株探米国株
英語
エドガーで原本を確認する
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the Quarterly Period Ended June 30, 2023

OR

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

For the Transition Period from                      to

Commission file number 000-27719

 

 

Southern First Bancshares, Inc.

(Exact name of registrant as specified in its charter)

South Carolina   58-2459561
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification No.)
     
6 Verdae Boulevard    
Greenville, S.C.   29607
(Address of principal executive offices)   (Zip Code)

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

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

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

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x 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 x 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 x
Non-accelerated filer ¨ Smaller Reporting Company ¨
    Emerging growth company ¨

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

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

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

8,076,438 shares of common stock, par value $0.01 per share, were issued and outstanding as of July 28, 2023.

 

 

 

Table of Contents 

SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARY

June 30, 2023 Form 10-Q

INDEX

  Page
PART I – CONSOLIDATED FINANCIAL INFORMATION  
     
Item 1. Consolidated Financial Statements  
     
  Consolidated Balance Sheets 3
     
  Consolidated Statements of Income 4
     
  Consolidated Statements of Comprehensive Income 5
     
  Consolidated Statements of Shareholders’ Equity 6
     
  Consolidated Statements of Cash Flows 7
     
  Notes to Unaudited Consolidated Financial Statements 8
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 28
     
Item 3. Quantitative and Qualitative Disclosures about Market Risk 44
     
Item 4. Controls and Procedures 44
     
PART II – OTHER INFORMATION  
     
Item 1. Legal Proceedings 45
     
Item 1A. Risk Factors 45
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 45
     
Item 3. Defaults upon Senior Securities 46
     
Item 4. Mine Safety Disclosures 46
     
Item 5. Other Information 46
     
Item 6. Exhibits 46

2

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,  
(dollars in thousands, except share data)   2023     2022  
    (Unaudited)     (Audited)  
ASSETS                
Cash and cash equivalents:                
Cash and due from banks   $ 24,742       18,788  
Federal funds sold     170,145       101,277  
Interest-bearing deposits with banks     10,183       50,809  
Total cash and cash equivalents     205,070       170,874  
Investment securities:                
Investment securities available for sale     91,548       93,347  
Other investments     12,550       10,833  
Total investment securities     104,098       104,180  
Mortgage loans held for sale     15,781       3,917  
Loans     3,537,616       3,273,363  
Less allowance for credit losses     (41,105 )     (38,639 )
Loans, net     3,496,511       3,234,724  
Bank owned life insurance     51,792       51,122  
Property and equipment, net     96,964       99,183  
Deferred income taxes, net     12,356       12,522  
Other assets     19,535       15,459  
Total assets   $ 4,002,107       3,691,981  
LIABILITIES                
Deposits   $ 3,433,018       3,133,864  
FHLB advances and related debt     180,000       175,000  
Subordinated debentures     36,268       36,214  
Other liabilities     51,307       52,391  
Total liabilities     3,700,593       3,397,469  
SHAREHOLDERS’ EQUITY                
Preferred stock, par value $.01 per share, 10,000,000 shares authorized     -       -  
Common stock, par value $.01 per share, 10,000,000 shares authorized,
8,058,438 and 8,011,045 shares issued and outstanding at June 30, 2023 and December 31, 2022, respectively		     81       80  
Nonvested restricted stock     (4,051 )     (3,306 )
Additional paid-in capital     120,912       119,027  
Accumulated other comprehensive loss     (12,710 )     (13,410 )
Retained earnings     197,282       192,121  
Total shareholders’ equity     301,514       294,512  
Total liabilities and shareholders’ equity   $ 4,002,107       3,691,981  

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

3

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

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

4

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

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

5

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, 2022     7,980,519     $ 80       -       -     $ (3,425 )   $ 117,286     $ (6,393 )   $ 170,976     $ 278,524  
Net income Retained earnings     -       -       -       -       -       -       -       7,240       7,240  
Proceeds from exercise of stock options     3,625       -       -       -       -       128       -       -       128  
Issuance of restricted stock     1,500       -       -       -       (71 )     71       -       -       -  
Compensation expense related to restricted stock, net of tax     -       -       -       -       266       -       -       -       266  
Compensation expense related to stock options, net of tax     -       -       -       -       -       229       -       -       229  
Other comprehensive loss     -       -       -       -       -       -       (3,750 )     -       (3,750 )
                                                                       
June 30, 2022     7,985,644     $ 80       -     $ -     $ (3,230 )   $ 117,714     $ (10,143 )   $ 178,216     $ 282,637  
March 31, 2023     8,047,975     $ 80       -     $ -     $ (4,462 )   $ 120,683     $ (11,775 )   $ 194,824     $ 299,350  
Net income     -       -       -       -       -       -       -       2,458       2,458  
Proceeds from exercise of stock options     10,000       1       -       -       -       168       -       -       169  
Issuance of restricted stock, net of forfeitures     463       -       -       -       85       (85 )     -       -       -  
Compensation expense related to restricted stock, net of tax     -       -       -       -       326       -       -       -       326  
Compensation expense related to stock options, net of tax     -       -       -       -       -       146       -       -       146  
Other comprehensive loss     -       -       -       -       -       -       (935 )     -       (935 )
                                                                         
June 30, 2023     8,058,438     $ 81       -     $ -     $ (4,051 )   $ 120,912     $ (12,710 )   $ 197,282     $ 301,514  

 		   For the six months ended June 30,  
  Common stock     Preferred stock     Nonvested
restricted		     Additional
paid-in		     Accumulated
other
comprehensive		     Retained        
(dollars in thousands, except share data)   Shares     Amount     Shares     Amount     stock     capital     income (loss)     earnings     Total  
December 31, 2021     7,925,819     $ 79       -       -     $ (1,435 )   $ 114,226     $ (740 )   $ 165,771     $ 277,901  
Net income Common stock     -       -       -       -       -       -       -       15,210       15,210  
Proceeds from exercise of stock options     21,750       1       -       -       -       706       -       -       707  
Issuance of restricted stock     38,075       -       -       -       (2,305 )     2,305       -       -       -  
Adoption of ASU 2016-13     -       -       -       -       -       -       -       (2,765 )     (2,765 )
Compensation expense related to restricted stock, net of tax     -       -       -       -       510       -       -       -       510  
Compensation expense related to stock options, net of tax     -       -       -       -       -       477       -       -       477  
Other comprehensive loss     -       -       -       -       -       -       (9,403 )     -       (9,403 )
                                                                         
June 30, 2022 Preferred stock     7,985,644     $ 80       -     $ -     $ (3,230 )   $ 117,714     $ (10,143 )   $ 178,216     $ 282,637  
December 31, 2022     8,011,045     $ 80       -     $ -     $ (3,306 )   $ 119,027     $ (13,410 )   $ 192,121     $ 294,512  
Net income     -       -       -       -       -       -       -       5,161       5,161  
Proceeds from exercise of stock options     11,000       1       -       -       -       184       -       -       185  
Issuance of restricted stock     36,393       -       -       -       (1,436 )     1,436       -       -       -  
Compensation expense related to restricted stock, net of tax     -       -       -       -       691       -       -       -       691  
Compensation expense related to stock options, net of tax     -       -       -       -       -       265       -       -       265  
Other comprehensive income     -       -       -       -       -       -       700       -       700  
Accumulated other comprehensive income (loss)Additional paid-in capital                                                                        
June 30, 2023     8,058,438     $ 81       -     $ -     $ (4,051 )   $ 120,912     $ (12,710 )   $ 197,282     $ 301,514  

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

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SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

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

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

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SOUTHERN FIRST BANCSHARES, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – Summary of Significant Accounting Policies

Nature of Business

Southern First Bancshares, Inc. (the “Company”) is a South Carolina corporation that owns all of the capital stock of Southern First Bank (the “Bank”) and all of the stock of Greenville First Statutory Trusts I and II (collectively, the “Trusts”). The Trusts are special purpose non-consolidated entities organized for the sole purpose of issuing trust preferred securities. The Bank's 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-month period ended June 30, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2023. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 as filed with the U.S. Securities and Exchange Commission (“SEC”) on February 13, 2023. The consolidated financial statements include the accounts of the Company and the Bank. In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810, “Consolidation,” the financial statements related to the Trusts have not been consolidated.

Business Segments

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

Risk and Uncertainties

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

Use of Estimates

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amount of income and expenses during the reporting periods. Actual results could differ from those estimates.

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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, and valuation of deferred tax assets.

Reclassifications

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

Subsequent Events

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

Adoption of New Accounting Standard

In January 2023, the Company adopted ASU 2022-02, “Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures” (“ASU 2022-02”), which eliminated the accounting guidance for troubled debt restructurings (“TDRs”) while enhancing disclosure requirements for certain loan refinancing and restructurings by creditors when a borrower is experiencing financial difficulty. In addition, for public business entities, the guidance requires disclosure of current-period gross write-offs by year of origination for financing receivables and net investments in leases within the scope of Subtopic 326-20. The Company adopted the guidance using the modified retrospective method. Upon adoption of this guidance, the Company no longer establishes a specific reserve for modifications to borrowers experiencing financial difficulty. Instead, these modifications are included in their respective cohort and a historical loss rate is applied to the current loan balance to arrive at the quantitative baseline portion of the allowance. The difference between the allowance previously determined and the current allowance was not material to the Company’s financial statements.

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

Newly Issued, But Not Yet Effective Accounting Standards

In December 2022, the FASB issued amendments to defer the sunset date of the Reference Rate Reform Topic of the Accounting Standards Codification from December 31, 2022 to December 31, 2024, because the current relief in Reference Rate Reform Topic may not cover a period of time during which a significant number of modifications may take place. The amendments were effective upon issuance. The Company does not expect these amendments to have a material effect on its financial statements.

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NOTE 2 – Investment Securities

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

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

 

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

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

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Schedule of maturities and yields on the Company’s investment securities                                                                                
                               
                      June 30, 2023  
    Less than one year     One to five years     Five to ten years     Over ten years     Total  
(dollars in thousands)   Amount     Yield     Amount     Yield     Amount     Yield     Amount     Yield     Amount     Yield  
Available for sale                                                                                
Corporate bonds Corporate bonds [Member]   $ -       -     $ -       -     $ 1,874       2.00 %   $ -       -     $ 1,874       2.00 %
US treasuries US treasuries [Member]     -       -       875       1.27 %     -       -       -       -       875       1.27 %
US government agencies US government agencies [Member]     -       -       3,253       0.85 %     7,557       1.55 %     -       -       10,810       1.34 %
State and political subdivisions State and political subdivisions [Member]     -       -       885       1.95 %     5,079       1.81 %     13,375       2.17 %     19,339       2.06 %
Asset-backed securities Asset-backed securities [Member]     -       -       -       -       392       5.74 %     5,176       6.23 %     5,568       6.20 %
Mortgage-backed securities Mortgage-backed securities [Member]     -       -       4,780       1.17 %     5,320       1.59 %     42,982       1.97 %     53,082       1.86 %
Total investment securities Total investment securities [Member]   $ -       -     $ 9,793       1.14 %   $ 20,222       1.75 %   $ 61,533       2.37 %   $ 91,548       2.10 %

 

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

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

Schedule of gross unrealized losses on investment securities and fair market value of related securities                                                                        
                   
                June 30, 2023  
    Less than 12 months     12 months or longer     Total  
(dollars in thousands)   #     Fair
value		     Unrealized
losses		     #     Fair
value		     Unrealized
losses		     #     Fair
value		     Unrealized
losses		  
Available for sale                                                                        
Corporate bonds     -     $ -     $ -       1     $ 1,874     $ 286       1     $ 1,874     $ 286  
US treasuries     -       -       -       1       875       124       1       875       124  
US government agencies     -       -       -       10       10,810       2,199       10       10,810       2,199  
State and political subdivisions     3       1,216       24       29       18,123       3,411       32       19,339       3,435  
Asset-backed     1       393       1       7       5,175       128       8       5,568       129  
Mortgage-backed securities Mortgage-backed securities [Member]                                                                        
FHLMC FHLMC [Member]     2       2,863       62       26       17,035       3,668       28       19,898       3,730  
FNMA FNMA [Member]     1       5       1       29       28,606       5,416       30       28,611       5,417  
GNMA GNMA [Member]     -       -       -       7       4,573       768       7       4,573       768  
Total investment securities     7     $ 4,477     $ 88       110     $ 87,071     $ 16,000       117     $ 91,548     $ 16,088  
                                                                         

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

At June 30, 2023 the Company had 117 individual investments that were in an unrealized loss position. The unrealized losses were primarily attributable to changes in interest rates, rather than deterioration in credit quality. The individual securities are each investment grade securities. The Company considers factors such as the financial condition of the issuer including credit ratings and specific events affecting the operations of the issuer, volatility of the security, underlying assets that collateralize the debt security, and other industry and macroeconomic conditions. The Company does not intend to sell these securities, and it is more likely than not that the Company will not be required to sell these securities before recovery of the amortized cost. The issuers of these securities continue to make timely principal and interest payments under the contractual terms of the securities. As such, there is no allowance for credit losses on available for sale securities recognized as of June 30, 2023.

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

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

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

NOTE 3 – Mortgage Loans Held for Sale

Mortgage loans originated and intended for sale in the secondary market are reported as loans held for sale and carried at fair value under the fair value option with changes in fair value recognized in current period earnings. At the date of funding of the mortgage loan held for sale, the funded amount of the loan, the related derivative asset or liability of the associated interest rate lock commitment, less direct loan costs becomes the initial recorded investment in the loan held for sale. Such amount approximates the fair value of the loan. At June 30 2023, mortgage loans held for sale totaled $15.8 million compared to $3.9 million at December 31, 2022.

NOTE 4 – Loans and Allowance for Credit Losses

The following table summarizes the composition of our loan portfolio. Total gross loans are recorded net of deferred loan fees and costs, which totaled $7.4 million as of June 30, 2023 and $7.3 million as of December 31, 2022.

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

Maturities and Sensitivity of Loans to Changes in Interest Rates

The information in the following tables summarizes the loan maturity distribution by type and related interest rate characteristics based on the contractual maturities of individual loans, including loans which may be 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.

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

 

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

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

                   
 Schedule of composition of gross loans by rate type   June 30, 2023     December 31, 2022  
    Interest Rate           Interest Rate  
(dollars in thousands)   Fixed     Floating or
Adjustable		     Fixed     Floating or
Adjustable		  
Commercial Commercial [Member]                                
Owner occupied RE Owner occupied RE [Member]   $ 600,648       3,715       598,513       3,814  
Non-owner occupied RE Non-owner occupied RE [Member]     792,099       97,591       742,763       75,246  
Construction Construction [Member]     90,403       14,752       90,246       13,971  
Business Business [Member]     313,001       94,889       298,866       73,089  
Total commercial loans     1,796,151       210,947       1,730,388       166,120  
Consumer Consumer [Member]                                
Real estate Real estate [Member]     1,040,232       -       919,130       11  
Home equity Home equity [Member]     13,525       171,439       14,173       163,791  
Construction Construction [Member]     60,800       -       79,750       -  
Other Other [Member]     16,830       23,980       19,113       6,013  
Total consumer loans     1,131,387       195,419       1,032,166       169,815  
Total gross loans, net of deferred fees   $ 2,927,538       406,366       2,762,554       335,935  

Credit Quality Indicators

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

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

· Pass— A pass loan ranges from minimal to average credit risk; however, still has acceptable credit risk.
· Watch—A watch loan exhibits above average credit risk due to minor weaknesses and warrants closer scrutiny by management.

 

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· Special mention—A special mention loan has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or the institution’s credit position at some future date.
· Substandard—A substandard loan is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified must have a well-defined weakness, or weaknesses, which may jeopardize the liquidation of the debt. A substandard loan is characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.
· Doubtful—A doubtful loan has all of the weaknesses inherent in one classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of the currently existing facts, conditions and values, highly questionable and improbable.

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

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Schedule of breakdown of outstanding loans by risk category                                                                         
                                                       
                                        June 30, 2023  
(dollars in thousands)   2023     2022     2021     2020     2019     Prior     Revolving     Revolving
Converted
to Term		     Total  
Commercial                                                      
Owner occupied RE                                                                        
Pass   $ 32,634       157,619       139,472       68,570       62,877       118,738       -       168       580,078  
Watch     -       3,510       469       16,170       3,585       6,489       -       -       30,223  
Special Mention     -       191       -       -       -       3,100       -       -       3,291  
Substandard     -       -       -       -       -       282       -       -       282  
Total Owner occupied RE     32,634       161,320       139,941       84,740       66,462       128,609       -       168       613,874  
                                                                         
Non-owner occupied RE                                                                        
Pass     75,513       305,006       174,325       110,120       54,654       182,840       222       -       902,680  
Watch     775       966       9,468       -       10,737       6,396       -       -       28,342  
Special Mention     -       -       200       -       9,028       965       -       -       10,193  
Substandard     -       -       -       -       7,974       2,347       -       -       10,321  
Total Non-owner occupied RE     76,288       305,972       183,993       110,120       82,393       192,548       222       -       951,536  
                                                                         
Construction                                                                        
Pass     9,046       71,909       24,939       8,397       242       -       -       -       114,533  
Watch     -       1,265       -       -       -       -       -       -       1,265  
Special Mention     -       -       -       -       -       -       -       -       -  
Substandard     -       -       -       -       -       -       -       -       -  
Total Construction     9,046       73,174       24,939       8,397       242       -       -       -       115,798  
                                                                         
Business                                                                        
Pass     34,799       142,869       52,202       20,565       19,229       55,100       151,640       1,162       477,566  
Watch     139       14,342       1,998       1,511       987       4,178       5,751       -       28,906  
Special Mention     102       1,232       226       459       245       416       -       98       2,778  
Substandard     -       492       -       27       174       1,314       462       -       2,469  
Total Business     35,040       158,935       54,426       22,562       20,635       61,008       157,853       1,260       511,719  
Total Commercial loans     153,008       699,401       403,299       225,819       169,732       382,165       158,075       1,428       2,192,927  
                                                                         
Consumer                                                                        
Real estate                                                                        
Pass     103,913       263,435       282,239       181,201       68,138       110,151       -       -       1,009,077  
Watch     491       5,715       7,936       3,974       2,069       4,156       -       -       24,341  
Special Mention     -       2,329       1,673       2,133       2,422       2,921       -       -       11,478  
Substandard     -       187       640       -       327       1,854       -       -       3,008  
Total Real estate     104,404       271,666       292,488       187,308       72,956       119,082       -       -       1,047,904  
                                                                         
Home equity                                                                        
Pass     -       -       -       -       -       -       172,802       -       172,802  
Watch     -       -       -       -       -       -       7,052       -       7,052  
Special Mention     -       -       -       -       -       -       3,967       -       3,967  
Substandard     -       -       -       -       -       -       1,763       -       1,763  
Total Home equity     -       -       -       -       -       -       185,584       -       185,584  
                                                                         
