UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the Quarterly Period Ended ~~June~~September 30, 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
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

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

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

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

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

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

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes ☒ No ☐

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

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

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

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

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

~~7,991,644~~7,997,344 shares of common stock, par value $0.01 per share, were issued and outstanding as of ~~July 29,~~November 1, 2022.

Table of Contents

SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARY
~~June~~September 30, 2022 Form 10-Q

INDEX

PART I – CONSOLIDATED FINANCIAL INFORMATION		Page

Item 1.	Consolidated Financial Statements	1

	Consolidated Balance Sheets	1

	Consolidated Statements of Income	2

	Consolidated Statements of Comprehensive Income	3

	Consolidated Statements of Shareholders’ Equity	4

	Consolidated Statements of Cash Flows	5

	Notes to Unaudited Consolidated Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	29

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	4845

Item 4.	Controls and Procedures	4946

PART II – OTHER INFORMATION		50

Item 1.	Legal Proceedings	5047

Item 1A.	Risk Factors	5047

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	5047

Item 3.	Defaults upon Senior Securities	5047

Item 4.	Mine Safety Disclosures	5047

Item 5.	Other Information	5047

Item 6.	Exhibits	5147

Table of Contents

PART I. CONSOLIDATED FINANCIAL INFORMATION

Item 1. CONSOLIDATED FINANCIAL STATEMENTS

SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS


	June 30,			December 31,			September 30,			December 31,
(dollars in thousands, except share data)	2022			2021			2022			2021
	(Unaudited)			(Audited)			(Unaudited)			(Audited)
ASSETS
Cash and cash equivalents:
Cash and due from banks	$	21,090			21,770		$	16,530			21,770
Federal funds sold		124,462			86,882			139,544			86,882
Interest-bearing deposits with banks		36,538			58,557			4,532			58,557
Total cash and cash equivalents		182,090			167,209			160,606			167,209
Investment securities:
Investment securities available for sale		98,991			120,281			91,521			120,281
Other investments		5,065			4,021			5,449			4,021
Total investment securities		104,056			124,302			96,970			124,302
Mortgage loans held for sale		18,329			13,556			9,243			13,556
Loans		2,845,205			2,489,877			3,030,027			2,489,877
Less allowance for credit losses		(34,192	)		(30,408	)		(36,317	)		(30,408	)
Loans, net		2,811,013			2,459,469			2,993,710			2,459,469
Bank owned life insurance		50,463			49,833			50,778			49,833
Property and equipment, net		96,674			92,370			99,530			92,370
Deferred income taxes, net		15,078			8,397			18,425			8,397
Accrued interest receivable		7,433			7,624			7,949			7,624
Other assets		2,527			2,788			2,458			2,788
Total assets	$	3,287,663			2,925,548		$	3,439,669			2,925,548
LIABILITIES
Deposits	$	2,870,158			2,563,826		$	3,001,452			2,563,826
FHLB advances and related debt		50,000			-			60,000			-
Subordinated debentures		36,160			36,106			36,187			36,106
Other liabilities		48,708			47,715			54,245			47,715
Total liabilities		3,005,026			2,647,647			3,151,884			2,647,647
SHAREHOLDERS’ EQUITY
Preferred stock, par value $.01 per share, 10,000,000 shares authorized		-			-			-			-
Common stock, par value $.01 per share, 10,000,000 shares authorized, 7,985,644 and 7,925,819 shares issued and outstanding at June 30, 2022 and December 31, 2021, respectively		80			79
Common stock, par value $.01 per share, 10,000,000 shares authorized, 7,997,344 and 7,925,819 shares issued and outstanding at September 30, 2022 and December 31, 2021, respectively								80			79
Nonvested restricted stock		(3,230	)		(1,435	)		(3,348	)		(1,435	)
Additional paid-in capital		117,714			114,226			118,433			114,226
Accumulated other comprehensive loss		(10,143	)		(740	)		(14,009	)		(740	)
Retained earnings		178,216			165,771			186,629			165,771
Total shareholders’ equity		282,637			277,901			287,785			277,901
Total liabilities and shareholders’ equity	$	3,287,663			2,925,548		$	3,439,669			2,925,548

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

Table of Contents

SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)

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

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

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

Table of Contents

SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)

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

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

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

Table of Contents

SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Unaudited)

For the three months ended June 30,

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

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

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

	For the six months ended June 30,																						For the three months ended September 30,
	Common stock				Preferred stock				Nonvested restricted			Additional paid-in		Accumulated other comprehensive			Retained						Common stock				Preferred stock				Nonvested restricted			Additional paid-in		Accumulated other comprehensive			Retained
(dollars in thousands, except share data)	Shares		Amount		Shares		Amount		stock			capital		income (loss)			earnings			Total			Shares		Amount		Shares		Amount		stock			capital		income (loss)			earnings		Total
December 31, 2020		7,772,748	$	78		-	$	-	$	(698	)	$	108,831	$	1,023		$	119,060		$	228,294
June 30, 2021																								7,899,931	$	79		-	$	-	$	(1,173	)	$	112,604	$	400		$	139,749	$	251,659
Net income		-		-		-		-		-			-		-			20,689			20,689			-		-		-		-		-			-		-			14,017		14,017
Proceeds from exercise of stock options		112,433		1		-		-		-			2,520		-			-			2,521			4,950		-		-		-		-			175		-			-		175
Issuance of restricted stock		14,750		-		-		-		(689	)		689		-			-			-			8,500		-		-		-		(431	)		431		-			-		-
Compensation expense related to restricted stock, net of tax		-		-		-		-		214			-		-			-			214			-		-		-		-		135			-		-			-		135
Compensation expense related to stock options, net of tax		-		-		-		-		-			564		-			-			564			-		-		-		-		-			291		-			-		291
Other comprehensive loss		-		-		-		-		-			-		(623	)		-			(623	)		-		-		-		-		-			-		(648	)		-		(648	)

June 30, 2021		7,899,931	$	79		-	$	-	$	(1,173	)	$	112,604	$	400		$	139,749		$	251,659
December 31, 2021		7,925,819		79		-		-		(1,435	)		114,226		(740	)		165,771			277,901
Adoption of ASU 2016-13		-		-		-		-		-			-		-			(2,765	)		(2,765	)
September 30, 2021																								7,913,381	$	79		-	$	-	$	(1,469	)	$	113,501	$	(248	)	$	153,766	$	265,629
June 30, 2022																								7,985,644		80		-		-		(3,230	)		117,714		(10,143	)		178,216		282,637
Net income		-		-		-		-		-			-		-			15,210			15,210			-		-		-		-		-			-		-			8,413		8,413
Proceeds from exercise of stock options		21,750		1		-		-		-			706		-			-			707			3,000		-		-		-		-			87		-			-		87
Issuance of restricted stock		38,075		-		-		-		(2,305	)		2,305		-			-			-			8,700		-		-		-		(405	)		405		-			-		-
Compensation expense related to restricted stock, net of tax		-		-		-		-		510			-		-			-			510			-		-		-		-		287			-		-			-		287
Compensation expense related to stock options, net of tax		-		-		-		-		-			477		-			-			477			-		-		-		-		-			227		-			-		227
Other comprehensive loss		-		-		-		-		-			-		(9,403	)		-			(9,403	)		-		-		-		-		-			-		(3,866	)		-		(3,866	)
June 30, 2022		7,985,644	$	80		-	$	-	$	(3,230	)	$	117,714	$	(10,143	)	$	178,216		$	282,637

September 30, 2022																								7,997,344	$	80		-	$	-	$	(3,348	)	$	118,433	$	(14,009	)	$	186,629	$	287,785

	For the nine months ended September 30,
	Common stock				Preferred stock				Nonvested restricted			Additional paid-in		Accumulated other comprehensive			Retained
(dollars in thousands, except share data)	Shares		Amount		Shares		Amount		stock			capital		income (loss)			earnings			Total
December 31, 2020		7,772,748	$	78		-	$	-	$	(698	)	$	108,831	$	1,023		$	119,060		$	228,294
Net income		-		-		-		-		-			-		-			34,706			34,706
Proceeds from exercise of stock options		117,383		1		-		-		-			2,695		-			-			2,696
Issuance of restricted stock		23,250		-		-		-		(1,120	)		1,120		-			-			-
Compensation expense related to restricted stock, net of tax		-		-		-		-		349			-		-			-			349
Compensation expense related to stock options, net of tax		-		-		-		-		-			855		-			-			855
Other comprehensive loss		-		-		-		-		-			-		(1,271	)		-			(1,271	)

September 30, 2021		7,913,381	$	79		-	$	-	$	(1,469	)	$	113,501	$	(248	)	$	153,766		$	265,629
December 31, 2021		7,925,819		79		-		-		(1,435	)		114,226		(740	)		165,771			277,901
Adoption of ASU 2016-13		-		-		-		-		-			-		-			(2,765	)		(2,765	)
Net income		-		-		-		-		-			-		-			23,623			23,623
Proceeds from exercise of stock options		24,750		1		-		-		-			793		-			-			794
Issuance of restricted stock		46,775		-		-		-		(2,710	)		2,710		-			-			-
Compensation expense related to restricted stock, net of tax		-		-		-		-		797			-		-			-			797
Compensation expense related to stock options, net of tax		-		-		-		-		-			704		-			-			704
Other comprehensive loss		-		-		-		-		-			-		(13,269	)		-			(13,269	)

September 30, 2022		7,997,344	$	80		-	$	-	$	(3,348	)	$	118,433	$	(14,009	)	$	186,629		$	287,785

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

Table of Contents

SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

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

	For the nine months ended September 30,
(dollars in thousands)	2022			2021
Operating activities
Net income	$	23,623			34,706
Adjustments to reconcile net income to cash provided by operating activities:
Provision for (reversal of) credit losses		3,830			(8,200	)
Depreciation and other amortization		2,521			1,621
Accretion and amortization of securities discounts and premium, net		554			713
Loss on sale of real estate owned		-			376
(Gain) Loss on sale of fixed assets		394			(10	)
Gain on sale of securities		(12	)		-
Net change in operating leases		814			266
Compensation expense related to stock options and restricted stock grants		1,501			1,204
Gain on sale of loans held for sale		(2,700	)		(11,187	)
Loans originated and held for sale		(191,448	)		(406,451	)
Proceeds from sale of loans held for sale		198,461			446,254
Increase in cash surrender value of bank owned life insurance		(945	)		(919	)
Increase in deferred tax asset		(5,766	)		(6,736	)
Decrease in other assets		5			2,698
Increase in other liabilities		6,006			(4,531	)
Net cash provided by operating activities		36,838			49,804
Investing activities
Increase (decrease) in cash realized from:
Increase in loans, net		(538,816	)		(246,421	)
Purchase of property and equipment		(13,134	)		(16,620	)
Purchase of investment securities:
Available for sale		(10,094	)		(37,908	)
Other investments		(15,235	)		(1,000	)
Payments and maturities, calls and repayments of investment securities:
Available for sale		21,517			16,514
Other investments		13,806			1,812
Purchase of bank owned life insurance		-			(7,500	)
Proceeds from sale of fixed assets		95			50
Proceeds from sale of other real estate owned		-			1,159
Net cash used for investing activities		(541,861	)		(289,914	)
Financing activities
Increase (decrease) in cash realized from:
Increase in deposits, net		437,626			290,260
Increase (decrease) in Federal Home Loan Bank advances and other borrowings, net		60,000			(25,000	)
Proceeds from the exercise of stock options		794			2,696
Net cash provided by financing activities		498,420			267,956
Net decrease in cash and cash equivalents		(6,603	)		27,846
Cash and cash equivalents at beginning of the period		167,209			100,687
Cash and cash equivalents at end of the period	$	160,606			128,533
Supplemental information
Cash paid for
Interest	$	9,155			5,404
Income taxes		8,270			18,357
Schedule of non-cash transactions
Foreclosure of other real estate		-			367
Unrealized loss on securities, net of income taxes		(13,259	)		(1,271	)
Right-of-use assets obtained in exchange for lease obligations:
Operating leases		237			4,803

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

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SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – Summary of Significant Accounting Policies

Nature of Business

Southern First Bancshares, Inc. (the “Company”) is a South Carolina corporation that owns all of the capital stock of Southern First Bank (the “Bank”) and all of the stock of Greenville First Statutory Trusts I and II (collectively, the “Trusts”). The Trusts are special purpose non-consolidated entities organized for the sole purpose of issuing trust preferred securities. The Bank’s 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- and ~~six-~~nine- month period ended ~~June~~September 30, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 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, 2021 as filed with the U.S. Securities and Exchange Commission (“SEC”) on March 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

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

Use of Estimates

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

~~Risks and Uncertainties~~

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

~~Table of Contents~~

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

As of June 30, 2022, the Company’s and the Bank’s capital ratios were in excess of all regulatory requirements. While management believes that we have sufficient capital to withstand an extended economic recession brought about by the COVID-19 pandemic, our reported and regulatory capital ratios could be adversely impacted by further credit losses.

