comparatively, our provision for loan losses was $6.0 million for the three months ended March 31, 2020 which resulted in an allowance for loan losses of $22.5 million, or 1.11% of gross loans. The negative provision for the first quarter of ~~2021~~2022, compared to a $300,000 reversal of provision expense in the first quarter of 2020. The $1.0 million provision in 2022 was driven by ~~a reduction~~the $170.1 million growth in ~~qualitative adjustment factors related to improvement~~our loan portfolio during the first quarter. In addition, we upgraded $86.4 million of hotel loans during the first quarter of 2022 after observing 12 months of positive financial performance. See additional discussion below in the ~~economic and business conditions at both the national and regional levels as~~section “Allowance for Credit Losses.”

Table of ~~March 31, 2021, partially offset by downgrades in our hotel loan portfolio as we believe the tourism and hospitality industry remains at risk of credit losses due to the pandemic.~~Contents

Noninterest Income

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


	Three months ended
	March 31,			Three months ended March 31,
(dollars in thousands)	2021		2020	2022		2021
Mortgage banking income	$	4,633	2,668	$	1,494		4,633
Service fees on deposit accounts		185	262		191		185
ATM and debit card income		470	398		528		470
Income from bank owned life insurance		267	270		315		267
Other income		349	318		399		349
Total noninterest income	$	5,904	3,916	$	2,927		5,904

Noninterest income ~~increased $2.0~~decreased $3.0 million, or ~~50.8%~~50.4%, for the first quarter of ~~2021~~2022 as compared to the same period in ~~2020.~~2021. The ~~increase~~decrease in total noninterest income resulted primarily from the following:

•

●

Mortgage banking income decreased by $3.1 million, or 67.8%, driven by low inventory in the housing market, lower refinance volumes, and a decrease in margin on loan sales. We do not expect mortgage origination volume to continue at levels seen in the prior year which will reduce the amount of mortgage banking income recorded in future periods in comparison to prior periods.

~~Mortgage banking income increased by $2.0 million, or 73.7%, driven by higher mortgage origination volume due to~~

Partially offsetting the ~~favorable interest rate environment for mortgage loans.~~

•

above decrease was an increase in ATM and debit card income ~~increased by $72,000,~~of $58,000, or ~~18.1%~~12.3%, due to an increase in debit card transactions.

•

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

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

Noninterest expenses

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

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


	Three months ended March 31,
(dollars in thousands)	2022		2021
Compensation and benefits	$	8,144		6,683
Mortgage production costs		1,649		2,867
Occupancy		1,777		1,637
Real estate owned expenses		-		387
Outside service and data processing costs		1,411		1,142
Insurance		261		301
Professional fees		496		421
Marketing		256		182
Other		691		542
Total noninterest expense	$	14,685		14,162

Noninterest expense was $14.7 million for the first quarter of 2022, a $523,000, or 3.7%, increase from noninterest expense of $14.2 million for the first quarter of ~~2021, a $1.8 million, or 14.5%, increase from noninterest expense of $12.4 million for the first quarter of 2020.~~2021. The increase in noninterest ~~expenses~~expense was driven primarily by the following:

•

	●	Compensation and benefits expense increased $1.5 million, or 21.9%, relating primarily to an increase in salaries and incentive compensation. We hired 17 new team members during the first quarter of 2022 and 24 new team members during 2021.

	●	Occupancy costs increased $140,000, or 8.6%, driven by increased rent expense and depreciation on our new office in Charlotte, North Carolina.

●

Outside service and data processing costs increased $269,000, or 23.6%, primarily due to increased software licensing costs and ATM/debit card related expenses.

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

•

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

•

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

•

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

•

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

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

	●	Mortgage production costs decreased by $1.2 million, or 42.5%, due primarily to less mortgage volume in the first quarter of 2022.

●

Real estate owned expenses decreased by $387,000 due to a large write-down on a piece of property during 2021.

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Our efficiency ratio was 56.3% for the first quarter of 2022, compared to 52.1% for the first quarter of ~~2021 compared to 56.2% for the first quarter of 2020.~~2021. 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 ~~improvement~~higher ratio during the first quarter of 2022, compared to the first quarter of 2021, ~~period~~ relates primarily to the ~~increase~~decrease in mortgage banking income.

We incurred income tax expense of ~~$2.9~~$2.3 million and ~~$810,000~~$2.9 million for the three months ended March 31, ~~2021~~2022 and ~~2020,~~2021, respectively. Our effective tax rate was ~~22.1%~~22.6% and ~~22.2%~~22.1% for the three months ended March 31, 2022 and 2021, ~~and 2020,~~ respectively.