Construction                                                                        
Pass     6,231       40,707       14,106       -       -       -       -       -       61,044  
Watch     -       -       -       -       -       -       -       -       -  
Special Mention     -       -       -       -       -       -       -       -       -  
Substandard     -       -       -       -       -       -       -       -       -  
Total Construction     6,231       40,707       14,106       -       -       -       -       -       61,044  
                                                                         
Other                                                                        
Pass     4,535       3,140       2,707       1,586       1,359       3,016       32,462       -       48,805  
Watch     44       37       356       7       3       177       95       -       719  
Special Mention     -       336       -       -       33       87       83       -       539  
Substandard     -       -       84       -       2       -       8       -       94  
Total Other     4,579       3,513       3,147       1,593       1,397       3,280       32,648       -       50,157  
                                                                         
Total Consumer loans     115,214       315,886       309,741       188,901       74,353       122,362       218,232       -       1,344,689  
Total loans   $ 268,222       1,015,287       713,040       414,720       244,085       504,527       376,307       1,428       3,537,616  
Current period gross write-offs             (200 )             (1 )             (9 )     (391 )             (601 )

 

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

                                                       
    December 31, 2022  
(dollars in thousands)   2022     2021     2020     2019     2018     Prior     Revolving     Revolving
Converted
to Term		     Total  
Commercial                                                                        
Owner occupied RE                                                                        
Pass   $ 169,083       122,654       85,867       66,299       36,718       93,915       -       -       574,536  
Watch     14,648       479       9,339       3,658       -       6,792       -       -       34,916  
Special Mention     200       -       -       -       -       2,960       -       -       3,160  
Substandard     -       -       -       -       289       -       -       -       289  
Total Owner occupied RE     183,931       123,133       95,206       69,957       37,007       103,667       -       -       612,901  
                                                                         
Non-owner occupied RE                                                                        
Pass     281,890       169,599       113,264       59,550       79,722       106,967       604       137       811,733  
Watch     1,061       9,491       -       10,683       1,408       11,660       -       -       34,303  
Special Mention     -       202       -       6,087       -       930       -       -       7,219  
Substandard     -       134       -       7,992       327       871       -       -       9,324  
Total Non-owner occupied RE     282,951       179,426       113,264       84,312       81,457       120,428       604       137       862,579  
                                                                         
Construction                                                                        
Pass     48,420       55,129       4,811       247       -       -       -       -       108,607  
Watch     1,119       -       -       -       -       -       -       -       1,119  
Special Mention     -       -       -       -       -       -       -       -       -  
Substandard     -       -       -       -       -       -       -       -       -  
Total Construction     49,539       55,129       4,811       247       -       -       -       -       109,726  
                                                                         
Business                                                                        
Pass     136,489       57,804       29,864       21,808       35,249       28,914       136,337       709       447,174  
Watch     3,186       2,058       1,318       1,282       179       3,074       3,783       439       15,319  
Special Mention     1,137       260       386       210       -       252       115       642       3,002  
Substandard     498       -       188       233       315       911       472       -       2,617  
Total Business     141,310       60,122       31,756       23,533       35,743       33,151       140,707       1,790       468,112  
Total Commercial loans     657,731       417,810       245,037       178,049       154,207       257,246       141,311       1,927       2,053,318  
                                                                         
Consumer                                                                        
Real estate                                                                        
Pass     243,589       269,565       189,075       72,499       39,042       76,172       -       -       889,942  
Watch     6,196       8,256       3,847       2,278       494       3,671       -       -       24,742  
Special Mention     3,114       1,938       2,644       2,258       955       2,639       -       -       13,548  
Substandard     -       648       227       341       408       1,422       -       -       3,046  
Total Real estate     252,899       280,407       195,793       77,376       40,899       83,904       -       -       931,278  
                                                                         
Home equity                                                                        
Pass     -       -       -       -       -       -       165,847       -       165,847  
Watch     -       -       -       -       -       -       7,226       -       7,226  
Special Mention     -       -       -       -       -       -       4,055       -       4,055  
Substandard     -       -       -       -       -       -       2,172       -       2,172  
Total Home equity     -       -       -       -       -       -       179,300       -       179,300  
                                                                         
Construction                                                                        
Pass     41,138       34,039       4,923       -       -       -       -       -       80,100  
Watch     -       -       -       -       -       -       -       -       -  
Special Mention     -       -       -       315       -       -       -       -       315  
Substandard     -       -       -       -       -       -       -       -       -  
Total Construction     41,138       34,039       4,923       315       -       -       -       -       80,415  
                                                                         
Other                                                                        
Pass     3,894       3,038       1,702       1,534       341       3,015       14,465       -       27,989  
Watch     46       367       15       5       16       175       93       -       717  
Special Mention     94       -       -       44       75       23       97       -       332  
Substandard     -       -       -       5       -       -       9       -       14  
Total Other     4,034       3,405       1,717       1,588       432       3,213       14,663       -       29,052  
Total Consumer loans     298,071       317,851       202,433       79,279       41,331       87,117       193,963       -       1,220,045  
Total loans   $ 955,802       735,661       447,470       257,328       195,538       344,363       335,274       1,927       3,273,363  

 

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

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

 

    December 31, 2022  
(dollars in thousands)   Accruing 30-
59 days past
due		     Accruing 60-89
days past due		     Accruing 90
days or more
past due		     Nonaccrual
loans		     Accruing
current		     Total  
Commercial                                                
Owner occupied RE   $ -       -       -       -       612,901       612,901  
Non-owner occupied RE     119       757       -       247       861,456       862,579  
Construction     -       -       -       -       109,726       109,726  
Business     24       1       -       182       467,905       468,112  
Consumer                                                
Real estate     330       -       -       1,099       929,849       931,278  
Home equity     50       -       -       1,099       178,151       179,300  
Construction     -       -       -       -       80,415       80,415  
Other     88       -       -       -       28,964       29,052  
Total loans   $ 611       758       -       2,627       3,269,367       3,273,363  
Total loans over 90 days past due     -       -       -       -       -       402  

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

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

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

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

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

The table below summarizes information regarding nonperforming assets.

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

Modifications to Borrowers Experiencing Financial Difficulty

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

Allowance for Credit Losses

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

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

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

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

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

Schedule of activity related to the allowance for credit losses                                                      
                         
                      Three months ended June 30, 2023  
    Commercial     Consumer        
(dollars in thousands)   Owner
occupied
RE		     Non-
owner
occupied
RE		     Construction     Business     Real
Estate		     Home
Equity		     Construction     Other     Total  
Balance, beginning of period   $ 5,984       11,285       1,110       8,022       10,079       2,663       810       482       40,435  
Provision for credit losses     (88 )     347       221       118       316       245       (126 )     62       1,095  
Loan charge-offs     -       (48 )     -       -       -       (389 )     -       (2 )     (439 )
Loan recoveries     -       -       -       12       -       2       -       -       14  
Net loan recoveries (charge-offs)     -       (48 )     -       12       -       (387 )     -       (2 )     (425 )
Balance, end of period   $ 5,896       11,584       1,331       8,152       10,395       2,521       684       542       41,105  
Net charge-offs to average loans (annualized)                             0.05 %
Allowance for credit losses to gross loans                             1.16 %
Allowance for credit losses to nonperforming loans                             1,363.11 %

 

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                      Three months ended June 30, 2022  
    Commercial     Consumer        
(dollars in thousands)   Owner
occupied RE		     Non-
owner
occupied
RE		     Construction     Business     Real
Estate		     Home
Equity		     Construction     Other     Total  
Balance, beginning of period   $ 4,898       9,973       929       6,217       7,602       2,197       844       284       32,944  
Provision for credit losses     (69 )     37       131       524       390       407       7       98       1,525  
Loan charge-offs     -       -       -       (55 )     -       (170 )     -       (91 )     (316 )
Loan recoveries     -       -       -       31       -       8       -       -       39  
Net loan recoveries (charge-offs)     -       -       -       (24 )     -       (162 )     -       (91 )     (277 )
Balance, end of period   $ 4,829       10,010       1,060       6,717       7,992       2,442       851       291       34,192  
Net charge-offs to average loans (annualized)                             0.04 %
Allowance for credit losses to gross loans                             1.20 %
Allowance for credit losses to nonperforming loans                             1,166.70 %
                                                                         
                         
                      Six months ended June 30, 2023  
    Commercial     Consumer        
(dollars in thousands)   Owner
occupied
RE		     Non-
owner
occupied
RE		     Construction     Business     Real
Estate		     Home
Equity		     Construction     Other     Total  
Balance, beginning of period   $ 5,867       10,376       1,292       7,861       9,487       2,551       893       312       38,639  
Provision for credit losses     29       1,385       39       268       908       298       (209 )     232       2,950  
Loan charge-offs     -       (209 )     -       (1 )     -       (389 )     -       (2 )     (601 )
Loan recoveries     -       32       -       24       -       61       -       -       117  
Net loan recoveries (charge-offs)     -       (177 )     -       23       -       (328 )     -       (2 )     (484 )
Balance, end of period   $ 5,896       11,584       1,331       8,152       10,395       2,521       684       542       41,105  
Net charge-offs to average loans (annualized)                             0.03 %
Allowance for credit losses to gross loans                             1.16 %
Allowance for credit losses to nonperforming loans                             1,363.11 %
                                                       
                            Six months ended June 30, 2022  
    Commercial     Consumer        
(dollars in thousands)   Owner
occupied
RE		     Non-
owner
occupied
RE		     Construction     Business     Real
Estate		     Home
Equity		     Construction     Other     Total  
Balance, beginning of period   $ 4,700       10,518       625       4,887       7,083       1,697       578       320       30,408  
Adjustment for CECL     (313 )     333       154       1,057       (294 )     438       130       (5 )     1,500  
Provision for credit losses     442       (841 )     281       683       1,203       572       143       67       2,550  
Loan charge-offs     -       -       -       (55 )     -       (339 )     -       (91 )     (485 )
Loan recoveries     -       -       -       145       -       74       -       -       219  
Net loan recoveries (charge-offs)     -       -       -       90       -       (265 )     -       (91 )     (266 )
Balance, end of period   $ 4,829       10,010       1,060       6,717       7,992       2,442       851       291       34,192  
Net charge-offs to average loans (annualized)                             0.02 %
Allowance for credit losses to gross loans                             1.20 %
Allowance for credit losses to nonperforming loans                             1,166.70 %

The $1.1 million provision for credit losses for the three months ended June 30, 2023 was driven by $119.7 million in loan growth combined with net charge-offs of $425,000 for the quarter. The $3.0 million provision for credit losses for the six months ended June 30, 2023 was driven by $264.3 million in loan growth for the period. In addition to loan growth, the provision for credit losses was impacted by slightly lower expected loss rates due to continued low charge-offs during the first half of 2023, while minor adjustments to an internal qualitative factor increased the qualitative component of the allowance and related provision expense.

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.

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These loans do not share common risk characteristics and are not included within the collectively evaluated loans for determining the allowance for credit losses.

The following tables present an analysis of collateral-dependent loans of the Company.

                   
                June 30, 2023  
 Schedule of analysis of collateral-dependent loans of the company   Real     Business              
(dollars in thousands)   estate     assets     Other     Total  
Commercial                        
Owner occupied RE   $ -       -       -       -  
Non-owner occupied RE     31       -       -       31  
Construction     -       -       -       -  
Business     42       -       -       42  
Total commercial     73       -       -       73  
Consumer                                
Real estate     195       -       -       195  
Home equity     185       -       -       185  
Construction     -       -       -       -  
Other     -       -       -       -  
Total consumer     380       -       -       380  
Total   $ 453       -       -       453  
                                 
                      December 31, 2022  
      Real       Business                  
(dollars in thousands)     estate       assets       Other       Total  
Commercial                                
Owner occupied RE   $ -       -       -       -  
Non-owner occupied RE     114       -       -       114  
Construction     -       -       -       -  
Business     30       -       -       30  
Total commercial     144       -       -       144  
Consumer                                
Real estate     207       -       -       207  
Home equity     194       -       -       194  
Construction     -       -       -       -  
Other     -       -       -       -  
Total consumer     401       -       -       401  
Total   $ 545       -       -       545  

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 $2.6 million at June 30, 2023 and is separately classified on the balance sheet within other liabilities. The following table presents the balance and activity in the allowance for credit losses for unfunded loan commitments for the three and six months ended June 30, 2023 and June 30, 2022.

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Schedule of allowance for credit losses for unfunded loan commitments                
             
    Three months ended     Three months ended  
(dollars in thousands)   June 30, 2023     June 30, 2022  
Balance, beginning of period   $ 2,750       2,080  
Adjustment for adoption of CECL     -       -  
Provision for (reversal of) credit losses     (185 )     250  
Balance, end of period   $ 2,565       2,330  
Unfunded Loan Commitments   $ 849,977       738,791  
Reserve for Unfunded Commitments to Unfunded Loan Commitments     0.30 %     0.32 %
                 
      Six months ended       Six months ended  
(dollars in thousands)     June 30, 2023       June 30, 2022  
Balance, beginning of period   $ 2,780       -  
Adjustment for adoption of CECL     -       2,000  
Provision for (reversal of) credit losses     (215 )     330  
Balance, end of period   $ 2,565       2,330  
Unfunded Loan Commitments   $ 849,977       738,791  
Reserve for Unfunded Commitments to Unfunded Loan Commitments     0.30 %     0.32 %

NOTE 5 – Derivative Financial Instruments

The Company utilizes derivative financial instruments primarily to manage its exposure to changes in interest rates. All derivative financial instruments are recognized as either assets or liabilities and measured at fair value.

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

The Company manages the interest rate and price risk associated with its outstanding IRLCs and mortgage loans held for sale by entering into derivative instruments such as forward sales of MBS. These derivatives are free- standing derivatives and are not designated as instruments for hedge accounting. Management expects these derivatives will experience changes in fair value opposite to changes in fair value of the IRLCs and mortgage loans held for sale, thereby reducing earnings volatility. The Company takes into account various factors and strategies in determining the portion of the mortgage pipeline (IRLCs and mortgage loans held for sale) it wants to economically hedge. The gain or loss resulting from the change in the fair value of the derivative is recognized in the Company’s statement of income during the period of change.

The Company entered into a pay-fixed portfolio layer method fair value swap, designated as a hedging instrument, with a total notional amount of $200.0 million in the second quarter of 2023. The Company is designating the fair value swap under the portfolio layer method (“PLM”). Under this method, the hedged item is designated as a hedged layer of a closed portfolio of financial loans that is anticipated to remain outstanding for the designated hedged period. Adjustments will be made to record the swap at fair value on the consolidated balance sheets, with changes in fair value recognized in interest income. The carrying value of the fair value swap on the consolidated balance sheets will also be adjusted through interest income, based on changes in fair value attributable to changes in the hedged risk.

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

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Schedule of carrying value of hedged asset and cumulative fair value hedging adjustment            
    June 30, 2023     December 31, 2022  
(dollars in thousands)     Carrying
Amount		       Hedged Asset       Carrying
Amount		       Hedged Asset  
Fixed Rate Asset1     202,750       2,750       -       -  
1 These amounts included the amortized cost basis of closed portfolios of fixed rate loans used to designate hedging relationships in which the hedged item is the stated amount of the assets in the closed portfolio anticipated to be outstanding for the designated hedged period. As of June 30, 2023, the amortized cost basis of the closed portfolio used in this hedging relationship was $741.4 million, the cumulative basis adjustment associated with this hedging relationship was $2.8 million, and the amount of the designated hedged item was $200.0 million.

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

Schedule of outstanding financial derivative instruments                
              June 30, 2023  
              Fair Value  
(dollars in thousands)   Notional     Balance Sheet
Location		   Asset/(Liability)  
Derivatives designated as hedging instruments:                    
Fair value swap Fair value swap [Member]   $ 200,000     Other assets   $ 2,750  
                     
Derivatives not designated as hedging instruments:                    
Mortgage loan interest rate lock commitments     24,630     Other assets     177  
MBS forward sales commitments     17,500     Other assets     59  
Total derivative financial instruments   $ 242,130         $ 2,986  
Total derivative financial instruments [Member]                    
Mortgage loan interest rate lock commitments [Member]                 December 31, 2022  
MBS forward sales commitments [Member]                 Fair Value  
(dollars in thousands)     Notional     Balance Sheet
Location		     Asset/(Liability)  
Derivatives not designated as hedging instruments:                    
Mortgage loan interest rate lock commitments   $ 6,793     Other assets     49  
MBS forward sales commitments     5,750     Other assets     27  
Total derivative financial instruments   $ 12,543         $ 76  

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

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

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

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

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NOTE 6 – Fair Value Accounting

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

  Level 1 – Quoted market price in active markets
 

Quoted prices in active markets for identical assets or liabilities. Level 1 assets and liabilities include certain debt and equity securities that are traded in an active exchange market.
   
  Level 2 – Significant other observable inputs
  Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 assets and liabilities include fixed income securities and mortgage-backed securities that are held in the Company’s available-for-sale portfolio and valued by a third-party pricing service, as well as certain impaired loans.
   
  Level 3 – Significant unobservable inputs
  Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.  These methodologies may result in a significant portion of the fair value being derived from unobservable data.  
   

The methods of determining the fair value of assets and liabilities presented in this note are consistent with our methodologies disclosed in Note 14 of the Company’s 2022 Annual Report on Form 10-K. See Note 5 for how the derivative asset fair value is determined. The Company’s loan portfolio is initially fair valued using a segmented approach, using the eight categories of loans as disclosed in Note 4 – Loans and Allowance for Credit Losses. Loans are considered a Level 3 classification.

Assets and Liabilities Recorded at Fair Value on a Recurring Basis

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

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

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

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

Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis

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

Schedule of assets and liabilities measured at fair value on a nonrecurring basis                                
                         
                As of June 30, 2023  
(dollars in thousands)   Level 1     Level 2     Level 3     Total  
Assets                        
Individually evaluated   $ -       306       3,636       3,942  
Total assets measured at fair value on a nonrecurring basis   $ -       306       3,636       3,942  
                                 
                      As of December 31, 2022  
(dollars in thousands)     Level 1       Level 2       Level 3       Total  
Assets                                
Individually evaluated   $ -       429       4,071       4,500  
Total assets measured at fair value on a nonrecurring basis   $ -       429       4,071       4,500  

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

For Level 3 assets and liabilities measured at fair value on a recurring or nonrecurring basis as of June 30, 2023 and December 31, 2022, the significant unobservable inputs used in the fair value measurements were as follows:

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

Fair Value of Financial Instruments

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

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

Schedule of estimated fair values of the company's financial instruments                                        
                   
          June 30, 2023  
(dollars in thousands)   Carrying
Amount		     Fair
Value		     Level 1     Level 2     Level 3  
Financial Assets:                                        
Other investments, at cost   $ 12,550       12,550       -       -       12,550  
Loans1     3,491,664       3,231,892       -       -       3,231,892  
Financial Liabilities:                                        
Deposits     3,433,018       3,013,696       -       3,013,696       -  
Subordinated debentures     36,268       40,767       -       40,767       -  
                                         
    December 31, 2022
(dollars in thousands)     Carrying
Amount		       Fair
Value		       Level 1       Level 2       Level 3  
Financial Assets:                                        
Other investments, at cost   $ 10,833       10,833       -       -       10,833  
Loans1     3,227,455       3,057,891       -       -       3,057,891  
Financial Liabilities:                                        
Deposits     3,133,864       2,717,900       -       2,717,900       -  
Subordinated debentures     36,214       39,885       -       39,885       -  
1 Carrying amount is net of the allowance for credit losses and individually evaluated loans.