The Company maintains access to multiple sources of liquidity, including a $15.0 million holding company line of credit with another bank which could be used to support capital ratios at the subsidiary bank. As of June 30, 2022, the $15.0 million line was unused.

Reclassifications

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

Subsequent Events

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

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Adoption of New Accounting Standard

In June 2016, 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.

~~Table of Contents~~

Allowance for Credit Losses - Securities Available for Sale

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

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

Accrued interest receivable on available for sale debt securities totaled ~~$438,000~~$477,000 at ~~June~~September 30, 2022 and was excluded from the estimate of credit losses.

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Allowance for Credit Losses - Loans

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

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

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

Commercial loans

●

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

●

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

~~Table of Contents~~

●

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

●

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

Consumer loans

●

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

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●

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

●

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

●

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

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

~~Table of Contents~~

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

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

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

Accrued Interest Receivable

Accrued interest receivable related to loans totaled ~~$7.0~~$7.5 million at ~~June~~September 30, 2022 and was reported in accrued interest receivable on the consolidated balance sheets. The Company elected not to measure an allowance for credit losses for accrued interest receivable and instead elected to reverse interest income on loans or securities that are placed on nonaccrual status, which is generally when the instrument is 90 days past due, or earlier if the Company believes the collection of interest is doubtful. The Company has concluded that this policy results in the timely reversal of uncollectable interest.

Unfunded Commitments

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

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

~~Table of Contents~~

Newly Issued, But Not Yet Effective Accounting Standards

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

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NOTE 2 – Investment Securities

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

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

December 31, 2021
Amortized Gross Unrealized Fair
Cost Gains Losses Value
Available for sale
Corporate bonds $ 2,198 - 10 2,188
US treasuries 999 - 7 992
US government agencies 14,504 1 336 14,169
SBA securities 429 9 - 438
State and political subdivisions 24,887 549 260 25,176
Asset-backed securities 10,136 45 17 10,164
Mortgage-backed securities
FHLMC 23,057 102 494 22,665
FNMA 40,924 235 660 40,499
GNMA 4,084 3 97 3,990
Total mortgage-backed securities 68,065 340 1,251 67,154
Total investment securities available for sale $ 121,218 944 1,881 120,281

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

	December 31, 2021
		Amortized	Gross Unrealized				Fair
	Cost		Gains			Losses	Value
Available for sale
Corporate bonds	$	2,198		-		10		2,188
US treasuries		999		-		7		992
US government agencies		14,504		1		336		14,169
SBA securities		429		9		-		438
State and political subdivisions		24,887		549		260		25,176
Asset-backed securities		10,136		45		17		10,164
Mortgage-backed securities
FHLMC		23,057		102		494		22,665
FNMA		40,924		235		660		40,499
GNMA		4,084		3		97		3,990
Total mortgage-backed securities		68,065		340		1,251		67,154
Total investment securities available for sale	$	121,218		944		1,881		120,281

Contractual maturities and yields on the Company’s investment securities at ~~June~~September 30, 2022 and December 31, 2021 are shown in the following table. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

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June 30, 2022
Less than one year One to five years Five to ten years Over ten years Total
(dollars in thousands) Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
Available for sale
Corporate bonds $ - - - - 1,981 1.99 % - - 1,981 1.99 %
US treasuries - - - - 905 1.27 % - - 905 1.27 %
US government agencies - - 2,445 0.83 % 8,001 1.49 % 807 1.48 % 11,253 1.34 %
State and political subdivisions - - 468 2.13 % 4,571 1.62 % 14,940 2.19 % 19,979 2.05 %
Asset-backed securities - - - - 1,246 3.33 % 6,507 2.03 % 7,753 2.23 %
Mortgage-backed securities - - 3,280 1.20 % 4,976 1.43 % 48,864 1.60 % 57,120 1.56 %
Total investment securities $ - - 6,193 1.12 % 21,680 1.64 % 71,118 1.76 % 98,991 1.69 %


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

																December 31, 2021										December 31, 2021
	Less than one year					One to five years					Five to ten years					Over ten years					Total					Less than one year						One to five years					Five to ten years					Over ten years					Total
(dollars in thousands)	Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield				Amount	Yield
Available for sale
Corporate bonds	$	-		-			-		-			2,188		1.98	%		-		-			2,188		1.98	%	$	-		-			-		-			2,188		1.98	%		-		-			2,188		1.98	%
US treasuries		-		-			-		-			992		1.27	%		-		-			992		1.27	%		-		-			-		-			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	%		-		-			2,481		0.36	%		8,756		1.31	%		2,932		1.79	%		14,169		1.24	%
SBA securities		-		-			-		-			-		-			438		1.01	%		438		1.01	%		-		-			-		-			-		-			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	%		-		-			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	%		-		-			-		-			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	%		387		2.10	%		4,411		1.29	%		9,121		1.59	%		53,235		1.38	%		67,154		1.40	%
Total investment securities	$	387		2.10	%		7,363		1.03	%		26,953		1.53	%		85,578		1.55	%		120,281		1.52	%	$	387		2.10	%		7,363		1.03	%		26,953		1.53	%		85,578		1.55	%		120,281		1.52	%

Table of Contents

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

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


	December 31, 2021																				September 30, 2022
	Less than 12 months						12 months or longer						Total								Less than 12 months						12 months or longer						Total
(dollars in thousands)	#		Fair value		Unrealized losses		#		Fair value		Unrealized losses		#		Fair value		Unrealized losses		#		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		1	$	1,877	$	302		-	$	-	$	-		1	$	1,877	$	302
US treasures		1		992		7		-		-		-		1		992		7
US treasuries																				-		-		-		1		863		136		1		863		136
US government agencies		7		9,831		173		4		3,837		163		11		13,668		336		-		-		-		10		10,635		2,371		10		10,635		2,371
State and political subdivisions		9		7,821		193		6		2,909		67		15		10,730		260		19		12,013		2,604		13		6,633		1,746		32		18,646		4,350
Asset-backed		2		1,751		9		2		1,717		7		4		3,468		16		6		5,432		108		2		1,413		39		8		6,845		147
Mortgage-backed securities
FHLMC		10		13,705		303		4		4,644		192		14		18,349		495		7		5,586		740		12		11,939		3,113		19		17,525		3,853
FNMA		11		16,098		296		9		11,264		364		20		27,362		660		19		9,985		1,528		18		20,084		4,332		37		30,069		5,860
GNMA		2		655		4		3		3,215		93		5		3,870		97		4		3,566		461		3		1,495		252		7		5,061		713
Total investment securities		43	$	53,041	$	995		28	$	27,586	$	886		71	$	80,627	$	1,881		56	$	38,459	$	5,743		59	$	53,062	$	11,989		115	$	91,521	$	17,732

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

~~Table of Contents~~

Table of Contents

At ~~June~~September 30, 2022 the Company had 76115 individual investments ~~with a fair market value of $65.3 million~~ that were in an unrealized loss ~~position for less than 12 months and 37 individual investments with a fair market value of $32.7 million that were in an unrealized loss position for 12 months or longer.~~position. The unrealized losses were primarily attributable to changes in interest rates, rather than deterioration in credit quality. The individual securities are each investment grade securities. The Company considers factors such as the financial condition of the issuer including credit ratings and specific events affecting the operations of the issuer, volatility of the security, underlying assets that collateralize the debt security, and other industry and macroeconomic conditions. The Company does not intend to sell these securities, and it is more likely than not that the Company will not be required to sell these securities before recovery of the amortized cost.

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


(dollars in thousands)	June 30, 2022		December 31, 2021		September 30, 2022		December 31, 2021
Federal Home Loan Bank stock	$	3,632		1,241	$	4,036		1,241
Other nonmarketable investments		1,030		2,377		1,010		2,377
Investment in Trust Preferred subsidiaries		403		403		403		403
Total other investments	$	5,065		4,021	$	5,449		4,021

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

NOTE 3 – Mortgage Loans Held for Sale

Mortgage loans originated and intended for sale in the secondary market are reported as loans held for sale and carried at fair value under the fair value option with changes in fair value recognized in current period earnings. At the date of funding of the mortgage loan held for sale, the funded amount of the loan, the related derivative asset or liability of the associated interest rate lock commitment, less direct loan costs becomes the initial recorded investment in the loan held for sale. Such amount approximates the fair value of the loan. At ~~June~~September 30, 2022, mortgage loans held for sale totaled ~~$18.3~~$9.2 million compared to $13.6 million at December 31, 2021.

NOTE 4 – Loans and Allowance for Credit Losses

The following table summarizes the composition of our loan portfolio. Total gross loans are recorded net of deferred loan fees and costs, which totaled ~~$6.2~~$6.7 million as of ~~June~~September 30, 2022 and $5.0 million as of December 31, 2021.


	June 30, 2022						December 31, 2021						September 30, 2022						December 31, 2021
(dollars in thousands)	Amount			% of Total			Amount			% of Total			Amount			% of Total			Amount			% of Total
Commercial
Owner occupied RE		551,544			19.4	%	$	488,965			19.6	%	$	572,972			18.9	%	$	488,965			19.6	%
Non-owner occupied RE		741,263			26.1	%		666,833			26.8	%		799,569			26.4	%		666,833			26.8	%
Construction		84,612			3.0	%		64,425			2.6	%		85,850			2.8	%		64,425			2.6	%
Business		389,790			13.7	%		333,049			13.4	%		419,312			13.8	%		333,049			13.4	%
Total commercial loans		1,767,209			62.2	%		1,553,272			62.4	%		1,877,703			61.9	%		1,553,272			62.4	%
Consumer
Real estate		812,130			28.5	%		694,401			27.9	%		873,471			28.8	%		694,401			27.9	%
Home equity		161,512			5.6	%		154,839			6.2	%		171,904			5.7	%		154,839			6.2	%
Construction		76,878			2.7	%		59,846			2.4	%		77,798			2.6	%		59,846			2.4	%
Other		27,476			1.0	%		27,519			1.1	%		29,151			1.0	%		27,519			1.1	%
Total consumer loans		1,077,996			37.8	%		936,605			37.6	%		1,152,324			38.1	%		936,605			37.6	%
Total gross loans, net of deferred fees		2,845,205			100.0	%		2,489,877			100.0	%		3,030,027			100.0	%		2,489,877			100.0	%
Less—allowance for credit losses		(34,192	)					(30,408	)					(36,317	)					(30,408	)
Total loans, net	$	2,811,013					$	2,459,469					$	2,993,710					$	2,459,469

Table of Contents

Maturities and Sensitivity of Loans to Changes in Interest Rates

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


	June 30, 2022										September 30, 2022
(dollars in thousands)	One year or less		After one but within five years		After five but within fifteen years		After fifteen years		Total		One year or less		After one but within five years		After five but within fifteen years		After fifteen years		Total
Commercial
Owner occupied RE	$	13,891		117,631		377,520		42,502		551,544	$	11,625		117,787		394,256		49,304		572,972
Non-owner occupied RE		38,324		347,550		327,641		27,748		741,263		44,182		383,518		344,874		26,995		799,569
Construction		4,763		23,348		44,728		11,773		84,612		5,413		26,336		48,891		5,210		85,850
Business		77,526		159,130		148,909		4,225		389,790		75,690		181,097		158,292		4,233		419,312
Total commercial loans		134,504		647,659		898,798		86,248		1,767,209		136,910		708,738		946,313		85,742		1,877,703
Consumer
Real estate	$	8,016		43,504		207,090		553,520		812,130	$	11,605		41,365		233,316		587,185		873,471
Home equity		1,554		22,238		132,251		5,469		161,512		1,377		20,822		144,336		5,369		171,904
Construction		1,102		591		14,226		60,959		76,878		241		589		20,129		56,839		77,798
Other		3,867		19,360		3,461		788		27,476		3,525		22,742		2,098		786		29,151
Total consumer loans		14,539		85,693		357,028		620,736		1,077,996		16,748		85,518		399,879		650,179		1,152,324
Total gross loans, net of deferred fees	$	149,043		733,352		1,255,826		706,984		2,845,205	$	153,658		794,256		1,346,192		735,921		3,030,027