Balance Sheet Review

Investment Securities

At March 31, ~~2021,~~2022, the ~~$94.8~~$111.1 million in our investment securities portfolio represented approximately ~~3.7%~~3.6% of our total assets. Our available for sale investment portfolio included ~~U.S.~~corporate bonds, US treasuries, US government agency ~~securities, SBA~~ securities, state and political subdivisions, asset-backed securities and mortgage-backed securities with a fair value of ~~$93.0~~$107.0 million and an amortized cost of ~~$93.1~~$115.1 million, resulting in an unrealized loss of ~~$114,000.~~$8.1 million. At December 31, ~~2020,~~2021, the ~~$98.4~~$124.3 million in our investment securities portfolio represented approximately ~~4.0%~~4.2% of our total assets, including investment securities with a fair value of ~~$94.7~~$120.3 million and an amortized cost of ~~$93.4~~$121.2 million for an unrealized ~~gain~~loss of ~~$1.3 million.~~$937,000.

Loans

Since loans typically provide higher interest yields than other types of interest earning assets, a substantial percentage of our earning assets are invested in our loan portfolio. Average loans, excluding mortgage loans held for sale, for the three months ended March 31, 2022 and 2021 ~~and 2020~~ were ~~$2.15~~$2.56 billion and ~~$1.98~~$2.21 billion, respectively. Before the allowance for ~~loan~~credit losses, total loans outstanding at March 31, ~~2021~~2022 and December 31, ~~2020~~2021 were ~~$2.18~~$2.66 billion and ~~$2.14~~$2.49 billion, respectively.

The principal component of our loan portfolio is loans secured by real estate mortgages. As of March 31, ~~2021,~~2022, our loan portfolio included ~~$1.86~~$2.28 billion, or ~~85.1%~~85.8%, of real estate loans, compared to ~~$1.81~~$2.13 billion, or ~~84.6%~~85.5%, at December 31, ~~2020.~~2021. 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 ~~$154.2~~$155.7 million as of March 31, ~~2021,~~2022, of which approximately ~~48%~~53% were in a first lien position, while the remaining balance was second liens. At December 31, ~~2020,~~2021, our home equity lines of credit totaled ~~$157.0~~$154.8 million, of which approximately ~~45%~~49% were in first lien positions, while the remaining balance was in second liens. The average home equity loan had a balance of approximately ~~$81,000~~$80,000 and a loan to value of 61% as of March 31, ~~2021,~~2022, compared to an average loan balance of ~~$83,000~~$81,000 and a loan to value of approximately 62% as of December 31, ~~2020.~~2021. Further, ~~0.3%~~0.7% and ~~0.2%~~1.0% of our total home equity lines of credit were over 30 days past due as of March 31, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively.

32Table of Contents

Following is a summary of our loan composition at March 31, ~~2021~~2022 and December 31, ~~2020.~~2021. During the first three months of ~~2021,~~2022, our loan portfolio increased by ~~$40.8~~$170.8 million, or ~~1.9%~~6.86%, with a ~~5.3%~~6.97% increase in commercial loans while consumer loans ~~while commercial loans remained stable~~increased by 6.68% during the period. The majority of the increase was in loans secured by real estate. Our consumer real estate portfolio grew by $51.3 million and includes high quality 1-4 family consumer real estate loans. Our average consumer real estate loan currently has a principal balance of ~~$437,000,~~$463,000, a term of 2022 years, and an average rate of ~~3.67%~~3.45% as of March 31, ~~2021,~~2022, compared to a principal balance of ~~$429,000,~~$454,000, a term of 1921 years, and an average rate of ~~3.82%~~3.47% as of December 31, ~~2020.~~

2021.

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

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


	March 31, 2022						December 31, 2021
(dollars in thousands)	Amount			% of Total			Amount			% of Total
Commercial
Owner occupied RE	$	527,776			19.8	%	$	488,965			19.6	%
Non-owner occupied RE		705,811			26.5	%		666,833			26.8	%
Construction		75,015			2.8	%		64,425			2.6	%
Business		352,932			13.3	%		333,049			13.4	%
Total commercial loans		1,661,534			62.4	%		1,553,272			62.4	%

Consumer
Real estate		745,667			28.0	%		694,401			27.9	%
Home equity		155,678			5.9	%		154,839			6.2	%
Construction		72,627			2.7	%		59,846			2.4	%
Other		25,169			1.0	%		27,519			1.1	%
Total consumer loans		999,141			37.6	%		936,605			37.6	%
Total gross loans, net of deferred fees		2,660,675			100.0	%		2,489,877			100.0	%
Less—allowance for credit losses		(32,944	)					(30,408	)
Total loans, net	$	2,627,731					$	2,459,469