NOTE 7 – Leases

The Company had operating right-of-use assets, included in property and equipment, of $22.9 million and $23.6 million as of June 30, 2023 and December 31, 2022, respectively.  The Company had lease liabilities, included in other liabilities, of $25.3 million and $25.8 million as of June 30, 2023 and December 31, 2022, respectively. We maintain operating leases on land and buildings for various office spaces. The lease agreements have maturity dates ranging from April 2025 to February 2032, some of which include options for multiple five-year extensions. The weighted average remaining life of the lease term for these leases was 6.40 years as of June 30, 2023. The ROU asset and lease liability are recognized at lease commencement by calculating the present value of lease payments over the lease term. 

The discount rate used in determining the lease liability for each individual lease was the FHLB fixed advance rate which corresponded with the remaining lease term at implementation of the accounting standard and as of the lease commencement date for leases subsequently entered into. The weighted average discount rate for leases was 2.29% as of June 30, 2023.

The total operating lease costs were $604,000 and $768,000 for the three months ended June 30, 2023 and 2022, respectively, and $1.2 million and $1.5 million for the six months ended June 30, 2023 and 2022, respectively.

Operating lease payments due as of June 30, 2023 were as follows:

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

NOTE 8 – Earnings Per Common Share

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

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

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

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

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

Cautionary warning regarding forward-looking statements

This report contains statements which constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”). Forward-looking statements may relate to our financial condition, results of operations, plans, objectives, or future performance.

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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:

● Restrictions or conditions imposed by our regulators on our operations;
● Increases in competitive pressure in the banking and financial services industries;
● Changes in access to funding or increased regulatory requirements with regard to funding, which could impair our liquidity;
● Changes in deposit flows, which may be negatively affected by a number of factors, including rates paid by competitors, general interest rate levels, regulatory capital requirements, returns available to clients on alternative investments and general economic or industry conditions;
● Credit losses as a result of declining real estate values, increasing interest rates, increasing unemployment, changes in payment behavior or other factors;
● Credit losses due to loan concentration;
● Changes in the amount of our loan portfolio collateralized by real estate and weaknesses in the real estate market;
● Our ability to successfully execute our business strategy;
● Our ability to attract and retain key personnel;
● The success and costs of our expansion into the Charlotte, North Carolina, Greensboro, North Carolina and Atlanta, Georgia markets and into potential new markets;
● Risks with respect to future mergers or acquisitions, including our ability to successfully expand and integrate the businesses and operations that we acquire and realize the anticipated benefits of the mergers or acquisitions;
● Changes in the interest rate environment which could reduce anticipated or actual margins;
● Changes in political conditions or the legislative or regulatory environment, including new governmental initiatives affecting the financial services industry;
● Changes in economic conditions resulting in, among other things, a deterioration in credit quality;
● Changes occurring in business conditions and inflation;
● Increased cybersecurity risk, including potential business disruptions or financial losses;
● Changes in technology;
● The adequacy of the level of our allowance for credit losses and the amount of loan loss provisions required in future periods;
● Examinations by our regulatory authorities, including the possibility that the regulatory authorities may, among other things, require us to increase our allowance for credit losses or write-down assets;
● Changes in U.S. monetary policy, the level and volatility of interest rates, the capital markets and other market conditions that may affect, among other things, our liquidity and the value of our assets and liabilities;
● Any increase in FDIC assessments which will increase our cost of doing business;
● Risks associated with complex and changing regulatory environments, including, among others, with respect to data privacy, artificial intelligence, information security, climate change or other environmental, social and governance matters, and labor matters, relating to our operations;
● 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;
● 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, 2022, in Part II, Item 1A, “Risk Factors” of our Quarterly Reports on Form 10-Q, and in our other filings with the SEC.

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

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 30, 2023, we had total assets of $4.00 billion, an 8.4% increase from total assets of $3.69 billion at December 31, 2022. The largest component of our total assets is loans which were $3.54 billion and $3.27 billion at June 30, 2023 and December 31, 2022, respectively. Our liabilities and shareholders’ equity at June 30, 2023 totaled $3.70 billion and $301.5 million, respectively, compared to liabilities of $3.40 billion and shareholders’ equity of $294.5 million at December 31, 2022. The principal component of our liabilities is deposits which were $3.43 billion and $3.13 billion at June 30, 2023 and December 31, 2022, respectively.

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

Our net income to common shareholders was $2.5 million and $7.2 million for the three months ended June 30, 2023 and 2022, respectively. Diluted earnings per share (“EPS”) was $0.31 for the second quarter of 2023 as compared to $0.90 for the same period in 2022. The decrease in net income was primarily driven by a decrease in net interest income resulting from higher costs on our deposit accounts related to the Federal Reserve’s cumulative 500 basis point interest rate increase during the past 16 months, combined with an increase in non-interest expenses.

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Our net income to common shareholders was $5.2 million and $15.2 million for the six months ended June 30, 2023 and 2022, respectively. Diluted EPS was $0.64 for the six months ended June 30, 2023 as compared to $1.88 for the same period in 2022. The decrease in net income was primarily driven by the increase in interest expense on our deposit accounts.

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 $18.8 million for the second quarter of 2023, a 24.3% decrease over net interest income of $24.9 million for the second quarter of 2022, driven primarily by the increase in interest expense on our deposit accounts. In addition, our net interest margin, on a tax-equivalent basis (TE), was 2.05% for the second quarter of 2023 compared to 3.35% for the same period in 2022.

We have included a number of tables to assist in our description of various measures of our financial performance. For example, the “Average Balances, Income and Expenses, Yields and Rates” table reflects the average balance of each category of our assets and liabilities as well as the yield we earned or the rate we paid with respect to each category during the three and six month periods ended June 30, 2023 and 2022. A review of this table shows that our loans typically provide higher interest yields than do other types of interest-earning assets, which is why we direct a substantial percentage of our earning assets into our loan portfolio. Similarly, the “Rate/Volume Analysis” tables demonstrate the effect of changing interest rates and changing volume of assets and liabilities on our financial condition during the periods shown. We also track the sensitivity of our various categories of assets and liabilities to changes in interest rates, and we have included tables to illustrate our interest rate sensitivity with respect to interest-earning accounts and interest-bearing accounts.

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

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Average Balances, Income and Expenses, Yields and Rates

       
    For the Three Months Ended June 30,  
    2023     2022  
(dollars in thousands)   Average
Balance		     Income/
Expense		     Yield/
Rate(1)		     Average
Balance		     Income/
Expense		     Yield/
Rate(1)		  
Interest-earning assets                                                
Federal funds sold and interest-bearing deposits with banks   $ 71,004     $ 891       5.03 %   $ 80,909     $ 180       0.89 %
Investment securities, taxable     93,922       623       2.66 %     98,527       404       1.64 %
Investment securities, nontaxable(2)     10,200       108       4.24 %     10,382       56       2.16 %
Loans(3)     3,511,225       41,089       4.69 %     2,795,274       26,610       3.82 %
Total interest-earning assets     3,686,351       42,711       4.65 %     2,985,092       27,250       3.66 %
Noninterest-earning assets     155,847                       154,659                  
Total assets   $ 3,842,198                     $ 3,139,751                  
Interest-bearing liabilities                                                
NOW accounts   $ 297,234       537       0.72 %   $ 389,563       144       0.15 %
Savings & money market     1,727,009       15,298       3.55 %     1,267,174       1,200       0.38 %
Time deposits     573,095       6,102       4.27 %     278,101       500       0.72 %
Total interest-bearing deposits     2,597,338       21,937       3.39 %     1,934,838       1,844       0.38 %
FHLB advances and other borrowings     135,922       1,382       4.08 %     53,179       105       0.79 %
Subordinated debentures     36,251       542       6.00 %     36,143       405       4.49 %
Total interest-bearing liabilities     2,769,511       23,861       3.46 %     2,024,160       2,354       0.47 %
Noninterest-bearing liabilities     771,388                       833,943                  
Shareholders’ equity     301,299                       281,648                  
Total liabilities and shareholders’ equity   $ 3,842,198                     $ 3,139,751                  
Net interest spread                     1.19 %                     3.19 %
Net interest income (tax equivalent) / margin           $ 18,850       2.05 %           $ 24,896       3.35 %
Less:  tax-equivalent adjustment(2)             (25 )                     (12 )        
Net interest income           $ 18,825                     $ 24,884          

 

(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.

Our net interest margin (TE) decreased 130 basis points to 2.05% during the second quarter of 2023, compared to the second quarter of 2022, primarily due to higher costs on our interest-bearing liabilities. Our average interest-bearing liabilities grew by $745.4 million during the second quarter of 2023, while the rate on these liabilities increased 299 basis points to 3.46%. In contrast, our average interest-earning assets grew by $701.3 million during the second quarter of 2023 while the average yield on these assets increased by 99 basis points to 4.65% during the same period.

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

The increase in average interest-earning assets for the second quarter of 2023 related primarily to an increase of $716.0 million in our average loan balances. The 99 basis point increase in yield on our interest-earning assets was driven by an 87 basis point increase in loan yield as our loan portfolio has repriced at rates higher than historical rates for the majority of the past 12 months.

Our net interest spread was 1.19% for the second quarter of 2023 compared to 3.19% for the same period in 2022. The net interest spread is the difference between the yield we earn on our interest-earning assets and the rate we pay on our interest-bearing liabilities. The 299 basis point increase in the rate on our interest-bearing liabilities was partially offset by a 99 basis point increase in yield on our interest-bearing assets, resulting in a 200 basis point decrease in our net interest spread for the 2023 period. We anticipate continued pressure on our net interest spread and net interest margin in future periods as a significant portion of our loan portfolio is at fixed rates which do not move with the Federal Reserve’s interest rate increases, while our deposit accounts reprice much more quickly. To partially address this continued pressure, we entered into a pay-fixed portfolio layer method fair value swap, designated as a hedging instrument, with a total notional amount of $200.0 million in the second quarter of 2023.

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The financial implication of this swap is described in further detail in “NOTE 5 – Derivative Financial Instruments” above.

Average Balances, Income and Expenses, Yields and Rates

       
    For the Six Months Ended June 30,  
    2023     2022  
(dollars in thousands)   Average
Balance		     Income/
Expense		     Yield/
Rate(1)		     Average
Balance		     Income/
Expense		     Yield/
Rate(1)		  
Interest-earning assets                                                
Federal funds sold and interest-bearing deposits with banks   $ 78,445     $ 1,860       4.78 %   $ 84,980     $ 239       0.57 %
Investment securities, taxable     90,739       1,152       2.56 %     105,771       829       1.58 %
Investment securities, nontaxable(2)     10,233       216       4.25 %     11,139       121       2.19 %
Loans(3)     3,423,365       77,837       4.59 %     2,685,237       50,541       3.80 %
Total interest-earning assets     3,602,782       81,065       4.54 %     2,887,127       51,730       3.61 %
Noninterest-earning assets     158,563                       153,618                  
Total assets   $ 3,761,345                     $ 3,040,745                  
Interest-bearing liabilities                                                
NOW accounts   $ 300,189       977       0.66 %   $ 397,763       259       0.13 %
Savings & money market     1,694,624       27,290       3.25 %     1,254,768       1,818       0.29 %
Time deposits     558,341       10,848       3.92 %     218,741       675       0.62 %
Total interest-bearing deposits     2,553,154       39,115       3.09 %     1,871,272       2,752       0.30 %
FHLB advances and other borrowings     77,408       1,582       4.12 %     35,004       118       0.68 %
Subordinated debentures     36,237       1,069       5.95 %     36,130       784       4.38 %
Total interest-bearing liabilities     2,666,799       41,766       3.16 %     1,942,406       3,654       0.38 %
Noninterest-bearing liabilities     794,627                       818,207                  
Shareholders’ equity     299,919                       280,132                  
Total liabilities and shareholders’ equity   $ 3,761,345                     $ 3,040,745                  
Net interest spread                     1.38 %                     3.23 %
Net interest income (tax equivalent) / margin           $ 39,298       2.20 %           $ 48,076       3.36 %
Less:  tax-equivalent adjustment(2)             (49 )                     (28 )        
Net interest income           $ 39,249                     $ 48,048          

 

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

During the first six months of 2023, our net interest margin (TE) decreased by 116 basis points to 2.20%, compared to 3.36% for the first six months of 2022, driven by the increase in yield on our interest-bearing liabilities. Our average interest-bearing liabilities grew by $724.4 million from the prior year, with the average yield increasing by 278 basis points to 3.16%. In contrast, our average interest-earning assets grew by $715.7 million, while the rate on these assets increased 93 basis points to 4.54%.

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

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

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

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Rate/Volume Analysis

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

       
    Three Months Ended  
    June 30, 2023 vs. 2022     June 30, 2022 vs. 2021  
    Increase (Decrease) Due to     Increase (Decrease) Due to  
(dollars in thousands)   Volume     Rate     Rate/
Volume		     Total     Volume     Rate     Rate/
Volume		     Total  
Interest income                                                                
Loans   $ 6,888       6,030       1,561       14,479     $ 5,417       (979 )     (237 )     4,201  
Investment securities     (20 )     291       (13 )     258       33       130       16       179  
Federal funds sold and interest-bearing deposits with banks     (22 )     835       (102 )     711       (17 )     212       (68 )     127  
Total interest income     6,846       7,156       1,446       15,448       5,433       (637 )     (289 )     4,507  
Interest expense                                                                
Deposits     403       16,159       3,531       20,093       195       602       127       924  
FHLB advances and other borrowings     165       435       676       1,276       2,415       (2 )     (2,309 )     104  
Subordinated debentures     4       133       1       138       1       24       -       25  
Total interest expense     572       16,727       4,208       21,507       2,611       624       (2,182 )     1,053  
Net interest income   $ 6,274       (9,571 )     (2,762 )     (6,059 )   $ 2,822       (1,261 )     1,893       3,454  

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

       
    Six Months Ended  
    June 30, 2023 vs. 2022     June 30, 2022 vs. 2021  
    Increase (Decrease) Due to     Increase (Decrease) Due to  
(dollars in thousands)   Volume     Rate     Rate/
Volume		     Total     Volume   Rate     Rate/
Volume		     Total  
Interest income                                                                
Loans   $ 14,084       10,333       2,879       27,296     $ 9,012     (2,786 )     (560 )     5,666  
Investment securities     (126 )     604       (82 )     396       120       191       41       352  
Federal funds sold and interest-bearing deposits with banks     (18 )     1,776       (137 )     1,621       (18 )     195       (37 )     140  
Total interest income     13,940       12,713       2,660       29,313       9,114       (2,400 )     (556 )     6,158  
Interest expense                                                                
Deposits     682       28,597       7,084       36,363       400       232       45       677  
FHLB advances and other borrowings     143       597       725       1,465       70       2       40       112  
Subordinated debentures     2       281       1       284       2       22       -       24  
Total interest expense     827       29,475       7,810       38,112       472       256       85       813  
Net interest income   $ 13,113       (16,762 )     (5,150 )     (8,799 )   $ 8,642     (2,656 )     (641 )     5,345  
                                                                 

Net interest income for the first half of 2023 was $39.2 million compared to $48.0 million for 2022, a $8.8 million, or 18.3%, decrease. The decrease in net interest income during 2023 was driven by a $38.1 million increase in interest expense, related primarily to higher rates on our interest-bearing deposits.

Provision for Credit Losses

The provision for credit losses, which includes a provision for losses on unfunded commitments, is a charge to earnings to maintain the allowance for credit losses and reserve for unfunded commitments at levels consistent with management’s assessment of expected losses in the loan portfolio at the balance sheet date. We review the adequacy of the allowance for credit losses on a quarterly basis. Please see the discussion included in Note 4 – Loans and Allowance for Credit Losses for a description of the factors we consider in determining the amount of the provision we expense each period to maintain this allowance.

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We recorded a $910,000 provision for credit losses in the second quarter of 2023, compared to a $1.8 million provision for credit losses in the second quarter of 2022. We recorded a provision expense of $2.7 million and $2.9 million for the six months ended June 30, 2023 and June 30, 2022, respectively. The $910,000 provision in 2023, which included a $1.1 million provision for credit losses and a $185,000 reversal for unfunded commitments, was driven by $119.7 million in loan growth during the second quarter. The $2.7 million provision expense for the first half of 2023 included a $3.0 million provision for credit losses and a $215,000 reversal for unfunded commitments.

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)   2023     2022     2023     2022  
Mortgage banking income   $ 1,337       1,184       1,959       2,678  
Service fees on deposit accounts     331       327       656       631  
ATM and debit card income     536       548       1,091       1,062  
Income from bank owned life insurance     338       315       670       630  
Loss on disposal of fixed assets     -       (394 )     -       (394 )
Other income     194       285       404       587  
Total noninterest income   $ 2,736       2,265       4,780       5,194  

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

● Mortgage banking income increased by $153,000, or 12.9%, from the second quarter of 2022 driven by an increase in gain on sale of loans and an increase in the unrealized gain from the related derivative.
● The second quarter of 2022 included a loss on disposal of fixed assets from our prior headquarters building.

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

● Mortgage banking income decreased by $719,000, or 26.8%, from the first half of 2022 driven by lower mortgage volume and less income recorded on the related derivative.
● Other income decreased $183,000, or 31.2%, primarily due to a decrease in various loan and appraisal fees reported as income.

Noninterest expenses

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

                   
    Three months ended
June 30,		     Six months ended
June 30,		  
(dollars in thousands)   2023     2022     2023     2022  
Compensation and benefits   $ 10,287       9,915       20,643       19,371  
Occupancy     2,518       2,219       4,975       3,997  
Outside service and data processing costs     1,705       1,528       3,334       3,062  
Insurance     897       367       1,586       628  
Professional fees     751       693       1,410       1,292  
Marketing     335       329       701       596  
Other     900       737       1,848       1,528  
Total noninterest expense   $ 17,393       15,788       34,497       30,474  

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

● Compensation and benefits expense increased $372,000, or 3.8%, relating primarily to annual salary increases and hiring of new team members as well as higher benefit related expenses.
● Occupancy costs increased $299,000, or 13.5%, driven by increased depreciation, maintenance and property tax expenses on our new headquarters building.
● Insurance costs increased $530,000, or 144.4%, as a result of higher FDIC insurance premiums.

Noninterest expense was $34.5 million for the first half of 2023, a $4.0 million, or 13.2%, increase from noninterest expense of $30.5 million for the first half of 2022. The increase in noninterest expense was driven primarily by increases in compensation and benefits, occupancy, and insurance expense as discussed above.