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

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

Table of Contents

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


	June 30, 2022				December 31, 2021				September 30, 2022			December 31, 2021
	Interest Rate						Interest Rate		Interest Rate					Interest Rate
(dollars in thousands)	Fixed		Floating or Adjustable		Fixed		Floating or Adjustable			Fixed	Floating or Adjustable		Fixed		Floating or Adjustable
Commercial
Owner occupied RE	$	534,364		3,289		463,589		8,518	$	558,592	2,755		463,589		8,518
Non-owner occupied RE		631,885		71,054		533,565		85,815		683,796	71,591		533,565		85,815
Construction		74,537		5,312		57,139		2,404		71,957	8,480		57,139		2,404
Business		240,839		71,425		191,522		74,694		270,224	73,398		191,522		74,694
Total commercial loans		1,481,625		151,080		1,245,815		171,431		1,584,569	156,224		1,245,815		171,431
Consumer
Real estate		804,102		12		679,756		13		861,854	12		679,756		13
Home equity		11,946		148,012		12,850		139,811		13,684	156,843		12,850		139,811
Construction		75,776		-		58,884		-		77,557	-		58,884		-
Other		17,522		6,087		13,220		6,228		17,816	7,810		13,220		6,228
Total consumer loans		909,346		154,111		764,710		146,052		970,911	164,665		764,710		146,052
Total gross loans, net of deferred fees	$	2,390,971		305,191		2,010,525		317,483	$	2,555,480	320,889		2,010,525		317,483

Credit Quality Indicators

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

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

●

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

●

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

●

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

●

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

Table of Contents

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


													June 30, 2022																			September 30, 2022
(dollars in thousands)	2022		2021		2020		2019		2018		Prior		Revolving		Revolving Converted to Term		Total			2022		2021		2020		2019		2018		Prior		Revolving		Revolving Converted to Term		Total
Commercial
Owner occupied RE
Pass	$	84,469		134,506		90,382		75,694		37,899		127,229		-		-		550,179		$	119,148		130,792		96,397		70,219		37,121		103,847		-		-		557,524
Watch																					1,375		484		-		2,460		-		7,005		-		-		11,324
Special Mention		-		159		-		-		-		156		-		-		315			205		-		-		-		-		2,981		-		-		3,186
Substandard		-		-		648		-		294		108		-		-		1,050			-		-		646		-		292		-		-		-		938
Total Owner occupied RE		84,469		134,665		91,030		75,694		38,193		127,493		-		-		551,544			120,728		131,276		97,043		72,679		37,413		113,833		-		-		572,972

Non-owner occupied RE
Pass		135,632		175,361		118,012		74,974		79,186		130,248		603		-		714,016			208,206		171,640		115,680		58,927		75,772		109,884		604		-		740,713
Watch																					1,399		9,494		-		12,220		6,538		12,089		-		-		41,740
Special Mention		-		204		-		310		5,494		5,533		-		-		11,541			-		203		-		6,145		173		1,286		-		-		7,807
Substandard		-		139		-		13,659		306		1,602		-		-		15,706			-		135		-		7,995		304		875		-		-		9,309
Total Non-owner occupied RE		135,632		175,704		118,012		88,943		84,986		137,383		603		-		741,263			209,605		181,472		115,680		85,287		82,787		124,134		604		-		799,569

Construction
Pass		17,630		54,916		8,762		2,771		-		533		-		-		84,612			26,521		54,253		3,394		1,682		-		-		-		-		85,850
Watch																					-		-		-		-		-		-		-		-		-
Special Mention		-		-		-		-		-		-		-		-		-			-		-		-		-		-		-		-		-		-
Substandard		-		-		-		-		-		-		-		-		-			-		-		-		-		-		-		-		-		-
Total Construction		17,630		54,916		8,762		2,771		-		533		-		-		84,612			26,521		54,253		3,394		1,682		-		-		-		-		85,850

Business
Pass		63,532		65,669		35,262		25,887		37,371		34,691		122,374		625		385,411			91,796		59,303		30,860		23,015		36,217		30,292		121,475		590		393,548
Watch																					6,844		2,399		1,375		1,370		157		3,070		5,433		477		21,125
Special Mention		961		-		394		-		-		165		113		183		1,816			903		-		390		240		-		162		115		182		1,992
Substandard		-		-		1,065		182		345		946		25		-		2,563			500		-		191		130		329		932		565		-		2,647
Total Business		64,493		65,669		36,721		26,069		37,716		35,802		122,512		808		389,790			100,043		61,702		32,816		24,755		36,703		34,456		127,588		1,249		419,312
Total Commercial loans		302,224		430,954		254,525		193,477		160,895		301,211		123,115		808		1,767,209			456,897		428,703		248,933		184,403		156,903		272,423		128,192		1,249		1,877,703

Consumer
Real estate
Pass		143,204		260,391		193,806		77,863		41,377		86,659		-		-		803,300			198,590		263,113		189,049		74,324		39,731		77,887		-		-		842,694
Watch																					1,707		8,554		2,991		3,002		896		4,737		-		-		21,887
Special Mention		-		1,105		1,376		1,191		564		1,094		-		-		5,330			116		1,341		1,373		1,057		562		1,085		-		-		5,534
Substandard		-		895		229		418		406		1,552		-		-		3,500			-		652		228		548		403		1,525		-		-		3,356
Total Real estate		143,204		262,391		195,411		79,472		42,347		89,305		-		-		812,130			200,413		273,660		193,641		78,931		41,592		85,234		-		-		873,471

Home equity
Pass		-		-		-		-		-		-		156,910		-		156,910			-		-		-		-		-		-		160,975		-		160,975
Watch																					-		-		-		-		-		-		6,187		-		6,187
Special Mention		-		-		-		-		-		-		2,122		-		2,122			-		-		-		-		-		-		2,283		-		2,283
Substandard		-		-		-		-		-		-		2,480		-		2,480			-		-		-		-		-		-		2,459		-		2,459
Total Home equity		-		-		-		-		-		-		161,512		-		161,512			-		-		-		-		-		-		171,904		-		171,904

Construction
Pass		19,945		42,828		13,799		-		-		-		-		-		76,572			29,666		37,281		9,947		-		-		-		-		-		76,894
Watch																					-		-		588		-		-		-		-		-		588
Special Mention		-		-		-		306		-		-		-		-		306			-		-		-		316		-		-		-		-		316
Substandard		-		-		-		-		-		-		-		-		-			-		-		-		-		-		-		-		-		-
Total Construction		19,945		42,828		13,799		306		-		-		-		-		76,878			29,666		37,281		10,535		316		-		-		-		-		77,798

Other
Pass		2,726		2,706		2,076		1,778		639		3,590		13,801		-		27,316	��		3,690		2,123		1,815		1,643		410		3,298		15,297		-		28,276
Watch																					-		368		17		20		25		181		90		-		701
Special Mention		5		-		7		34		56		6		32		-		140			4		-		-		30		53		4		34		-		125
Substandard		-		-		-		9		-		-		11		-		20			-		36		-		6		-		-		7		-		49
Total Other		2,731		2,706		2,083		1,821		695		3,596		13,844		-		27,476			3,694		2,527		1,832		1,699		488		3,483		15,428		-		29,151
Total Consumer loans		165,880		307,925		211,293		81,599		43,042		92,901		175,356		-		1,077,996			233,773		313,468		206,008		80,946		42,080		88,717		187,332		-		1,152,324
Total loans	$	468,104		738,879		465,818		275,076		203,937		394,112		298,471		808		2,845,205		$	690,670		742,171		454,941		265,349		198,983		361,140		315,524		1,249		3,030,027

Table of Contents

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


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

The following tables present loan balances by payment status.


	June 30, 2022												September 30, 2022
(dollars in thousands)	Accruing 30-59 days past due		Accruing 60-89 days past due		Accruing 90 days or more past due		Nonaccrual loans		Accruing current		Total		Accruing 30-59 days past due		Accruing 60-89 days past due		Accruing 90 days or more past due		Nonaccrual loans		Accruing current		Total
Commercial
Owner occupied RE	$	-		-		-		-		551,544		551,544	$	-		-		-		-		572,972		572,972
Non-owner occupied RE		-		-		-		981		740,282		741,263		57		-		-		253		799,259		799,569
Construction		-		-		-		-		84,612		84,612		-		-		-		-		85,850		85,850
Business		91		-		-		-		389,699		389,790		123		-		-		79		419,110		419,312
Consumer
Real estate		482		697		-		552		810,399		812,130		77		131		-		904		872,359		873,471
Home equity		-		-		-		1,398		160,114		161,512		129		-		-		1,379		170,396		171,904
Construction		-		-		-		-		76,878		76,878		-		-		-		-		77,798		77,798
Other		-		-		-		-		27,476		27,476		-		-		-		-		29,151		29,151
Total loans	$	573		697		-		2,931		2,839,806		2,845,205	$	386		131		-		2,615		3,026,895		3,030,027

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

December 31, 2021

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

As of ~~June~~September 30, 2022 and December 31, 2021, loans 30 days or more past due represented ~~0.10%~~0.07% and 0.09% of the Company’s total loan portfolio, respectively. Commercial loans 30 days or more past due were 0.01% and 0.00% of the Company’s total loan portfolio as of ~~June~~September 30, 2022 and December 31, 2021, respectively. Consumer loans 30 days or more past due were ~~0.09%~~0.06% of total loans as of ~~June~~September 30, 2022 and December 31, 2021.

Nonperforming assets

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

Table of Contents

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


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

~~Table of Contents~~

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

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


	CECL						Incurred loss		CECL						Incurred loss
	June 30, 2022						December 31, 2021		September 30, 2022						December 31, 2021
	Nonaccrual		Nonaccrual						Nonaccrual		Nonaccrual
	loans		loans		Total		Total		loans		loans		Total		Total
	with no		with an		nonaccrual		nonaccrual		with no		with an		nonaccrual		nonaccrual
(dollars in thousands)	allowance		allowance		loans		loans			allowance		allowance		loans		loans
Commercial
Owner occupied RE		-		-		-		-		-		-		-		-
Non-owner occupied RE	$	121		860		981		1,070	$	117		136		253		1,070
Construction		-		-		-		-		-		-		-		-
Business		-		-		-		-		79		-		79		-
Total commercial		121		860		981		1,070		196		136		332		1,070
Consumer
Real estate		-		552		552		1,750		-		904		904		1,750
Home equity		200		1,198		1,398		2,044		197		1,182		1,379		2,044
Construction		-		-		-		-		-		-		-		-
Other		-		-		-		-		-		-		-		-
Total consumer		200		1,750		1,950		3,794		197		2,086		2,283		3,794
Total	$	321		2,610		2,931		4,864	$	393		2,222		2,615		4,864

Table of Contents

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

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

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


	Three months ended June 30, 2022					Three months ended June 30, 2021				Three months ended September 30, 2022			Three months ended September 30, 2021
(dollars in thousands)	Average recorded investment		Recognized interest income			Average recorded investment		Recognized interest income			Average recorded investment	Recognized interest income		Average recorded investment	Recognized interest income
Commercial
Owner occupied RE	$	1,247		11			1,379		16	$	1,240	16		1,269	17
Non-owner occupied RE		874		36			2,073		32		361	-		5,125	227
Construction		-		-			68		-		-	-		-	-
Business		1,051		10			2,118		20		1,539	47		2,665	61
Total commercial		3,172		57			5,638		68		3,140	63		9,059	305
Consumer
Real estate		1,908		17			4,337		60		1,862	48		3,609	-
Home equity		1,611		(3	)		1,679		18		1,190	15		1,859	30
Construction		-		-			-		-		-	-		-	-
Other		118		1			131		1		115	1		127	1
Total consumer		3,637		15			6,147		79		3,167	64		5,595	31
Total gross loans	$	6,809		72			11,785		147	$	6,307	127		14,654	336

Table of Contents


	Nine months ended September 30, 2022				Nine months ended September 30, 2021				Year ended December 31, 2021
(dollars in thousands)	Average recorded investment		Recognized interest income		Average recorded investment		Recognized interest income		Average recorded investment		Recognized interest income
Commercial
Owner occupied RE	$	1,248		48		1,419		49		1,387		65
Non-owner occupied RE		535		78		3,643		321		3,128		182
Construction		-		-		69		-		55		-
Business		1,573		76		2,497		115		2,218		62
Total commercial		3,356		202		7,628		485		6,788		309
Consumer
Real estate		2,378		86		3,911		102		3,641		98
Home equity		1,613		36		1,944		64		1,964		85
Construction		-		-		-		-		-		-
Other		118		3		130		3		129		4
Total consumer		4,109		125		5,985		169		5,734		187
Total gross loans	$	7,465		327		13,613		654		12,522		496