Nonperforming assets

Nonperforming assets include real estate acquired through foreclosure or deed taken in lieu of foreclosure and loans on nonaccrual status. Generally, a loan is placed on nonaccrual status when it becomes 90 days past due as to principal or interest, or when we believe, after considering economic and business conditions and collection efforts, that the borrower’s financial condition is such that collection of the contractual principal or interest on the loan is doubtful. A payment of interest on a loan that is classified as nonaccrual is recognized as a reduction in principal when received. Our policy with respect to nonperforming loans requires the borrower to make a minimum of six consecutive payments in accordance with the loan terms and to show capacity to continue performing into the future before that loan can be placed back on accrual status. As of March 31, ~~2021~~2022 and December 31, ~~2020,~~2021, we had no loans 90 days past due and still accruing.

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


(dollars in thousands)	March 31, 2021		December 31, 2020		March 31, 2022		December 31, 2021
Commercial	$	1,452		1,477	$	265		270
Consumer		3,201		3,083		1,554		1,642
Nonaccruing troubled debt restructurings		3,150		3,509		2,713		2,952
Total nonaccrual loans		7,803		8,069		4,532		4,864
Other real estate owned		-		1,169		-		-
Total nonperforming assets	$	7,803		9,238	$	4,532		4,864

At March 31, ~~2021,~~2022, nonperforming assets were ~~$7.8~~$4.5 million, or ~~0.30%~~0.15% of total assets and ~~0.36%~~0.17% of gross loans. Comparatively, nonperforming assets were ~~$9.2~~$4.9 million, or ~~0.37%~~0.17% of total assets and ~~0.43%~~0.20% of gross loans at December 31, ~~2020.~~2021. Nonaccrual loans decreased ~~$266,000~~$332,000 during the first three months of ~~2021~~2022 due primarily to ~~$452,000 of nonaccrual loans returned to accrual status and $365,000~~$418,000 of loans paid or charged off, and partially offset by ~~$551,000 of new loans on nonaccrual.~~ a $170,000 addition to nonaccrual loans.

The amount of foregone interest income on ~~the~~ nonaccrual loans in the first three months of 2022 and 2021 ~~and 2020~~ was ~~approximately $1,000 and $51,000, respectively.~~not material. At March 31, ~~2021~~2022 and ~~2020,~~2021, the allowance for ~~loan~~credit losses represented ~~557.5%~~726.9% and ~~226.1%~~557.5% of the total amount of nonperforming loans, respectively. A significant portion, or approximately ~~98%~~95%, of nonperforming loans at March 31, ~~2021~~2022, was secured by real estate. We have evaluated the underlying collateral on these loans and believe that the collateral on these loans is sufficient to minimize future losses.

Table of Contents

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

In addition, at March 31, ~~2021, 85.1%~~2022, 85.8% of our loans were collateralized by real estate and ~~91%~~95% of our impaired loans were secured by real estate. We utilize third party appraisers to determine the fair value of collateral dependent loans. Our current loan and appraisal policies require us to obtain updated appraisals on an annual basis, either through a new external appraisal or an appraisal evaluation. Impaired loans are individually reviewed on a quarterly basis to determine the level of impairment. As of March 31, ~~2021,~~2022, we did not have any impaired real estate loans carried at a value in excess of the appraised value. We typically charge-off a portion or create a specific reserve for impaired loans when we do not expect repayment to occur as agreed upon under the original terms of the loan agreement.

At March 31, ~~2021,~~2022, impaired loans totaled ~~$12.2~~$7.8 million, for which ~~$5.0~~$2.8 million of these loans had a reserve of approximately ~~$1.6 million~~$820,000 allocated in the allowance. During the first three months of 2022, the average recorded investment in impaired loans was approximately $7.8 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 ~~$12.6~~$12.5 million. Comparatively, impaired loans totaled $13.0 million at December 31, 2020 for which $5.1 million of these loans had a reserve of approximately $1.7 million allocated in the allowance. During 2020, the average recorded investment in impaired loans was approximately $14.6 million.