Our efficiency ratio was 80.7% for the second quarter of 2023, compared to 58.2% for the second quarter of 2022. The efficiency ratio represents the percentage of one dollar of expense required to be incurred to earn a full dollar of revenue and is computed by dividing noninterest expense by the sum of net interest income and noninterest income. The higher ratio during the second quarter of 2023, compared to the second quarter of 2022, relates primarily to the decrease in net interest income and noninterest income, combined with higher noninterest expenses.

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

Balance Sheet Review

Investment Securities

At June 30, 2023, the $104.1 million in our investment securities portfolio represented approximately 2.6% of our total assets. Our available for sale investment portfolio included corporate bonds, US treasuries, US government agency securities, state and political subdivisions, asset-backed securities and mortgage-backed securities with a fair value of $91.5 million and an amortized cost of $107.6 million, resulting in an unrealized loss of $16.1 million. At December 31, 2022, the $104.2 million in our investment securities portfolio represented approximately 2.8% of our total assets, including investment securities with a fair value of $93.3 million and an amortized cost of $110.3 million for an unrealized loss of $17.0 million.

Loans

Since loans typically provide higher interest yields than other types of interest earning assets, a substantial percentage of our earning assets are invested in our loan portfolio. Average loans, excluding mortgage loans held for sale, for the six months ended June 30, 2023 and 2022 were $3.42 billion and $2.67 billion, respectively. Before the allowance for credit losses, total loans outstanding at June 30, 2023 and December 31, 2022 were $3.54 billion and $3.27 billion, respectively.

The principal component of our loan portfolio is loans secured by real estate mortgages. As of June 30, 2023, our loan portfolio included $3.0 billion, or 84.1%, of real estate loans, compared to $2.78 billion, or 84.8%, at December 31, 2022. Most of our real estate loans are secured by residential or commercial property. We obtain a security interest in real estate, in addition to any other available collateral, in order to increase the likelihood of the ultimate repayment of the loan. Generally, we limit the loan-to-value ratio on loans to coincide with the appropriate regulatory guidelines. We attempt to maintain a relatively diversified loan portfolio to help reduce the risk inherent in concentration in certain types of collateral and business types. Home equity lines of credit totaled $185.6 million as of June 30, 2023, of which approximately 47% were in a first lien position, while the remaining balance was second liens. At December 31, 2022, our home equity lines of credit totaled $179.3 million, of which approximately 48% were in first lien positions, while the remaining balance was in second liens. The average home equity loan had a balance of approximately $85,000 and a loan to value of 75% as of June 30, 2023, compared to an average loan balance of $84,000 and a loan to value of approximately 73% as of December 31, 2022.

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Further, 0.6% of our total home equity lines of credit were over 30 days past due as of both June 30, 2023 and December 31, 2022.

Following is a summary of our loan composition at June 30, 2023 and December 31, 2022. During the first six months of 2023, our loan portfolio increased by $264.2 million, or 8.1%, with a 7.0% increase in commercial loans while consumer loans increased by 10.2% during the period. The majority of the increase was in loans secured by real estate. Our level of non-owner occupied commercial real estate and multi-family loans represents 273.2% of the Bank’s total risk-based capital at June 30, 2023. Our consumer real estate portfolio grew by $116.6 million and includes high quality 1-4 family consumer real estate loans. Our average consumer real estate loan currently has a principal balance of $470,000, a term of 25 years, and an average rate of 3.98% as of June 30, 2023, compared to a principal balance of $468,000, a term of 22 years, and an average rate of 3.71% as of December 31, 2022.

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

Nonperforming assets

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

Following is a summary of our nonperforming assets.

             
(dollars in thousands)   June 30, 2023     December 31, 2022  
Commercial   $ 891       429  
Consumer     2,125       2,198  
Total nonaccrual loans     3,016       2,627  
Other real estate owned     -       -  
Total nonperforming assets   $ 3,016       2,627  

At June 30, 2023, nonperforming assets were $3.0 million, or 0.08% of total assets and 0.09% of gross loans. Comparatively, nonperforming assets were $2.6 million, or 0.07% of total assets and 0.08% of gross loans at December 31, 2022.

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Nonaccrual loans increased $389,000 during the first six months of 2023 due primarily to one commercial relationship totaling $733,000, which is secured by real estate, that was added to nonaccrual status offset by $360,000 of paydowns on the nonaccrual loans.

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

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

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

At June 30, 2023, individually evaluated loans totaled $4.8 million with a reserve of approximately $905,000 allocated in the allowance for credit losses. During the first six months of 2023, the average recorded investment in individually evaluated loans was approximately $6.0 million. Comparatively, individually evaluated loans totaled $7.1 million at December 31, 2022 for which $6.8 million of these loans had a reserve of approximately $1.3 million allocated in the allowance for credit losses. During 2022, the average recorded investment in individually evaluated loans was approximately $7.6 million.

Allowance for Credit Losses

The allowance for credit losses was $41.1 million, representing 1.16% of outstanding loans and providing coverage of 1,363.11%, of nonperforming loans at June 30, 2023 compared to $38.6 million, or 1.18% of outstanding loans and 1470.84% of nonperforming loans at December 31, 2022. At June 30, 2022, the allowance for credit losses was $34.2 million, or 1.20% of outstanding loans and 1,166.70% of nonperforming loans.

Deposits and Other Interest-Bearing Liabilities

Our primary source of funds for loans and investments is our deposits and advances from the FHLB. In the past, we have chosen to obtain a portion of our certificates of deposits from areas outside of our market in order to obtain longer term deposits than are readily available in our local market. Our internal guidelines regarding the use of brokered CDs limit our brokered CDs to 20% of total deposits, which allows us to take advantage of the attractive terms that wholesale funding can offer while mitigating the related inherent risk.

Our retail deposits represented $3.01 billion, or 87.7% of total deposits, while our wholesale deposits represented $421.6 million, or 12.3%, of total deposits at June 30, 2023. At December 31, 2022, retail deposits represented $2.90 billion, or 92.5%, of our total deposits. Wholesale deposits were $236.2 million, representing 7.5% of our total deposits, at December 31, 2022. Our loan-to-deposit ratio was 103% at June 30, 2023 and 104% at December 31, 2022.

The following is a detail of our deposit accounts:

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    June 30,     December 31,  
(dollars in thousands)   2023     2022  
Non-interest bearing   $ 698,084       804,115  
Interest bearing:                
NOW accounts     308,762       318,030  
Money market accounts     1,692,900       1,506,418  
Savings     36,243       40,673  
Time, less than $250,000     114,691       89,876  
Time and out-of-market deposits, $250,000 and over     582,338       374,752  
Total deposits   $ 3,433,018       3,133,864  

During the past 12 months, we continued our focus on increasing core deposits, which exclude out-of-market deposits and time deposits of $250,000 or more, in order to provide a relatively stable funding source for our loan portfolio and other earning assets. Our core deposits were $2.88 billion and $2.76 billion at June 30, 2023, and December 31, 2022, respectively. In addition, at June 30, 2023 and December 31, 2022, we estimate that we have approximately $968.1 million and $1.1 billion, or 28.2% and 36.6% of total deposits, respectively, in uninsured and uncollateralized deposits, including related interest accrued and unpaid. Uninsured deposits alone represented $1.4 billion and $1.5 billion at June 30, 2023 and December 31, 2022, respectively. Since it is not reasonably practicable to provide a precise measure of uninsured deposits, the amounts above are estimates and are based on the same methodologies and assumptions used by the FDIC for the Bank’s regulatory reporting requirements.

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

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

During the first six months of 2023, our average transaction account balances increased by $314.7 million, or 13.0%, from the prior year, while our average time deposit balances increased by $340,000, or 155.3%. We have experienced record growth in new account openings throughout our footprint during the first half of 2023. In addition, we have added $234.1 million in wholesale time deposits.

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

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

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

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

Liquidity and Capital Resources

Liquidity is our ability to fund operations, to meet depositor withdrawals, to provide for customers’ credit needs, and to meet maturing obligations and existing commitments. Our liquidity principally depends on our cash flows from operating activities, investment in and maturity of assets, changes in balances of deposits and borrowings, and our ability to borrow funds. The bank failures in the first five months of 2023 exemplify the potential serious results of the unexpected inability of insured depository institutions to obtain needed liquidity to satisfy deposit withdrawal requests, including how quickly such requests can accelerate once uninsured depositors lose confidence in an institutions ability to satisfy its obligations to depositors. We seek to ensure our funding needs are met by maintaining a level of liquidity through asset and liability management. Liquidity management involves monitoring our sources and uses of funds in order to meet our day-to-day cash flow requirements while maximizing profits. Liquidity management is made more complicated because different balance sheet components are subject to varying degrees of management control. For example, the timing of maturities of our investment portfolio is fairly predictable and subject to a high degree of control at the time investment decisions are made. However, net deposit inflows and outflows are far less predictable and are not subject to the same degree of control.

At June 30, 2023 and December 31, 2022 our cash and cash equivalents totaled $205.1 million and $170.9 million, respectively, or 5.1% and 4.6% of total assets, respectively. Our investment securities at June 30, 2023 and December 31, 2022 amounted to $104.1 million and $104.2 million, respectively, or 2.6% and 2.8% of total assets, respectively. Investment securities traditionally provide a secondary source of liquidity since they can be converted into cash in a timely manner.

Our ability to maintain and expand our deposit base and borrowing capabilities serves as our primary source of liquidity. We plan to meet our future cash needs through the liquidation of temporary investments, the generation of deposits, loan payoffs, and from additional borrowings. In addition, we will receive cash upon the maturity and sale of loans and the maturity of investment securities. We maintain five federal funds purchased lines of credit with correspondent banks totaling $118.5 million for which there were no borrowings against the lines of credit at June 30, 2023.

We are also a member of the FHLB, from which applications for borrowings can be made. The FHLB requires that securities, qualifying mortgage loans, and stock of the FHLB owned by the Bank be pledged to secure any advances from the FHLB. The unused borrowing capacity currently available from the FHLB at June 30, 2023 was $609.0 million, based primarily on the Bank’s qualifying mortgages available to secure any future borrowings. However, we are able to pledge additional securities to the FHLB in order to increase our available borrowing capacity. In addition, at June 30, 2023 and December 31, 2022 we had $392.9 million and $341.5 million, respectively, of letters of credit outstanding with the FHLB to secure client deposits. Further, in July 2023, we enrolled in the Federal Reserve’s Bank Term Funding Program which offer loans of up to one year in length if we pledge collateral eligible for purchase by the Federal Reserve Banks in open market operations, such as U.S. Treasuries, U.S. agency securities, and U.S. agency mortgage-backed securities.

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

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We also have a line of credit with another financial institution for $15.0 million, which was unused at June 30, 2023. The line of credit was renewed on December 21, 2021 at an interest rate of One Month CME Term SOFR plus 3.5% and a maturity date of December 20, 2023. As of June 30, 2023, we were in violation of one particular loan covenant and have subsequently received a waiver from the lender regarding this violation.

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

Total shareholders’ equity was $301.5 million at June 30, 2023 and $294.5 million at December 31, 2022. The $7.0 million increase from December 31, 2022 is primarily related to net income of $5.2 million during the first six months of 2023, stock option exercises and equity compensation expenses of $956,000, and a decrease in the unrealized loss on securities available for sale of $700,000.

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

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

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

Regulatory capital rules, which we refer to Basel III, impose minimum capital requirements for bank holding companies and banks. The Basel III rules apply to all national and state banks and savings associations regardless of size and bank holding companies and savings and loan holding companies other than “small bank holding companies,” generally holding companies with consolidated assets of less than $3 billion. In order to avoid restrictions on capital distributions or discretionary bonus payments to executives, a covered banking organization must maintain a “capital conservation buffer” on top of our minimum risk-based capital requirements. This buffer must consist solely of common equity Tier 1, but the buffer applies to all three measurements (common equity Tier 1, Tier 1 capital and total capital). The capital conservation buffer consists of an additional amount of CET1 equal to 2.5% of risk-weighted assets.

To be considered “well-capitalized” for purposes of certain rules and prompt corrective action requirements, the Bank must maintain a minimum total risked-based capital ratio of at least 10%, a total Tier 1 capital ratio of at least 8%, a common equity Tier 1 capital ratio of at least 6.5%, and a leverage ratio of at least 5%. As of June 30, 2023, our capital ratios exceed these ratios and we remain “well capitalized.”

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

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          June 30, 2023  
    Actual     For capital
adequacy purposes
minimum plus the
capital conservation
buffer		     To be well capitalized
under prompt
corrective
action provisions
minimum		  
(dollars in thousands)   Amount     Ratio     Amount     Ratio     Amount     Ratio  
Total Capital (to risk weighted assets)   $ 380,560       12.10 %   $ 251,669       8.00 %   $ 314,586       10.00 %
Tier 1 Capital (to risk weighted assets)     341,215       10.85 %     188,751       6.00 %     251,669       8.00 %
Common Equity Tier 1 Capital (to risk weighted assets)     341,215       10.85 %     141,564       4.50 %     204,481       6.50 %
Tier 1 Capital (to average assets)     341,215       8.85 %     154,264       4.00 %     192,830       5.00 %
                                                 
     

December 31, 2022

  
      Actual       For capital
adequacy purposes
minimum plus the
capital conservation
buffer		       To be well capitalized
under prompt
corrective
action provisions
minimum		  
(dollars in thousands)     Amount       Ratio       Amount       Ratio       Amount       Ratio  
Total Capital (to risk weighted assets)   $ 366,988       12.45 %   $ 235,892       8.00 %   $ 294,865       10.00 %
Tier 1 Capital (to risk weighted assets)     330,108       11.20 %     176,919       6.00 %     235,892       8.00 %
Common Equity Tier 1 Capital (to risk weighted assets)     330,108       11.20 %     132,689       4.50 %     191,662       6.50 %
Tier 1 Capital (to average assets)     330,108       9.43 %     140,040       4.00 %     175,050       5.00 %

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

             
    June 30, 2023  
    Actual     For capital
adequacy purposes
minimum plus the
capital conservation
buffer (1)		     To be well capitalized
under prompt
corrective
action provisions
minimum		  
(dollars in thousands)   Amount     Ratio     Amount     Ratio     Amount     Ratio  
Total Capital (to risk weighted assets)   $ 389,514       12.40 %   $ 251,322       8.00 %     N/A       N/A  
Tier 1 Capital (to risk weighted assets)     327,224       10.42 %     188,491       6.00 %     N/A       N/A  
Common Equity Tier 1 Capital (to risk weighted assets)     314,224       10.00 %     141,369       4.50 %     N/A       N/A  
Tier 1 Capital (to average assets)     327,224       8.48 %     154,286       4.00 %     N/A       N/A  
                                                 
      December 31, 2022  
      Actual       For capital
adequacy purposes
minimum plus the
capital conservation
buffer (1)		       To be well capitalized
under prompt
corrective
action provisions
minimum		  
(dollars in thousands)     Amount       Ratio       Amount       Ratio       Amount       Ratio  
Total Capital (to risk weighted assets)   $ 380,802       12.91 %   $ 235,892       8.00 %     N/A       N/A  
Tier 1 Capital (to risk weighted assets)     320,922       10.88 %     176,919       6.00 %     N/A       N/A  
Common Equity Tier 1 Capital (to risk weighted assets)     307,922       10.44 %     132,689       4.50 %     N/A       N/A  
Tier 1 Capital (to average assets)     320,922       9.17 %     140,057       4.00 %     N/A       N/A  
(1) The prompt corrective action provisions are only applicable at the Bank level. The Bank exceeded the general minimum regulatory requirements to be considered “well capitalized.”

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

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Effect of Inflation and Changing Prices

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

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

Off-Balance Sheet Risk

Commitments to extend credit are agreements to lend money to a client as long as the client has not violated any material condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require the payment of a fee. At June 30, 2023 unfunded commitments to extend credit were $850.0 million, of which $238.5 million were at fixed rates and $611.5 million were at variable rates. At December 31, 2022, unfunded commitments to extend credit were $878.3 million, of which approximately $318.9 million were at fixed rates and $559.4 million were at variable rates. A significant portion of the unfunded commitments related to commercial business loans and consumer home equity lines of credit. We evaluate each client’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by us upon extension of credit, is based on our credit evaluation of the borrower. The type of collateral varies but may include accounts receivable, inventory, property, plant and equipment, and commercial and residential real estate. As of June 30, 2023, the reserve for unfunded commitments was $2.6 million or 0.30% of total unfunded commitments. As of December 31, 2022, the reserve for unfunded commitments was $2.8 million or 0.32% of total unfunded commitments.

At June 30, 2023 and December 31, 2022, there were commitments under letters of credit for $14.8 million and $14.3 million, respectively. The credit risk and collateral involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Since most of the letters of credit are expected to expire without being drawn upon, they do not necessarily represent future cash requirements.

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

Critical Accounting Estimates

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

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

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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.

As of June 30, 2023, the following table summarizes the forecasted impact on net interest income using a base case scenario given upward and downward movements in interest rates of 100, 200, and 300 basis points based on forecasted assumptions of prepayment speeds, nominal interest rates and loan and deposit repricing rates. Estimates are based on current economic conditions, historical interest rate cycles and other factors deemed to be relevant. However, underlying assumptions may be impacted in future periods which were not known to management at the time of the issuance of the Consolidated Financial Statements. Therefore, management’s assumptions may or may not prove valid. No assurance can be given that changing economic conditions and other relevant factors impacting our net interest income will not cause actual occurrences to differ from underlying assumptions. In addition, this analysis does not consider any strategic changes to our balance sheet which management may consider as a result of changes in market conditions.

Interest rate scenario   Change in net interest
income from base		  
Up 300 basis points     (17.55 )%
Up 200 basis points     (11.67 )%
Up 100 basis points     (5.86 )%
Base     -  
Down 100 basis points     7.60 %
Down 200 basis points     14.60 %
Down 300 basis points     21.12 %

Item 4. CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures

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

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Changes in Internal Control over Financial Reporting

There has been no change in the Company’s internal control over financial reporting during the six months ended June 30, 2023, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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, 2022, as well as cautionary statements contained in this Quarterly Report on Form 10-Q, including those under the caption “Cautionary Warning Regarding Forward-Looking Statements” set forth in Part I, Item 2 of this Form 10-Q, risks and matters described elsewhere in this Form 10-Q, and in our other filings with the SEC.

We are providing these additional risk factors to supplement the risk factors contained in Item 1A. of our (i) Annual Report on Form 10-K for the year ended December 31, 2022 and (ii) Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2023.

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

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

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

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

(a) Not applicable.
(b) Not applicable.
(c) Not applicable.

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Item 3. DEFAULTS UPON SENIOR SECURITIES.

None.

Item 4. MINE SAFETY DISCLOSURES.

Not applicable.

Item 5. OTHER INFORMATION.

None.

Item 6. EXHIBITS.