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

~~Table of Contents~~

Allowance for Credit Losses

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


									Three months ended June 30, 2022																									Three months ended September 30, 2022
		Commercial										Consumer														Commercial										Consumer
(dollars in thousands)		Owner occupied RE			Non- owner occupied RE		Construction		Business			Real Estate		Home Equity			Construction		Other			Total				Owner occupied RE		Non- owner occupied RE			Construction			Business		Real Estate		Home Equity		Construction		Other		Total
Balance, beginning of period		$	4,898			9,973		929		6,217			7,602		2,197			844		284			32,944			$	4,829		10,010			1,060			6,717		7,992		2,442		851		291		34,192
Provision for credit losses			(69	)		37		131		524			390		407			7		98			1,525				476		(1,595	)		(82	)		875		782		3		41		25		525
Loan charge-offs			-			-		-		(55	)		-		(170	)		-		(91	)		(316	)			-		-			-			-		-		-		-		-		-
Loan recoveries			-			-		-		31			-		8			-		-			39				-		1,540			-			51		-		8		-		1		1,600
Net loan recoveries (charge-offs)			-			-		-		(24	)		-		(162	)		-		(91	)		(277	)			-		1,540			-			51		-		8		-		1		1,600
Balance, end of period		$	4,829			10,010		1,060		6,717			7,992		2,442			851		291			34,192			$	5,305		9,955			978			7,643		8,774		2,453		892		317		36,317
Net charge-offs to average loans (annualized)	Net charge-offs to average loans (annualized)																						0.04	%	Net charge-offs to average loans (annualized)																				(0.22	%)
Allowance for credit losses to gross loans	Allowance for credit losses to gross loans																						1.20	%	Allowance for credit losses to gross loans																				1.20	%
Allowance for credit losses to nonperforming loans	Allowance for credit losses to nonperforming loans																						1166.70	%	Allowance for credit losses to nonperforming loans																				1388.87	%


										Six months ended June 30, 2022																										Nine months ended September 30, 2022
		Commercial											Consumer															Commercial											Consumer
(dollars in thousands)		Owner occupied RE			Non- owner occupied RE			Construction		Business			Real Estate			Home Equity			Construction		Other			Total				Owner occupied RE			Non- owner occupied RE			Construction		Business			Real Estate			Home Equity			Construction		Other			Total
Balance, beginning of period		$	4,700			10,518			625		4,887			7,083			1,697			578		320			30,408			$	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				(313	)		333			154		1,057			(294	)		438			130		(5	)		1,500
Provision for credit losses			442			(841	)		281		683			1,203			572			143		67			2,550				918			(2,436	)		199		1,558			1,985			575			184		92			3,075
Loan charge-offs			-			-			-		(55	)		-			(339	)		-		(91	)		(485	)			-			-			-		(55	)		-			(339	)		-		(91	)		(485	)
Loan recoveries			-			-			-		145			-			74			-		-			219				-			1,540			-		196			-			82			-		1			1,819
Net loan recoveries (charge-offs)			-			-			-		90			-			(265	)		-		(91	)		(266	)			-			1,540			-		141			-			(257	)		-		(90	)		1,334
Balance, end of period		$	4,829			10,010			1,060		6,717			7,992			2,442			851		291			34,192			$	5,305			9,955			978		7,643			8,774			2,453			892		317			36,317
Net charge-offs (recoveries) to average loans (annualized)	Net charge-offs (recoveries) to average loans (annualized)																								0.02	%	Net charge-offs (recoveries) to average loans (annualized)																								(0.06	%)
Allowance for credit losses to gross loans	Allowance for credit losses to gross loans																								1.20	%	Allowance for credit losses to gross loans																								1.20	%
Allowance for credit losses to nonperforming loans	Allowance for credit losses to nonperforming loans																								1166.70	%	Allowance for credit losses to nonperforming loans																								1388.87	%

Table of Contents

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

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

	Three months ended September 30, 2021
	Commercial											Consumer
(dollars in thousands)	Owner occupied RE			Non- owner occupied RE			Construction		Business			Real Estate			Home equity			Construction			Other			Total
Balance, beginning of period	$	7,099			13,223			951		6,722			10,028			2,562			753			574			41,912
Provision for loan losses		(1,159	)		(1,558	)		149		(1,246	)		(1,469	)		(598	)		(28	)		(91	)		(6,000	)
Loan charge-offs		-			(159	)		-		(84	)		-			-			-			-			(243	)
Loan recoveries		-			129			-		58			18			193			-			8			406
Net loan recoveries (charge-offs)		-			(30	)		-		(26	)		18			193			-			8			163
Balance, end of period	$	5,940			11,635			1,100		5,450			8,577			2,157			725			491			36,075
Net charge-offs (recoveries) to average loans (annualized)																									(0.03	%)
Allowance for loan losses to gross loans																									1.51	%
Allowance for loan losses to nonperforming loans																									259.95	%

Six months ended June 30, 2021

Commercial Consumer
(dollars in thousands) Owner occupied RE Non-owner occupied RE Construction Business Real
Estate Home Equity Construction Other Total
Balance, beginning of period $ 8,145 12,049 1,154 7,845 10,453 3,249 747 �� 507 44,149
Provision for loan losses (1,140 ) 1,050 (203 ) (1,011 ) (425 ) (552 ) 6 75 (2,200 )
Loan charge-offs - - - (268 ) - (139 ) - (8 ) (415 )
Loan recoveries 94 124 - 156 - 4 - - 378
Net loan recoveries (charge-offs) 94 124 - (112 ) - (135 ) - (8 ) (37 )
Balance, end of period $ 7,099 13,223 951 6,722 10,028 2,562 753 574 41,912
Net charge-offs to average loans (annualized) 0.00 %

													Nine months ended September 30, 2021
	Commercial																		Consumer
(dollars in thousands)	Owner occupied RE			Non- owner occupied RE			Construction			Business			Real Estate			Home Equity			Construction			Other			Total
Balance, beginning of period	$	8,145			12,049			1,154			7,845			10,453			3,249			747			507			44,149
Provision for loan losses		(2,299	)		(509	)		(54	)		(2,256	)		(1,894	)		(1,149	)		(22	)		(17	)		(8,200	)
Loan charge-offs		-			(158	)		-			(353	)		-			(139	)		-			(8	)		(658	)
Loan recoveries		94			253			-			214			18			196			-			9			784
Net loan recoveries (charge-offs)		94			95			-			(139	)		18			57			-			1			126
Balance, end of period	$	5,940			11,635			1,100			5,450			8,577			2,157			725			491			36,075
Net charge-offs to average loans (annualized)																										0.01	%

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

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

									June 30, 2021												September 30, 2021
	Allowance for loan losses						Recorded investment in loans						Allowance for loan losses						Recorded investment in loans
(dollars in thousands)	Commercial		Consumer		Total		Commercial		Consumer		Total		Commercial		Consumer		Total		Commercial		Consumer		Total
Individually evaluated	$	1,454		134		1,588		5,308		6,079		11,387	$	955		210		1,165		12,810		5,111		17,921
Collectively evaluated		26,536		13,788		40,324		1,415,635		827,113		2,242,748		23,170		11,740		34,910		1,482,186		888,940		2,371,126
Total	$	27,995		13,917		41,912		1,420,943		833,192		2,254,135	$	24,125		11,950		36,075		1,494,996		894,051		2,389,047

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

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

June 30, 2022

Real Business
(dollars in thousands) estate assets Other Total
Commercial
Owner occupied RE $ - - - -
Non-owner occupied RE 121 - - 121
Construction - - - -
Business - - - -
Total commercial 121 - - 121
Consumer
Real estate - - - -
Home equity 200 - - 200
Construction - - - -
Other - - - -
Total consumer 200 - - 200
Total $ 321 - - 321

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

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

Allowance for Credit Losses - Unfunded Loan Commitments

The allowance for credit losses for unfunded loan commitments was ~~$2.3~~$2.8 million at ~~June~~September 30, 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 ~~six~~nine months ended ~~June~~September 30, 2022.

Six months ended
(dollars in thousands) June 30, 2022
Balance, beginning of period -
Adjustment for adoption of CECL $ 2,000
Provision for loan losses 330
Balance, end of period $ 2,330

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

NOTE 5 – Troubled Debt Restructurings

At ~~June~~September 30, 2022, the Company had 1315 loans totaling ~~$5.8~~$6.8 million compared to 14 loans totaling $6.3 million at December 31, 2021, which were considered as TDRs. The Company considers a loan to be a TDR when the debtor experiences financial difficulties and the Company grants a concession to the debtor that it would not normally consider. Concessions can relate to the contractual interest rate, maturity date, or payment structure of the note. As part of the workout plan for individual loan relationships, the Company may restructure loan terms to assist borrowers facing financial challenges in the current economic environment.

~~The~~There were ~~no renewals or modifications to any~~three loans considered new TDRs during the three and ~~six~~nine months ended ~~June~~September 30, 2022. There was one consumer real estate loan with a pre-modification and post-modification balance of $885,000, and there were two commercial business loans with a pre-modification balance totaling $1.1 million and a post-modification balance totaling $1.1 million. For the three and ~~six~~nine months ended ~~June~~September 30, 2021, renewals and modifications were not material.

As of ~~June~~September 30, 2022 and 2021, there were no loans modified as a TDR for which there was a payment default (60 days past due) within 12 months of the restructuring date.

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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 ~~June~~September 30, 2022 and December 31, 2021.

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

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

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

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

NOTE 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.

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

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~~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

The methods of determining the fair value of assets and liabilities presented in this note are consistent with our methodologies disclosed in Note 14 of the Company’s 2021 Annual Report on Form 10-K. The Company’s loan portfolio is initially fair valued using a segmented approach, using the eight categories of loans as disclosed in Note 4 – Loans and Allowance for Credit Losses. Loans are considered a Level 3 classification.

Assets and Liabilities Recorded at Fair Value on a Recurring Basis

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

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

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

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

Liabilities
Mortgage loan interest rate lock commitments	$	-		7		-		7
Total liabilities measured at fair value on a recurring basis	$	-		7		-		7

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

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

Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis

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

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

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

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

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

Fair Value of Financial Instruments

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

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

June 30, 2022
(dollars in thousands) Carrying
Amount Fair
Value Level 1 Level 2 Level 3
Financial Assets:
Other investments, at cost $ 5,065 5,065 - - 5,065
Loans¹ 2,804,524 2,688,356 - - 2,688,356
Financial Liabilities:
Deposits 2,822,594 2,419,809 - 2,419,809 -
Subordinated debentures 36,160 36,651 - 36,651 -

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

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

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

NOTE 8 – Leases

~~Effective January 1, 2019,~~The Company enters into leases in the ~~Company adopted ASU 2016-02, “Leases (Topic 842)”.~~normal course of business. As of ~~June~~September 30, 2022, we leased six of our offices under various operating lease agreements. ~~The~~All of our leases are operating leases under applicable accounting standards and the lease agreements have maturity dates ranging from August 2028 to February 2032, some of which include options for multiple five-year extensions. The weighted average remaining life of the lease term for these leases was ~~7.39~~7.19 years as of ~~June~~September 30, 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 asat implementation of ~~January 1, 2019 for leases that existed at adoption~~the accounting standard and as of the lease commencement date for leases subsequently entered into. The weighted average discount rate for leases was ~~2.28%~~2.27% as of ~~June~~September 30, 2022.

The total operating lease costs were ~~$768,000~~$582,000 and ~~$640,000~~$711,000 for the three months ended ~~June~~September 30, 2022 and 2021, respectively, and ~~$1.5 million and $1.4~~$2.1 million for the ~~six~~nine months ended ~~June~~September 30, 2022 and ~~2021, respectively.~~2021. The right-of-use (ROU) asset, included in property and equipment, and lease liability, included in other liabilities, was ~~$23.7~~$23.6 million and ~~$25.3~~$25.8 million as of ~~June~~September 30, 2022, respectively, compared to $26.6 million and $28.0 million as of December 31, 2021, respectively. The ROU asset and lease liability are recognized at lease commencement by calculating the present value of lease payments over the lease term.

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Maturities of lease liabilities as of ~~June~~September 30, 2022 were as follows:

Operating
(dollars in thousands) Leases
2022 $ 377
2023 1,938
2024 1,990
2025 2,045
2026 2,096
Thereafter 24,093
Total undiscounted lease payments 32,539
Discount effect of cash flows 7,263
Total lease liability $ 25,276

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

NOTE 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- and ~~six-~~nine- month periods ended ~~June~~September 30, 2022 and 2021. Dilutive common shares arise from the potentially dilutive effect of the Company’s stock options that were outstanding at ~~June~~September 30, 2022. The assumed conversion of stock options can create a difference between basic and dilutive net income per common share. At ~~June~~September 30, 2022 and 2021, there were ~~162,366~~162,060 and ~~113,239~~159,029 options, respectively, that were not considered in computing diluted earnings per common share because they were anti-dilutive.

Three months ended
June 30, Six months ended
June 30,
(dollars in thousands, except share data) 2022 2021 2022 2021
Numerator:
Net income available to common shareholders $ 7,240 10,323 15,210 20,689
Denominator:
Weighted-average common shares outstanding – basic 7,957,631 7,847,516 7,944,814 7,811,217
Common stock equivalents 97,279 140,099 130,682 137,077
Weighted-average common shares outstanding – diluted 8,054,910 7,987,615 8,075,496 7,948,294
Earnings per common share:
Basic $ 0.91 1.32 1.91 2.65
Diluted $ 0.90 1.29 1.88 2.60

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

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Item 2. MANAGEMENT’S DISCUSSION AND Analysis of Financial Condition and Results of Operations.