We consider a loan to be a TDR when the debtor experiences financial difficulties and we provide concessions such that we will not collect all principal and interest in accordance with the original terms of the loan agreement. Concessions can relate to the contractual interest rate, maturity date, or payment structure of the note. As part of our workout plan for individual loan relationships, we may restructure loan terms to assist borrowers facing challenges in the current economic environment. As of March 31, ~~2021,~~2022, we determined that we had loans totaling ~~$7.5~~$6.0 million that we considered TDRs compared to ~~$8.4~~$6.3 million as of December 31, ~~2020. The decrease during the first three months of 2021 was driven by four client relationships with loans totaling $908,000 that were paid off or removed from TDR status during the quarter.~~2021.

Allowance for ~~Loan~~Credit Losses

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

The allowance for credit losses was $32.9 million, representing 1.24% of outstanding loans and providing coverage of 726.88%, of nonperforming loans compared to $30.4 million, or 1.22% of outstanding loans and 625.22% of nonperforming loans at December 31, 2021. At March 31, 2021, the allowance for loan losses was $43.5 million, ~~and $22.5 million at March 31, 2021 and 2020, respectively,~~ or 1.99% of outstanding loans ~~at March 31, 2021~~ and ~~1.11%~~557.48% of ~~outstanding loans at March 31, 2020. At December 31, 2020, our allowance for loan losses was $44.1 million, or 2.06%~~nonperforming loans. The adoption of ~~outstanding loans.~~

~~During the three months ended March 31, 2021, we charged-off $406,000 of loans and recorded $56,000 of recoveries~~CECL on loans previously charged-off, for net charge-offs of $350,000. Comparatively, we charged-off $266,000 of loans and recorded $86,000 of recoveries on loans previously charged-off, resulting in net charge-offs of $180,000 for the first three months of 2020. The $650,000 decrease inJanuary 1, 2022 increased the allowance for ~~loan~~credit losses by $1.5 million. In addition, we recorded a provision for credit losses of $1.0 million during the first ~~three months~~quarter of ~~2021 is~~2022 driven by ~~a reduction in qualitative adjustment factors related to~~ the ~~improvement in economic conditions at both the national and regional levels at March 31, 2021, partially offset by downgrades~~growth in our ~~hotel~~ loan ~~portfolio as we believe the tourism and hospitality industry remains at risk of credit losses due to the pandemic.~~portfolio.

34Table of Contents

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


	Three months ended
	March 31,					Year ended		Three months ended March 31,						Year ended
(dollars in thousands)		2021		2020		December 31, 2020		2022			2021			December 31, 2021
Balance, beginning of period	$	44,149		16,642		16,642		$	30,408			44,149			44,149
Provision		(300	)	6,000		29,600
Adjustment for adoption of CECL									1,500			-			-
Provision for (reversal of) credit losses									1,025			(300	)		(12,400	)
Loan charge-offs		(406	)	(266	)	(3,414	)		(169	)		(406	)		(2,166	)
Loan recoveries		56		86		1,321			180			57			825
Net loan charge-offs		(350	)	(180	)	(2,093	)
Net loan (charge-offs) recoveries									11			(349	)		(1,341	)
Balance, end of period	$	43,499		22,462		44,149		$	32,944			43,500			30,408

Deposits and Other Interest-Bearing Liabilities

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

Our retail deposits represented ~~$2.26~~$2.62 billion, or ~~100%~~96.9% of total deposits, while our wholesale deposits represented $85.0 million, or 3.1%, of total deposits at March 31, ~~2021.~~2022. At December 31, ~~2020,~~2021, retail deposits represented ~~$2.12~~$2.56 billion, or ~~99.0% of our total deposits, and brokered CDs were $22.0 million, representing 1.0%~~100%, of our total deposits. Our loan-to-deposit ratio was ~~97%~~98% at March 31, ~~2021~~2022 and ~~100%~~97% at December 31, ~~2020.~~2021.

The following is a detail of our deposit accounts:


	March 31,		December 31,		March 31,		December 31,
(dollars in thousands)	2021		2020		2022		2021
Non-interest bearing	$	677,282		576,610	$	779,262	$	768,650
Interest bearing:
NOW accounts		304,530		268,739		416,322		401,788
Money market accounts		1,064,659		1,042,745		1,238,866		1,201,099
Savings		31,588		27,254		41,630		39,696
Time, less than $100,000		31,856		36,454
Time and out-of-market deposits, $100,000 and over		148,836		190,956
Time, less than $250,000						150,032		68,179
Time and out-of-market deposits, $250,000 and over						82,062		84,414
Total deposits	$	2,258,751		2,142,758	$	2,708,174	$	2,563,826

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 ~~$2.16~~$2.54 billion and ~~$2.01~~$2.48 billion at March 31, ~~2021,~~2022, and December 31, ~~2020,~~2021, respectively.