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

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INDEX TO EXHIBITS

Exhibit
Number		   Description
3.1   Amended and Restated Articles, as amended, of Southern First Bancshares, Inc. (effective May 19, 2023)
     
3.1.1   Amended and Restated Articles, as amended, of Southern First Bancshares, Inc. (effective May 19, 2023) (redline version of amended sections)
     
10.1   Employment Agreement by and between Southern First Bank and Calvin C. Hurst, dated March 21, 2019.*
     
31.1   Rule 13a-14(a) Certification of the Principal Executive Officer.
     
31.2   Rule 13a-14(a) Certification of the Principal Financial Officer.
     
32   Section 1350 Certifications.
     
101   The following materials from the Quarterly Report on Form 10-Q of Southern First Bancshares, Inc. for the quarter ended June 30, 2023, formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statement of Changes in Shareholders’ Equity, (v) Consolidated Statements of Cash Flows and (vi) Notes to Unaudited Consolidated Financial Statements.
     
104   Cover Page Interactive Data File (embedded within the Inline XBRL document)

 

 

*   Management contract or compensatory plan or arrangement.

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SIGNATURES

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

  

    SOUTHERN FIRST BANCSHARES, INC.
    Registrant
     
     
Date: August 1, 2023   /s/R. Arthur Seaver, Jr.
    R. Arthur Seaver, Jr.
    Chief Executive Officer (Principal Executive Officer)
     
     
Date: August 1, 2023   /s/D. Andrew Borrmann
    D. Andrew Borrmann
    Chief Financial Officer (Principal Financial and Accounting Officer)

 

48

EX-3.1 2 sfst4220081-ex3_1.htm AMENDED AND RESTATED

Exhibit 3.1

AMENDED AND RESTATED

ARTICLES OF INCORPORATION

OF

SOUTHERN FIRST BANCSHARES, INC.

(as amended effective May 19, 2023)

(restated for purposes of Item 601(b)(3) of Regulation S-K only)

ARTICLE ONE

NAME

The name of the corporation is Southern First Bancshares, Inc. (the “Corporation”).

ARTICLE TWO

ADDRESS AND REGISTERED AGENT

The street address of the registered office of the Corporation shall be 6 Verdae Boulevard, Greenville, South Carolina 29607. The name of the Corporation’s registered agent at such address shall be R. Arthur Seaver.

ARTICLE THREE

CAPITALIZATION

The Corporation shall have the authority, exercisable by its board of directors, to issue up to 10,000,000 shares of voting common stock, par value $.01 per share, and to issue up to 10,000,000 shares of preferred stock, par value $.01 per share, of which 17,299 shares have been designated as Fixed Rate Cumulative Perpetual Preferred Stock, Series T, having the voting powers, preferences and relative participating, optional and other special rights, and qualifications, limitations and restrictions thereof set forth on the Certificate of Designations attached hereto and made a part hereof. The board of directors shall have the authority to specify the preferences, limitations and relative rights of each class of preferred stock.

ARTICLE FOUR

PREEMPTIVE RIGHTS

The shareholders shall not have any preemptive rights to acquire additional stock in the Corporation.

ARTICLE FIVE

NO CUMULATIVE VOTING RIGHTS

The Corporation elects not to have cumulative voting, and no shares issued by this Corporation may be cumulatively voted for directors of the Corporation (or for any other decision).

ARTICLE SIX

LIMITATION ON DIRECTOR LIABILITY

No director of the Corporation shall be personally liable to the Corporation or its shareholders for monetary damages for breach of the duty of care or any other duty as a director, except that such liability shall not be eliminated for:

(i) any breach of the director’s duty of loyalty to the Corporation or its shareholders; (ii) acts or omissions not in good faith or which involve gross negligence, intentional misconduct, or a knowing violation of law;

 


(iii)  liability imposed under Section 33-8-330 (or any successor provision or redesignation thereof) of the Act; and

(iv)  any transaction from which the director derived an improper personal benefit.

If at any time the Act shall have been amended to authorize the further elimination or limitation of the liability of a director, then the liability of each director of the Corporation shall be eliminated or limited to the fullest extent permitted by the Act, as so amended, without further action by the shareholders, unless the provisions of the Act, as amended, require further action by the shareholders.

Any repeal or modification of the foregoing provisions of this Article Six shall not adversely affect the elimination or limitation of liability or alleged liability pursuant hereto of any director of the Corporation for or with respect to any alleged act or omission of the director occurring prior to such a repeal or modification.

ARTICLE SEVEN

CONTROL SHARE ACQUISITIONS

The provisions of Title 35, Chapter 2, Article 1 of the Code of Laws of South Carolina shall not apply to control share acquisitions of shares of the Corporation.

ARTICLE EIGHT

CLASSIFIED BOARD OF DIRECTORS

At the annual meeting of shareholders that is held in calendar year 2023, the Class III directors shall be elected for a term expiring at the annual of meeting of shareholders that is held in calendar year 2026 and until such directors’ successors have been elected and qualified. At the annual meeting of shareholders that is held in calendar year 2024, the Class I directors shall be elected for a term expiring at the annual meeting of shareholders that is held in calendar year 2025 and until such directors’ successors shall have been elected and qualified. At the annual meeting of shareholders that is held in calendar year 2025, the Class I and Class II directors shall be elected for a term expiring at the annual meeting of shareholders that is held in calendar year 2026 and until such directors’ successors shall have been elected and qualified. At each annual shareholders’ meeting held thereafter, all directors shall be elected for terms expiring at the next annual meeting of shareholders and until such directors’ successors shall have been elected and qualified. Each director, except in the case of his earlier death, written resignation, retirement, disqualification or removal, shall serve for the duration of his term, as staggered, and thereafter until his successor shall have been elected and qualified.

ARTICLE NINE

CONSIDERATION OF OTHER CONSTITUENCIES

In discharging the duties of their respective positions and in determining what is in the best interests of the Corporation, the board of directors, committees of the board of directors, and individual directors, in addition to considering the effects of any actions on the Corporation and its shareholders, may consider the interests of the employees, customers, suppliers, creditors, and other constituencies of the Corporation and its subsidiaries, the communities and geographical areas in which the Corporation and its subsidiaries operate or are located, and all other factors such directors consider pertinent. This provision solely grants discretionary authority to the board of directors and shall not be deemed to provide to any other constituency any right to be considered.

2


CERTIFICATE OF DESIGNATIONS

OF

FIXED RATE CUMULATIVE PERPETUAL PREFERRED STOCK, SERIES T

OF

SOUTHERN FIRST BANCSHARES, INC.

Pursuant to the provisions of the articles of incorporation and the bylaws of the Company and applicable law, a series of Preferred Stock, $0.01 par value per share, of the Company be and hereby is created, and that the designation and number of shares of such series, and the voting and other powers, preferences and relative, participating, optional or other rights, and the qualifications, limitations and restrictions thereof, of the shares of such series, are as follows:

Part 1. Designation and Number of Shares. There is hereby created out of the authorized and unissued shares of preferred stock of the Company a series of preferred stock designated as the “Fixed Rate Cumulative Perpetual Preferred Stock, Series T” (the “Designated Preferred Stock”). The authorized number of shares of Designated Preferred Stock shall be 17,299.

Part 2. Standard Provisions. The Standard Provisions contained in Annex A attached hereto are incorporated herein by reference in their entirety and shall be deemed to be a part of this Certificate of Designations to the same extent as if such provisions had been set forth in full herein.

Part. 3. Definitions. The following terms are used in this Certificate of Designations (including the Standard Provisions in Annex A attached hereto) as defined below:

(a) “Common Stock” means the common stock, par value $0.01 per share, of the Corporation.

(b) “Dividend Payment Date” means February 15, May 15, August 15 and November 15 of each year.

(c) “Junior Stock” means the Common Stock, and any other class or series of stock of the Company the terms of which expressly provide that it ranks junior to Designated Preferred Stock as to dividend rights and/or as to rights on liquidation, dissolution or winding up of the Company.

(d) “Liquidation Amount” means $1,000.00 per share of Designated Preferred Stock.

(e) “Minimum Amount” means $4,324,750.

(f) “Parity Stock” means any class or series of stock of the Company (other than Designated Preferred Stock) the terms of which do not expressly provide that such class or series will rank senior or junior to Designated Preferred Stock as to dividend rights and/or as to rights on liquidation, dissolution or winding up of the Company (in each case without regard to whether dividends accrue cumulatively or non-cumulatively).

(g) “Signing Date” means the Original Issue Date.

Part. 4. Certain Voting Matters. Holders of shares of Designated Preferred Stock will be entitled to one vote for each such share on any matter on which holders of Designated Preferred Stock are entitled to vote, including any action by written consent.

[Remainder of Page Intentionally Left Blank]

 


ANNEX A

STANDARD PROVISIONS

Section 1. General Matters. Each share of Designated Preferred Stock shall be identical in all respects to every other share of Designated Preferred Stock. The Designated Preferred Stock shall be perpetual, subject to the provisions of Section 5 of these Standard Provisions that form a part of the Certificate of Designations. The Designated Preferred Stock shall rank equally with Parity Stock and shall rank senior to Junior Stock with respect to the payment of dividends and the distribution of assets in the event of any dissolution, liquidation or winding up of the Corporation.

Section 2. Standard Definitions. As used herein with respect to Designated Preferred Stock:

(a) “Applicable Dividend Rate” means (i) during the period from the Original Issue Date to, but excluding, the first day of the first Dividend Period commencing on or after the fifth anniversary of the Original Issue Date, 5% per annum and (ii) from and after the first day of the first Dividend Period commencing on or after the fifth anniversary of the Original Issue Date, 9% per annum.

(b) “Appropriate Federal Banking Agency” means the “appropriate Federal banking agency” with respect to the Corporation as defined in Section 3(q) of the Federal Deposit Insurance Act (12 U.S.C. Section 1813(q)), or any successor provision.

(c) “Business Combination” means a merger, consolidation, statutory share exchange or similar transaction that requires the approval of the Corporation’s stockholders.

(d) “Business Day” means any day except Saturday, Sunday and any day on which banking institutions in the State of New York generally are authorized or required by law or other governmental actions to close.

(e) “Bylaws” means the bylaws of the Corporation, as they may be amended from time to time.

(f) “Certificate of Designations” means the Certificate of Designations or comparable instrument relating to the Designated Preferred Stock, of which these Standard Provisions form a part, as it may be amended from time to time.

(g) “Charter” means the Corporation’s certificate or articles of incorporation, articles of association, or similar organizational document.

(h) “Dividend Period” has the meaning set forth in Section 3(a).

(i) “Dividend Record Date” has the meaning set forth in Section 3(a).

(j) “Liquidation Preference” has the meaning set forth in Section 4(a).

(k) “Original Issue Date” means the date on which shares of Designated Preferred Stock are first issued.

(l) “Preferred Director” has the meaning set forth in Section 7(b).

 


(m) “Preferred Stock” means any and all series of preferred stock of the Corporation, including the Designated Preferred Stock.

(n) “Qualified Equity Offering” means the sale and issuance for cash by the Corporation to persons other than the Corporation or any of its subsidiaries after the Original Issue Date of shares of perpetual Preferred Stock, Common Stock or any combination of such stock, that, in each case, qualify as and may be included in Tier 1 capital of the Corporation at the time of issuance under the applicable risk-based capital guidelines of the Corporation’s Appropriate Federal Banking Agency (other than any such sales and issuances made pursuant to agreements or arrangements entered into, or pursuant to financing plans which were publicly announced, on or prior to October 13, 2008).

(o) “Share Dilution Amount” has the meaning set forth in Section 3(b).

(p) “Standard Provisions” mean these Standard Provisions that form a part of the Certificate of Designations relating to the Designated Preferred Stock.

(q) “Successor Preferred Stock” has the meaning set forth in Section 5(a).

(r) “Voting Parity Stock” means, with regard to any matter as to which the holders of Designated Preferred Stock are entitled to vote as specified in Sections 7(a) and 7(b) of these Standard Provisions that form a part of the Certificate of Designations, any and all series of Parity Stock upon which like voting rights have been conferred and are exercisable with respect to such matter.

Section 3. Dividends.

(a) Rate. Holders of Designated Preferred Stock shall be entitled to receive, on each share of Designated Preferred Stock if, as and when declared by the Board of Directors or any duly authorized committee of the Board of Directors, but only out of assets legally available therefor, cumulative cash dividends with respect to each Dividend Period (as defined below) at a rate per annum equal to the Applicable Dividend Rate on (i) the Liquidation Amount per share of Designated Preferred Stock and (ii) the amount of accrued and unpaid dividends for any prior Dividend Period on such share of Designated Preferred Stock, if any. Such dividends shall begin to accrue and be cumulative from the Original Issue Date, shall compound on each subsequent Dividend Payment Date (i.e., no dividends shall accrue on other dividends unless and until the first Dividend Payment Date for such other dividends has passed without such other dividends having been paid on such date) and shall be payable quarterly in arrears on each Dividend Payment Date, commencing with the first such Dividend Payment Date to occur at least 20 calendar days after the Original Issue Date. In the event that any Dividend Payment Date would otherwise fall on a day that is not a Business Day, the dividend payment due on that date will be postponed to the next day that is a Business Day and no additional dividends will accrue as a result of that postponement. The period from and including any Dividend Payment Date to, but excluding, the next Dividend Payment Date is a “Dividend Period”, provided that the initial Dividend Period shall be the period from and including the Original Issue Date to, but excluding, the next Dividend Payment Date. Dividends that are payable on Designated Preferred Stock in respect of any Dividend Period shall be computed on the basis of a 360-day year consisting of twelve 30-day months. The amount of dividends payable on Designated Preferred Stock on any date prior to the end of a Dividend Period, and for the initial Dividend Period, shall be computed on the basis of a 360-day year consisting of twelve 30-day months, and actual days elapsed over a 30-day month. Dividends that are payable on Designated Preferred Stock on any Dividend Payment Date will be payable to holders of record of Designated Preferred Stock as they appear on the stock register of the Corporation on the applicable record date, which shall be the 15th calendar day immediately preceding such Dividend Payment Date or such other record date fixed by the Board of Directors or any duly authorized committee of the Board of Directors that is not more than 60 nor less than 10 days prior to such Dividend Payment Date (each, a “Dividend Record Date”).

 


Any such day that is a Dividend Record Date shall be a Dividend Record Date whether or not such day is a Business Day. Holders of Designated Preferred Stock shall not be entitled to any dividends, whether payable in cash, securities or other property, other than dividends (if any) declared and payable on Designated Preferred Stock as specified in this Section 3 (subject to the other provisions of the Certificate of Designations).

(b) Priority of Dividends. So long as any share of Designated Preferred Stock remains outstanding, no dividend or distribution shall be declared or paid on the Common Stock or any other shares of Junior Stock (other than dividends payable solely in shares of Common Stock) or Parity Stock, subject to the immediately following paragraph in the case of Parity Stock, and no Common Stock, Junior Stock or Parity Stock shall be, directly or indirectly, purchased, redeemed or otherwise acquired for consideration by the Corporation or any of its subsidiaries unless all accrued and unpaid dividends for all past Dividend Periods, including the latest completed Dividend Period (including, if applicable as provided in Section 3(a) above, dividends on such amount), on all outstanding shares of Designated Preferred Stock have been or are contemporaneously declared and paid in full (or have been declared and a sum sufficient for the payment thereof has been set aside for the benefit of the holders of shares of Designated Preferred Stock on the applicable record date). The foregoing limitation shall not apply to (i) redemptions, purchases or other acquisitions of shares of Common Stock or other Junior Stock in connection with the administration of any employee benefit plan in the ordinary course of business (including purchases to offset the Share Dilution Amount (as defined below) pursuant to a publicly announced repurchase plan) and consistent with past practice, provided that any purchases to offset the Share Dilution Amount shall in no event exceed the Share Dilution Amount; (ii) purchases or other acquisitions by a broker-dealer subsidiary of the Corporation solely for the purpose of market-making, stabilization or customer facilitation transactions in Junior Stock or Parity Stock in the ordinary course of its business; (iii) purchases by a broker-dealer subsidiary of the Corporation of capital stock of the Corporation for resale pursuant to an offering by the Corporation of such capital stock underwritten by such broker-dealer subsidiary; (iv) any dividends or distributions of rights or Junior Stock in connection with a stockholders’ rights plan or any redemption or repurchase of rights pursuant to any stockholders’ rights plan; (v) the acquisition by the Corporation or any of its subsidiaries of record ownership in Junior Stock or Parity Stock for the beneficial ownership of any other persons (other than the Corporation or any of its subsidiaries), including as trustees or custodians; and (vi) the exchange or conversion of Junior Stock for or into other Junior Stock or of Parity Stock for or into other Parity Stock (with the same or lesser aggregate liquidation amount) or Junior Stock, in each case, solely to the extent required pursuant to binding contractual agreements entered into prior to the Signing Date or any subsequent agreement for the accelerated exercise, settlement or exchange thereof for Common Stock. “Share Dilution Amount” means the increase in the number of diluted shares outstanding (determined in accordance with generally accepted accounting principles in the United States, and as measured from the date of the Corporation’s consolidated financial statements most recently filed with the Securities and Exchange Commission prior to the Original Issue Date) resulting from the grant, vesting or exercise of equity-based compensation to employees and equitably adjusted for any stock split, stock dividend, reverse stock split, reclassification or similar transaction. When dividends are not paid (or declared and a sum sufficient for payment thereof set aside for the benefit of the holders thereof on the applicable record date) on any Dividend Payment Date (or, in the case of Parity Stock having dividend payment dates different from the Dividend Payment Dates, on a dividend payment date falling within a Dividend Period related to such Dividend Payment Date) in full upon Designated Preferred Stock and any shares of Parity Stock, all dividends declared on Designated Preferred Stock and all such Parity Stock and payable on such Dividend Payment Date (or, in the case of Parity Stock having dividend payment dates different from the Dividend Payment Dates, on a dividend payment date falling within the Dividend Period related to such Dividend Payment Date) shall be declared pro rata so that the respective amounts of such dividends declared shall bear the same ratio to each other as all accrued and unpaid dividends per share on the shares of Designated Preferred Stock (including, if applicable as provided in Section 3(a) above, dividends on such amount) and all Parity Stock payable on such Dividend Payment Date (or, in the case of Parity Stock having dividend payment dates different from the Dividend Payment Dates, on a dividend payment date falling within the Dividend Period related to such Dividend Payment Date) (subject to their having been declared by the Board of Directors or a duly authorized committee of the Board of Directors out of legally available funds and including, in the case of Parity Stock that bears cumulative dividends, all accrued but unpaid dividends) bear to each other.

 


If the Board of Directors or a duly authorized committee of the Board of Directors determines not to pay any dividend or a full dividend on a Dividend Payment Date, the Corporation will provide written notice to the holders of Designated Preferred Stock prior to such Dividend Payment Date. Subject to the foregoing, and not otherwise, such dividends (payable in cash, securities or other property) as may be determined by the Board of Directors or any duly authorized committee of the Board of Directors may be declared and paid on any securities, including Common Stock and other Junior Stock, from time to time out of any funds legally available for such payment, and holders of Designated Preferred Stock shall not be entitled to participate in any such dividends.

Section 4. Liquidation Rights.