The following discussion reviews our results of operations for the three and ~~six~~nine month periods ended ~~June~~September 30, 2022 as compared to the three and ~~six~~nine month periods ended ~~June~~September 30, 2021 and assesses our financial condition as of ~~June~~September 30, 2022 as compared to December 31, 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, 2021 included in our Annual Report on Form 10-K for that period. Results for the three and ~~six~~nine month periods ended ~~June~~September 30, 2022 are not necessarily indicative of the results for the year ending December 31, 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 continuing impact of COVID-19 and its variants on our business, including~~Changes in the ~~impact of the actions taken by governmental authorities to try and contain the virus~~interest rate environment which could reduce anticipated 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;actual margins;

●

Restrictions or conditions imposed by our regulators on our operations;

●

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

●

Changes in access to funding or increased regulatory requirements with regard to ~~funding;~~funding, which could impair our liquidity;

●

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

●

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

●

Credit losses due to loan concentration;

●

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

●

Our ability to successfully execute our business strategy;

●

Our ability to attract and retain key personnel;

●

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

●

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

●

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

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●

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

●

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

●

Changes occurring in business conditions and inflation;

●

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

●

Changes in technology;

●

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

●

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

●

Changes in 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;

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●

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

●

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

●

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

●

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

●

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

●

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

●

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

~~Table of Contents~~

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 ~~June~~September 30, 2022, we had total assets of ~~$3.29~~$3.44 billion, a ~~12.4%~~17.6% increase from total assets of $2.93 billion at December 31, 2021. The largest component of our total assets is loans which were ~~$2.85~~$3.03 billion and $2.49 billion at ~~June~~September 30, 2022 and December 31, 2021, respectively. Our liabilities and shareholders’ equity at ~~June~~September 30, 2022 totaled ~~$3.01~~$3.15 billion and ~~$282.6~~$287.8 million, respectively, compared to liabilities of $2.65 billion and shareholders’ equity of $277.9 million at December 31, 2021. The principal component of our liabilities is deposits which were ~~$2.87~~$3.00 billion and $2.56 billion at ~~June~~September 30, 2022 and December 31, 2021, respectively.

Like most community banks, we derive the majority of our income from interest received on our loans and investments. Our primary source of funds for making these loans and investments is our deposits, on which we pay interest. Consequently, one of the key measures of our success is our amount of net interest income, or the difference between the income on our interest-earning assets, such as loans and investments, and the expense on our interest-bearing liabilities, such as deposits and borrowings. Another key measure is the spread between the yield we earn on these interest-earning assets and the rate we pay on our interest-bearing liabilities, which is called our net interest spread. In addition to earning interest on our loans and investments, we earn income through fees and other charges to our clients.

Our net income to common shareholders was ~~$7.2~~$8.4 million and ~~$10.3~~$14.0 million for the three months ended ~~June~~September 30, 2022 and 2021, respectively. Diluted earnings per share (“EPS”) was ~~$0.90~~$1.04 for the ~~second~~third quarter of 2022 as compared to $1.29 for the same period in 2021. The decrease in net income was primarily driven by an increase in the provision for credit losses and a decrease in mortgage banking income, as well as an increase in noninterest expense.

Our net income to common shareholders was $15.2 million and $20.7 million for the six months ended June 30, 2022 and 2021. Diluted EPS was $1.88 for the six months ended June 30, 2022 as compared to $2.60$1.75 for the same period in 2021. The decrease in net income was primarily driven by an increase in the provision for credit losses and a decrease in mortgage banking income, as well as an increase in noninterest expenses.

~~In addition, during the second quarter~~

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

~~RESULTS OF OPERATIONS~~Our net income to common shareholders was $23.6 million and $34.7 million for the nine months ended September 30, 2022 and 2021. Diluted EPS was $2.93 for the nine months ended September 30, 2022 as compared to $4.36 for the same period in 2021. The decrease in net income was primarily driven by an increase in the provision for credit losses and a decrease in mortgage banking income, as well as an increase in noninterest expenses.

results of operations

Net Interest Income and Margin

Our level of net interest income is determined by the level of earning assets and the management of our net interest margin. Our net interest income was ~~$24.9~~$25.5 million for the ~~second~~third quarter of 2022, a ~~16.1%~~14.8% increase over net interest income of ~~$21.4~~$22.2 million for the ~~second~~third quarter of 2021, driven by an increase in interest income ~~on loans~~primarily as a result of loan growth during the past 12 months. In addition, our net interest margin, on a tax-equivalent basis (TE), was ~~3.35%~~3.19% for the ~~second~~third quarter of 2022 compared to ~~3.50%~~3.38% for the same period in 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 and ~~six~~nine month periods ended ~~June~~September 30, 2022 and 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” tables demonstrate the effect of changing interest rates and changing volume of assets and liabilities on our financial condition during the periods shown. We also track the sensitivity of our various categories of assets and liabilities to changes in interest rates, and we have included tables to illustrate our interest rate sensitivity with respect to interest-earning accounts and interest-bearing accounts.

~~Table of Contents~~

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

Table of Contents

Average Balances, Income and Expenses, Yields and Rates


	For the Three Months Ended June 30,															For the Three Months Ended September 30,
	2022								2021							2022							2021
(dollars in thousands)	Average Balance		Income/ Expense			Yield/ Rate⁽¹⁾			Average Balance		Income/ Expense		Yield/ 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	$	80,909	$	180			0.89	%	$	119,211	$	53		0.18	%	$	122,071	$	676		2.20	%	$	145,899	$	68			0.18	%
Investment securities, taxable		98,527		404			1.64	%		85,306		212		1.00	%		91,462		449		1.95	%		93,428		301			1.28	%
Investment securities, nontaxable⁽²⁾		10,382		56			2.16	%		11,599		74		2.56	%		10,160		74		2.89	%		10,974		70			2.54	%
Loans⁽³⁾		2,795,274		26,610			3.82	%		2,240,236		22,409		4.01	%		2,941,350		29,752		4.01	%		2,351,467		23,063			3.89	%
Total interest-earning assets		2,985,092		27,250			3.66	%		2,456,352		22,748		3.71	%		3,165,043		30,951		3.88	%		2,601,768		23,502			3.58	%
Noninterest-earning assets		154,659								117,836							159,233							132,929
Total assets	$	3,139,751							$	2,574,188						$	3,324,726						$	2,734,697
Interest-bearing liabilities
NOW accounts	$	389,563		144			0.15	%	$	298,446		46		0.06	%	$	361,500		178		0.20	%	$	316,775		48			0.06	%
Savings & money market		1,267,174		1,200			0.38	%		1,131,391		580		0.21	%		1,417,181		3,663		1.03	%		1,209,991		651			0.21	%
Time deposits		278,101		500			0.72	%		175,612		294		0.67	%		361,325		1,180		1.30	%		161,300		235			0.58	%
Total interest-bearing deposits		1,934,838		1,844			0.38	%		1,605,449		920		0.23	%		2,140,006		5,021		0.93	%		1,688,066		934			0.22	%
FHLB advances and other borrowings		53,179		105			0.79	%		44		2		18.23	%		1,357		10		2.92	%		-		-			0.00	%
Subordinated debentures		36,143		405			4.49	%		36,035		379		4.22	%		36,169		449		4.93	%		36,062		380			4.18	%
Total interest-bearing liabilities		2,024,160		2,354			0.47	%		1,641,528		1,301		0.32	%		2,177,532		5,480		1.00	%		1,724,128		1,314			0.30	%
Noninterest-bearing liabilities		833,943								688,576							858,202							753,901
Shareholders’ equity		281,648								244,084							288,542							256,668
Total liabilities and shareholders’ equity	$	3,139,751							$	2,574,188						$	3,324,276						$	2,734,697
Net interest spread							3.19	%						3.39	%						2.88	%							3.28	%
Net interest income (tax equivalent) / margin			$	24,896			3.35	%			$	21,447		3.50	%			$	25,471		3.19	%			$	22,188			3.38	%
Less: tax-equivalent adjustment⁽²⁾				(12	)							17							17							(16	)
Net interest income			$	24,884							$	21,430						$	25,454						$	22,172

(1)

Annualized for the three month period.

(2)

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

(3)

Includes mortgage loans held for sale.

~~Table of Contents~~

Our net interest margin (TE) decreased 1519 basis points to ~~3.35%~~3.19% during the ~~second~~third quarter of 2022, compared to the ~~second~~third quarter of 2021, primarily due to ~~a reduction~~higher costs on our interest-bearing liabilities, partially offset by an increase in yield on our interest-earning ~~assets combined with higher costs on our interest-bearing liabilities.~~assets. Our average interest-earning assets grew by $528.7 million during the second quarter of 2022, while the average yield on these assets decreased by five basis points to 3.66% during the same period. In addition, our average interest-bearing liabilities grew by ~~$382.6~~$453.4 million during the ~~second~~third quarter of 2022, while the rate on these liabilities increased 1570 basis points to ~~0.47%~~1.00%. In contrast, our average interest-earning assets grew by $563.3 million during the third quarter of 2022, however, the average yield on these assets increased by 30 basis points to 3.88% during the same period.

The increase in average interest-earning assets for the ~~second~~third quarter of 2022 related primarily to an increase of ~~$555.0~~$589.9 million in our average loan balances. The ~~decrease~~30-basis point increase in yield on our interest-earning assets was driven by a 1912 basis point ~~decrease~~increase in loan yield as our loan portfolio has repriced at rates ~~lower~~higher than ~~historic rates~~historical for the majority of the past 12 months. Following the Federal Reserve’s recent interest rate hikes, our loan yield has begun to increase, resulting in a ~~five basis~~19-basis point gain from ~~3.77%~~3.82% in the ~~first~~second quarter of 2022.

The increase in our average interest-bearing liabilities during the ~~second~~third quarter of 2022 resulted primarily from a ~~$329.4~~$451.9 million increase in our interest-bearing deposits, ~~and a $53.1 million increase in FHLB advances and other borrowings,~~ while the ~~15 basis~~70-basis point increase in rate on our interest-bearing liabilities resulted primarily from a ~~15 basis~~71-basis point increase in deposit rates.

Our net interest spread was ~~3.19%~~2.88% for the ~~second~~third quarter of 2022 compared to ~~3.39%~~3.28% for the same period in 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 the yield on our interest-earning assets and the~~70-basis point increase in the rate on our interest-bearing liabilities ~~resulted~~was partially offset by a 30 basis point increase in yield on our interest-bearing assets, resulting in a 2040 basis point decrease in our net interest spread for the 2022 period. We anticipate continued pressure on our net interest spread and net interest margin in future periods as a significant portion of our loan portfolio is at fixed rates which do not move with the Federal Reserve’s interest rate increases, while our deposit accounts reprice much more quickly.

~~Table of Contents~~

Table of Contents

Average Balances, Income and Expenses, Yields and Rates


	For the Nine Months Ended September 30,
	2022								2021
(dollars in thousands)	Average Balance		Income/ Expense			Yield/ Rate⁽¹⁾			Average Balance		Income/ Expense			Yield/ Rate⁽¹⁾
Interest-earning assets
Federal funds sold and interest-bearing deposits with banks	$	97,479	$	915			1.25	%	$	118,417	$	167			0.19	%
Investment securities, taxable		100,947		1,278			1.69	%		87,981		759			1.15	%
Investment securities, nontaxable⁽²⁾		10,811		195			2.41	%		11,197		217			2.59	%
Loans⁽³⁾		2,771,546		80,294			3.87	%		2,267,611		67,938			4.01	%
Total interest-earning assets		2,980,783		82,682			3.71	%		2,485,206		69,081			3.72	%
Noninterest-earning assets		155,511								117,679
Total assets	$	3,136,294							$	2,602,885
Interest-bearing liabilities
NOW accounts	$	385,543		437			0.15	%	$	298,785		141			0.06	%
Savings & money market		1,309,502		5,481			0.56	%		1,142,409		1,817			0.21	%
Time deposits		266,791		1,855			0.93	%		183,239		1,051			0.77	%
Total interest-bearing deposits		1,961,836		7,773			0.53	%		1,624,433		3,009			0.25	%
FHLB advances and other borrowings		23,665		129			0.73	%		941		4			0.57	%
Subordinated debentures		36,143		1,233			4.56	%		36,035		1,143			4.24	%
Total interest-bearing liabilities		2,021,644		9,135			0.60	%		1,661,409		4,156			0.33	%
Noninterest-bearing liabilities		831,684								697,533
Shareholders’ equity		282,966								243,943
Total liabilities and shareholders’ equity	$	3,136,294							$	2,602,885
Net interest spread							3.11	%							3.39	%
Net interest income (tax equivalent) / margin			$	73,547			3.30	%			$	64,925			3.49	%
Less: tax-equivalent adjustment⁽²⁾				(45	)							(50	)
Net interest income			$	73,502							$	64,875

(1)

Annualized for the nine month period.