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


	Three months ended March 31,
	2022					2021
(dollars in thousands)	Amount		Rate			Amount		Rate
Noninterest-bearing demand deposits	$	753,546		-	%	$	603,292		-	%
Interest-bearing demand deposits		406,054		0.03	%		280,737		0.07	%
Money market accounts		1,201,816		0.05	%		1,055,678		0.22	%
Savings accounts		40,409		0.01	%		28,789		0.05	%
Time deposits less than $100,000		25,392		0.05	%		34,416		0.80	%
Time deposits greater than $100,000		133,329		0.12	%		178,962		1.03	%
Total deposits	$	2,560,546		0.04	%	$	2,181,874		0.21	%

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

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During the first three months of ~~2021,~~2022, our average transaction account balances increased by ~~$392.5~~$433.3 million, or ~~24.9%~~22.0%, from the prior year, while our average time deposit balances decreased by ~~$116.3 million,~~$55,000, or ~~35.3%~~25.62%.

All of our time deposits are certificates of deposits. The maturity distribution of our time deposits ~~of $100,000~~$250,000 or more at March 31, ~~2021~~2022 was as follows:


(dollars in thousands)	March 31, 2021		March 31, 2022
Three months or less	$	37,817	$	13,510
Over three through six months		32,177		20,935
Over six through twelve months		51,691		35,520
Over twelve months		27,151		12,097
Total	$	148,836	$	82,062

Time deposits that meet or exceed the FDIC insurance limit of $250,000 at March 31, ~~2021~~2022 and December 31, ~~2020~~2021 were ~~$97.0~~$82.1 million and ~~$130.9~~$84.4 million, respectively.

Liquidity and Capital Resources

Liquidity represents the ability of a company to convert assets into cash or cash equivalents without significant loss, and the ability to raise additional funds by increasing liabilities. Liquidity management involves monitoring our sources and uses of funds in order to meet our day-to-day cash flow requirements while maximizing profits. Liquidity management is made more complicated because different balance sheet components are subject to varying degrees of management control. For example, the timing of maturities of our investment portfolio is fairly predictable and subject to a high degree of control at the time investment decisions are made. However, net deposit inflows and outflows are far less predictable and are not subject to the same degree of control. ~~We have not experienced any unusual pressure on our deposit balances or our liquidity position as a result of the COVID-19 pandemic.~~

At March 31, ~~2021~~2022 and December 31, ~~2020~~2021 cash and cash equivalents totaled ~~$155.3~~$149.2 million and ~~$100.7~~$167.2 million, respectively, or ~~6.0%~~4.9% and ~~4.1%~~5.7% of total assets, respectively. Our investment securities at March 31, ~~2021~~2022 and December 31, ~~2020~~2021 amounted to ~~$94.8~~$111.1 million and ~~$98.4~~$124.3 million, respectively, or ~~3.7%~~3.6% and ~~4.0%~~4.2% 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 March 31, ~~2021.~~

2022.

We are also a member of the FHLB, from which applications for borrowings can be made. The FHLB requires that securities, qualifying mortgage loans, and stock of the FHLB owned by the Bank be pledged to secure any advances from the FHLB. The unused borrowing capacity currently available from the FHLB at March 31, ~~2021~~2022 was ~~$511.9~~$591.8 million, based primarily on the Bank’s ~~$1.2 million investment in FHLB stock, as well as~~ qualifying mortgages available to secure any future borrowings. However, we are able to pledge additional securities to the FHLB in order to increase our available borrowing capacity. In addition, at March 31, ~~2021~~2022 and December 31, ~~2020~~2021 we had ~~$232.8~~$286.0 million and ~~$206.2~~$259.5 million, respectively, of letters of credit outstanding with the FHLB to secure client deposits.

We also have a line of credit with another financial institution for $15.0 million, which was unused at March 31, ~~2021.~~2022. The line of credit ~~has~~was renewed on December 21, 2021 at an interest rate of ~~LIBOR~~One Month CME Term SOFR plus ~~3.50%~~3.5% and a maturity date of December ~~31, 2021.~~20, 2023.

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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 ~~$239.5~~$278.5 million at March 31, ~~2021~~2022 and ~~$228.3~~$277.9 million at December 31, ~~2020.~~2021. The ~~$11.2 million~~$623,000 increase from December 31, ~~2020~~2021 is primarily related to net income of ~~$10.4~~$8.0 million during the first three months of ~~2021,~~2022, stock option exercises and equity compensation expenses of ~~$2.0~~$1.1 million, partially offset by a ~~$1.1~~$5.7 million decrease in other comprehensive ~~loss.~~loss and the tax-effected impact of $2.8 million of expense related to the adoption of CECL recorded as an adjustment to retained earnings.