(a) Voluntary or Involuntary Liquidation. In the event of any liquidation, dissolution or winding up of the affairs of the Corporation, whether voluntary or involuntary, holders of Designated Preferred Stock shall be entitled to receive for each share of Designated Preferred Stock, out of the assets of the Corporation or proceeds thereof (whether capital or surplus) available for distribution to stockholders of the Corporation, subject to the rights of any creditors of the Corporation, before any distribution of such assets or proceeds is made to or set aside for the holders of Common Stock and any other stock of the Corporation ranking junior to Designated Preferred Stock as to such distribution, payment in full in an amount equal to the sum of (i) the Liquidation Amount per share and (ii) the amount of any accrued and unpaid dividends (including, if applicable as provided in Section 3(a) above, dividends on such amount), whether or not declared, to the date of payment (such amounts collectively, the “Liquidation Preference”).

(b) Partial Payment. If in any distribution described in Section 4(a) above the assets of the Corporation or proceeds thereof are not sufficient to pay in full the amounts payable with respect to all outstanding shares of Designated Preferred Stock and the corresponding amounts payable with respect of any other stock of the Corporation ranking equally with Designated Preferred Stock as to such distribution, holders of Designated Preferred Stock and the holders of such other stock shall share ratably in any such distribution in proportion to the full respective distributions to which they are entitled.

(c) Residual Distributions. If the Liquidation Preference has been paid in full to all holders of Designated Preferred Stock and the corresponding amounts payable with respect of any other stock of the Corporation ranking equally with Designated Preferred Stock as to such distribution has been paid in full, the holders of other stock of the Corporation shall be entitled to receive all remaining assets of the Corporation (or proceeds thereof) according to their respective rights and preferences.

(d) Merger, Consolidation and Sale of Assets Not Liquidation. For purposes of this Section 4, the merger or consolidation of the Corporation with any other corporation or other entity, including a merger or consolidation in which the holders of Designated Preferred Stock receive cash, securities or other property for their shares, or the sale, lease or exchange (for cash, securities or other property) of all or substantially all of the assets of the Corporation, shall not constitute a liquidation, dissolution or winding up of the Corporation.

 


Section 5. Redemption.

(a) Optional Redemption. Except as provided below, the Designated Preferred Stock may not be redeemed prior to the first Dividend Payment Date falling on or after the third anniversary of the Original Issue Date. On or after the first Dividend Payment Date falling on or after the third anniversary of the Original Issue Date, the Corporation, at its option, subject to the approval of the Appropriate Federal Banking Agency, may redeem, in whole or in part, at any time and from time to time, out of funds legally available therefor, the shares of Designated Preferred Stock at the time outstanding, upon notice given as provided in Section 5(c) below, at a redemption price equal to the sum of (i) the Liquidation Amount per share and (ii) except as otherwise provided below, any accrued and unpaid dividends (including, if applicable as provided in Section 3(a) above, dividends on such amount) (regardless of whether any dividends are actually declared) to, but excluding, the date fixed for redemption. Notwithstanding the foregoing, prior to the first Dividend Payment Date falling on or after the third anniversary of the Original Issue Date, the Corporation, at its option, subject to the approval of the Appropriate Federal Banking Agency, may redeem, in whole or in part, at any time and from time to time, the shares of Designated Preferred Stock at the time outstanding, upon notice given as provided in Section 5(c) below, at a redemption price equal to the sum of (i) the Liquidation Amount per share and (ii) except as otherwise provided below, any accrued and unpaid dividends (including, if applicable as provided in Section 3(a) above, dividends on such amount) (regardless of whether any dividends are actually declared) to, but excluding, the date fixed for redemption; provided that (x) the Corporation (or any successor by Business Combination) has received aggregate gross proceeds of not less than the Minimum Amount (plus the “Minimum Amount” as defined in the relevant certificate of designations for each other outstanding series of preferred stock of such successor that was originally issued to the United States Department of the Treasury (the “Successor Preferred Stock”) in connection with the Troubled Asset Relief Program Capital Purchase Program) from one or more Qualified Equity Offerings (including Qualified Equity Offerings of such successor), and (y) the aggregate redemption price of the Designated Preferred Stock (and any Successor Preferred Stock) redeemed pursuant to this paragraph may not exceed the aggregate net cash proceeds received by the Corporation (or any successor by Business Combination) from such Qualified Equity Offerings (including Qualified Equity Offerings of such successor). The redemption price for any shares of Designated Preferred Stock shall be payable on the redemption date to the holder of such shares against surrender of the certificate(s) evidencing such shares to the Corporation or its agent. Any declared but unpaid dividends payable on a redemption date that occurs subsequent to the Dividend Record Date for a Dividend Period shall not be paid to the holder entitled to receive the redemption price on the redemption date, but rather shall be paid to the holder of record of the redeemed shares on such Dividend Record Date relating to the Dividend Payment Date as provided in Section 3 above.

(b) No Sinking Fund. The Designated Preferred Stock will not be subject to any mandatory redemption, sinking fund or other similar provisions. Holders of Designated Preferred Stock will have no right to require redemption or repurchase of any shares of Designated Preferred Stock.

(c) Notice of Redemption. Notice of every redemption of shares of Designated Preferred Stock shall be given by first class mail, postage prepaid, addressed to the holders of record of the shares to be redeemed at their respective last addresses appearing on the books of the Corporation. Such mailing shall be at least 30 days and not more than 60 days before the date fixed for redemption. Any notice mailed as provided in this Subsection shall be conclusively presumed to have been duly given, whether or not the holder receives such notice, but failure duly to give such notice by mail, or any defect in such notice or in the mailing thereof, to any holder of shares of Designated Preferred Stock designated for redemption shall not affect the validity of the proceedings for the redemption of any other shares of Designated Preferred Stock. Notwithstanding the foregoing, if shares of Designated Preferred Stock are issued in book-entry form through The Depository Trust Corporation or any other similar facility, notice of redemption may be given to the holders of Designated Preferred Stock at such time and in any manner permitted by such facility.

 


Each notice of redemption given to a holder shall state: (1) the redemption date; (2) the number of shares of Designated Preferred Stock to be redeemed and, if less than all the shares held by such holder are to be redeemed, the number of such shares to be redeemed from such holder; (3) the redemption price; and (4) the place or places where certificates for such shares are to be surrendered for payment of the redemption price.

(d) Partial Redemption. In case of any redemption of part of the shares of Designated Preferred Stock at the time outstanding, the shares to be redeemed shall be selected either pro rata or in such other manner as the Board of Directors or a duly authorized committee thereof may determine to be fair and equitable. Subject to the provisions hereof, the Board of Directors or a duly authorized committee thereof shall have full power and authority to prescribe the terms and conditions upon which shares of Designated Preferred Stock shall be redeemed from time to time. If fewer than all the shares represented by any certificate are redeemed, a new certificate shall be issued representing the unredeemed shares without charge to the holder thereof.

(e) Effectiveness of Redemption. If notice of redemption has been duly given and if on or before the redemption date specified in the notice all funds necessary for the redemption have been deposited by the Corporation, in trust for the pro rata benefit of the holders of the shares called for redemption, with a bank or trust company doing business in the Borough of Manhattan, The City of New York, and having a capital and surplus of at least $500 million and selected by the Board of Directors, so as to be and continue to be available solely therefor, then, notwithstanding that any certificate for any share so called for redemption has not been surrendered for cancellation, on and after the redemption date dividends shall cease to accrue on all shares so called for redemption, all shares so called for redemption shall no longer be deemed outstanding and all rights with respect to such shares shall forthwith on such redemption date cease and terminate, except only the right of the holders thereof to receive the amount payable on such redemption from such bank or trust company, without interest. Any funds unclaimed at the end of three years from the redemption date shall, to the extent permitted by law, be released to the Corporation, after which time the holders of the shares so called for redemption shall look only to the Corporation for payment of the redemption price of such shares.

(f) Status of Redeemed Shares. Shares of Designated Preferred Stock that are redeemed, repurchased or otherwise acquired by the Corporation shall revert to authorized but unissued shares of Preferred Stock (provided that any such cancelled shares of Designated Preferred Stock may be reissued only as shares of any series of Preferred Stock other than Designated Preferred Stock).

Section 6. Conversion. Holders of Designated Preferred Stock shares shall have no right to exchange or convert such shares into any other securities.

Section 7. Voting Rights.

(a) General. The holders of Designated Preferred Stock shall not have any voting rights except as set forth below or as otherwise from time to time required by law.

(b) Preferred Stock Directors.

 


Whenever, at any time or times, dividends payable on the shares of Designated Preferred Stock have not been paid for an aggregate of six quarterly Dividend Periods or more, whether or not consecutive, the authorized number of directors of the Corporation shall automatically be increased by two and the holders of the Designated Preferred Stock shall have the right, with holders of shares of any one or more other classes or series of Voting Parity Stock outstanding at the time, voting together as a class, to elect two directors (hereinafter the “Preferred Directors” and each a “Preferred Director”) to fill such newly created directorships at the Corporation’s next annual meeting of stockholders (or at a special meeting called for that purpose prior to such next annual meeting) and at each subsequent annual meeting of stockholders until all accrued and unpaid dividends for all past Dividend Periods, including the latest completed Dividend Period (including, if applicable as provided in Section 3(a) above, dividends on such amount), on all outstanding shares of Designated Preferred Stock have been declared and paid in full at which time such right shall terminate with respect to the Designated Preferred Stock, except as herein or by law expressly provided, subject to revesting in the event of each and every subsequent default of the character above mentioned; provided that it shall be a qualification for election for any Preferred Director that the election of such Preferred Director shall not cause the Corporation to violate any corporate governance requirements of any securities exchange or other trading facility on which securities of the Corporation may then be listed or traded that listed or traded companies must have a majority of independent directors. Upon any termination of the right of the holders of shares of Designated Preferred Stock and Voting Parity Stock as a class to vote for directors as provided above, the Preferred Directors shall cease to be qualified as directors, the term of office of all Preferred Directors then in office shall terminate immediately and the authorized number of directors shall be reduced by the number of Preferred Directors elected pursuant hereto. Any Preferred Director may be removed at any time, with or without cause, and any vacancy created thereby may be filled, only by the affirmative vote of the holders a majority of the shares of Designated Preferred Stock at the time outstanding voting separately as a class together with the holders of shares of Voting Parity Stock, to the extent the voting rights of such holders described above are then exercisable. If the office of any Preferred Director becomes vacant for any reason other than removal from office as aforesaid, the remaining Preferred Director may choose a successor who shall hold office for the unexpired term in respect of which such vacancy occurred.

(c) Class Voting Rights as to Particular Matters. So long as any shares of Designated Preferred Stock are outstanding, in addition to any other vote or consent of stockholders required by law or by the Charter, the vote or consent of the holders of at least 66 2/3% of the shares of Designated Preferred Stock at the time outstanding, voting as a separate class, given in person or by proxy, either in writing without a meeting or by vote at any meeting called for the purpose, shall be necessary for effecting or validating:

(i) Authorization of Senior Stock. Any amendment or alteration of the Certificate of Designations for the Designated Preferred Stock or the Charter to authorize or create or increase the authorized amount of, or any issuance of, any shares of, or any securities convertible into or exchangeable or exercisable for shares of, any class or series of capital stock of the Corporation ranking senior to Designated Preferred Stock with respect to either or both the payment of dividends and/or the distribution of assets on any liquidation, dissolution or winding up of the Corporation;

(ii) Amendment of Designated Preferred Stock. Any amendment, alteration or repeal of any provision of the Certificate of Designations for the Designated Preferred Stock or the Charter (including, unless no vote on such merger or consolidation is required by Section 7(c)(iii) below, any amendment, alteration or repeal by means of a merger, consolidation or otherwise) so as to adversely affect the rights, preferences, privileges or voting powers of the Designated Preferred Stock; or

(iii) Share Exchanges, Reclassifications, Mergers and Consolidations.

 


Any consummation of a binding share exchange or reclassification involving the Designated Preferred Stock, or of a merger or consolidation of the Corporation with another corporation or other entity, unless in each case (x) the shares of Designated Preferred Stock remain outstanding or, in the case of any such merger or consolidation with respect to which the Corporation is not the surviving or resulting entity, are converted into or exchanged for preference securities of the surviving or resulting entity or its ultimate parent, and (y) such shares remaining outstanding or such preference securities, as the case may be, have such rights, preferences, privileges and voting powers, and limitations and restrictions thereof, taken as a whole, as are not materially less favorable to the holders thereof than the rights, preferences, privileges and voting powers, and limitations and restrictions thereof, of Designated Preferred Stock immediately prior to such consummation, taken as a whole; provided, however, that for all purposes of this Section 7(c), any increase in the amount of the authorized Preferred Stock, including any increase in the authorized amount of Designated Preferred Stock necessary to satisfy preemptive or similar rights granted by the Corporation to other persons prior to the Signing Date, or the creation and issuance, or an increase in the authorized or issued amount, whether pursuant to preemptive or similar rights or otherwise, of any other series of Preferred Stock, or any securities convertible into or exchangeable or exercisable for any other series of Preferred Stock, ranking equally with and/or junior to Designated Preferred Stock with respect to the payment of dividends (whether such dividends are cumulative or non-cumulative) and the distribution of assets upon liquidation, dissolution or winding up of the Corporation will not be deemed to adversely affect the rights, preferences, privileges or voting powers, and shall not require the affirmative vote or consent of, the holders of outstanding shares of the Designated Preferred Stock.

(d) Changes after Provision for Redemption. No vote or consent of the holders of Designated Preferred Stock shall be required pursuant to Section 7(c) above if, at or prior to the time when any such vote or consent would otherwise be required pursuant to such Section, all outstanding shares of the Designated Preferred Stock shall have been redeemed, or shall have been called for redemption upon proper notice and sufficient funds shall have been deposited in trust for such redemption, in each case pursuant to Section 5 above.

(e) Procedures for Voting and Consents. The rules and procedures for calling and conducting any meeting of the holders of Designated Preferred Stock (including, without limitation, the fixing of a record date in connection therewith), the solicitation and use of proxies at such a meeting, the obtaining of written consents and any other aspect or matter with regard to such a meeting or such consents shall be governed by any rules of the Board of Directors or any duly authorized committee of the Board of Directors, in its discretion, may adopt from time to time, which rules and procedures shall conform to the requirements of the Charter, the Bylaws, and applicable law and the rules of any national securities exchange or other trading facility on which Designated Preferred Stock is listed or traded at the time.

Section 8. Record Holders. To the fullest extent permitted by applicable law, the Corporation and the transfer agent for Designated Preferred Stock may deem and treat the record holder of any share of Designated Preferred Stock as the true and lawful owner thereof for all purposes, and neither the Corporation nor such transfer agent shall be affected by any notice to the contrary.

Section 9. Notices. All notices or communications in respect of Designated Preferred Stock shall be sufficiently given if given in writing and delivered in person or by first class mail, postage prepaid, or if given in such other manner as may be permitted in this Certificate of Designations, in the Charter or Bylaws or by applicable law. Notwithstanding the foregoing, if shares of Designated Preferred Stock are issued in book-entry form through The Depository Trust Corporation or any similar facility, such notices may be given to the holders of Designated Preferred Stock in any manner permitted by such facility.

Section 10. No Preemptive Rights. No share of Designated Preferred Stock shall have any rights of preemption whatsoever as to any securities of the Corporation, or any warrants, rights or options issued or granted with respect thereto, regardless of how such securities, or such warrants, rights or options, may be designated, issued or granted.

Section 11. Replacement Certificates. The Corporation shall replace any mutilated certificate at the holder’s expense upon surrender of that certificate to the Corporation. The Corporation shall replace

 


certificates that become destroyed, stolen or lost at the holder’s expense upon delivery to the Corporation of reasonably satisfactory evidence that the certificate has been destroyed, stolen or lost, together with any indemnity that may be reasonably required by the Corporation.

Section 12. Other Rights. The shares of Designated Preferred Stock shall not have any rights, preferences, privileges or voting powers or relative, participating, optional or other special rights, or qualifications, limitations or restrictions thereof, other than as set forth herein or in the Charter or as provided by applicable law.

 

EX-3.1 3 sfst4220081-ex311.htm EXHIBIT 3.1.1

Exhibit 3.1.1

AMENDED AND RESTATED

ARTICLES OF INCORPORATION

OF

SOUTHERN FIRST BANCSHARES, INC.

(as amended effective May 19, 2023)

(redline version of amended sections)

ARTICLE EIGHT

CLASSIFIED BOARD OF DIRECTORS

At the annual meeting of shareholders that is held in calendar year 2023, the Class III directors shall be elected for a term expiring at the annual of meeting of shareholders that is held in calendar year 2026 and until such directors’ successors have been elected and qualified. At the annual meeting of shareholders that is held in calendar year 2024, the Class I directors shall be elected for a term expiring at the annual meeting of shareholders that is held in calendar year 2025 and until such directors’ successors shall have been elected and qualified. At the annual meeting of shareholders that is held in calendar year 2025, the Class I and Class II directors shall be elected for a term expiring at the annual meeting of shareholders that is held in calendar year 2026 and until such directors’ successors shall have been elected and qualified. At each annual shareholders’ meeting held thereafter, all directors shall be elected for terms expiring at the next annual meeting of shareholders and until such directors’ successors shall have been elected and qualified. Each director, except in the case of his earlier death, written resignation, retirement, disqualification or removal, shall serve for the duration of his term, as staggered, and thereafter until his successor shall have been elected and qualified.

 

 

EX-10.1 4 sfst4220081-ex10_1.htm EMPLOYMENT AGREEMENT BY AND BETWEEN SOUTHERN FIRST BANK AND CALVIN C. HURST, DATED MARCH 21, 2019.

Exhibit 10.1

EMPLOYMENT AGREEMENT

THIS EMPLOYMENT AGREEMENT (this “Agreement”) is made as of and effective on the 21st day of March, 2019 (the “Effective Date”) by and between Southern First Bank (the “Employer”), having its principal office at 100 Verdae Boulevard, Suite 100, Greenville, South Carolina 29607 and Calvin Chandler Hurst (hereinafter called “Employee”), a resident of the State of South Carolina. References herein to the “Company” refer to Southern First Bancshares, Inc., the parent company of the Employer.

Employer desires to employ Employee as a Executive Vice President and Chief Banking Officer. Employer desires to provide for the employment of Employee and to provide an employment arrangement which Employer has determined will encourage the continued dedication of Employee to Employer. Employee is willing to serve Employer on the terms and conditions herein provided. Unless otherwise specified hereafter, any services performed by the Employee shall be for the benefit of the Employer and, therefore, any payments or benefits paid to the Employee pursuant to this Agreement shall be the sole responsibility of the Employer; provided, however, the Employer’s obligation to make any payments owed to the Employee under this Agreement shall be discharged to the extent compensation payments are made by the Company.