(2)

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

(3)

Includes mortgage loans held for sale.

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

During the first ~~six~~nine months of 2022, our net interest margin (TE) decreased by 19 basis points to ~~3.36%~~3.30%, compared to ~~3.55%~~3.49% for the first ~~six~~nine months of 2021, driven by the ~~decrease~~increase in ~~yield on our interest-earning assets, combined with the higher~~ yield on our interest-bearing liabilities. Our average interest-bearing liabilities grew by $360.2 million, while the rate on these liabilities increased 27 basis points to 0.60%. In addition, our average interest-earning assets grew by ~~$461.2~~$495.6 million from the prior year, with the average yield decreasing by 18one basis ~~points~~point to ~~3.61%~~3.71%. ~~In addition, our average interest-bearing liabilities grew by $312.5 million, while the rate on these liabilities increased three basis points to 0.38%.~~

The increase in average interest-earning assets for the first ~~half~~nine months of 2022 related primarily to a ~~$460.3~~$503.9 million increase in our average loan balances. The decrease in yield on our interest-earning assets was driven by a ~~27 basis~~14-basis point decrease in our loan yield ~~primarily~~as new and renewed loans were repriced at lower rates related to the interest rate reductions by the Federal Reserve which occurred during 2020. Recently, the yield on our loan portfolio has begun to increase as the Federal Reserve has raised interest rates by ~~150~~300 basis points during the first ~~six~~nine months of 2022.

~~Table of Contents~~

The increase in average interest-bearing liabilities for the first ~~half~~nine months of 2022 was driven by an increase in interest-bearing deposits of ~~$278.8~~$337.4 million and a ~~$33.6~~$22.7 million increase in FHLB advances and other borrowings, while the increase in cost was driven by a ~~five basis~~28-basis point increase on our interest-bearing deposits.

Our net interest spread was ~~3.23%~~3.11% for the first ~~half~~nine months of 2022 compared to ~~3.44%~~3.39% for the same period in 2021. The ~~21 basis~~28-basis point decrease in our net interest spread was driven by the ~~18 basis~~27-basis point ~~decrease~~increase in yield on our ~~interest-earning assets.~~interest-bearing liabilities.

Table of Contents

Rate/Volume Analysis

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


	Three Months Ended
	September 30, 2022 vs. 2021											September 30, 2021 vs. 2020
	Increase (Decrease) Due to											Increase (Decrease) Due to
(dollars in thousands)	Volume			Rate			Rate/ Volume			Total		Volume			Rate			Rate/ Volume			Total
Interest income
Loans	$	5,674			815			200			6,689	$	2,898			(2,556	)		(321	)		21
Investment securities		(9	)		164			(4	)		151		73			(23	)		(5	)		45
Federal funds sold and interest-bearing deposits with banks		(11	)		740			(121	)		608		(6	)		13			(2	)		5
Total interest income		5,654			1,719			75			7,448		2,965			(2,566	)		(328	)		71
Interest expense
Deposits		217			3,142			728			4,087		276			(1,556	)		(179	)		(1,459	)
FHLB advances and other borrowings		-			-			10			10		-			-			-			-
Subordinated debentures		1			68			-			69		1			(6	)		-			(5	)
Total interest expense		218			3,210			738			4,166		277			(1,562	)		(179	)		(1,464	)
Net interest income	$	5,436			(1,491	)		(663	)		3,282	$	2,688			(1,004	)		(149	)		1,535

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

Net interest income, the largest component of our income, was ~~$24.9~~$25.5 million for the ~~second~~third quarter of 2022 and ~~$21.4~~$22.2 million for the ~~second~~third quarter of 2021, a ~~$3.5~~$3.3 million, or ~~16.2%~~14.8%, ~~increase.~~increase year over year. The increase during 2022 was driven by a ~~$4.5~~$7.4 million increase in interest income primarily due to higher volume of loans. In addition, interest expense increased by ~~$1.1~~$4.2 million primarily due to an increase in ~~volume of FHLB advances and other borrowings at decreased rates.~~rates on our interest-bearing deposits.

	Nine Months Ended
	September 30, 2022 vs. 2021											September 30, 2021 vs. 2020
	Increase (Decrease) Due to											Increase (Decrease) Due to
(dollars in thousands)	Volume			Rate			Rate/ Volume			Total		Volume			Rate			Rate/ Volume			Total
Interest income
Loans	$	16,300			(3,180	)		(764	)		12,356	$	4,994			(6,565	)		(454	)		(2,025	)
Investment securities		146			307			49			502		281			(354	)		(91	)		(164	)
Federal funds sold and interest-bearing deposits with banks		(11	)		813			(54	)		748		3			(53	)		(1	)		(51	)
Total interest income		16,435			(2,060	)		(769	)		13,606		5,278			(6,972	)		(546	)		(2,240	)
Interest expense
Deposits		719			3,265			780			4,764		966			(8,425	)		(727	)		(8,186	)
FHLB advances and other borrowings		63			3			59			125		(324	)		(220	)		212			(332	)
Subordinated debentures		4			86			-			90		3			(93	)		-			(90	)
Total interest expense		786			3,354			839			4,979		645			(8,738	)		(515	)		(8,608	)
Net interest income	$	15,649			(5,414	)		(1,608	)		8,627	$	4,633			1,766			(31	)		6,368

~~Table of Contents~~

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

Net interest income for the first ~~half~~nine months of 2022 was ~~$48.0~~$73.5 million compared to ~~$42.7~~$64.9 million for 2021, ~~a $5.3~~an $8.6 million, or ~~12.5%~~13.3%, increase. The increase in net interest income during 2022 was driven by a ~~$6.2~~$13.6 million increase in interest income, related primarily to loan growth.

Provision for Credit Losses

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

Table of Contents

We recorded a ~~$1.8 million~~$950,000 provision for credit losses in the ~~second~~third quarter of 2022, compared to a ~~$1.9~~$6.0 million reversal of provision expense in the ~~second~~third quarter of 2021. We recorded a provision expense of ~~$2.9~~$3.8 million and a provision reversal of ~~$2.2~~$8.2 million for the ~~six~~nine months ended ~~June~~September 30, 2022 and ~~June~~September 30, 2021, respectively. The ~~$1.8 million~~$950,000 provision in 2022, which included a ~~$250,000~~$425,000 provision for unfunded commitments, was driven by ~~$184.5~~$184.8 million in loan growth during the ~~second~~third quarter, combined with a ~~$52.2~~$102.3 million increase in unfunded commitments. The ~~$2.9~~$3.8 million provision expense for the first ~~half~~nine months of 2022 included a ~~$330,000~~$755,000 provision for unfunded commitments. The prior year reversals of provision expense related to a reduction in qualitative adjustment factors driven by the overall improvement in economic conditions as well as improvement in the credit quality of our portfolio following the pandemic.

36Noninterest Income

~~Table of Contents~~

~~Noninterest Income~~

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

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


	Three months ended September 30,				Nine months ended September 30,
(dollars in thousands)	2022		2021		2022			2021
Mortgage banking income	$	1,230		2,829		3,907			9,445
Service fees on deposit accounts		194		199		594			557
ATM and debit card income		559		542		1,651			1,532
Income from bank owned life insurance		315		321		945			919
Net lender and referral fees on PPP loans		-		-		-			268
Loss on disposal of fixed assets		-		-		(394	)		-
Other income		382		348		1,170			1,043
Total noninterest income	$	2,680		4,239		7,873			13,764

Noninterest income decreased ~~$1.4~~$1.6 million, or ~~37.5%~~36.8%, for the ~~second~~third quarter of 2022 as compared to the same period in 2021. The decrease in total noninterest income resulted primarily from the following:

●

Mortgage banking income decreased by ~~$799,000,~~$1.6 million, or ~~40.3%~~56.5%, 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.

●

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

●

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

Noninterest income decreased ~~$4.3~~$5.9 million, or ~~45.5%~~42.8%, during the first ~~half~~nine months of 2022 as compared to 2021. The decrease in total noninterest income resulted primarily from decreases in mortgage banking income and the disposal of fixed assets from our prior headquarters building.

Noninterest expenses

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


	Three months ended June 30,				Six months ended June 30,				Three months ended September 30,					Nine months ended September 30,
(dollars in thousands)	2022		2021		2022		2021		2022		2021			2022		2021
Compensation and benefits	$	9,915		8,724		19,371		17,834	$	9,843		9,064			29,214		26,897
Occupancy		2,219		1,552		3,997		3,190		2,442		1,685			6,439		4,875
Real estate owned expenses		-		1		-		388
Real estate owned (income) expenses										-		(3	)		-		385
Outside service and data processing costs		1,528		1,391		3,062		2,704		1,529		1,368			4,591		4,072
Insurance		367		262		628		563		507		244			1,134		807
Professional fees		693		615		1,292		1,210		555		694			1,848		1,905
Marketing		329		208		596		398		338		247			934		645
Other		737		742		1,528		1,370		832		740			2,360		2,109
Total noninterest expense	$	15,788		13,495		30,474		27,657	$	16,046		14,039			46,520		41,695

Table of Contents

Noninterest expense was ~~$15.8~~$16.0 million for the ~~second~~third quarter of 2022, a ~~$2.3~~$2.0 million, or ~~17.0%~~14.3%, increase from noninterest expense of ~~$13.5~~$14.0 million for the ~~second~~third quarter of 2021. The increase in noninterest expense was driven primarily by the following:

●

Compensation and benefits expense increased ~~$1.2 million,~~$779,000, or ~~13.7%~~8.6%, relating primarily to annual salary increases and compensation and benefits expense related to the hiring of new team members.

●

Occupancy costs increased ~~$667,000,~~$757,000, or ~~43.0%~~44.9%, driven by costs associated with the relocation of our headquarters, as well as increased rent expense and depreciation on our new office in Charlotte, North Carolina, ~~as well as additional costs associated with~~and the ~~relocation~~expansion of our ~~headquarters.~~Summerville office.

●

Insurance costs increased ~~$105,000,~~$263,000, or ~~40.1%~~107.8%, during the ~~second~~third quarter of 2022 ~~related to~~driven by higher FDIC insurance premiums.

●

Outside service and data processing costs increased ~~$137,000,~~$161,000, or ~~9.8%~~11.8%, during the ~~second~~third quarter of 2022 related to increased item processing, ~~and~~ electronic banking costs, ~~due to increased transactions.~~and ATM card related expenses which are primarily driven by transaction volume.

●

Marketing expenses increased ~~$121,000,~~$91,000, or ~~58.2%~~36.8%, due to an increase in community outreach and sponsorships.

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

Noninterest expense was ~~$30.5~~$46.5 million for the first ~~half~~nine months of 2022, a ~~$2.8~~$4.8 million, or ~~10.2%~~11.6%, increase from noninterest expense of ~~$27.7~~$41.7 million for the first ~~half~~nine months of 2021. The increase in noninterest expense was driven primarily by increases in compensation and benefits, occupancy, outside services and data processing costs and marketing expenses as discussed above. Partially offsetting these increases was a decrease in real estate owned expenses during the 2022 period.

Our efficiency ratio was ~~58.2%~~57.0% for the ~~second~~third quarter of 2022, compared to ~~53.9%~~53.2% for the ~~second~~third quarter of 2021 and 57.2% for the first ~~half~~nine months of 2022 compared to 53.0% for the first ~~half~~nine months of 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 higher ratio during the ~~second~~third quarter of 2022, compared to the ~~second~~third quarter of 2021, relates primarily to the decrease in mortgage banking ~~income.~~income, combined with higher noninterest expenses.

We incurred income tax expense of ~~$2.3~~$2.7 million and ~~$3.1~~$4.4 million for the three months ended ~~June~~September 30, 2022 and 2021, respectively, and ~~$4.7~~$7.4 million and ~~$6.1~~$10.4 million for the ~~six~~nine months ended ~~June~~September 30, 2022 and 2021, respectively. Our effective tax rate was ~~23.5%~~23.9% and ~~22.7%~~23.1% for the ~~six~~nine months ended ~~June~~September 30, 2022 and 2021, respectively. The higher tax rate during the first ~~six~~nine months of 2022 relates to the lesser impact of equity compensation transactions during the period.

Balance Sheet Review

Investment Securities

At ~~June~~September 30, 2022, the ~~$104.1~~$97.0 million in our investment securities portfolio represented approximately ~~3.2%~~2.8% of our total assets. Our available for sale investment portfolio included corporate bonds, US treasuries, US government agency securities, state and political subdivisions, asset-backed securities and mortgage-backed securities with a fair value of ~~$99.0~~$91.5 million and an amortized cost of ~~$111.8~~$109.3 million, resulting in an unrealized loss of ~~$12.8~~$17.7 million. At December 31, 2021, the $124.3 million in our investment securities portfolio represented approximately 4.2% of our total assets, including investment securities with a fair value of $120.3 million and an amortized cost of $121.2 million for an unrealized loss of $937,000.