The following table shows the return on average assets (net income divided by average total assets), return on average equity (net income divided by average equity), equity to assets ratio (average equity divided by average assets), and tangible common equity ratio (total equity less preferred stock divided by total assets) annualized for the three months ended March 31, ~~2021~~2022 and the year ended December 31, ~~2020.~~2021. Since our inception, we have not paid cash dividends.


	March 31, 2021		December 31, 2020		March 31, 2022			December 31, 2021
Return on average assets	1.68	%	0.76	%		1.10	%		1.75	%
Return on average equity	18.22	%	8.49	%		11.60	%		18.64	%
Return on average common equity	18.22	%	8.49	%		11.60	%		18.64	%
Average equity to average assets ratio	9.24	%	9.01	%		9.47	%		9.39	%
Tangible common equity to assets ratio	9.28	%	9.20	%		9.06	%		9.50	%

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

Regulatory capital rules, ~~adopted in July 2013 and fully-phased in as of January 1, 2019,~~ which we refer to Basel III, impose minimum capital requirements for bank holding companies and banks. The Basel III rules apply to all national and state banks and savings associations regardless of size and bank holding companies and savings and loan holding companies other than “small bank holding companies,” generally holding companies with consolidated assets of less than $3 billion (such as the Company). Although we had over $3 billion in assets at March 31, 2022, under Federal Reserve guidance, the Company still maintains its status as a “small bank holding company.” If our consolidated total assets exceed $3 billion at June 30, 2022, we will lose our status as a “small bank holding company” in March 2023. In order to avoid restrictions on capital distributions or discretionary bonus payments to executives, a covered banking organization must maintain a “capital conservation buffer” on top of our minimum risk-based capital requirements. This buffer must consist solely of common equity Tier 1, but the buffer applies to all three measurements (common equity Tier 1, Tier 1 capital and total capital). The capital conservation buffer consists of an additional amount of CET1 equal to 2.5% of risk-weighted assets.

To be considered “well-capitalized” for purposes of certain rules and prompt corrective action requirements, the Bank must maintain a minimum total risked-based capital ratio of at least 10%, a total Tier 1 capital ratio of at least 8%, a common equity Tier 1 capital ratio of at least 6.5%, and a leverage ratio of at least 5%. As of March 31, ~~2021,~~2022, our capital ratios exceed these ratios and we remain “well capitalized.”

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


	March 31, 2021
				For capital			To be well capitalized
				adequacy purposes			under prompt
				minimum plus the			corrective
				capital conservation			action provisions			March 31, 2022
			Actual	buffer			minimum			Actual					For capital adequacy purposes minimum plus the capital conservation buffer					To be well capitalized under prompt corrective action provisions minimum
(dollars in thousands)	Amount		Ratio	Amount		Ratio	Amount		Ratio	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total Capital (to risk weighted assets)	$	290,432	14.29%		213,370	10.50%		203,209	10.00%	$	338,371		13.83	%	$	256,832		10.50	%	$	244,602		10.00	%
Tier 1 Capital (to risk weighted assets)		264,807	13.03%		172,728	8.50%		162,568	8.00%		307,767		12.58	%		207,912		8.50	%		195,681		8.00	%
Common Equity Tier 1 Capital (to risk weighted assets)		264,807	13.03%		142,247	7.00%		132,086	6.50%		307,767		12.58	%		171,221		7.00	%		158,992		6.50	%
Tier 1 Capital (to average assets)		264,807	10.61%		99,853	4.00%		124,816	5.00%		307,767		10.46	%		117,718		4.00	%		147,147		5.00	%


	December 31, 2020
				For capital			To be well capitalized
				adequacy purposes			under prompt
				minimum plus the			corrective
				capital conservation			action provisions			December 31, 2021
			Actual	buffer			minimum			Actual					For capital adequacy purposes minimum plus the capital conservation buffer					To be well capitalized under prompt corrective action provisions minimum
(dollars in thousands)	Amount		Ratio	Amount		Ratio	Amount		Ratio	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total Capital (to risk weighted assets)	$	279,414	13.92%	$	160,554	8.00%	$	200,693	10.00%	$	331,052		14.36	%	$	242,048		10.50	%	$	230,522		10.00	%
Tier 1 Capital (to risk weighted assets)		254,092	12.66%		120,416	6.00%		160,554	8.00%		302,217		13.11	%		195,944		8.50	%		184,418		8.00	%
Common Equity Tier 1 Capital (to risk weighted assets)		254,092	12.66%		90,312	4.50%		130,451	6.50%		302,217		13.11	%		161,365		7.00	%		149,839		6.50	%
Tier 1 Capital (to average assets)		254,092	10.26%		99,094	4.00%		123,867	5.00%		302,217		10.55	%		114,537		4.00	%		143,172		5.00	%