In consideration of the mutual covenants contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

1.  Employment. Employer shall employ Employee, and Employee shall serve Employer, as a Executive Vice President and Chief Banking Officer and in such capacity shall perform such duties as are consistent with that position, and as Employer from time to time may direct. Employee shall have such authority and responsibilities consistent with Employee’s position as are set forth in Employer’s Bylaws or assigned by Employer’s Board of Directors (the “Board”), Employer’s Chief Executive Officer, or Employer’s President from time to time. Employee shall devote Employee’s full business time, attention, skill and efforts to the performance of Employee’s duties hereunder, except during periods of illness or periods of vacation and leaves of absence consistent with Employer’s policy. Such duties shall be performed at Employer’s principal corporate offices or subsidiary offices as agreed upon by Employer and Employee. Employer reserves the right from time to time to extend, curtail or change the title and duties of Employee. Employee may devote reasonable periods to service as a director or advisor to other organizations, to charitable and community activities, and to managing Employee’s personal investments; provided that such activities do not materially interfere with the performance of Employee’s duties hereunder and are not in conflict or competitive with, or adverse to, the interests of Employer.

2.  Term. Unless earlier terminated as provided in section 13 below, Employee’s employment under this Agreement shall commence on the Effective Date and be for a term ending January 31, 2021 (the “Term”). On January 31, 2020 and on the last day of January each year thereafter, the Term shall automatically be extended for an additional one (1) year so that the remaining Term shall continue to be two (2) years; provided that Employer or Employee may at any time, by written notice, fix the Term to a finite term of two (2) years commencing with the date of the written notice.

3.  Base Salary. For all services rendered by Employee under this Agreement, Employer shall pay Employee a rate of base salary of $215,000 per year (the “Base Salary”). The Base Salary shall be reviewed annually by the Board, and may be increased by the Board or a duly appointed committee thereof, in its sole discretion. The Base Salary shall be paid in accordance with Employer’s standard payroll procedures, but in any case, no less frequently than monthly.

     

4.  Benefits.

(a) Employee shall be entitled, to the extent that Employee’s position, title, tenure, salary, age, health and other qualifications make Employee eligible, to participate in such pension, profit sharing, bonus, life insurance, hospitalization, major medical, and other employee benefit plans or programs of Employer currently in existence on the date hereof or later established that generally are provided to executive employees of Employer. Employee’s participation in any such plan or program shall be subject to the provisions, rules and regulations applicable thereto. Any Company stock options or similar awards shall be issued to Employee at an exercise price per share of not less than the fair market value per share of the corresponding shares as of the date of grant and the number of shares subject to such grant shall be fixed on such date. Any and all bonus payments made to Employee shall be paid by the earlier of: (i) seventy (70) days after the end of the year in which the bonus was earned by Employee or (ii) with the first payroll cycle following the Company’s press release announcing its previous year’s financial performance.

(b) Employer shall provide Employee with a $800 monthly automobile allowance, paid in accordance with Employer’s standard payroll procedures, but in any case, no less frequently than monthly.

5.  Working Facilities. Employee shall be furnished with an office and such other facilities and services as may be necessary or suitable to Employee’s position and adequate for the performance of Employee’s duties.

6.  Expenses. Employee is authorized to incur reasonable expenses for promoting the business of Employer, including expenses for entertainment, travel and similar items, but only to the extent that such expenses are allowable deductions to Employer on its Federal income tax return. Expenses for which there is a fifty percent (50%) tax deduction limitation for entertainment, travel and similar items shall be considered reimbursable expenses. Employer shall reimburse Employee for all such expenses within sixty (60) days of Employee’s written notice to Employer of such expenses. Employee shall repay to Employer the amounts of any expenses claimed which, for lack of proper documentation or otherwise, are not allowed to Employer as deductions for Federal income tax purposes.

7.  Vacations. Employee shall be entitled each fiscal year to twenty (20) paid days off, which shall be granted on a noncumulative basis from year-to-year, as granted by Employer to employees of similar tenure and compensation rank, pursuant to Employer’s paid days off policy. Employer reserves the right to modify this and any other personnel policy from time to time. Any payments made by the Employer to the Employee as compensation for paid vacation leave shall be paid in accordance with the Employer’s standard payroll procedures.

8.   Ownership of Work Product.

(a) Employee shall diligently disclose to Employer as soon as it is created or conceived by Employee, and Employer shall own, all Work Product (as defined below). To the extent permitted by law, all Work Product shall be considered work made for hire by Employee and owned by Employer.

(b) If any of the Work Product may not, by operation of law, be considered work made for hire by Employee for Employer (or if ownership of all right, title and interest of the intellectual property rights therein shall not otherwise vest exclusively in Employer), Employee agrees to assign, and upon creation thereof automatically assigns, without further consideration, the ownership of all Work Product to Employer, its successors and assigns.

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(c) Employer, its successors and assigns, shall have the right to obtain and hold in its or their own name copyrights, registrations, and any other protection available in the foregoing.

(d) Employee agrees to perform upon the reasonable request of Employer, during or after Employee’s employment, such further acts as may be necessary or desirable to transfer, perfect and defend Employer’s ownership of the Work Product. When requested, Employee will:

(i) Execute, acknowledge and deliver any requested affidavits and documents of assignment and conveyance;

(ii) Obtain and aid in the enforcement of copyrights (and, if applicable, patents) with respect to the Work Product in any countries;

(iii) Provide testimony in connection with any proceeding affecting the right, title or interest of Employer in any Work Product; and

(iv) Perform any other acts deemed necessary or desirable to carry out the purposes of this Agreement.

(e) Employer shall reimburse all reasonable out-of-pocket expenses incurred by Employee at Employer’s request in connection with subsection 8(d) within sixty (60) days of Employee’s written notice to Employer of such expenses.

(f) For purposes hereof, “Work Product” shall mean all intellectual property rights, including all Trade Secrets (as defined below), U.S. and international copyrights, patentable inventions, discoveries and improvements, and other intellectual property rights, in any programming, documentation, technology or other work product that relates to the business and interests of Employer or any Affiliates and that Employee conceives, develops, or delivers to Employer at any time during the Term of Employee’s employment. “Work Product” shall also include all intellectual property rights in any programming, documentation, technology or other work product that is now contained in any of the products or systems (including development and support systems) of Employer to the extent Employee conceived, developed or delivered such Work Product to Employer prior to the date of this Agreement while Employee was engaged as an independent contractor or employee of Employer. Employee hereby irrevocably relinquishes for the benefit of Employer and its assigns any moral rights in the Work Product recognized by applicable law.

9.  Protection of Trade Secrets and Confidential Information.

(a) Through exercise of Employee’s rights and performance of Employee’s obligations under this Agreement, Employee will be exposed to “Trade Secrets” and “Confidential Information” (as those terms are defined below). “Trade Secrets” shall mean information or data of or about Employer or any Affiliates (as defined in subsection 26(a)), including, but not limited to, technical or non-technical data, formulas, patterns, compilations, programs, devices, methods, techniques, drawings, processes, financial data, financial plans, product plans, or lists of actual or potential customers, clients, distributors, or licensees, that: (i) derive economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from their disclosure or use; and (ii) are the subject of efforts that are reasonable under the circumstances to maintain their secrecy. To the extent that the foregoing definition is inconsistent with the definition of “trade secret” mandated under applicable law, the latter definition shall govern for purposes of interpreting Employee’s obligations under this Agreement. Except as required to perform Employee’s obligations under this Agreement, or except with Employer’s prior written permission, Employee shall not

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use, redistribute, market, publish, disclose or divulge to any other person or entity any Trade Secrets of Employer. Employee’s obligations under this provision shall remain in force (during and after the Term) for so long as such information or data shall continue to constitute a Trade Secret under applicable law. Employee agrees to cooperate with any and all confidentiality requirements of Employer, and Employee shall immediately notify Employer of any unauthorized disclosure or use of any Trade Secrets of which Employee becomes aware.

(b) Employee agrees to maintain in strict confidence and, except as necessary to perform Employee’s duties for Employer, not to use or disclose any Confidential Information at any time, either during the Term of Employee’s employment or for a period of one (1) year after Employee’s last date of employment, so long as the pertinent data or information remains Confidential Information. “Confidential Information” shall mean any non-public information of a competitively sensitive or personal nature, other than Trade Secrets, acquired by Employee during Employee’s employment, relating to Employer or any Affiliate or Employer’s or any Affiliate’s business, operations, customers, suppliers, products, employees, financial affairs or industrial practices. Notwithstanding anything herein to the contrary, no obligation or liability shall accrue hereunder with respect to any information that is or becomes publicly available without the fault of Employee.

(c) Employee will abide by Employer’s policies and regulations, as established from time to time, for the protection of its Confidential Information. Employee acknowledges that all records, files, data, documents, and the like relating to suppliers, customers, costs, prices, systems, methods, personnel, technology and other materials relating to Employer or its Affiliated entities shall be and remain the sole property of Employer and/or such Affiliated entity. Employee agrees, upon the request of Employer, and in any event upon termination of Employee’s employment, to turn over all copies of all media, records, documentation, etc., pertaining to Employer (together with a written statement certifying as to Employee’s compliance with the foregoing).

10. Non-Solicitation of Customers. During the Employee’s employment with the Employer and for a period of one (1) year following termination or expiration of this Agreement, Employee shall not (except on behalf of or with the prior written consent of the Employer) directly or indirectly solicit any individual or entity which was a customer or client of Employer or any of its Affiliates for the purpose of providing a service or product to such customer or client which is the same type of service or product offered or provided by Employer or any of its Affiliates; provided, however, that this restriction shall apply only to those customers or clients with whom Employee had contact in connection with services or products provided by Employer or any of its Affiliates within two (2) years prior to the date of termination of such employment.

11. Non-Solicitation of Employees. During the Employee’s employment with the Employer and for a period of one (1) year following termination or expiration of this Agreement, Employee shall not, directly or indirectly, on the Employee’s own behalf or in the service of or on behalf of others, induce or solicit, or attempt to induce or solicit, for employment purposes or for any type of consulting purposes any employee of or consultant to the Employer or any of its Affiliates for the purpose of providing services that are the same or similar to the types of services offered or engaged in by any employee of or consultant to the Employer or any of its Affiliates at the time of termination of Employee’s employment with Employer.

12. Non-Competition Agreement. During Employee’s employment with the Employer and for a period of one (1) year following termination or expiration of this Agreement, Employee shall not (without the prior written consent of Employer) compete with Employer or any of its Affiliates, directly or indirectly, engage in forming, serving as an organizer, director, officer of, employee or agent, or consultant to, or acquiring or maintaining more than a one percent (1%) passive investment in, a depository financial institution or holding company thereof if such depository institution or holding company has, or upon

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formation will have, one or more offices or branches located within thirty (30) miles of any office or branch of Employer or any of its Affiliates in existence at the time Employee’s employment with Employer is terminated (the “Territory”). Notwithstanding the foregoing, Employee may serve as an officer of or consultant to a depository institution or holding company thereof even though such institution operates one or more offices or branches in the Territory, if Employee’s employment does not directly involve, in whole or in part, the depository financial institution’s or holding company’s operations in the Territory.

13. Termination and Severance Payments.

(a) Employee’s employment under this Agreement may be terminated prior to the end of the Term only as follows:

(i) upon the death of Employee;

(ii) by Employer upon the Disability (as defined in subsection 26(d)) of Employee for a period of one hundred and eighty (180) days;

(iii) by Employer for Cause (as defined in subsection 26(b)) upon delivery of a Notice of Termination (as defined in subsection 26(g)) to Employee;

(iv) by Employer without Cause upon delivery of a Notice of Termination to Employee;

(v) by Employee for Good Reason (as defined in subsection 26(e)) upon delivery of a Notice of Termination to the Employer within a ninety (90) day period beginning on the thirtieth (30th) day after the occurrence of a Change in Control (as defined in subsection 26(c)) or within a ninety (90) day period beginning on the one (1) year anniversary of the occurrence of a Change in Control; or

(vi) by Employee upon delivery of a Notice of Termination to Employer.

(b) If Employee’s employment is terminated because of the Employee’s death, Employer shall pay Employee’s estate:

(i) any sums due Employee as Base Salary and/or reimbursement of expenses through the end of the month during which death occurred, paid in accordance with Employer’s standard payroll procedures, but in any case, no less frequently than monthly; and

(ii) any bonus earned or accrued through the date of death. Any bonus for previous years which was not yet paid will be paid pursuant to the terms as set forth in section 4(a). Any bonus that is earned in the year of death will be paid on the earlier of: (i) seventy (70) days after the end of the year in which the Employee died or (ii) with the first payroll cycle following the Company’s press release announcing its financial performance for the year in which the Employee died. To the extent that the bonus is performance-based, the amount of the bonus will be calculated by taking into account the performance of the Employer for the entire year and prorating this through the date of Employee’s death.

(c) During the period of any Disability leading up to the termination of Employee’s employment as a result of the Disability, Employer shall:

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(i) continue to pay the Employee’s full Base Salary at the rate then in effect and all perquisites and other benefits (other than any bonus) in accordance with Employer’s standard payroll procedures, but in any case, no less frequently than monthly, until Employee becomes eligible for benefits under any long-term disability plan or insurance program maintained by Employer; provided that the amount of any such payments to Employee shall be reduced by the sum of the amounts, if any, payable to Employee for the same period under any disability benefit or pension plan covering the Employee; and

(ii) pay Employee any bonus earned or accrued through the date of Disability. Any bonus for previous years which was not yet paid will be paid pursuant to the terms as set forth in section 4(a). Any bonus that is earned in the year of Disability will be paid on the earlier of: (i) seventy (70) days after the end of the year in which Employee became Disabled or (ii) with the first payroll cycle following the Company’s press release announcing its financial performance for the year in which the Employee became Disabled.

(d) If Employee’s employment is terminated for Cause, Employee shall receive only any sums due Employee as Base Salary and/or reimbursement of expenses through the date of termination, paid in accordance with Employer’s standard payroll procedures, but in any case, no less frequently than monthly.

(e) If Employee’s employment is terminated by Employer without Cause, conditioned upon the effectiveness of the release described in Section 13(i) below and subject to the possibility of a six-month delay described below in Section 29(a), beginning on the first day of the month following the date of the Employee’s termination, and continuing on the first day of the month for the next eleven (11) months, the Employer shall pay to the Employee monthly severance compensation in cash in an amount equal to one-twelfth (1/12th) of the Employee’s annual rate of Base Salary at the date of termination. Employer shall also pay Employee any bonus earned or accrued through the date of termination. Any bonus for previous years, which was not yet paid, will be paid as stated in Section 4(a) of this Agreement. The restrictive covenants contained in sections 10, 11 and 12 shall not apply to Employee.

(f) If Employee’s employment is terminated by Employee for Good Reason, in addition to other rights and remedies available in law or equity, Employee shall be entitled to the following:

(i) Subject to the possibility of a six-month delay described below in Section 29(a), beginning on the date following the date of the Employee’s termination, the Employer shall provide Employee with the same severance compensation and accrued bonus set forth in Section 13(e);

(ii) Employee may continue participation, in accordance with the terms of the applicable benefits plans, in the Company’s group health plan pursuant to plan continuation rules under the Consolidated Omnibus Budget Reconciliation Act (“COBRA”). In accordance with COBRA, assuming Employee is covered under the Company’s group health plan as of his date of termination, Employee will be entitled to elect COBRA continuation coverage for the legally required COBRA period (the “Continuation Period”). If Employee elects COBRA coverage for group health coverage, he will be obligated to pay the portion of the full COBRA cost of the coverage equal to an active employee’s share of premiums for coverage for the respective plan year and the Company’s share of such premiums shall be treated as taxable income to Employee. Notwithstanding the above, the Employer’s obligations hereunder with respect to the foregoing benefits provided in this subsection (ii) shall be limited to the extent that if Employee obtains any coverage pursuant to a subsequent employer’s benefit plans which duplicates the Employer’s coverage, the

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duplicative coverage may be terminated by Employer. This subsection (ii) shall not be interpreted so as to limit any benefits to which Employee or his dependents or beneficiaries may be entitled under any of Employer’s employee benefit plans, programs, or practices following the Employee’s Termination of Employment, including, without limitation, retiree medical and life insurance benefits; and

(iii) the restrictive covenants contained in sections 10, 11 and 12 shall not apply to Employee.

(g) If Employee’s employment is terminated by Employee without Good Reason, Employee shall receive only any sums due Employee as Base Salary and/or reimbursement of expenses through the date of termination, paid in accordance with Employer’s standard payroll procedures, but in any case, no less frequently than monthly.

(h) With the exceptions of the provisions of this section 13, and the express terms of any benefit plan under which Employee is a participant, it is agreed that, upon termination of Employee’s employment, Employer shall have no obligation to Employee for, and Employee waives and relinquishes, any further compensation or benefits (exclusive of COBRA benefits). Unless otherwise stated in this section 13, the effect of termination on any outstanding incentive awards, stock options, stock appreciation rights, performance units, or other incentives shall be governed by the terms of the applicable benefit or incentive plan and/or the agreements governing such incentives. Within sixty (60) days of termination of Employee’s employment, and as a condition to the Employer’s obligation to pay any severance hereunder, the Employee shall execute, and not timely revoke during any revocation period provided pursuant to such release, a mutually satisfactory form of release acknowledging such remaining obligations and discharging both parties, as well as Employer’s officers, directors and employees with respect to their actions for or on behalf of Employer, from any other claims or obligations arising out of or in connection with Employee’s employment by Employer, including the circumstances of such termination. In most instances, payment will be made, or in the case of installment payments, will begin as soon as practicable after such release is effective. However, if the 60-day period spans two calendar years, such severance payment will be made as soon as possible in the subsequent taxable year.

(i) The parties intend that the severance payments and other compensation provided for herein are reasonable compensation for Employee’s services to Employer and shall not constitute “excess parachute payments” within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the “Code”), and any regulations thereunder. If the Employer’s independent accountants acting as auditors for the Employer determine that any or the aggregate value (as determined pursuant to Section 280G of the Code) of all payments, distributions, accelerations of vesting, awards and provisions of benefits by the Employer to or for the benefit of Employee (whether paid or payable, distributed or distributable, accelerated, awarded or provided pursuant to the terms of this Agreement or otherwise), (a “Payment”) would constitute an excess parachute payment and be subject to the excise tax imposed by Section 4999 of the Code (the “Excise Tax”), such Payment shall be reduced to the least extent necessary so that no portion of the Payment shall be subject to the Excise Tax, but only if, by reason of such reduction, the net after-tax benefit received by the Employee as a result of such reduction will exceed the net after-tax benefit that would have been received by the Employee if no such reduction were made. The Payment shall be reduced, if applicable, by the Employer in the following order of priority: (A) reduction of any cash payments otherwise payable to the Employee pursuant to a supplemental executive retirement plan including, without limitation, any salary continuation agreement between the Employee and the Employer; (B) reduction of any cash severance payments otherwise payable to the Employee that are exempt from Section 409A of the Code; (C) reduction of any other cash payments or benefits otherwise payable to the Employee that are exempt from Section 409A of the Code, but excluding any payments attributable to any acceleration of vesting or payments with respect to any equity award that are exempt from Section 409A of

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the Code; (D) reduction of any payments attributable to any acceleration of vesting or payments with respect to any equity award that are exempt from Section 409A of the Code, in each case beginning with payments that would otherwise be made last in time; and (E) reduction of any other payments or benefits otherwise payable to the Employee on a pro-rata basis or such other manner that complies with Section 409A of the Code, but excluding any payments attributable to any acceleration of vesting and payments with respect to any equity award that are exempt from Section 409A of the Code. If, however, such Payment is not reduced as described above, then such Payment shall be paid in full to the Employee and the Employee shall be responsible for payment of any Excise Taxes relating to the Payment.