38Loans

~~Table of Contents~~

~~Loans~~

Since loans typically provide higher interest yields than other types of interest earning assets, a substantial percentage of our earning assets are invested in our loan portfolio. Average loans, excluding mortgage loans held for sale, for the ~~six~~nine months ended ~~June~~September 30, 2022 and 2021 were ~~$2.67~~$2.76 billion and ~~$2.21~~$2.23 billion, respectively. Before the allowance for credit losses, total loans outstanding at ~~June~~September 30, 2022 and December 31, 2021 were ~~$2.85~~$3.03 billion and $2.49 billion, respectively.

Table of Contents

The principal component of our loan portfolio is loans secured by real estate mortgages. As of ~~June~~September 30, 2022, our loan portfolio included ~~$2.43~~$2.58 billion, or ~~85.3%~~85.2%, of real estate loans, compared to $2.13 billion, or 85.5%, at December 31, 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 ~~$161.5~~$171.9 million as of ~~June~~September 30, 2022, of which approximately 50% were in a first lien position, while the remaining balance was second liens. At December 31, 2021, our home equity lines of credit totaled $154.8 million, of which approximately 49% were in first lien positions, while the remaining balance was in second liens. The average home equity loan had a balance of approximately ~~$80,000~~$83,000 and a loan to value of ~~71%~~72% as of ~~June~~September 30, 2022, compared to an average loan balance of $81,000 and a loan to value of approximately 62% as of December 31, 2021. Further, ~~0.87%~~0.72% and 1.0% of our total home equity lines of credit were over 30 days past due as of ~~June~~September 30, 2022 and December 31, 2021, respectively.

Following is a summary of our loan composition at ~~June~~September 30, 2022 and December 31, 2021. During the first ~~six~~nine months of 2022, our loan portfolio increased by ~~$355.3~~$540.2 million, or ~~14.3%~~21.7%, with a ~~13.8%~~20.9% increase in commercial loans while consumer loans increased by ~~15.1%~~23.0% during the period. The majority of the increase was in loans secured by real estate. Our consumer real estate portfolio grew by ~~$117.7~~$179.1 million and includes high quality 1-4 family consumer real estate loans. Our average consumer real estate loan currently has a principal balance of ~~$468,000,~~$471,000, a term of 22 years, and an average rate of ~~3.48%~~3.53% as of ~~June~~September 30, 2022, compared to a principal balance of $454,000, a term of 21 years, and an average rate of 3.47% as of December 31, 2021.


	June 30, 2022						December 31, 2021						September 30, 2022						December 31, 2021
(dollars in thousands)	Amount			% of Total			Amount			% of Total			Amount			% of Total			Amount			% of Total
Commercial
Owner occupied RE	$	551,544			19.39	%	$	488,965			19.6	%	$	572,972			18.9	%	$	488,965			19.6	%
Non-owner occupied RE		741,263			26.05	%		666,833			26.8	%		799,569			26.4	%		666,833			26.8	%
Construction		84,612			2.97	%		64,425			2.6	%		85,850			2.8	%		64,425			2.6	%
Business		389,790			13.70	%		333,049			13.4	%		419,312			13.8	%		333,049			13.4	%
Total commercial loans		1,767,209			62.11	%		1,553,272			62.4	%		1,877,703			61.9	%		1,553,272			62.4	%
Consumer
Real estate		812,130			28.54	%		694,401			27.9	%		873,471			28.8	%		694,401			27.9	%
Home equity		161,512			5.68	%		154,839			6.2	%		171,904			5.7	%		154,839			6.2	%
Construction		76,878			2.70	%		59,846			2.4	%		77,798			2.6	%		59,846			2.4	%
Other		27,476			0.97	%		27,519			1.1	%		29,151			1.0	%		27,519			1.1	%
Total consumer loans		1,077,996			37.89	%		936,605			37.6	%		1,152,324			38.1	%		936,605			37.6	%
Total gross loans, net of deferred fees		2,845,205			100.0	%		2,489,877			100.0	%		3,030,027			100.0	%		2,489,877			100.0	%
Less—allowance for credit losses		(34,192	)					(30,408	)					(36,317	)					(30,408	)
Total loans, net	$	2,811,013					$	2,459,469					$	2,993,710					$	2,459,469

~~Table of Contents~~

Nonperforming assets

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

Table of Contents

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


(dollars in thousands)	June 30, 2022		December 31, 2021		September 30, 2022		December 31, 2021
Commercial	$	259		270	$	332		270
Consumer		383		1,642		197		1,642
Nonaccruing troubled debt restructurings		2,289		2,952		2,086		2,952
Total nonaccrual loans		2,931		4,864		2,615		4,864
Other real estate owned		-		-		-		-
Total nonperforming assets	$	2,931		4,864	$	2,615		4,864

At ~~June~~September 30, 2022, nonperforming assets were ~~$2.9~~$2.6 million, or ~~0.09%~~0.08% of total assets and ~~0.10%~~0.09% of gross loans. Comparatively, nonperforming assets were $4.9 million, or 0.17% of total assets and 0.20% of gross loans at December 31, 2021. Nonaccrual loans decreased ~~$1.9~~$2.2 million during the first ~~six~~nine months of 2022 due primarily to ~~$724,000~~$1.5 million of loans paid or charged off and ~~$1.1~~$1.4 million of loans ~~returning~~returned to accruing status.

The amount of foregone interest income on nonaccrual loans in the first ~~six~~nine months of 2022 and 2021 was not material. At ~~June~~September 30, 2022 and 2021, the allowance for credit losses represented ~~1,166.70%~~1,388.87% and ~~619.47%~~259.95% of the total amount of nonperforming loans, respectively. A significant portion, or approximately ~~92%~~97%, of nonperforming loans at ~~June~~September 30, 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.

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

In addition, at ~~June~~September 30, 2022, ~~85.3%~~85.2% of our loans were collateralized by real estate and ~~92.2%~~97.0% 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 ~~June~~September 30, 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.

~~Table of Contents~~

At ~~June~~September 30, 2022, impaired loans totaled ~~$5.0~~$7.2 million, for which ~~$4.7~~$5.5 million of these loans had a reserve of approximately ~~$1.0~~$1.3 million allocated in the allowance. During the first ~~six~~nine months of 2022, the average recorded investment in impaired loans was approximately ~~$7.0~~$7.5 million. Comparatively, impaired loans totaled $8.2 million at December 31, 2021 for which $2.9 million of these loans had a reserve of approximately $836,000 allocated in the allowance. During 2021, the average recorded investment in impaired loans was approximately $12.5 million.

We consider a loan to be a TDR when the debtor experiences financial difficulties and we provide concessions such that we will not collect all principal and interest in accordance with the original terms of the loan agreement. Concessions can relate to the contractual interest rate, maturity date, or payment structure of the note. As part of our workout plan for individual loan relationships, we may restructure loan terms to assist borrowers facing challenges in the current economic environment. As of ~~June~~September 30, 2022, we determined that we had loans totaling ~~$5.8~~$6.8 million that we considered TDRs compared to $6.3 million as of December 31, 2021.

Table of Contents

Allowance for Credit Losses

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

The allowance for credit losses was ~~$34.2~~$36.3 million, representing 1.20% of outstanding loans and providing coverage of ~~1,166.7%~~1,388.87%, of nonperforming loans at ~~June~~September 30, 2022 compared to $30.4 million, or 1.22% of outstanding loans and 625.22% of nonperforming loans at December 31, 2021. At ~~June~~September 30,, 2021, the allowance for loan losses was ~~$41.9~~$36.1 million, or ~~1.86%~~1.51% of outstanding loans and ~~619.47%~~259.95% of nonperforming loans. The adoption of CECL on January 1, 2022 increased the allowance for credit losses by $1.5 million. In addition, we recorded a provision for credit losses of ~~$1.5 million~~$525,000 during the ~~second~~third quarter of 2022 driven by the growth in our loan portfolio.

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

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

Deposits and Other Interest-Bearing Liabilities

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

~~Table of Contents~~

Our retail deposits represented ~~$2.68~~$2.83 billion, or ~~93.5%~~94.2% of total deposits, while our wholesale deposits represented ~~$187.5~~$175.1 million, or ~~6.5%~~5.8%, of total deposits at ~~June~~September 30, 2022. At December 31, 2021, retail deposits represented $2.56 billion, or 100%, of our total deposits. Our loan-to-deposit ratio was ~~99%~~101% at ~~June~~September 30, 2022 and 97% at December 31, 2021.

The following is a detail of our deposit accounts:


	June 30,		December 31,		September 30,		December 31,
(dollars in thousands)	2022		2021		2022		2021
Non-interest bearing	$	799,169		768,650	$	791,050		768,650
Interest bearing:
NOW accounts		364,189		401,788		357,863		401,788
Money market accounts		1,320,329		1,201,099		1,452,958		1,201,099
Savings		41,944		39,696		42,335		39,696
Time, less than $250,000		62,340		68,179		79,386		68,179
Time and out-of-market deposits, $250,000 and over		282,187		84,414		277,860		84,414
Total deposits	$	2,870,158		2,563,826	$	3,001,452		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 ~~$2.59~~$2.72 billion and $2.48 billion at ~~June~~September 30, 2022, and December 31, 2021, respectively.

Table of Contents

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


	Six months ended June 30,										Nine months ended September 30,
	2022					2021					2022					2021
(dollars in thousands)	Amount		Rate			Amount		Rate			Amount		Rate			Amount		Rate
Noninterest-bearing demand deposits	$	769,844		0.00	%	$	621,934		0.00	%	$	781,303		0.00	%	$	648,930		0.00	%
Interest-bearing demand deposits		397,763		0.13	%		289,640		0.06	%		385,543		0.15	%		298,785		0.06	%
Money market accounts		1,214,062		0.30	%		1,077,309		0.22	%		1,268,039		0.58	%		1,110,579		0.22	%
Savings accounts		40,707		0.05	%		30,750		0.05	%		41,463		0.05	%		31,830		0.05	%
Time deposits less than $100,000		23,406		0.30	%		32,393		0.52	%		24,519		0.45	%		39,136		0.48	%
Time deposits greater than $100,000		195,334		0.39	%		161,997		0.91	%		242,272		0.40	%		144,103		0.87	%
Total deposits	$	2,641,116		0.19	%	$	2,214,023		0.19	%	$	2,743,139		0.33	%	$	2,273,363		0.18	%

During the first ~~six~~nine months of 2022, our average transaction account balances increased by ~~$427.1~~$386.2 million, or ~~19.3%~~18.5%, from the prior year, while our average time deposit balances increased by ~~$24,000,~~$84,000, or ~~12.5%~~45.6%.

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


(dollars in thousands)	June 30, 2022		September 30, 2022
Three months or less	$	125,510	$	130,449
Over three through six months		69,975		104,180
Over six through twelve months		74,329		29,773
Over twelve months		12,373		13,458
Total	$	282,187	$	277,860

Time deposits that meet or exceed the FDIC insurance limit of $250,000 at ~~June~~September 30, 2022 and December 31, 2021 were ~~$282.2~~$283.4 million and $84.4 million, respectively.

~~Table of Contents~~

Liquidity and Capital Resources

Liquidity represents the ability of a company to convert assets into cash or cash equivalents without significant loss, and the 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.

At ~~June~~September 30, 2022 and December 31, 2021 our cash and cash equivalents totaled ~~$182.1~~$160.6 million and $167.2 million, respectively, or ~~5.5%~~4.7% and 5.7% of total assets, respectively. Our investment securities at ~~June~~September 30 2022 and December 31, 2021 amounted to ~~$104.1~~$97.0 million and $124.3 million, respectively, or ~~3.2%~~2.8% and 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 ~~June~~September 30, 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 ~~June~~September 30, 2022 was ~~$556.6~~$618.9 million, based primarily on the Bank’s qualifying mortgages available to secure any future borrowings. However, we are able to pledge additional securities to the FHLB in order to increase our available borrowing capacity. In addition, at ~~June~~September 30, 2022 and December 31, 2021 we had ~~$315.2~~$307.5 million and $254.5 million, respectively, of letters of credit outstanding with the FHLB to secure client deposits.

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We also have a line of credit with another financial institution for $15.0 million, which was unused at ~~June~~September 30, 2022. The line of credit was renewed on December 21, 2021 at an interest rate of One Month CME Term SOFR plus 3.5% and a maturity date of December 20, 2023.

We believe that our existing stable base of core deposits, federal funds purchased lines of credit with correspondent banks, and borrowings from the FHLB will enable us to successfully meet our long-term liquidity needs. However, as short-term liquidity needs arise, we have the ability to sell a portion of our investment securities portfolio to meet those needs.