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


	March 31, 2021
						To be well capitalized
						under prompt
				For capital		corrective
				adequacy purposes		action provisions		March 31, 2022
			Actual	minimum		minimum		Actual					For capital adequacy purposes minimum plus the capital conservation buffer ⁽¹⁾					To be well capitalized under prompt corrective action provisions minimum
(dollars in thousands)	Amount		Ratio	Amount	Ratio	Amount	Ratio	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total Capital (to risk weighted assets)	$	301.236	14.82%	213,370	10.50%	N/A	N/A	$	351,522		14.37	%	$	256,832		10.50	%		N/A		N/A
Tier 1 Capital (to risk weighted assets)		252,611	12.43%	172,728	8.50%	N/A	N/A		297,918		12.18	%		207,911		8.50	%		N/A		N/A
Common Equity Tier 1 Capital (to risk weighted assets)		239,611	11.79%	142,247	7.00%	N/A	N/A		284,918		11.65	%		171,221		7.00	%		N/A		N/A
Tier 1 Capital (to average assets)		252,611	10.12%	99,853	4.00%	N/A	N/A		297,918		10.12	%		117,736		4.00	%		N/A		N/A


	December 31, 2020
							To be well capitalized
							under prompt
					For capital		corrective
					adequacy purposes		action provisions		December 31, 2021
			Actual		minimum		minimum		Actual					For capital adequacy purposes minimum plus the capital conservation buffer ⁽¹⁾					To be well capitalized under prompt corrective action provisions minimum
(dollars in thousands)	Amount		Ratio	Amount		Ratio	Amount	Ratio	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total Capital (to risk weighted assets)	$	288,593	14.38%	$	160,554	8.00%	N/A	N/A	$	343,476		14.90	%	$	242,048		10.50	%		N/A		N/A
Tier 1 Capital (to risk weighted assets)		240,271	11.97%		120,416	6.00%	N/A	N/A		291,641		12.65	%		195,944		8.50	%		N/A		N/A
Common Equity Tier 1 Capital (to risk weighted assets)		227,271	11.32%		90,312	4.50%	N/A	N/A		278,641		12.09	%		161,365		7.00	%		N/A		N/A
Tier 1 Capital (to average assets)		240,271	9.70%		99,094	4.00%	N/A	N/A		291,641		10.18	%		114,555		4.00	%		N/A		N/A

⁽¹⁾

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

The ability of the Company to pay cash dividends is dependent upon receiving cash in the form of dividends from the Bank. The dividends that may be paid by the Bank to the Company are subject to legal limitations and regulatory capital requirements. Since our inception, we have not paid cash dividends.

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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 March 31, ~~2021,~~2022, unfunded commitments to extend credit were ~~$490.1~~$686.5 million, of which ~~$116.5~~$234.7 million were at fixed rates and ~~$373.6~~$451.8 million were at variable rates. At December 31, ~~2020,~~2021, unfunded commitments to extend credit were ~~$480.1~~$618.7 million, of which approximately ~~$114.6~~$205.4 million were at fixed rates and ~~$365.5~~$413.3 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 the adoption of CECL on January 1, 2022, we recorded a reserve for unfunded commitments of $2.0 million, or 0.31% of total unfunded commitments. As of March 31, 2022, the reserve for unfunded commitments was $2.1 million or 0.30% of total unfunded commitments.

At March 31, ~~2021~~2022 and December 31, ~~2020,~~2021, there were commitments under letters of credit for ~~$9.0~~$10.5 million and ~~$8.7~~$10.2 million, respectively. The credit risk and collateral involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Since most of the letters of credit are expected to expire without being drawn upon, they do not necessarily represent future cash requirements.

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

~~Market Risk and Interest Rate Sensitivity~~

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

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

As of March 31, 2021, the following table summarizes the forecasted impact on net interest income using a base case scenario given upward and downward movements in interest rates of 100, 200, and 300 basis points based on forecasted assumptions of prepayment speeds, nominal interest rates and loan and deposit repricing rates. Estimates are based on current economic conditions, historical interest rate cycles and other factors deemed to be relevant. However, underlying assumptions may be impacted in future periods which were not known to management at the time of the issuance of the Consolidated Financial Statements. Therefore, management’s assumptions may or may not prove valid. No assurance can be given that changing economic conditions and other relevant factors impacting our net interest income will not cause actual occurrences to differ from underlying assumptions. In addition, this analysis does not consider any strategic changes to our balance sheet which management may consider as a result of changes in market conditions.