14. Oral Modification Not Binding. This Agreement supersedes all prior agreements and understandings between the parties and may not be changed or terminated orally, and no change or attempted waiver of the provisions hereof shall be binding unless in writing and signed by the party against whom the same is sought to be enforced; provided, however, that Employee’s compensation may be increased at any time by Employer without in any way affecting any of the other terms and conditions of this Agreement, which in all other respects shall remain in full force and effect.

15. Governing Law. This Agreement and all rights hereunder shall be governed by the laws of the State of South Carolina, except to the extent governed by the laws of the United States of America in which case federal laws shall govern. Any action brought by any party to this Agreement shall be brought and maintained in a court of competent jurisdiction in the State of South Carolina.

16. Remedies for Breach; Non-Waiver. Employee recognizes and agrees that a breach by Employee of any covenant contained in this Agreement would cause immeasurable and irreparable harm to Employer. In the event of a breach or threatened breach of any covenant contained herein, Employer shall be entitled to temporary and permanent injunctive relief, restraining Employee from violating or threatening to violate any covenant contained herein, as well as all costs and fees incurred by Employer, including attorneys’ fees, as a result of Employee’s breach or threatened breach of the covenant. Employer and Employee agree that the relief described herein is in addition to such other and further relief as may be available to Employer at equity or by law. Nothing herein shall be construed as prohibiting Employer from pursuing any other remedies available to it for such breach of threatened breach, including the recovery of damages from Employee. Failure of the Employer to enforce any of the provisions of this Agreement or any rights with respect thereto shall in no way be considered a waiver of such provisions or rights or in any way otherwise affect the validity of this Agreement.

17. Consideration. Employee acknowledges and agrees that valid consideration has been given to Employee by Employer in return for the promises of Employee set forth herein.

18. Covenants are Independent. The covenants on the part of Employee contained herein shall each be construed as agreements independent of each other and of any other provisions in this Agreement and the unenforceability of one shall not affect the enforceability of the remaining covenants.

19. Severability and Substitution of Valid Provisions. To the extent that any provision or language of this Agreement is deemed unenforceable, by virtue of the scope of the business activity prohibited or the length of time the activity is prohibited, Employer and Employee agree that this Agreement shall be enforced to the fullest extent permissible under the laws and public policies of the State of South Carolina.

20. Extension of Periods. Each of the time periods described in Sections 9-12 of this Agreement shall be automatically extended by any length of time during which Employee is in breach of the corresponding covenant contained herein. Such provisions of this Agreement shall continue in full force and effect throughout the duration of the extended periods.

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21. Reasonable Restraint. It is agreed by the parties that the foregoing covenants in this Agreement are necessary for the legitimate business interests of Employer and impose a reasonable restraint on Employee in light of the activities and business of Employer on the date of the execution of this Agreement.

22. Withholding of Taxes. Employer may withhold from any amounts payable to Employee under this Agreement all federal, state, city or other taxes and withholdings as shall be required pursuant to any applicable law, rule or regulation.

23. Notices. Any notice required or permitted to be given under this Agreement shall be sufficient if given in writing and either personally delivered or sent by registered or certified mail to Employee’s residence in the case of Employee or to its principal office in the case of Employer.

24. Assignment. The rights and obligations of the parties to this Agreement shall inure to the benefit of and shall be binding upon the successors and assigns of Employer. This Agreement shall not be terminated by any merger or consolidation whether or not the Employer or the Company is the consolidated or surviving corporation or by transfer of all or substantially all of the assets of the Employer or the Company to another corporation if there is a surviving or resulting corporation in such transfer.

25. Severability. It is not the intent of any party hereto to violate any public policy of any jurisdiction in which this Agreement may be enforced. If any provision of this Agreement or the application of any provision hereof to any person or circumstances is held invalid, unenforceable or otherwise unlawful, the remainder of this Agreement and the application of such provision to any other person or circumstances shall not be affected. In addition, the applicable provision shall be reformed to the extent (and only to the extent) necessary to make it valid, enforceable and legal.

26. Certain Definitions.

(a) “Affiliate” shall mean the Company and any business entity controlled by the Employer or the Company, controlling or under common control with the Employer or the Company.

(b) “Cause” shall consist of any of:

(i) the commission by Employee of a willful act (including, without limitation, a dishonest or fraudulent act) or a grossly negligent act, or the willful or grossly negligent omission to act by Employee, which is intended to cause, causes or is reasonably likely to cause material harm to Employer or any Affiliate (including harm to its business reputation);

(ii) the indictment of Employee for the commission or perpetration by Employee of any felony or any crime involving dishonesty, moral turpitude or fraud;

(iii) the material breach by Employee of this Agreement that, if susceptible of cure, remains uncured thirty (30) days following written notice to Employee of such breach;

(iv) the receipt of any form of notice, written or otherwise, that any regulatory agency having jurisdiction over Employer intends to institute any form of formal or informal (e.g., a memorandum of understanding which relates to Employee’s performance)

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regulatory action against Employee, Employer or any Affiliate (provided that the Board determines in good faith, with Employee abstaining from participating in the consideration of and vote on the matter, that the subject matter of such action involves acts or omissions by or under the supervision of Employee or that termination of Employee would materially advance Employer’s or Affiliate’s compliance with the purpose of the action or would materially assist Employer or Affiliate in avoiding or reducing the restrictions or adverse effects to Employer or Affiliate related to the regulatory action);

(v) the exhibition by Employee of a standard of behavior within the scope of Employee’s employment that is materially disruptive to the orderly conduct of Employer’s or Affiliate’s business operations (including, without limitation, substance abuse or sexual misconduct) to a level which, in the Board’s good faith and reasonable judgment, with Employee abstaining from participating in the consideration of and vote on the matter, is materially detrimental to Employer’s or Affiliate’s best interest, that, if susceptible of cure remains uncured ten (10) days following written notice to Employee of such specific inappropriate behavior; or

(vi) the failure of Employee to devote Employee’s full business time and attention to Employee’s employment as provided under this Agreement that, if susceptible of cure, remains uncured thirty (30) days following written notice to Employee of such failure.

(c) “Change in Control” shall mean the occurrence during the Term of any of the following events, unless such event is a result of a Non-Control Transaction:

(i) the individuals who, as of the date of this Agreement, are members of the Board of Directors of the Company (the “Incumbent Board”) cease for any reason to constitute at least fifty percent (50%) of the Board of Directors of the Company; provided, however, that if the election, or nomination for election by the Company’s shareholders, of any new director was approved in advance by a vote of at least fifty percent (50%) of the Incumbent Board, such new director shall, for purposes of this Agreement, be considered as a member of the Incumbent Board; provided, further, that no individual shall be considered a member of the Incumbent Board if such individual initially assumed office as a result of either an actual or threatened election contest, or other actual or threatened solicitation of proxies or consents by or on behalf of any person other than the Board of Directors of the Company, including by reason of any agreement intended to avoid or settle any election contest or proxy contest;

(ii) an acquisition (other than directly from the Company) of any voting securities of the Company (the “Voting Securities”) by any “Person” (as the term “person” is used for purposes of Section 13(d) or 14(d) of the Securities Exchange Act of 1934 (the “Exchange Act”)) immediately after which such Person has “Beneficial Ownership” (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of twenty percent (20%) or more of the combined voting power of the Company’s then outstanding Voting Securities; provided, however, that in determining whether a Change in Control has occurred, Voting Securities which are acquired in a Non-Control Transaction shall not constitute an acquisition which would cause a Change in Control;

(iii) consummation of: (a) a merger, consolidation, or reorganization involving the Company; (b) a complete liquidation or dissolution of the Company; or (c) the sale or

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other disposition of all or substantially all of the assets of the Company to any Person (other than a transfer to a subsidiary); or

(iv) a notice of an application is filed with the South Carolina Board of Financial Institutions, the Office of Comptroller of the Currency (the “OCC”) or the Federal Reserve Board or any other bank or thrift regulatory approval (or notice of no disapproval) is granted by the Federal Reserve, South Carolina Board of Financial Institutions, the OCC, the Federal Deposit Insurance Corporation, or any other regulatory authority for permission to acquire control of the Company or any of its banking subsidiaries; provided, however, that if the application is filed in connection with a transaction which has been approved by the Board of Directors of the Company, then the Change in Control shall not be deemed to occur until consummation of the transaction.

(d) “Disability” or “Disabled” shall mean as defined by Treasury Regulation § 1.409A-3(i)(4).

(e) “Good Reason” shall mean the occurrence after a Change in Control of any of the events or conditions described in subsections (i) through (vii) hereof:

(i) a change in the Employee’s status, title, position or responsibilities (including reporting responsibilities) which, in the Employee’s reasonable judgment, represents an adverse change from Employee’s status, title, position or responsibilities as in effect at any time within ninety (90) days preceding the date of a Change in Control or at any time thereafter; the assignment to the Employee of any duties or responsibilities which, in the Employee’s reasonable judgment, are inconsistent with Employee’s status, title, position or responsibilities as in effect at any time within ninety (90) days preceding the date of a Change in Control or at any time thereafter; any removal of the Employee from or failure to reappoint or reelect Employee to any of such offices or positions, except in connection with the termination of Employee’s employment for Disability or Cause, as a result of Employee’s death, or by the Employee other than for Good Reason, or any other change in condition or circumstances that in the Employee’s reasonable judgment makes it materially more difficult for the Employee to carry out the duties and responsibilities of the Employee’s office than existed at any time within ninety (90) days preceding the date of Change in Control or at any time thereafter;

(ii) a reduction in the Employee’s Base Salary or any failure to pay the Employee any compensation or benefits to which Employee is entitled within five (5) days of the date due;

(iii) the Employer’s requiring the Employee to be based at any place outside a thirty (30) - mile radius from the executive offices occupied by the Employee immediately prior to the Change in Control, except for reasonably required travel on the Employer’s business which is not materially greater than such travel requirements prior to the Change in Control;

(iv) the failure by the Employer to (A) continue in effect (without reduction in benefit level and/or reward opportunities) any material compensation or employee benefit plan in which the Employee was participating at any time within ninety (90) days preceding the date of a Change in Control or at any time thereafter, unless such plan is replaced with a plan that provides substantially equivalent compensation or benefits to the Employee, or (B) provide the Employee with compensation and benefits, in the aggregate,

  11  

at least equal (in terms of benefit levels and/or reward opportunities) to those provided for under each other employee benefit plan, program and practice in which the Employee was participating at any time within ninety (90) days preceding the date of a Change in Control or at any time thereafter;

(v) any material breach by the Employer of any material provision of this Agreement; or

(vi) any purported termination of the Employee’s employment for Cause by the Employer which does not comply with the terms of this Agreement.

Employee’s right to terminate Employee’s employment for Good Reason shall not be affected by Employee’s incapacity due to physical or mental illness.

(f) “Non-Control Transaction” shall mean a transaction described below:

(i) the shareholders of the Company, immediately before such merger, consolidation or reorganization own, directly or indirectly, immediately following such merger, consolidation or reorganization, at least fifty percent (50%) of the combined voting power of the outstanding voting securities of the corporation resulting from such merger, consolidation or reorganization (the “Surviving Corporation”) in substantially the same proportion as their ownership of the Voting Securities immediately before such merger, consolidation or reorganization; and

(ii) immediately following such merger, consolidation or reorganization, the number of directors on the board of directors of the Surviving Corporation who were members of the Incumbent Board shall at least equal the number of directors who were affiliated with or appointed by the other party to the merger, consolidation or reorganization.

(g) “Notice of Termination” shall mean a written notice of termination from one party to the other which specifies an effective date of termination, indicates the specific termination provision in this Agreement relied upon, and, in the case of (i) a termination for Cause, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Employee’s employment under the provision so indicated, or (ii) in the case of a termination for Good Reason, sets forth the Good Reason event which occurred no more than ninety (90) days prior to the date of the notice and provides the Employer not less than thirty (30) days to remedy this condition.

(h) “Terminate”, “terminated”, “termination”, or “Termination of Employment” shall mean separation from service as defined by Treasury Regulation § 1.409A-1(h).

27. Compliance with Regulatory Restrictions. Notwithstanding anything to the contrary herein, and in addition to any restrictions stated in Section 13 hereof, any compensation or other benefits paid to the Employee shall be limited to the extent required by any federal or state regulatory agency having authority over the Company or the Employer. The Employee agrees that compliance by the Company or the Employer with such regulatory restrictions, even to the extent that compensation or other benefits paid to the Employee are limited, shall not be a breach of this Agreement by the Company or the Employer.

28. Compliance with Dodd–Frank Wall Street Reform and Consumer Protection Act. Notwithstanding anything to the contrary herein, any incentive payments to the Employee shall be limited to the extent required under the Dodd–Frank Wall Street Reform and Consumer Protection Act (the “Act”),

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including, but not limited to, clawbacks for such incentive payments as required by the Act. The Employee agrees to such amendments, agreements, or waivers that are required by the Act or requested by the Company to comply with the terms of the Act.

29. Compliance with Internal Revenue Code Section 409A. All payments that may be made and benefits that may be provided pursuant to this Agreement are intended to qualify for an exclusion from Section 409A of the Code and any related regulations or other pronouncements thereunder and, to the extent not excluded, to meet the requirements of Section 409A of the Code. Any payments made under Section 13 of this Agreement which are paid on or before the last day of the applicable period for the short-term deferral exclusion under Treasury Regulation § 1.409A-1(b)(4) are intended to be excluded under such short-term deferral exclusion. Any remaining payments under Section 13 are intended to qualify for the exclusion for separation pay plans under Treasury Regulation § 1.409A-1(b)(9). Each payment made under Section 13 shall be treated as a “separate payment”, as defined in Treasury Regulation § 1.409A-2(b)(2), for purposes of Code Section 409A. Further, notwithstanding anything to the contrary, all severance payments payable under the provisions of Section 13 shall be paid to the Employee no later than the last day of the second calendar year following the calendar year in which occurs the date of Employee’s termination of employment. None of the payments under this Agreement are intended to result in the inclusion in Employee’s federal gross income on account of a failure under Section 409A(a)(1) of the Code. The parties intend to administer and interpret this Agreement to carry out such intentions. However, Company does not represent, warrant or guarantee that any payments that may be made pursuant to this Agreement will not result in inclusion in Employee’s gross income, or any penalty, pursuant to Section 409A(a)(1) of the Code or any similar state statute or regulation. Notwithstanding any other provision of this Agreement, to the extent that the right to any payment (including the provision of benefits) hereunder provides for the “deferral of compensation” within the meaning of Section 409A(d)(1) of the Code, the payment shall be paid (or provided) in accordance with the following:

(a) If the Employee is a “Specified Employee” within the meaning of Section 409A(a)(2)(B)(i) of the Code on the date of the Employee’s termination (the “Separation Date”), and if an exemption from the six month delay requirement of Code Section 409A(a)(2)(B)(i) is not available, then no such payment shall be made or commence during the period beginning on the Separation Date and ending on the date that is six months following the Separation Date or, if earlier, on the date of the Employee’s death. The amount of any payment that would otherwise be paid to the Employee during this period shall instead be paid to the Employee on the first day of the first calendar month following the end of the period.

(b) Payments with respect to reimbursements of expenses or benefits or provision of fringe or other in-kind benefits shall be made on or before the last day of the calendar year following the calendar year in which the relevant expense or benefit is incurred. The amount of expenses or benefits eligible for reimbursement, payment or provision during a calendar year shall not affect the expenses or benefits eligible for reimbursement, payment or provision in any other calendar year.

30.   Entire Agreement. This Agreement supersedes any other agreements, oral or written, between the parties with respect to the subject matter hereof, and contains all of the agreements and understandings between the parties with respect to the employment of Employee by Employer. Any waiver or modification of any term of this Agreement shall be effective only if it is set forth in writing signed by all parties hereto.

31. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same agreement.

[Signatures appear on the following page.]

  13  

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the Effective Date.

  EMPLOYER:
   
  SOUTHERN FIRST BANK
     
[CORPORATE SEAL] By: /s/ R. Arthur Seaver, Jr.
    Name: R. Arthur Seaver, Jr.
Attest:   Title: Chief Executive Officer

 

/s/ Julie Fairchild  
Secretary  

 

  EMPLOYEE:
   
  /s/ Calvin Chandler Hurst
  Calvin Chandler Hurst

 

  14  
EX-31.1 5 sfst4220081-ex31_1.htm RULE 13A-14(A) CERTIFICATION OF THE PRINCIPAL EXECUTIVE OFFICER.

Exhibit 31.1

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

 

Exhibit 31.1

Rule 13a-14(a) Certification of the Principal Executive Officer.
     
I, R. Arthur Seaver, Jr., certify that:
     
  1. I have reviewed this quarterly report on Form 10-Q of Southern First Bancshares, Inc.;
     
  2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
     
  3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
     
  4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
     
    a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
     
    b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
     
    c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and
     
    d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
     
  5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
     
    a) All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
     
    b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date:  August 1, 2023 By: /s/ R. Arthur Seaver, Jr.  
  R. Arthur Seaver, Jr.  
  Chief Executive Officer  

 

EX-31.2 6 sfst4220081-ex31_2.htm RULE 13A-14(A) CERTIFICATION OF THE PRINCIPAL FINANCIAL OFFICER.

Exhibit 31.2

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

 

Exhibit 31.2

Rule 13a-14(a) Certification of the Principal Financial Officer.
     
I, D. Andrew Borrmann, certify that:
     
  1. I have reviewed this quarterly report on Form 10-Q of Southern First Bancshares, Inc.;
     
  2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
     
  3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
     
  4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
     
    a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
     
    b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
     
    c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and
     
    d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
     
  5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
     
    a) All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
     
    b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date:  August 1, 2023 By: /s/ D. Andrew Borrmann  
  D. Andrew Borrmann  
  Chief Financial Officer  

 

EX-32 7 sfst4220081-ex32.htm SECTION 1350 CERTIFICATIONS.

Exhibit 32

Section 1350 Certifications.

 

Exhibit 32

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

The undersigned, the Chief Executive Officer and the Chief Financial Officer of Southern First Bancshares, Inc. (the "Company"), each certify that, to his knowledge on the date of this certification:
 
  1. The quarterly report of the Company for the period ended June 30, 2023 as filed with the Securities and Exchange Commission on this date (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
   
  2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
  /s/ R. Arthur Seaver, Jr.  
  R. Arthur Seaver, Jr.  
  Chief Executive Officer  
  Date: August 1, 2023  
     
  /s/ D. Andrew Borrmann  
  D. Andrew Borrmann  
  Chief Financial Officer  
  Date: August 1, 2023