Total shareholders’ equity was ~~$282.6~~$287.8 million at ~~June~~September 30, 2022 and $277.9 million at December 31, 2021. The ~~$4.7~~$9.9 million increase from December 31, 2021 is primarily related to net income of ~~$15.2~~$23.6 million during the first ~~six~~nine months of 2022 and stock option exercises and equity compensation expenses of ~~$1.7~~$2.3 million, partially offset by a ~~$9.4~~$13.3 million decrease in other comprehensive 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.

~~Table of Contents~~

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


	June 30, 2022			December 31, 2021			September 30, 2022			December 31, 2021
Return on average assets		1.01	%		1.75	%		1.01	%		1.75	%
Return on average equity		10.95	%		18.64	%		11.16	%		18.64	%
Return on average common equity		10.95	%		18.64	%		11.16	%		18.64	%
Average equity to average assets ratio		9.21	%		9.39	%		9.02	%		9.39	%
Tangible common equity to assets ratio		8.60	%		9.50	%		8.37	%		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, which we refer to Basel III, impose minimum capital requirements for bank holding companies and banks. The Basel III rules apply to all national and state banks and savings associations regardless of size and bank holding companies and savings and loan holding companies other than “small bank holding companies,” generally holding companies with consolidated assets of less than $3 billion (such as the Company). Although we had over $3 billion in assets at ~~June~~September 30, 2022, under Federal Reserve guidance, the Company will maintain its status as a “small bank holding company” until 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.

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To be considered “well-capitalized” for purposes of certain rules and prompt corrective action requirements, the Bank must maintain a minimum total risked-based capital ratio of at least 10%, a total Tier 1 capital ratio of at least 8%, a common equity Tier 1 capital ratio of at least 6.5%, and a leverage ratio of at least 5%. As of ~~June~~September 30, 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.


	June 30, 2022																				September 30, 2022
	Actual					For capital adequacy purposes minimum plus the capital conservation buffer					To be well capitalized under prompt corrective action provisions minimum					Actual					For capital adequacy purposes minimum plus the capital conservation buffer					To be well capitalized under prompt corrective action provisions minimum
(dollars in thousands)	Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio
Total Capital (to risk weighted assets)	$	347,708		13.45	%	$	271,451		10.50	%	$	258,525		10.00	%	$	358,442		13.09	%	$	287,578		10.50	%	$	273,884		10.00	%
Tier 1 Capital (to risk weighted assets)		315,369		12.20	%		219,746		8.50	%		206,820		8.00	%		324,181		11.84	%		232,802		8.50	%		219,107		8.00	%
Common Equity Tier 1 Capital (to risk weighted assets)		315,369		12.20	%		180,967		7.00	%		168,041		6.50	%		324,181		11.84	%		191,719		7.00	%		178,025		6.50	%
Tier 1 Capital (to average assets)		315,369		10.01	%		125,964		4.00	%		157,455		5.00	%		324,181		9.72	%		133,432		4.00	%		166,790		5.00	%


	December 31, 2021
	Actual					For capital adequacy purposes minimum plus the capital conservation buffer					To be well capitalized under prompt corrective action provisions minimum
(dollars in thousands)	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total Capital (to risk weighted assets)	$	331,052		14.36	%	$	242,048		10.50	%	$	230,522		10.00	%
Tier 1 Capital (to risk weighted assets)		302,217		13.11	%		195,944		8.50	%		184,418		8.00	%
Common Equity Tier 1 Capital (to risk weighted assets)		302,217		13.11	%		161,365		7.00	%		149,839		6.50	%
Tier 1 Capital (to average assets)		302,217		10.55	%		114,537		4.00	%		143,172		5.00	%

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


			September 30, 2022
	Actual					For capital adequacy purposes minimum plus the capital conservation buffer ⁽¹⁾					To be well capitalized under prompt corrective action provisions minimum
(dollars in thousands)	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total Capital (to risk weighted assets)	$	372,055		13.58	%	$	287,578		10.50	%		N/A		N/A
Tier 1 Capital (to risk weighted assets)		314,794		11.49	%		232,802		8.50	%		N/A		N/A
Common Equity Tier 1 Capital (to risk weighted assets)		301,794		11.02	%		191,719		7.00	%		N/A		N/A
Tier 1 Capital (to average assets)		314,794		9.44	%		133,450		4.00	%		N/A		N/A

June 30, 2022
Actual For capital
adequacy purposes
minimum plus the
capital conservation
buffer ⁽¹⁾ To be well capitalized
under prompt
corrective
action provisions
minimum
(dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
Total Capital (to risk weighted assets) $ 361,119 13.97 % $ 271,451 10.50 % N/A N/A
Tier 1 Capital (to risk weighted assets) 305,780 11.83 % 219,746 8.50 % N/A N/A
Common Equity Tier 1 Capital (to risk weighted assets) 292,780 11.33 % 180,967 7.00 % N/A N/A
Tier 1 Capital (to average assets) 305,780 9.71 % 125,980 4.00 % N/A N/A


			December 31, 2021
	Actual					For capital adequacy purposes minimum plus the capital conservation buffer ⁽¹⁾					To be well capitalized under prompt corrective action provisions minimum
(dollars in thousands)	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total Capital (to risk weighted assets)	$	343,476		14.90	%	$	242,048		10.50	%		N/A		N/A
Tier 1 Capital (to risk weighted assets)		291,641		12.65	%		195,944		8.50	%		N/A		N/A
Common Equity Tier 1 Capital (to risk weighted assets)		278,641		12.09	%		161,365		7.00	%		N/A		N/A
Tier 1 Capital (to average assets)		291,641		10.18	%		114,555		4.00	%		N/A		N/A

December 31, 2021
Actual For capital
adequacy purposes
minimum plus the
capital conservation
buffer ⁽¹⁾ To be well capitalized
under prompt
corrective
action provisions
minimum
(dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
Total Capital (to risk weighted assets) $ 343,476 14.90 % $ 242,048 10.50 % N/A N/A
Tier 1 Capital (to risk weighted assets) 291,641 12.65 % 195,944 8.50 % N/A N/A
Common Equity Tier 1 Capital (to risk weighted assets) 278,641 12.09 % 161,365 7.00 % N/A N/A
Tier 1 Capital (to average assets) 291,641 10.18 % 114,555 4.00 % N/A N/A

⁽¹⁾

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

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The ability of the Company to pay cash dividends 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.

~~Table of Contents~~

Effect of Inflation and Changing Prices

The effect of relative purchasing power over time due to inflation has not been taken into account in our consolidated financial statements. Rather, our financial statements have been prepared on an historical cost basis in accordance with generally accepted accounting principles.

Unlike most industrial companies, our assets and liabilities are primarily monetary in nature. Therefore, the effect of changes in interest rates will have a more significant impact on our performance than will the effect of changing prices and inflation in general. In addition, interest rates may generally increase as the rate of inflation increases, although not necessarily in the same magnitude. As discussed previously, we seek to manage the relationships between interest sensitive assets and liabilities in order to protect against wide rate fluctuations, including those resulting from inflation.

Off-Balance Sheet Risk

Commitments to extend credit are agreements to lend money to a client as long as the client has not violated any material condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require the payment of a fee. At ~~June~~September 30, 2022, unfunded commitments to extend credit were ~~$738.6~~$840.9 million, of which ~~$273.8~~$315.1 million were at fixed rates and ~~$465.0~~$525.8 million were at variable rates. At December 31, 2021, unfunded commitments to extend credit were $618.7 million, of which approximately $205.4 million were at fixed rates and $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 ~~June~~September 30, 2022, the reserve for unfunded commitments was ~~$2.3~~$2.8 million or ~~0.32%~~0.33% of total unfunded commitments.

At ~~June~~September 30, 2022 and December 31, 2021, there were commitments under letters of credit for ~~$12.3~~$12.6 million and $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.

Critical Accounting Estimates

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

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

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

●

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

●

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

●

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

●

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

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

Accounting, Reporting, and Regulatory Matters

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

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

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

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

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

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As of ~~June~~September 30, 2022, the following table summarizes the forecasted impact on net interest income using a base case scenario given upward and downward movements in interest rates of 100, 200, and 300 basis points based on forecasted assumptions of prepayment speeds, nominal interest rates and loan and deposit repricing rates. Estimates are based on current economic conditions, historical interest rate cycles and other factors deemed to be relevant. However, underlying assumptions may be impacted in future periods which were not known to management at the time of the issuance of the Consolidated Financial Statements. Therefore, management’s assumptions may or may not prove valid. No assurance can be given that changing economic conditions and other relevant factors impacting our net interest income will not cause actual occurrences to differ from underlying assumptions. In addition, this analysis does not consider any strategic changes to our balance sheet which management may consider as a result of changes in market conditions.

Interest rate scenario	Change in net interest income from base
Up 300 basis points		(~~0.25~~9.97	)%
Up 200 basis points		~~0.17~~(6.47	)%
Up 100 basis points		~~0.49~~(3.17	)%
Base		-
Down 100 basis points		~~(4.85~~7.17	)%
Down 200 basis points		~~(7.09~~11.16	)%
Down 300 basis points		~~(8.01~~7.15	)%

Item 4. CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures

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

Changes in Internal Control over Financial Reporting

There has been no change in the Company’s internal control over financial reporting during the ~~six~~nine months ended ~~June~~September 30, 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, 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, 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 ~~second~~third quarter of 2022:

(d) Maximum

Number (or

Number of

Approximate

Shares (or

Dollar Value) of

Units)

Shares (or

(a) Total

Purchased as

Units) that May

Number of

Part of Publicly

Yet Be

Shares (or

(b) Average

Announced

Purchased

Units)

Price Paid per

Plans or

Under the Plans

Period

Purchased

Share (or Unit)

Programs

or Programs

~~April~~July 1, 2022 – ~~April 30,~~July 31, 2022

-399,026

~~May~~August 1, 2022 – ~~May~~August 31, 2022

-399,026

~~June~~September 1, 2022 – ~~June~~September 30, 2022

399,026*399,026

Total

399,026*399,026

*On June 21, 2022, the Company announced a share repurchase plan allowing us to repurchase up to 399,026 shares of our common stock (the “Repurchase Plan”). As of ~~June~~September 30, 2022, we have not repurchased any of the shares authorized for repurchase under the Repurchase Plan. The Company is not obligated to purchase any such shares under the Repurchase Plan, and the Repurchase Plan may be discontinued, suspended or restarted at any time; however, repurchases under the Repurchase Plan after December 31, 2022 would require additional approval of our Board of Directors and the Federal Reserve.

Item 3. DEFAULTS UPON SENIOR SECURITIES.

None.

Item 4. MINE SAFETY DISCLOSURES.

Not applicable.

Item 5. OTHER INFORMATION.

None.

~~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.

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INDEX TO EXHIBITS

Exhibit 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 ~~June~~September 30, 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)
______		________________________________________________

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~~SIGNATURES~~
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SIGNATURES

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


	SOUTHERN FIRST BANCSHARES, INC.
	Registrant

Date: ~~August 2,~~November 1, 2022	/s/ R. Arthur Seaver, Jr.
	R. Arthur Seaver, Jr.
	Chief Executive Officer (Principal Executive Officer)

Date: ~~August 2,~~November 1, 2022	/s/ Michael D. Dowling
	Michael D. Dowling
	Chief Financial Officer (Principal Financial and Accounting Officer)

5249

0001090009 sfst:~~HomeEquitysMember~~Construction3Member sfst:~~RecognizedInterestIncomeMember 2021-01-01 2021-12-31~~Accruing6089DaysPastDueMember 2022-09-30 iso4217:USD xbrli:shares


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


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

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

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

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


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


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


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

												Six months ended June 30, 2021
	Commercial																	Consumer
(dollars in thousands)	Owner occupied RE			Non-owner occupied RE		Construction			Business			Real Estate			Home Equity			Construction		Other			Total
Balance, beginning of period	$	8,145			12,049		1,154			7,845			10,453			3,249			747	��	507			44,149
Provision for loan losses		(1,140	)		1,050		(203	)		(1,011	)		(425	)		(552	)		6		75			(2,200	)
Loan charge-offs		-			-		-			(268	)		-			(139	)		-		(8	)		(415	)
Loan recoveries		94			124		-			156			-			4			-		-			378
Net loan recoveries (charge-offs)		94			124		-			(112	)		-			(135	)		-		(8	)		(37	)
Balance, end of period	$	7,099			13,223		951			6,722			10,028			2,562			753		574			41,912
Net charge-offs to average loans (annualized)																								0.00	%


	Six months ended
(dollars in thousands)	June 30, 2022
Balance, beginning of period		-
Adjustment for adoption of CECL	$	2,000
Provision for loan losses		330
Balance, end of period	$	2,330


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


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


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