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

Critical Accounting ~~Policies~~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. ~~Our significant accounting policies are described in the footnotes to our audited consolidated financial statements as of December 31, 2020, as filed in our Annual Report on Form 10-K.~~

Certain accounting policies inherently involve ~~significant~~a greater reliance on the use of estimates, assumptions and judgments and, ~~assumptions by us that~~as such, have a ~~material impact on the carrying value~~greater possibility of ~~certain assets and liabilities. We consider these accounting policies to~~producing results that could be ~~critical accounting policies. The judgment and assumptions we use are based on historical experience and other factors,~~materially different than originally reported, which we believe to be reasonable under the circumstances. Our Critical Accounting Policies are the allowance for loan losses, fair value of financial instruments and income taxes. Because of the nature of the judgment and assumptions we make, actual results could differ from these judgments and estimates that could have a material impact on the carrying values of our assets and liabilities and our results of operations. ~~A brief discussion~~Of the significant accounting policies used in the preparation of ~~each~~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 ~~these areas appears~~Financial Condition and Results of Operations—Critical Accounting Estimates” in our ~~2020~~ Annual Report on Form ~~10-K. During~~10-K for the ~~first three months~~year ended December 31, 2021, for a description our significant accounting policies that use critical accounting estimates.

Table of ~~2021,~~Contents

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 ~~did not~~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 ~~alter the manner in which we applied~~impact our ~~Critical~~allowance and provision for credit losses. See Note 1 – Summary of Significant Accounting Policies ~~or developed related assumptions and estimates.~~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 – ~~Nature~~Summary of ~~Business and Basis of Presentation~~Significant Accounting Policies in the accompanying ~~condensed~~ notes to consolidated financial statements included elsewhere in this report for details of recently issued accounting pronouncements and their expected impact on our consolidated financial statements.

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.

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

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As of March 31, 2022, the following table summarizes the forecasted impact on net interest income using a ~~“smaller reporting company”~~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 ~~defined by Item 10~~a result of ~~Regulation S-K, the Company is not required to provide information required by this Item.~~

changes in market conditions.

Interest rate scenario	Change in net interest income from base
Up 300 basis points		(15.53	)%
Up 200 basis points		(9.85	)%
Up 100 basis points		(4.61	)%
Base		-
Down 100 basis points		(2.24	)%
Down 200 basis points		(3.04	)%
Down 300 basis points		(3.82	)%

Item 4. CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures

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

Changes in Internal Control over Financial Reporting

There has been no change in the Company’s internal control over financial reporting during the three months ended March 31, ~~2021,~~2022, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS.

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

Item 1A. RISK FACTORS.

Investing in shares of our common stock involves certain risks, including those identified and described in Item 1A. of our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2020,~~2021, 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 to the risk factors disclosed in Item 1A. of Part I in our Annual Report on Form 10-K for the year ended December 31, ~~2020.~~2021.

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

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

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

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

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

None

Item 3. DEFAULTS UPON SENIOR SECURITIES.

None.

Item 4. MINE SAFETY DISCLOSURES.

Not applicable.

Item 5. OTHER INFORMATION.

None.

Table of Contents

Item 6. EXHIBITS.

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

INDEX TO EXHIBITS

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

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

32		Section 1350 Certifications.

101		The following materials from the Quarterly Report on Form 10-Q of Southern First Bancshares, Inc. for the quarter ended March 31, ~~2021,~~2022, 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)
_______		_______________________________________________

43Table of Contents

SIGNATURES

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

		SOUTHERN FIRST BANCSHARES, INC.
		Registrant

Date: ~~April 29, 2021~~ May 6, 2022		/s/R. Arthur Seaver, Jr.
		R. Arthur Seaver, Jr.
		Chief Executive Officer ~~(Principal~~ (Principal Executive Officer)

Date: ~~April 29, 2021~~ May 6, 2022		/s/Michael D. Dowling
		Michael D. Dowling
		Chief Financial Officer ~~(Principal~~ (Principal Financial and Accounting Officer)

SOUTHERN FIRST BANCSHARES INC SC 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Carrying amount is net of the allowance for credit losses or loan losses, as applicable, and previously presented impaired loans. 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 false 864 --12-31 Q1 0001090009 679-9000 iso4217:USD xbrli:shares


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

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

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


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


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


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


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


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


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


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


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